Good day, ladies and gentlemen, and welcome to the American Financial Group 2017 Fourth Quarter and Full Year Results Conference Call. [Operator Instructions]. As a reminder, this call is being recorded. I would now like to turn the call over to Diane Weidner, Assistant Vice President, Investor Relations. Please go ahead, ma'am.

Thank you. Good morning, and welcome to American Financial Group's Fourth 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 CFO. Our press release, investor supplement and webcast presentation are posted on AFG's website. These materials will be referenced during portions of today's call. Before I turn the discussion over to Carl, I would 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 Securities 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 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 our responses 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. Thus, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now I am pleased to turn the call over to Carl Lindner III to discuss our results.

Well, good morning. We released our 2017 fourth quarter and full year results yesterday afternoon. If you'd please turn to Slide 3 of the webcast slides for an overview. AFG's fourth quarter and full year results established new all-time highs for core operating earnings. Our results were enabled by strong operating profitability in both the Property and Casualty and Annuity segments of our business, strong investment performance and effective capital management. And 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 paid $421 million in dividends during the year, representing $113 million in regular common stock dividends and $308 million in special dividends paid in May and November of last year. Our quarterly dividend was increased by 12% to an annual rate of $1.40 per share beginning in October of '17. AFG's 5-year total annualized shareholder return, representing growth in share price plus dividends was approximately 27%, exceeding the total return performance of the S&P 500, the S&P Property and Casualty index and the S&P Life and Health index over that same period. Turning to Slide 4. We're pleased to report fourth quarter core earnings per share of $2.20, another all-time quarterly high for AFG. Our diversified portfolio of Specialty Property and Casualty and Annuity businesses has enabled us to outperform many of our peers during a very challenging quarter and year for the industry overall. These results include very strong profitability in our Property and Casualty operations and record earnings before the impact of fair value accounting in our Annuity segment. Our core P&C results included income of $0.28 per share related to the Neon reinsurance-to-close transaction. Fourth quarter annualized core operating return on equity was 17.2% for 2017 compared…

Thank you, Carl. AFG's Annuity segment had another record year, achieving pretax earnings of $380 billion. This record result demonstrates our commitment to achieving appropriate returns on new business and our ability to deliver consumer-friendly products that the market finds attractive. I'll start with a review of our Annuity results for the fourth quarter beginning on Slide 8. Annuity earnings before income taxes were $97 million in the fourth quarter of 2017 compared to $132 million in the fourth quarter of 2016. Under GAAP rules, a portion of the reserves for fixed-indexed annuities is considered to be an embedded derivative and is recorded at fair value based on the estimated present value of certain expected future cash flows. The impact of fair value accounting for fixed-indexed annuities includes Annuity interest accreted on this embedded derivative reserve, totaling $3 million in the fourth quarter of 2017 and $1 million in the fourth quarter of 2016. In addition to this interest, Annuity segment earnings are also impacted by other changes in the fair value of the embedded derivative. Presumptions used in calculating this fair value include, projected interest rates, option costs, surrenders, withdrawals and mortality. Variances from these assumptions as well as changes in the stock market would generally result in a change in fair value. Many of these adjustments are not economic in nature for the current reporting period, but rather impact the timing of reported results. In the fourth quarter of 2017, the benefit of the higher stock market was more than offset by lower than expected interest rates, resulting in a net $11 million unfavorable impact to Annuity earnings. By comparison, in the fourth quarter of 2016, a significant increase in interest rates as well as an increase in the stock market resulted in large favorable impacts on Annuity…

Thank you, Craig. For the 2017 fourth quarter, we're pleased to report core EPS of $2.20. This establishes a new all-time quarterly high for AFG's core EPS. Slide 13 summarizes AFG's operating earnings results that Carl and Craig have covered. The $2.20 is based on core net operating earnings in the quarter of $197 million. You can see a more detailed view of the components on Page 4 of our Quarterly Investor Supplement. Property and Casualty pretax operating earnings were up 29% when compared to the 2016 fourth quarter. This is most significantly due to the 42% year-on-year increase in underwriting profit. Underwriting profit improved in our Specialty Property and Transportation subsegment and was especially flat in Specialty Financial. Our Specialty Casualty subsegment showed the greatest increase in underwriting profit. Neon, due to the reinsurance-to-close transaction, made a significant contribution, along with several other of our Specialty Casualty businesses, including our workers' compensation businesses and our Excess and Surplus Lines operations. Catastrophe losses in the quarter were level with last year's quarter, thanks to favorable development on third quarter cat losses. We also had another very strong crop year. Pretax Annuity operating earnings were $97 million, a decrease of $35 million due to fair value accounting adjustments. Parent company interest expense decreased by $1 million. We look for this to decline further in 2018 after our November 2017 debt retirement and refinancing. Slide 14 provides a reconciliation of core net operating earnings to net earnings. Net unrealized gains on securities were $4 million or $0.04 per share in the fourth quarter of 2017. We'd previously announced a loss on the early retirement of AFG's 9-7/8% senior notes, which was $26 million or 29% per share during the quarter. As Carl noted earlier, due to the impact of tax reform, AFG…

[Operator Instructions]. Our first question is from Greg Peters of Raymond James.

