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Executives

Carl Lindner - Chairman of the Board

Keith Jensen – CFO & SVP

American Financial Group (AFG) Bank of America Merrill Lynch Insurance Conference February 15, 2012 7:30 AM ET

Unidentified Analyst

Only a perennial speaker at this conference, American Financial Group, I have got Carl Lindner and Keith Jensen, I will let you guys do your introductions. This specialty company with some very interesting niches and they will be talking about those, I want to say personally that the founder of this company Carl Junior excuse me, passed away in 2011.

And I had a chance to many times sit down with Carl, he was a class act, he built really interesting company and even though it's we are sad to see him leave us, I certainly know he would be very pleased to see the company where it is today, Carl.

Carl Lindner

Good morning. I always appreciate the opportunity to let us share enthusiasm about American Financial Group which we consider to be one of the premier specialty essentially insurers out there. We are thankful to Gartner, our great management team that we were able to have a solid year despite of pretty challenging year of catastrophe, tough crop conditions throughout the year and then also earlier this year we are also very happy that to announce that we had no losses insuring the slack line at the halftime show at the Super Bowl.

For those of you who saw the guy balancing there we as a specialty insurer. We had the manufacturers defect liability cover for the slack line, so if it would've broken and there would've been some problems so we would have had few losses.

But that’s kind of what we are about is finding niches and finding interesting ways to deploying. So why invest in AFG, these are the things that I am going to be talking about this morning. We have a great spread of the diversity of business, not one of the 25 different businesses that we are involved in makes up more than 16% of our property and casualty net written premium. The results of the large property and casualty specialties, some of them like Crop-Hail, government (inaudible) or force-placed mortgages property insurance and the captive part of the national interstate and then our annuity business, you know those businesses don’t really correlate to the rest of the specialty property and casualty business that we have and we really like that diversity, I think it means more consistent earnings over time.

Our market position continues to improve in our various businesses today, as you can see over half of our property and casualty group gross written premium is produced by businesses with the top 10 rankings.

And we are also a top five player in most of the major annuity and supplemental lines. The main brand that we are building is the Great American name and Great American Insurance Group and among agents and brokers and our customers in the various niche business where we think we are doing a good job of developing a brand to the customers that we serve and in equine world where we're number one.

If you talk to horse trainer and any number of the different types of Arabians, thorough breeds and you ask them who they would most think of as an insurance company, probably think Great American.

Here you can say over the past three and five years we have had strong compound growth in book value per share. Surpassing our peers, you can also see along with strong growth and book value per share. We have had five and 10 compounded shareholder returns including dividends that surpassed the market and surpassed our peers.

Our in-house money-management arm, American Money Management has really given us a long-term damage over our peers. As you can see AFG’s annualized total return over five years for its fixed income portfolio, we are beating the peers by about in a composite by about a 110 basis points.

Over that time that means a $1 billion dollars of outperformance, small percentages add up over time. Also maybe I would maybe mention our risk analytics investment at year end I think we still Keith have maybe a $120 million of that left but since the IPO, we have had realized gains or unrealized gains of about $300 million that's a pretty big win on an investment like that. We are proud of the strategy that we put into place on that.

We feel we feel intelligently using our excess capital which was roughly $785 million at year-end 2011. We are keeping $200 million to 300 million of powdered drive, defensively because of the financial market volatility we return capital to shareholders through $316 million of share repurchase in 2011 at about 90% of tangible book value, it's about the average and through $68 million of dividends.

We are looking to repurchase probably another $250 million – $300 million of our stock if it continues to be as attractive as it is and will continue to review our dividend again this year. We are always looking for ways to expand our stable of specialty of niches whether it's through a hardening market and an internal growth, whether it's through small acquisition startups, we've been good at that over a long period of time.

Maybe the most important reason to invest in AFG is that we are undervalued and both on a PE and a book value moment basis as you can see. As I have mentioned to you before we performed well in a challenging year for our industry and we have the balance sheet to take advantage of opportunities going forward.

I will talk just a little bit about our property and casualty and specialty property and casualty business. Here is a snap shot of our business, the 23 or so different niches that we have fit into the three main categories with the property and transportation segment being the largest.

Our specialty I might mention to you that our business comes from over 8000 agents and brokers, less than 9% of our overall business comes from the top three national producers. We have good relationships with top national producers but it's more price-sensitive business a lot of time, so we like that architecture. We like a big spread and diversity and distribution, that’s the way we like it.

Let’s talk just a little bit about our specialty, property and casualty strategy. Obviously everybody is our industry is really focused on getting some price increase this year, securing price increases to improve our price adequacy. We are hoping to get 2% to 4% overall in price this year. If the market allows we will go for more. The majority of our businesses are still performing pretty well so outside of California workers comp and just a few areas we probably don't have quite the same need for as large of increases as maybe some of our peers, that said its main goal to get price increase this year.

