American Financial Group, Inc. (NYSE: AFG) today reported 2018 second
quarter net earnings attributable to shareholders of $210 million ($2.31
per share) compared to $145 million ($1.61 per share) for the 2017
second quarter. The $2.31 per share is a record for AFG’s second
quarter. Net earnings for the quarter include $25 million ($0.27 per
share) in after-tax net realized gains on securities. By comparison, net
earnings in the 2017 second quarter include $5 million ($0.05 per share)
in after-tax net realized gains on securities and expenses of $5 million
($0.05 per share) related to the redemption of AFG’s 6.375% Senior
Notes. The change in the federal corporate tax rate from 35% to 21%,
enacted by the Tax Cuts and Jobs Act of 2017 and effective January 1,
2018, contributed to a lower effective tax rate in 2018 as compared to
2017. Details may be found in the table below. Book value per share was
$57.08 per share at June 30, 2018. AFG paid cash dividends of $1.85 per
share during the quarter, which included a $1.50 per share special
dividend. Annualized return on equity was 17.1% and 12.3% for the second
quarters of 2018 and 2017, respectively.
Core net operating earnings were $185 million ($2.04 per share) for the
2018 second quarter, compared to $145 million ($1.61 per share) in the
2017 second quarter. The $2.04 per share represents a 27% increase over
the prior year period, and a record second quarter for AFG core earnings
per share. The improved results were attributable to higher earnings in
our Specialty Property and Casualty (“P&C”) Insurance operations and our
Annuity Segment, as well as the benefit of the lower corporate income
tax rate. Book value per share, excluding unrealized gains related to
fixed maturities, was $55.24 per share at June 30, 2018. Core net
operating earnings for the second quarters of 2018 and 2017 generated
annualized returns on equity of 15.1% and 12.3%, respectively.
AFG’s net earnings attributable to shareholders, determined in
accordance with U.S. generally accepted accounting principles (GAAP),
include certain items that may not be indicative of its ongoing core
operations. The table below identifies such items and reconciles net
earnings attributable to shareholders to core net operating earnings, a
non-GAAP financial measure. AFG believes that its core net operating
earnings provides management, financial analysts, ratings agencies and
investors with an understanding of the results from the ongoing
operations of the Company by excluding the impact of net realized gains
and losses and other special items that are not necessarily indicative
of operating trends. AFG’s management uses core net operating earnings
to evaluate financial performance against historical results because it
believes this provides a more comparable measure of its continuing
business. Core net operating earnings is also used by AFG’s management
as a basis for strategic planning and forecasting.
Pretax non-core items:
Non-core Items:
Footnote (a) is contained in the accompanying Notes to
Financial Schedules at the end of this release.
Carl H. Lindner III and S. Craig Lindner, AFG’s Co-Chief Executive
Officers, issued this statement: “We are pleased to report record second
quarter earnings per share for AFG and an annualized core ROE that
exceeded 15%. In addition to strong operating profitability and
investment results in both our Specialty P&C and Annuity Segments, we
achieved meaningful growth across our portfolio of businesses.
“AFG had approximately $720 million of excess capital (including parent
company cash of approximately $260 million) at June 30, 2018 and
following the payment of the special dividend. Where appropriate, our
excess capital will be deployed into AFG’s core businesses as we
identify potential for healthy, profitable organic growth, and
opportunities to expand our specialty niche businesses through
acquisitions and start-ups that meet our target return thresholds. In
addition, returning capital to shareholders in the form of regular and
special cash dividends and opportunistic share repurchases are also an
important and effective component of our capital management strategy. We
will evaluate our excess capital position again in the second half of
2018 and note that the special cash dividend paid in May does not
preclude our consideration of additional actions with respect to our
regular quarterly dividend, additional special dividends and
opportunistic share repurchases.
“Based on results for the first six months of 2018, we now expect AFG’s
core net operating earnings in 2018 to be in the range of $8.10 to $8.60
per share, up from our original estimate of $7.90 to $8.40 per share.
Our core earnings per share guidance excludes non-core items such as
realized gains and losses, as well as other significant items that are
not able to be estimated with reasonable precision, or that may not be
indicative of ongoing operations.”
