Good day, ladies and gentlemen. And welcome to the Second Quarter 2008 American Financial Group Earnings Conference call. My name is Shenou and I will be your coordinator for today. At this time all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. [Operator Instructions]. As reminder this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's conference, Mr. Keith Jensen, Senior Vice President of American Financial. Please proceed.

Thank you. Good morning. I am here with Carl Lindner III, and Craig Lindner, the Co-CEOs of American Financial Group, and we are happy to welcome you to the second quarter conference call. If you are viewing this webcast from our website you can follow along with the slide presentation, if you would 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, subject to risk and uncertainties. The factors which could cause actual results 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 Securities and Exchange Commission, including the Annual Report on Form 10-K, 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 items that are not considered to be part of ongoing operations, such as net realized gains and losses on investments, effects from accounting changes, discontinued operations, significant asbestos and environmental charges, and certain other non-recurring items. AFG believes it to be a useful tool for analysts and investors in analyzing ongoing operating trends, and will be discussed for various queries during this call. A reconciliation of net earnings to core net operating earnings is included in our earnings release. Now I am pleased to turn the call over Carl Lindner III, Co-Chief Executive Officer of American Financial Group.

Good morning and thank you for joining us. We released our 2008 second quarter results yesterday afternoon. I'd like to start by covering some highlights on slide 3 of the webcast. Core net operating earnings per share for the quarter were $0.96 compared to $0.93 in the 2007 second quarter, reflecting the beneficial effect of our 2007 and 2008 share repurchases. Improved results in our annuity and supplemental insurance operations and higher investment income were more than offset by lower underwriting results in our property and casualty operations, largely driven by catastrophe losses. Record core net operating earnings for the first half of 2008 were $2.05 per share compared with $1.84 per share for the comparable period in '07. Net earnings were $0.52 per share compared to $0.54 per share in the 2007 second quarter. 2008 second quarter earnings were impacted by net realized losses on investments of approximately $41 million or $0.35 per share. These charges were primarily related to declines in the market value of our equity positions and financial institutions, including National City. We also completed our previously announced asbestos and environmental internal review. The 2008 net earnings included a $0.09 per share charge for strengthening A&E reserves, whereas the 2007 second quarter results were impacted by $0.46 per share of A&E charges. We are pleased that there were no new emerging trends or issues at surface in connection with their review. Our insurance results for the quarter and through the first half of the year continued at an excellent pace. Each of our four property and casualty business segments produced solid underwriting profit, and we continue to make progress towards meeting the company's 2008 objectives. Our annuity and supplemental insurance businesses benefited from increased spreads in the annuity lines during the quarter and, to a lesser…

[Operator Instructions] And your first question comes from the line of Jay Cohen of Merrill Lynch.

Thank you. And still, I don't know, kind of good morning, good afternoon is right [indiscernible]. I've got a bunch of questions. Let me start with just several. The first is, in the property and transportation segment, in the second quarter did you record any losses in the crop business? I think you really don't get those of the second half or did you book some reserves for that?

We did not. Jay, as we have indicated, it's really pre-mature to look forward and know what the answer is. This is something that we will analysis it in the third quarter and then the finalize it in the fourth quarter.

Jay,as I mentioned, in our guidance we are figuring an accident year that's $60 million less or about 50% less than last year's record accident year in that. So we are. So we know what the reserves, where we are... we're trying to be conservative.

Yes, the other way can be that, actually put some stuff in the second quarter, and you guys have done that. But it's obviously incorporated in your view for the year. And the share count seemed to go up in the quarter, kind of quarter end share count, I am just wondering what was happening there and were there any repurchases in the quarter?

There were about $800,000 of repurchases in the month of April. The reason you saw the share count go up in the quarter is because when we retired the convertible issue, we issued shares for the premium. And my recollection is that, that was 2.2 million shares or something in that range.

Right, right, that's helpful. Okay, and then on annuity life business, can you give us the core earnings for that business from the third and fourth quarter of last year, excluding the minority interest?

I think we'll need to get back to you on that. I don't know that we have that specifically in front of us, we're working off [indiscernible].

That's great, thanks a lot.

And your next question comes from the line of John Gwynn of Morgan Keegan.