Just a couple of questions for you. I noted your comments about the crop results, and I was hoping you might provide additional detail around not only the full year number for '17 but what you're thinking the outlook for the crop component is for 2018?

Hi, Greg. This is Carl. Again, we don't separately report crop. 2016 was an extraordinary year for crop. Last year, in '17, turned out to be a very good year also. Both of those years are probably above what we would consider to be a normal crop run rate. So in 2018, our guidance assumes a more normal crop operating income run rate, if that's helpful.

I guess. Maybe I just can come at this from a different perspective, then. If just look at your consolidated current accident year loss ratio results, and I'm just looking at the full year 2017 versus 2016. I guess this is from Page 6 of your supplement. It looks like the current year accident loss pick deteriorated 110 basis points. And I guess, when I think about 2018, I'm wondering if you're anticipating another 100-plus basis point erosion in your accident and your loss pick? Or is the pricing environment changing enough where it will stabilize?

I guess, Greg, this is Jeff Consolino. I would first kind of give an overarching statement that we've considered not only crop as we've been discussing, but pricing objectives and trends in all of our specialty lines of business within the combined ratio guidance that Carl gave you. So that's our best current estimate of where we're going to wind up. Now in terms of deterioration, I don't like to kind of focus overall. I think, looking at the subsegments is more appropriate. And, for example, we had, in the Property and Transportation subsegment, a movement up in the accident year combined ratio X cats, 2017 versus 2016, of 1.8 points. While crop is fully 2/3 of that move up, we had a very satisfying crop year in 2017, and that move you see is just the fact that 2016 was a superior year to 2017 as we look at the year currently. So even to use the word deterioration on the heels of two pretty good years this kind of a contrary thing to say or hard to get your mind around. But that's what the driver is, and rather than trying to parcel this out, I would just focus on our overall combined ratio guidance as the totality of our best current estimate.

I think the other thing is, commercial auto, National Interstate and our Great American trucking business is a significant part of the Property and Transportation segment also. That is one place where we did achieve 3% in price increase this past year, where the market, particularly in commercial auto liability and the problems the industry continues to have, I think that will continue to have an opportunity to get some decent price increase in the commercial auto part of our business in that, so.

I don't mean to over emphasize the current accident year result. I mean, you had a great year end full year result. So maybe just one other question on Property, Casualty, and then I have one question for Craig. On Property Casualty, I noticed that a couple of states insurance department commissioners have called for a pass through of tax benefits from the lower federal tax reform and looking to benefit their consumers of the states. So I'm wondering if that's even going to have any impact on any of your businesses. And then I'll just put in the other question for Craig, and then I'll just listen to your answers. Craig, I was just wondering in your sales outlook for indexed annuities, I'm wondering if there's any change in the competitive posture in the marketplace as a result of tax reform? I know some of your competitors are offshore, and I'm just curious if there's any, if you've seen -- noted any change there?

So Greg, on the first question. In a very difficult year for the industry, where a lot of lines need some rate, it's kind of hard to talk about competing away benefits when you're in that kind of environment. Plus there's -- not all of our competitors in our specialty markets were taxpaying entities prior to tax reform, so there's also that moving piece. Just to maintain the same returns, there may be some different price needed in that. Tax rate is really only one of the many factors that impacts on pricing. Frankly, the more important factors are loss history, loss trends, expenses, investment yield, reinsurance cost, risk selection and those factors. So that's our take on things.

Okay. And Craig, could you comment on annuity sales?

Sure. Greg, what I would say is it's probably too early for us to give an opinion as of whether the tax reform is going to have a big impact on the competitive environment. First of all, we were extremely pleased with the outcome, the leveling of the playing field, what I think that was a significant positive for U.S.-based companies that weren't taking advantage of the loophole. I have to believe given companies that were paying very little tax are now going to be paying the same tax as the U.S.-based companies, I have to believe that long-term, that is going to have an impact on their pricing. I don't think they are going to accept -- I wouldn't think that they would now accept the return that is several points below what they were targeting before. So I would hope that longer term, it would have some impact on the competitive environment.

Our next question is from Amit Kumar of Buckingham Research.