Specialty Property and Casualty Insurance
Operations
Core operating earnings before income taxes in AFG’s P&C Insurance
Segment were $180 million in the second quarter of 2018, compared to
$163 million in the prior year period, an increase of $17 million, or
10%. Underwriting profit in the second quarter of 2018 was in line with
the strong results reported in the 2017 second quarter; higher P&C net
investment income was the primary driver of the improved year-over-year
results, primarily the result of higher earnings on certain investments
(including limited partnerships and similar investments); these high
returns should not necessarily be expected to repeat in future periods.
The Specialty P&C insurance operations generated an underwriting profit
of $73 million in both the 2018 and 2017 second quarters. The second
quarter 2018 combined ratio of 93.7% was 0.5 points higher than the
prior year period. Results in the second quarter of 2018 include 3.9
points of favorable prior year reserve development, compared to 2.2
points in the 2017 second quarter. Catastrophe losses added 1.4 points
to the second quarter 2018 results, compared to 1.7 points in the
comparable prior year period.
Gross and net written premiums each grew 11% for the second quarter of
2018, when compared to the second quarter of 2017. Average renewal
pricing across the entire P&C Group was up approximately 1.4% for the
quarter. Excluding our workers’ compensation business, renewal pricing
was up approximately 3.4%. Further details about AFG’s Specialty P&C
operations may be found in the accompanying schedules.
The Property and Transportation Group reported an underwriting
profit of $23 million in the second quarter of 2018, compared to $21
million in the second quarter of 2017. These results include higher
year-over-year underwriting profits in our transportation businesses and
improved results in our ocean marine operations and lower underwriting
profitability in our property & inland marine and equine mortality
businesses. Catastrophe losses were $10 million for this group
during the second quarter of 2018, compared to $11 million in the
comparable prior year period.
Gross and net written premiums for the second quarter of 2018 were both
7% higher than the comparable 2017 period. The growth is primarily
attributable to new business opportunities in our property & inland
marine business and higher premiums in our transportation businesses,
which included a 5% renewal premium increase in National Interstate’s
business. Overall renewal rates in this group increased 4% on average
for the second quarter of 2018.
The Specialty Casualty Group reported an underwriting profit of
$29 million in both the second quarters of 2018 and 2017. Higher
profitability in our targeted markets businesses was offset by lower
year-over-year profitability in our excess and surplus lines.
Underwriting profitability in our workers compensation business
continues to be very strong. Catastrophe losses for this group were $1
million and $2 million in the second quarters of 2018 and 2017,
respectively.
Gross and net written premiums for the second quarter of 2018 increased
13% and 14%, respectively, when compared to the second quarter of 2017.
Growth within Neon was the driver of the higher premiums. Our general
liability, executive liability and excess and surplus lines businesses
also reported higher year-over-year premiums. This growth was partially
offset by lower premiums in our workers’ compensation businesses.
Renewal pricing for this group was flat in the second quarter. Excluding
rate decreases in our workers’ compensation businesses, renewal rates in
this group were up approximately 3%.
The Specialty Financial Group reported underwriting profit of $22
million in the second quarter of 2018, compared to $23 million in the
second quarter of 2017. Higher underwriting profitability in our
financial institutions business was partially offset by lower
underwriting profitability in our surety business. Catastrophe losses
for this group were $3 million and $5 million in the second quarters of
2018 and 2017, respectively. All of the businesses in this group
continued to achieve excellent underwriting margins.
Gross and net written premiums for the second quarter of 2018 were up
10% and 7%, respectively, when compared to the same 2017 period,
primarily as a result of higher premiums in our financial institutions
business. Renewal pricing in this group was up approximately 5% for the
quarter.
Carl Lindner III stated: “I’m pleased with our Specialty P&C results
during the second quarter. Each of our Specialty P&C Groups reported
strong underwriting margins and we achieved double digit year-over-year
growth in net written premiums. Second quarter renewal pricing for our
Specialty P&C Group overall was at its highest level in 13 quarters.
Based on results during the first six months of the year, we now expect
growth in net written premium to be in the range of 4% to 8%, up from
our original estimate of 3% to 7%, and we continue to expect an overall
2018 calendar year combined ratio in the range of 92% to 94%.”
Further details about AFG’s Specialty P&C operations may be found in the
accompanying schedules and in our Quarterly Investor Supplement, which
is posted on our website.