Thanks. Carl, a company that most analysts and investors uses a peer comparison for AFG, those with consolidated, recently cut a deal with a Japanese company, what seemed to be a pretty favorable price. Do you have any comment on that transaction?

It'sbeen a very good company. Tokyo had a very specific strategic objective in mind. Photojia [ph] shareholders got a great price for the company. I suppose if somebody have approached us with the three times book type of proposal and those kind of multiples, we, along with anybody else will have to think seriously about something like that.

Jim Maguire probably learned part of this property casualty lessons at Great American earlier in his career, I guess you also learned how to cut a deal too.

I'd say so, yes, I think he used to work in our D&O operations when he was first entering the industry in that. But now clearly, Jim is very bright. I guess, he obviously got a good education from us too.

Right. Keith, would you care to comment on the change in your credit arrangements during the quarter?

Sure during this quarter, we have entered into an additional credit agreement. We have an outstanding $500 million line of credit. As of the end of the quarter, we have drawn about $395 million of that. We have decided that, it was prudent for us to add into credit facility. So we have entered into $120 million supplemental line of credit which just gives us additional liquidity and cushion against any unforeseen outcomes.

Okay. And Keith, in the first half of the year, is there any crop... in the second quarter is there crop premium actually booked?

Very, very modest.

Okay and most of this occurs in the third quarter and some falls into the fourth quarter, right?

Yes, that's correct.

Okay. Craig, of the $49 million of equity impairment in the quarter, what portion of that pre-tax... what portion of that was net savings.

Let me get you that number here, John.

Craig I've got, that was about $19 million.

19 million from net savings.

Yes.

That's pre-tax.

Pre-tax.

Okay. And Craig, at the cap rate level you mentioned improvement in spread, is that both action on creditive rights end market yields or is it one way or the other?

It is both, John I would say that it's more driven by the opportunity to buy investments that are much wider spread.

Okay. And Craig at cap rate I assume you reviewed that quarterly, other any concerns we should have about that say during the third quarter?

We take a look at that on a quarterly basis, the really thorough analysis and actually is a fourth quarter analysis, John. But spreads that we're enjoying right now are actually wider than what we have assumed in our back amortization.

Okay. And also Craig, on the 403b market, there have been a number of changes here recently. Is there anything that's materially affected your operations?

We'll find that here in a couple of months. The whole industry is going through a process right now where... with the implementation of the 403b regs which will be effective January 1 2009, each of the school systems is being given different responsibilities. And they have had... historically they're being given responsibility to basically administer the 403b plans for all the teachers. And what that means is most of the school systems are putting a TPA in place to handle that and are going through a process right now to identify the companies that they're going to allow to sell in the school district. And hard to predict with a lot of accuracy where everybody is going to end up. I think at the end of the day, we will be in a fewer school districts but the number of companies selling in each of the individual school systems will go from 13, 14, 15 of five or so. We do a lot more business in fewer school systems. And I'd say we're about a third of the way through the process right now. And pretty early, we are doing in the RFP, RFI process that we are going through.

And the recent SEC moves on variable products, is that something that you think you are at a relative advantage or disadvantage on if it is indeed finalized that way?

Do you mean that equity indexed annuity product?

Right, right I am sorry.

Yes, first of all, the feedback that we get from the industry is that the industry is pretty much unanimous in their opposition to the proposal as outlined. So we would expect to see some changes but I certainly think that we are going to be in a descent position to continue to get our share of the market, kind of no matter what changes are put in place.

Okay, great. That's all I have. Thank you.

And your next question comes from the line of Gary Lenov [ph] of Ironwork.

Thank you. I was hoping you could repeat your outlook for the property and transportation business for the full year. I missed, when you said, you expect the net written premium fee --

Behappy to. Our net written premiums in the property and transportation group will increase 5% to 8%, really fueled by higher crop premiums as well as some new initiatives in our transportation businesses. Also, the group will also have a combined ratio guidance of 86% to 90%, combined ratios. And again what I mentioned to Jay is our '08 guidance for our combined ratio is based on the assumption that our accident year underwriting results in our crop operations will be about 50% or $60 million lower than the record 2007 results that we had.