A few questions. The first question sort of goes back to the previous discussion on the agriculture book and the numbers. You used a statement in a more normal run rate. What exactly is that number when you say it's a normal run rate?

Well, we're looking at what your results are over more of a 5 to 10 year period of time, adjusted for any changes in the program itself, trying to adjust for changes in the program. As you know, there were years where the industry didn't make any money, years of big drought, where the industry didn't make a lot of money or where we made a smaller amount of money. And in this business, you're going to have -- each year is going to be a little bit different. So I think that's the best way that we think that we can project forward, is looking at the business and the changes and then looking at a, what we consider to be a normalized run rate. And in years of drought, where there is heavy drought, that could be lower than that. In years where there's great conditions and prices don't change a lot, you can have more. Some of those things you don't know, and the whole year's out. In this business, we usually don't know exactly what we have until the time you hit December and January, where you've got all the answers, so.

Sorry. I should probably rephrase the question. What I was trying to remember, and I don't have the numbers in front of me, was that below 90% combined ratio? Or is that like an 88% to 90% number? I can always go back and check. But I was wondering if you had those numbers handy on a historical basis.

Hi, Amit. This is Jeff. I don't have those numbers handy. And to my knowledge, we don't really present them in any of our investor information.

Okay. One can always, I guess, compute them using the statements. Moving on to the discussion on commercial auto. Jeff, maybe, can you just give us a quick download on how the loss cost trends are? And is it now in the right direction, et cetera? Just give us a quick update versus the historical perspective.

I'll let Jeff think about that, but I can give you a progress report on our commercial auto business, if that would be helpful. Yes, our 2017 calendar year combined ratio for National Interstate improved 3.8 points to 94.6 combined ratio. So we're very pleased with that. Workers' compensation was very profitable. Commercial auto is making an underwriting profit but frankly still needs more rate to get it to the combined ratio, to a level that meets our return objectives long term. Overall, rates for National Interstate, for the year, went up about 4%. Jeff, do you have any thoughts there on loss costs for National Interstate?

Sure, and maybe be more broadly for our trucking business as well. So we're clearly watching loss trends carefully, and we have been since 2012 when unexpected severity started to creep into the business. We would measure the long-term loss trend for National Interstate's business somewhere in the neighborhood of 3.5 points plus or minus, maybe a little bit more. On the physical damage side, that was commercial auto liability, it's more muted down around kind of 1.5 points.

Yes. Jeff is speaking to our Great American trucking piece, that, which is mainly our owner operator business. We've had great results there in '17, and we got a little bit of price increase there, 2% last year.

We've been hearing this earnings season from -- in companies you have, and many of them are great competitors and very respected and we understand there's still a lot of work to do in commercial auto. We've been raising rates since 2012 and try to stay ahead of trend, and we're going to keep at it.

Particularly in commercial auto liability, we got some work to do and -- as well as what the industry does. I think, maybe we're improving a little quicker than our peers, and I hope that maybe as other companies retrench that we get some opportunities about that. I know, I think I spoke about Westfield's exit from the truck business, which was right in National Interstate's backyard. And I know we took it -- that provided some fourth quarter opportunities, so. Hoping we get some more opportunities like that.

Got it. That's really helpful. And one cleanup and I'll re-queue. This is like a separate question. I know after the sale of the LTC business, there was a small piece of reserves. I think it was $37 million or so as of 2016 10-K. Has that piece already been salient, or what's the reserve number? Maybe just like a quick one minute update on that would be great.

Let me get the stats on it. It's a tiny, tiny piece, but let me get my hands on the stats here. Just a second.

[Operator Instructions]. Our next question is from Paul Newsome of Sandler O'Neill.

I wanted to ask you a sort of philosophical question about M&A, and whether or not this change in tax form changes the kinds of things you're looking for, looking at, respectively.

I don't think it really changes the kinds of things that we're looking at. I would say that the change in the beat provisions probably helped to narrow it. They helped to narrow, but not eliminate an embedded tax advantage that foreign competitors have had in potential M&A bidding situations, so. I think probably the beat provisions narrow that advantage a little bit. And so from that standpoint, we think we're fairly careful, thoughtful acquirers of business that demand double-digit returns and that, versus just going for a quick fix that's buying something that's immediately accretive and -- or just accretive, but it can get me the right return. So I think that the change, the beat provisions, could probably help us a little bit where maybe we hadn't been as competitive because of our -- the high bar that we have for ourselves.

And secondly, do you think the regulatory environment has changed at all? I mean obviously, you're not necessarily affected by this, but we're hearing lot of states talk about trying to roll back rates because of taxes. But does this signal a change in how regulators are looking at insurance companies, in your opinion?