Annuity Segment
As shown in the following table, AFG’s Annuity Segment reported $99
million in pretax earnings in the second quarter of 2018, a 16% increase
over the $85 million reported in the second quarter of 2017.
Components of Annuity Earnings Before Income
Taxes
$
123
$
101
22%
$
235
$
199
18%
Annuity Earnings Before Fair Value Accounting for FIAs – Annuity
earnings before fair value accounting for fixed-indexed annuities (FIAs)
and unlocking were $123 million in the second quarter of 2018, a 22%
increase over the $101 million reported in the second quarter of 2017.
These earnings represent a quarterly record for the Annuity segment. As
shown in AFG’s Quarterly Investor Supplement, these outstanding results
were favorably impacted by growth in assets and by exceptionally high
returns on certain investments (including very strong earnings from
limited partnerships and similar investments); these high returns should
not necessarily be expected to repeat in future periods. The benefit of
these items was partially offset by the runoff of higher-yielding
investments.
Impact of Fair Value Accounting for FIAs – Under GAAP, a portion
of the reserves for FIAs ($2.8 billion and $2.1 billion at June 30, 2018
and 2017, respectively) is considered an embedded derivative and is
recorded at fair value based on the estimated present value of certain
expected future cash flows. Assumptions 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, will generally result in a change in fair
value. Some of these adjustments are not economic in nature for the
current reporting period, but rather impact the timing of reported
results. The components of this impact were as follows (in millions):
Components of Impact of Fair Value
Accounting for FIAs
The impact of fair value accounting for FIAs includes an ongoing expense
for annuity interest accreted on the FIA embedded derivative reserve.
The amount of interest accreted in any period is generally based on the
size of the embedded derivative and current interest rates. We expect
both the size of the embedded derivative and interest rates to rise,
resulting in continued increases in interest on the embedded derivative
liability.
In the second quarter of 2018, the stock market increased nearly 3% and
interest rates rose 20 to 25 basis points; these increases exceeded our
expectation of a 1% increase and a 5 basis point increase, respectively.
The significant favorable impact from these two items more than offset
continued higher FIA option costs.
For additional analysis of fair value accounting, see our Quarterly
Investor Supplement, which is posted on AFG’s website.
Unlocking – AFG monitors the major actuarial assumptions
underlying its annuity operations throughout the year and conducts
detailed reviews (“unlocking”) of its assumptions in the fourth quarter
of each year. If changes in the economic environment or actual
experience would cause material revisions to future estimates, AFG will
unlock assumptions in an interim quarter. Due to continued higher FIA
option costs (resulting primarily from higher than expected risk-free
interest rates), AFG unlocked its assumptions for option costs and
interest rates in the second quarter of 2018, resulting in a net charge
to earnings of $27 million, as shown in the table above. AFG will
continue its practice of conducting detailed reviews of its assumptions
(including option costs and interest rates) in the fourth quarter each
year, including 2018.
Craig Lindner commented, “The unlocking charge reflects the higher FIA
option costs that we mentioned last quarter. We now believe these higher
costs are not temporary and believe it is appropriate to unlock our
assumptions in the second quarter. The unlocking charge takes into
account the negative impact of higher option costs, partially offset by
higher reinvestment rates. In addition, we have started adjusting FIA
renewal caps to help mitigate the higher option costs; these actual and
expected cap decreases were used in calculating the unlocking charge.”
Annuity Premiums – AFG’s Annuity Segment reported statutory
premiums of $1.4 billion in the second quarter of 2018, compared to $1.3
billion in the second quarter of 2017. Significantly higher premiums in
the Retail and Broker-Dealer channels were partially offset by lower
premiums in the Financial Institutions channel.
Craig Lindner stated, “We are pleased with the $1.4 billion of premiums
in the second quarter, which represents a quarterly record. We continue
to earn our targeted returns despite volatile interest rates. Production
in the Retail and Broker-Dealer markets was particularly strong due to
the launch of several new products, in addition to an improving interest
rate environment in the first half of 2018. Our indirect bank channel
premiums have softened due to certain competitors offering significantly
higher crediting rates.”