: Okay, that's helpful. In the release you have mentioned that your net written premiums in the quarter, in property and transportation business were affected by... you mentioned, required statutory premium adjustments as well as I guess the delay in premium reporting due to the flooding. Can you just elaborate on what are those premiums that required adjustments, and can you help us just a magnitude of the impact because of the flooding?

Sure, the premium adjustments are actually a strange accounting rule, SSAP-78 where the premium has to be reduced by the amount of Federal Crop Insurance Corporation's underwriting gain, after non-proportional insurance. It's a long way of saying that the premium is actually reduced for accounting purposes by the underwriting gain, that goes off to the Federal government. So that's what we are referring to, and you will see that there was a similar adjustment in the previous year. And that's in part reflective of the fact that in 2007 period the profits that we had were actually in excess, as Carl said earlier, they were record profits. And so that affected that adjustment. I think you had a second question, what was that?

The second question was I recognized that most of the premium is reported, crop premium is reported in the third quarter. But you made a mention of the fact that your written premiums for the second quarter were impacted by the delays related to the floods?

That's correct. What happened is the Federal government actually gave farmers, a one month reprieve on their acres planted reporting. And so we will be on a one month lag. So we'll be receiving what we normally would have had in June, in July and then likewise July and August.

Can you share the magnitude of what that might be?

I don't really have a sense of that. I'd like to say to you is that in... if you look at prior years, the amount of premium that's recorded in the first part of the year, first half of the year is very modest. The vast majority of the premium is recorded in the third and fourth quarters.

Okay.

Okay, between crop prices, I mean for the whole year between what's happened with crop prices and now the continued expansion of plan net, our crop business is going to be up double-digit for us this year is what we think.

Okay, great. Gentlemen thank you very much.

And your next question comes from the line of Amit Kumar of Fox-Pitt Kelton.

Yes, thanks so much. Just going back to the discussion on the crop book. Can you just refresh us as to what are the terms of Munich Re cover?

Sure in the Munich Re cover, what we do is, if you take $100 of crop premium about 25% of that ceded to the federal government under their various accruals and the remainder is 50/50 quota share with Munich Re. And in that quota share they pick up half of their residuals. So retained roughly 35% to 40% of the gross written premium.

Okay that's very helpful. And has there been an any change in terms of... I know you have talked about your crop book being up double digits. But going forward, is there any change in terms of the by state distribution based on what has happened recently?

I don't think there have been any meaningful changes here over the past year.

Okay and finally, I think you have touched upon this previously. But you've added to Alt-A now I think it's at $930 million, in Q1 it was close to $700 million. Do you think this is the appropriate level where you wanted to be or could there be like, what's that thought process going forward?

I think we are probably close to the maximum amount that we are comfortable within Alt-A securities. And we have just viewed some of the opportunities as being very, very attractive here in the last 3 to 4 months. But I think we are up about at the limit of our comfort level. Even though we feel very good about what we have purchased and, the market values reflected, we've been in the right spot, buying those securities,

Okay, that's helpful. And one, finally one quick numbers question, do you have unrealized real estate gains number?

With caveat that we don't go through and do a full appraisal, when we look at the cash flow and reasonable multiples on that cash flow, we are looking at roughly $100 million to $150 million of unrealized pre-tax.

So that's nearly double right, previously I thought it was 65 in Q1.

No it's similar to what we've had for last... for a while.

Okay, that's very helpful. Thanks so much.

And your next question comes from the line of David Kukupa [ph] of Amber Capital.

Hi, and good afternoon. I was wondering if you can show us that you are worried about some potential taxes change, as far as the Presidential election. For example, estate taxes or capital gain taxes that could incline a company like yours which is family controlled to contemplate consolidation?

I think we are like other business executives or business families, sure a change in tax rates or in personal income, sure. That's something that we are concerned about. And we are in involvement of political process and that we hope have some impact on that.

Okay. Also maybe if you can discuss about the consolidation, say again but more on your strategic view, if there were any new business line you would like to enter, where it would make more sense for you to enter through acquisition versus growing organically, on trying to develop the business?

