American Financial Group, Inc. (NASDAQ: AFG) (NYSE:AFG) today
reported record net earnings attributable to shareholders of $127
million ($1.09 per share) for the 2009 second quarter, compared to
$60 million ($.52 per share) reported in the 2008 second quarter.
The 2009 results reflect realized gains on investments, compared to
realized losses in the prior period. Book value per share increased
by $4.33 to $26.48 per share during the quarter as a result of
earnings and significant improvement in unrealized losses on fixed
maturity investments. Net earnings for the first six months of 2009
were a record $231 million ($1.98 per share) compared to $136
million ($1.16 per share) for the same period a year ago.
Record second quarter core net operating earnings of $117
million ($1.01 per share) were up 5% percent from the comparable
period a year earlier. Improved underwriting results in the
specialty property and casualty insurance (“P&C”) operations
and higher investment income were offset somewhat by lower results
in the annuity and supplemental insurance group. Annualized core
operating return on equity was 18%.
AFG’s net earnings attributable to shareholders, determined in
accordance with generally accepted accounting principles (“GAAP”),
include certain items that may not be indicative of its ongoing
core operations. The following table identifies such items and
reconciles net earnings attributable to shareholders to core net
operating earnings, a non-GAAP financial measure that AFG believes
is a useful tool for investors and analysts in analyzing ongoing
operating trends.
In millions, except per share
amounts
Three months endedJune
30,
Six months endedJune
30,
2009 2008 2009
2008 Components of net earnings attributable to
shareholders:
Core net operating earnings (a)
$ 117 $ 111 $ 248
$ 239 Significant A&E charges - (10 ) -
(10 ) Realized investment gains (losses)
10
(41 ) (17
) (93 ) Net
earnings attributable to shareholders $
127 $ 60
$ 231 $
136 Components of EPS:
Core net
operating earnings $ 1.01 $ .96
$ 2.13 $ 2.05 Significant
A&E charges - (.09 ) - (.09 ) Realized investment gains
(losses)
.08 (.35
) (.15 )
(.80 ) Diluted EPS
$ 1.09 $ .52
$ 1.98 $
1.16
Footnotes are contained in the accompanying Notes To Financial
Schedules at the end of this release.
Carl Lindner III and Craig Lindner, AFG’s Co-Chief Executive
Officers, issued this statement: “In the face of the continuing
challenges in our economy, AFG’s strong operating results in 2009
reflect the successful execution of our specialization strategy.
Our insurance professionals understand that patience and adherence
to underwriting discipline are essential to producing profitable
business, especially in this environment. Most of our P&C
business segments achieved excellent underwriting profit and we
have benefited from the favorable effect of wider spreads in our
annuity business. Our previously announced asbestos and
environmental (“A&E”) study was completed during the quarter
and we are pleased that only minor reserve adjustments were
necessary.
“Improvements in market conditions have also resulted in a
substantial reduction in unrealized losses on AFG’s fixed maturity
investments. As a result of this improvement and continuing strong
earnings, our shareholders’ equity grew by $577 million since the
end of 2008. Market conditions continued to improve subsequent to
June 30 and we are hopeful that this strengthening will continue.
Our balance sheet and liquidity position remain very strong. During
the second quarter, we successfully completed a $350 million
10-year debt offering, which strengthens our overall capital
position. Our financial leverage and capital in our insurance
businesses are at levels that fully support our operations and are
consistent with our commitments to our rating agencies.
“Because of our strong second quarter results, we have increased
our core net operating earnings guidance for 2009 to be between
$3.80 and $4.10 per share, up from $3.75 to $4.05 per share. These
expected results exclude the potential for significant catastrophe
and crop losses, significant adjustments to asbestos and
environmental reserves, and large gains or losses from asset
sales.”