Craig Lindner added, “Based on our sales year-to-date, we continue to
expect that our 2018 full year annuity premiums will be up 10% to 15%
over the $4.3 billion reported in 2017, reflecting expected continued
year over year improvement in the Retail and Broker-Dealer channels, as
well as the launch of new products in 2018.
“In addition, as a result of the stronger than expected earnings in the
first half of 2018, we are raising our estimate for 2018 pretax Annuity
earnings. We now expect those earnings (including Fair Value accounting
and the second quarter unlocking charge) to be in the range of $395 to
$430 million, up from our original guidance of $385 to $425 million.
“These estimates assume (i) stock market increases of 1% per quarter,
(ii) an increase in interest rates of 5 to 10 basis points between now
and year end, (iii) normalized income on the Annuity Segment’s
investments, and (iv) FIA option costs remain in line with recent costs.
Fluctuations in any of those items, as compared to our expectations,
could lead to significant positive or negative impacts on the Annuity
Segment’s results.”
More information about premiums and the results of operations for our
Annuity Segment may also be found in our Quarterly Investor Supplement.
Investments
Effective January 1, 2018, AFG adopted ASU 2016-01, which requires that
all equity securities previously classified as “available for sale” be
reported at fair value, with holding gains and losses recognized in net
earnings, instead of accumulated other comprehensive income (AOCI). AFG
recorded second quarter 2018 net realized gains on securities of $25
million ($0.27 per share) after tax and after deferred acquisition costs
(DAC), which included $15 million ($0.16 per share) in after-tax,
after-DAC net gains to adjust equity securities that the Company
continued to own, to fair value. By comparison, AFG recorded net
realized gains of $5 million in the comparable 2017 period. The impact
to our income statement will vary depending upon the level of volatility
in the performance of the securities held in our equity portfolio and
the overall market.
Unrealized gains on fixed maturities were $191 million after tax and
after DAC at June 30, 2018, a decrease of $428 million since year-end.
Our portfolio continues to be high quality, with 90% of our fixed
maturity portfolio rated investment grade and 98% with a National
Association of Insurance Commissioners’ designation of NAIC 1 or 2, its
highest two categories.
For the six months ended June 30, 2018, P&C net investment income was
approximately 18% higher than the comparable 2017 period, and included
unusually high returns on certain private equity and limited partnership
investments.
More information about the components of our investment portfolio may be
found in our Quarterly Investor Supplement, which is posted on our
website.
About American Financial Group, Inc.
American Financial Group is an insurance holding company, based in
Cincinnati, Ohio with assets of approximately $60 billion. Through the
operations of Great American Insurance Group, AFG is engaged primarily
in property and casualty insurance, focusing on specialized commercial
products for businesses, and in the sale of traditional fixed,
fixed-indexed and variable-indexed annuities in the retail, financial
institutions, registered investment advisor and education markets. Great
American Insurance Group’s roots go back to 1872 with the founding of
its flagship company, Great American Insurance Company.
Forward Looking Statements
This press release contains certain statements that may be deemed to be
“forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. All statements in this press release not dealing with historical
results are forward-looking and are based on estimates, assumptions and
projections. Examples of such forward-looking statements include
statements relating to: the Company’s expectations concerning market and
other conditions and their effect on future premiums, revenues,
earnings, investment activities and the amount and timing of share
repurchases; recoverability of asset values; expected losses and the
adequacy of reserves for asbestos, environmental pollution and mass tort
claims; rate changes; and improved loss experience.
Actual results and/or financial condition could differ materially from
those contained in or implied by such forward-looking statements for a
variety of reasons including, but not limited to: changes in financial,
political and economic conditions, including changes in interest and
inflation rates, currency fluctuations and extended economic recessions
or expansions in the U.S. and/or abroad; performance of securities
markets, including FIA option costs; new legislation or declines in
credit quality or credit ratings that could have a material impact on
the valuation of securities in AFG’s investment portfolio; the
availability of capital; regulatory actions (including changes in
statutory accounting rules); changes in the legal environment affecting
AFG or its customers; tax law and accounting changes; levels of natural
catastrophes and severe weather, terrorist activities (including any
nuclear, biological, chemical or radiological events), incidents of war
or losses resulting from civil unrest and other major losses;
development of insurance loss reserves and establishment of other
reserves, particularly with respect to amounts associated with asbestos
and environmental claims; availability of reinsurance and ability of
reinsurers to pay their obligations; trends in persistency and
mortality; competitive pressures; the ability to obtain adequate rates
and policy terms; changes in AFG’s credit ratings or the financial
strength ratings assigned by major ratings agencies to AFG’s operating
subsidiaries; the impact of the conditions in the international
financial markets and the global economy (including those associated
with the United Kingdom’s expected withdrawal from the European Union,
or “Brexit”) relating to AFG’s international operations; and other
factors identified in AFG’s filings with the Securities and Exchange
Commission.