Well, we have grown our business both internally as well as making acquisitions. We are pretty active in the first half of this year, through the purchase of around two-thirds of Marketform, which helped us enter the new niche of non-US made now. We also are excited about that acquisition in that we have had pent-up demand by our US executives to write business in Europe, businesses like fidelity and crime, D&O, ocean, marine, large property. And we think Marketform will give us an excellent opportunity, to do that. We've made or are in the process of making a number of hires in those key specialty areas. And we expect there to be some positive impact from those hires in 2009. So, we are always looking for ways to increase our market position in the some 25 or 26 specialty property and casualty businesses that we already have or looking for new opportunities. And we're always out there.

: Thank you very much.

: [Operator Instructions]. And your next question comes the line of Jay Cohen of Merrill Lynch,

Just a couple of other questions. First is, the California comp business, once again great results there. We did see at least one of your I think better competitors in California begin to have some issues on the margins. And I am wondering if you can sort of describe what you do differently than others and as why your margins have held out better?

Well, I mean, we and Zenith and a few others have been special hatching in that market for, forever. And we have Republic or Work Comp subsidiary there has outstanding claims operation and our underwriting folks really have probably looked at every risk or a lot of the most efficient California of any size over long period of time. So I think that, that makes a difference. As we've mentioned, we've been probably more conservative with our loss reserves than maybe quite a few of our competitors wanting to see how California reform plays out in that. So, I think maybe that's one reason why we've been able to, maybe report stronger, calendar year results. Maybe longer than, some others in that. I think the small to medium sized right now, side and I think that maybe has also helped us maybe versus, some others in that. Those should be the things that would probably come to mind.

All right thanks Carl. And the other question, in the RVI business I know that has been run-off, for some reason I have thought your exposure was at this point quite minimal. So I think it's little surprise to see the losses flowing through. If used car prices continued to decline, what kind of exposure do you have in the second half of this year and into next year for further underwriting losses? Or did you try and take that into account when you did reserves in 2Q?

Let me take the first part of your question first Jay. I think that we have said is that in the past reporting periods that the programs that we had been in for RVI were essentially gone except for one with the one measure manufacturer that where we never had any losses. All of these businesses have been put into run-off and that manufacturer has about another year of leases. And the manufacturer is Honda, and I think we have said that in a variety of forums. What we are seeing is with the gas prices Honda, some of their larger vehicles are having unusual drops in their used car values as well. And so we've put up the additional amount this quarter to try and be conservative and take that into account. Clearly if there was a dramatic additional drop, there would be some additional losses on our part but we think we're in pretty good shape on it at this point in time. And the amount that we put up in this quarter was about $10 million.

That's helpful. So if used car prices kind of stay where they are, depressed, but don't decline more, you are saying it should be okay in the second half of the year?

Yes, that's right and remember that we're talking about Honda.

Right, right. Yes, I guess it could have been...

It's not across a broad market. Broad market we're out of.

Jayin the past... I have got to probably make some comments feeling that we might even have some favorable run-off there in Honda. And I think, with fuel prices where there were, that perspective has changed. Just as Keith mentioned because of the drop in the SUV part of their stuff. So, there won't be any favorable development with... if the used car values stay the same, we'll fine probably with the charge we took in the same quarter, some launch.

I guess you made good two decisions, one to exit the business and two, not do any huge deals with GM otherwise it might be in more difficult position at this point.

That might be true.

Thanks.

Jay, let me.. you had asked a question earlier that I've got an answer for you now. You had asked about third and fourth quarter of '07.

Yes.

GA-PR operating earnings, that was $57 million for that 6 months period. And that's before consideration of debt expense and before consideration of minority interest.

Yes Jay, another part of our business are premier, lease and loan business. The three auto manufacturers in decisions on leasing programs, probably will hurt us from... but it's doing [ph] revenue by about $30 million through some other products in that, but more on the revenue side I think than the profitability side, probably not much on that side.

Okay that's helpful. Thanks guys.

There are no further questions. I will now like to turn the call back over to Mr. Keith Jensen.

All right thank you. We appreciate your taking the time to join us and we look forward reporting to you at the end of the third quarter. Thank you and have a good day.

Ladies and gentlemen that concludes the presentation. Thank you for participation. You may now disconnect. Have an excellent weekend.