We want to continue to improve the position of our existing operations adding new niches as I mention through our Lloyds Insurer Market Form, we want to continue to expand internationally, we have used that platform to expand business that we know things like DNO, things like equine mortality, things like ocean marine, fidelity and prime (ph) those businesses that we know well, we use that market form as a platform to grow those businesses.

We were at about $50 million expansion premium off of our market form platform. Strategically aligned and sentenced really time and annual and long-term compensation incentive compensation of our business managers and even our employees to making underwriting profit is really critical in this business. You don't want them to send your underwriters and your claims but you want to send them in the wrong lane.

We have heavy underwriting culture in our company and we default towards underwriting profit versus revenue or growth and that’s just part of our culture. We feel good about our overall reserve position today also, one thing you ought to know about AFG is we are a company with lower catastrophe volatility relative to our peers and to industry. That is past year for instance you know our cats were probably 1.6 points of our combined ratio. Another way to look at that would be under the new RMS 11 CAT modeling for wind storm, one in 500 year windstorm number would be about a $140 million after-tax for us, roughly 3% of shareholders equity, compared to others it's relatively small.

This is my favorite slide, Bill Berkeley and his son through Cincinnati and we were talking and I think over 10 ten years if I would show this slide over 10 years, Bill is on top, but I had to rub it in that over the past five years so we were the top dog now. Having superior underwriting talent and having superior investment talent that goes a long way in the property and it's really what’s driven our industry-leading pretax returns to the past five years. So we are very proud of that, as you can see this time of period underwriting also we are proud of our underwriting track record and our ability to outperform over time.

I thought I would include this add that we have been running, we are proud of it, you can see the number of member companies and they are rated A and best over 100 years or those that have been on words 50 or else you could see there is really just two companies that would fit that category and Great American is one of those.

Again we have been very pleased with our result and each one of our operating segments. We are projecting healthy combined ratios and underwriting profitability for each of our main segments in 2012. We had quite a bit of growth if you look-up there last year. That was driven by national interstate’s Van Liner acquisition. It was also driven by crop prices which we have benefited from increasing, on the premium side, we also benefited from some of the businesses we started up a while ago and are growing. We started, we bought little company that did workers compensation large loss rated types of things.

Right now there's a hardening in that market and we are seeing nice growth. That’s really is pretty much our workers comp business outside of California than I am talking about. And then we started environmental liability units some two or three years ago and that has been nice growth in him that business.

2012, as you can see is probably as we took advantage of crop prices increasing it looks like the game is not over probably till prices are set based on February, March average price but it looks like crop prices are down a little bit and so our 2012 growth is being restrained by crop prices moving in the other direction. Most of our -- if you exclude crop in I think our guidance down one to three if you exclude crop it would be 1% to 5% and I think that where we end up in that range is really going to be determined by how the market progresses on pricing. How much price we get, whether there is continued tightening in the market in that.

With that I am going to turn things over to him Keith Jensen, he is going to talk to you a little bit about our annuity and supplemental business and investments.

Keith Jensen

Thank you and good morning, as Carl said one of the hallmarks of American Financial Group is a focus on niche products where we believe that we can have a competitive advantage and as we think about that we think about it either in the nature of the product, the nature of major of distribution or something whether it's going to be a unique skill set that we can apply that give us a competitive advantage.

That applies as well in our annuity and supplemental businesses, I didn’t get the right slide, the history of the annuity of and supplemental business goes back to 1975. We made an acquisition of the predecessor in American Financial Group or Great American Insurance and along with that came a small little annuity company, it was doing business in the 403B market, over the time since that day we have progressive point, we are now the third-largest 403B writer within the and so what you will see here is the nature of products we sell into that market and in the retirement annuities market and then most recently in the last couple of years we have begun selling in a meaningful way in the bank markets primarily so far to PNC and Regions Bank, we have about ten others where we are in the startup mode and distributing through that market as well and that’s been a lucrative opportunity for u in the last couple of years.

Okay, looks I am going to be defeated by technology. I am going to look at our strategic focus here, the things that we are paying particular attention to at this point but one is that we have made some significant changes in the past year in the distribution that we are using through the 403B market. The model used to be one of large MGAs with an army of agents that would go out and in the individual school districts or hospital situations, presenting products, making sales.

We are finding that the business model is really moving from that to more consumer centric model and that model there is very high commission by the time you have hit the mountains through the MGAs and all of the agents, you went up through there, taking a contract. So during this past year we have eliminated the MGA model and gone straight to a contract with agents. This has put us into a position where we can increase the crediting rate to a policyholders as well as providing the ultimate sales force with a reasonable return on their efforts.