I'd say it's really too early to really kind of have much of an assessment on that, as the tax law is so new, so. I think I made some comments earlier that, where you have a lot of blood on the floor, results that weren't that great this past year. I think that influences things. I think, again, the tax rate's only one piece, when you're trying to price properly in that, loss histories and trends and expenses and your bets and your use of predictive analytics and all that are important factors, probably more important factors than the tax, as far as how you set your rates.

And it looks like we have a follow-up from Amit Kumar with Buckingham Research.

I want to go back to the discussion on consolidation. And then when you -- I think it was Paul's question. This might even be closer to Jeff. If you look at the recent market activity with AIG acquiring Validus, apart from the acquisition, they also talked about using third-party capital, et cetera. I was curious, in terms of a thematic thought process, do you think AFG could make something work or look at something or does it make sense, just based on -- you do have the currency, based on the current stock multiple. I mean, has your thought process changed on that front? Or is it just too difficult to make it work?

I'm a little unclear of the question. Is what too difficult to make?

Is, thematically, if AFG were to look at some of the smaller, I guess, Bermuda entities as partners, do you think that makes sense? Or are you so far removed from looking at any reinsurance segment per se? This is like a nonstarter from Day 1.

Yes, you know something Amit, one of the reasons we did so well is because of our careful underwriting and appetite and selection around catastrophe business. So I think you're correct. I think it would be hard for us to -- we wouldn't have a big appetite to integrate or acquire or integrate a business that has large property cat exposures or who's overexposed on the property, primary property D&F on that. I think that we have -- with our Neon team today, the other aspect is, is we've really put a quality team in place to give us a play in the property cat part of the market -- that business, on the reinsurance side, and we have a quality team that we've put in place to help us take advantage of opportunities in the D&F marketplace. So we have good quality talent in and, frankly, with that talent, we'd probably have the ability to write as much or little as what we have an appetite for. So really, it doesn't really add much to us to acquire a Bermuda entity or any other entity that is heavily exposed that way, so.

And Amit, I do have the stats on the long-term care, if you'd like to hear those. At the end of the year, AFG had $38 million of policy reserves in total. Because of the immaterial size of the remaining LTC business, the company certainly doesn't expect to have any material charges in the future. I'd also mentioned that the remaining business is all located in Florida, and the company recently received approval for a 10-year rate plan, which included rate increases in the first five years.

Our next question is from Greg Peters of Raymond James.

It's for Craig. I just wanted more color on the Annuity sales guidance in last year's results. I'm wondering if you could provide additional color on top of everything you've already provided on sales results by the bank channel versus independent agent channel. And what your view is for each of those channels for 2018? And maybe update us on DOL? And where, if any, that's going to have an effect in 2018?

Okay. Greg, I think, clearly, I think distribution had some distractions in 2017, is that looming DOL rule, it was moving all over the place and certainly concerned about where that would end up, have an impact on industry premiums, in my opinion. As you know, what ended up being implemented was DOL light, and has been delayed until July of 2019. FIAs can still be sold by insurance-only agents. I think without a doubt it had -- that distraction had an impact on our sales in the second half of 2017 and clearly, on the industry sales. As I mentioned, the sales of fixed and indexed annuities in 2017 are estimated to be down 9%. Our hope is that some of the noise around that will be gone this year, and will result in stronger industry premiums. Time will tell, but that certainly is our hope. As it relates to any kind of oversight, I will tell you that we support any rule that requires agents to act in the client's best interest. It's hard to argue against that. We think that our consumer-centric [indiscernible] makes us quite a bit less vulnerable to any Department of Labor rule. There's a -- probably pretty likely that the SEC will propose some kind of a fiduciary rule in the near future. It will likely apply to all brokerage accounts, both qualified and nonqualified, and there's going need to be some conformity between the SEC and DOL provisions. So that's kind of where I come out on that subject. In terms of more color or -- certainly the environment of -- we believe that we're in the beginning of a rising interest rate environment. That should be positive for fixed and indexed annuity sales, so. Is that answering your question? Or would you like...

That's great color. I'm glad I asked the follow-up of you, and maybe you could comment on -- I assume the down 9% number was more, rippled more through the independent channel than the bank channel. So maybe -- go ahead.

Yes. Let me see if I could put my hands on that brick. Hang on one second, Greg. Greg, I'm just looking -- the information that I'm looking at is [indiscernible] information that booking that and at least in the schedule that I have in front of me, it doesn't break down financial institutions versus retail. Clearly, retail was impacted in a more major way last year.

Thank you. And that does conclude our question-and-answer for today. I would now like to turn the call back over to Diane Weidner for any further remarks.

Thank you all for joining us this morning. We look forward to speaking with you again at the end of our next quarter. Have a good day, everyone.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.