The forward-looking statements herein are made only as of the date of
this press release. The Company assumes no obligation to publicly update
any forward-looking statements.
Conference Call
The Company will hold a conference call to discuss 2018 second quarter
results at 11:30 a.m. (ET) tomorrow, Thursday, August 2, 2018. Toll-free
telephone access will be available by dialing 1-877-459-8719
(international dial-in 424-276-6843). The conference ID for the live
call is 4674986. Please dial in five to ten minutes prior to the
scheduled start time of the call.
A replay will be available two hours following the completion of the
call and will remain available until 11:59 p.m. (ET) on August 9, 2018.
To listen to the replay, dial 1-855-859-2056 (international dial-in
404-537-3406) and provide the conference ID 4674986.
The conference call and accompanying webcast slides will also be
broadcast live over the internet. To access the event, click the
following link: https://www.afginc.com/news-and-events/event-calendar.
Alternatively, you can choose Events from the Investor Relations
page at www.AFGinc.com.
An archived webcast will be available immediately after the call via the
same link on our website until August 9, 2018 at 11:59 p.m. (ET). An
archived audio MP3 file will be available within 24 hours of the call.
(Financial summaries follow)
This earnings release and AFG’s Quarterly Investor Supplement are
available in the Investor Relations section of AFG’s website: www.AFGinc.com.
Gain (loss) on change in fair value of assets/liabilities
Costs and expenses
Earnings before income taxes
260
205
434
428
Less: Net earnings (losses) attributable to noncontrolling
interests
(2
)
–
(6
)
2
Selected Balance Sheet Data:
Shareholders’ equity (excluding unrealized gains/losses related to
fixed maturities)(c)
$
4,920
$
4,724
Book value per share (excluding unrealized gains/losses related to
fixed maturities
$
55.24
$
53.51
Common Shares Outstanding
89.1
88.3
Footnotes (b) and (c) are contained in the accompanying Notes
to Financial Schedules at the end of this release.
Supplemental Information:(d)
Footnote (d) is contained in the accompanying Notes to
Financial Schedules at the end of this release.
Components of Statutory Premiums
Annuity Premiums:
Components of Annuity Earnings Before
Income Taxes
Annuity earnings before income taxes
$
99
$
85
16
%
$
224
$
181
24
%
Supplemental Annuity Information
Net spread earned before impact of fair value accounting for FIAs
and unlocking*
1.46
%
1.32
%
1.43
%
1.31
%
Impact of fair value accounting for FIAs
0.04
%
(0.21
%)
0.09
%
(0.12
%)
Net spread earned after impact of fair value accounting for FIAs
and unlocking*
1.18
%
1.11
%
1.36
%
1.19
%
AMERICAN FINANCIAL GROUP, INC.Notes to Financial
Schedules
a) Components of core net operating earnings (in millions):
Core Operating Earnings before Income Taxes:
Annuity segment, before fair value accounting for FIAs and
unlocking
* Other Corporate Expenses includes income and expenses
associated with AFG‘s run-off businesses.
b) Excluding the significant tax benefit related to stock-based
compensation, AFG’s effective tax rate for the quarter and six months
ended June 30, 2017 was 32% and 33%, respectively.
c) Shareholders’ Equity at June 30, 2018 includes $191 million ($2.14
per share) in unrealized after-tax gains on fixed maturities and
$27 million ($0.30 per share) in unrealized after-tax losses on fixed
maturity-related cash flow hedges. Shareholders’ Equity at December 31,
2017 includes $619 million ($7.01 per share) in unrealized after-tax
gains on fixed maturities and $13 million ($0.14 per share) in
unrealized after-tax losses on fixed maturity-related cash flow hedges.
d) Supplemental Notes:
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