Thursday, May 24, 2001

Further recovery seen at American Financial

Firm primed for today's meeting

By Cliff Peale
The Cincinnati Enquirer

        After years of promising investors that its toughest markets were about to turn around, American Financial Group Inc. is primed to deliver this year.

        The Cincinnati insurer, the umbrella company for Carl Lindner Jr.'s $12 billion financial empire, has exited unprofitable markets, cut costs and increased rates.

        This year, it should all start to take hold, said Carl Lindner III, co-president and head of property and casualty operations.

[photo] The clouds are parting and sunshine breaking through for Great American, on Third Street downtown
(Ernest Coleman photo)
| ZOOM |
        “It's kind of nice to be in an industry that's turning up,” the younger Mr. Lindner said in an interview.

        For investors in American Financial, the recovery of its flagship Great American Insurance unit and other specialty businesses should be steady this year and even greater next year, analysts said.

        At its annual meeting today, American Financial will give the same message to its shareholders. It comes at a crucial time for Mr. Lindner, who recently turned 82.

        His Cincinnati Reds are struggling to compete financially with teams in larger markets, and Chiquita Brands International, which he controls, is restructuring $862 million in debt and might have to file a plan in federal bankruptcy court.

        Suddenly, the core insurance operations are among the most promising of Mr. Lindner's businesses after lagging for several years.

        “We've been in a long competitive cycle in many of our businesses, but we like the market environment we're in,” his son said.

        The results already have started to show up on American Financial's bottom line — and its stock price. Since mid-March, the stock has jumped by 25 percent to more than $27 a share.

        But the real impact will come later this year and especially in 2002, when customers renew their policies at the higher rates that Great American started to charge last year.

        Jay Cohen, who studies insurance stocks for Merrill Lynch, said the entire insurance industry had been caught in a bad cycle. American Financial could recover well because it keeps plenty of reserves and concentrates its resources on businesses where it can be profitable.

        “The last couple of years have been tough, but it's getting better,” Mr. Cohen said. “The company has a fairly good long-term underwriting track record.”

        Mr. Cohen is predicting share earnings from insurance operations of $1.75 in 2001 and $2.50 in 2002, compared with 71 cents last year.

        American Financial's strategy, like many of its competitors, is simple: Increase rates until you can make a profit on writing basic policies.

        “In some of our businesses, it's been 15 years since we've seen the opportunity to increase price and increase profit margins,” Mr. Lindner said.

        Many of American Financial's specialty businesses, such as lender services, directors' and officers' insurance, and others, have performed well and still are improving, Keith Jensen, senior vice president, said.

        But the company's worst market of all, California workers' compensation, is tightening now after rate increases of 25 percent last year and up to 40 percent this year.

        “That business is a disaster for everybody,” Mr. Cohen of Merrill Lynch said. “Just the fact that they're still around is a good thing.”

        And American Financial also has the elder Mr. Lindner's resources at hand.

        That means it can create cash by selling off some of more than $200 million in real-estate holdings. For example, the company has recently sold the air rights over some buildings around the Grand Central Terminal in New York.

        “We built up value there, and over the next couple of years, we're planning on unlocking some of that,” Carl Lindner III said.
       The Cincinnati Enquirer/ERNEST COLEMAN .


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