As with any annuity company, we focused very intently on the effects of interest-rate fluctuations. We hold meetings with our investment advisory team every two weeks to look at what the rates are in the marketplace, to look at what crediting rates are available to us and we are in a position right now where we have been able to contain and maintain our crediting rates at a level such we are getting a return of about 280 basis points while the same time providing a reasonable return to our shareholders and policyholders.

We do have to focus as you might is appreciate on making sure that there is an appropriate asset liability mix because if those get out of sync with each other it can be a very serious problem.

We focus heavily on that and do not go into an arena where we have a duration mismatch greater than one. And finally strong high quality balance sheet this carries over from what Carl described from our property and casualty businesses. We are committed to the proposition that we need to be in a position where the capitalization of our companies is not an issue to potential policy holders and to rating agencies who as we all know have a (inaudible) hand and some refer to them as a defector regulators in our industry.

So we are in a position where the equity that we keep, the capital that we keep in our businesses is at a level that would be – merit be in the next rating category higher, so that we never get into the position where that’s the pacing item for us.

Couple of things on operating results; you can see there has been a substantial increase year-over-year in our statutory net premiums. About 250 million of that increase comes from the work that I have described that we are doing in the bank distribution and the remainder of the increase is from premiums into retirement products arena where we have been having substantial opportunities to grow into to provide additional service.

The pre-operating earnings that you see below, I would note that in 2010 we did have a $25 million charge for deferred acquisition costs, if we play that into this metric you can see that earnings were about the same year-over-year and supplemental insurance which is primarily Medicare supplement progressed over the past year as well.

Carl mentioned something’s about the investment, I would just reiterate what he said and indicated that we really looking at the investment as a core competency. This is an area that we don't outsource, we manage it all ourselves. Carl gave you some statistics that talked about the spread over the past four years between ourselves and competitors in the investment arena and the spread was pretty wide. We are just going to give you one anecdotal reason why because we are skeptic and who makes how do you really do that, nobody can do that in perpetuity and that may be true but during the past three or four years, when we went through the recent recession as others were disposing of their residential mortgage-backed securities, we were buying. We feel like it's an area that we have significant expertise. Over the years we have maintained underwriting policies as we look at that policy they have been very stringent.

We haven’t bought into the CDOs, we didn’t buy into the mezzanine financing, we only purchase things that are the primary securitization, AAA category, top tranche. As a result of maintaining that discipline leading up to and through the recession during the three years of recession which we measure is starting about December 31 of ’07 and in December 31 of ’10.

Our return on mortgage-backed securities was 41%, 15% annualized. We think that was an incredible opportunity that many missed because the turmoil and uncertainty in the market was severe. With those thoughts we would be pleased to respond to any questions that you may have.

Unidentified Analyst

I just had a couple of questions, one of the areas for 2012, well you do expect a bit more growth the specialty, casualty business and I am wondering what's driving that. Are there any particular niches in that area that you think can drive that growth?

Carl Lindner

Well I think as far as where we are going to get potentially get the most rate it probably is going to be within that category and then property and transportation. So some of it probably be rate driven, as I mentioned to you we feel that other than California workers comp business we see the markets definitely hardening both from an underwriting and pricing standpoint so I think we are going to see an opportunity there to get more pricing and grow.

Some of our startup businesses like Environmental Liability, California workers comp for the first time we've been dropping our volume in our California Workers Comp business for at least four or five years now. For the first time I think we are saying that with some rate and the economy beginning to improve and the competitive marketplace being a little more saying that we might see even some growth there.

So I think we are going to get a little growth because of price across the board in lot of those lines that makeup especially (inaudible).

Unidentified Analyst

On the conference call you did talk about some of the price increases you were seeing in the fourth quarter, can you give us at least qualitatively what you're seeing in the first quarter of things continuing accelerate the way they did in 2011.

Carl Lindner

That’s probably a little too early to comment on that.

Unidentified Analyst

Since there is no question, let me throw another one out there. Can mention on the annuity side eliminating the MGAs, they would've some value I assume to the transaction. Does that now involve you making more investments to handle some of those the responsibilities that they had previously done?

Carl Lindner

By and large the majority of things that they were doing were things that were also been done on the platform for the portion of our business that was not going through that particular channel and so we were in a position from a systems perspective and from the people perspective to take that additional work with very modest less than 10 headcount increase in the number of people servicing.

Unidentified Analyst

We have got a quiet audience this morning.

Carl Lindner

It's early.

Unidentified Analyst

Well that’s it, why don’t you join me in thanking management of AFG.

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