P&C Core
Results
The P&C specialty insurance operations generated an
underwriting profit of $112 million in the 2009 second quarter, 49%
higher than the prior year period. The combined ratio for the 2009
second quarter was 82% compared to 88% in the 2008 period. Results
for the second quarter include $39 million (6 points) in favorable
reserve development from our run-off automotive residual value
insurance ("RVI") operations in addition to $42 million (7 points)
of other favorable development. Favorable reserve development in
the second quarter of 2008 was $70 million (11 points). In
addition, catastrophe losses in the second quarter of 2009 were $11
million (2 points), compared with $25 million (4 points) for the
2008 second quarter. Overall average renewal rates in the first
half of 2009 were flat when compared with the same prior year
period. Underwriting profit of the P&C specialty insurance
operations for the first six months of 2009 was $217 million, 11%
higher than the 2008 period. Further details of the P&C
Specialty operations may be found in the accompanying
schedules.
The Property and Transportation group reported combined
ratios of 88% and 83%, respectively, for the second quarter and
first half of 2009. The improvement in the combined ratios compared
to the same 2008 periods was primarily due to lower catastrophe
losses. Results for the second quarter and first half of 2009
included $8 million (4 points) and $9 million (2 points),
respectively, of catastrophe losses compared to $21 million (10
points) and $24 million (5 points) for the same 2008 periods. Net
written premiums for the 2009 second quarter and first six months
were impacted by an increase in crop business ceded under a
reinsurance agreement as well as volume reductions and soft market
conditions in the property and inland marine and transportation
operations. Excluding crop, 2009 net written premiums for this
group decreased 10% for both the quarter and first six months,
respectively, when compared to the prior year periods.
The Specialty Casualty group’s combined ratios for the
second quarter and first half of 2009 were 81% and 79%,
respectively, compared to 78% and 77% in the comparable 2008
periods. The group’s results for the second quarter and first half
of 2009 included lower levels of favorable reserve development.
Many of the businesses in this group continued to generate
excellent underwriting profitability but at a lower level due to
significantly reduced premiums. Declines in gross and net written
premiums for the second quarter and first half of 2009 were
attributed primarily to lower general liability premiums resulting
from the softening in the homebuilders market and excess and
surplus lines. These declines were partially offset by additional
premium growth from Marketform, a majority-owned Lloyds insurer
that was acquired in January 2008 and has served as a platform to
expand overseas distribution in several product lines.
The Specialty Financial group reported underwriting
income of $54 million in the second quarter of 2009, compared to $5
million in 2008’s second quarter. Favorable trends in used car
sales prices benefited results in our RVI operations. Our remaining
RVI reserves relate to domestic and Canadian RVI contracts. The
majority of the domestic leases will terminate by the end of the
third quarter. Our remaining $52 million of Canadian RVI reserves
relate to leases that terminate through the end of 2010. Year to
date underwriting income for the Specialty Financial group was $67
million, up from $22 million in the comparable 2008 period. Gross
and net written premiums were down in the three and six month
periods, as a decision to exit certain automotive-related lines of
business dampened volumes. Growth in the Fidelity and Crime and
Financial Institutions businesses partially offset these
declines.
The California Workers’ Compensation business posted
small underwriting losses in both the second quarter and first six
months of 2009, compared to underwriting profits of $13 million and
$23 million in comparable periods in 2008. Combined ratios were
101% and 100%, for the second quarter and first six months,
respectively, compared to 75% and 78% in the 2008 periods,
respectively. These increases were driven primarily by a
competitive pricing environment, the potential adverse impact of a
disability claim ruling and lower favorable development. Gross and
net premiums decreased in large measure due to the rate reductions
in traditional workers’ compensation business in California and
reductions in employer payrolls. Our Republic Indemnity subsidiary
filed for rate increases that resulted in a blended premium rate
increase of 8%, effective July 1, 2009. Renewal rates for our
California workers compensation business decreased approximately 1%
through the first half of 2009; however, we are encouraged by
indications that we are achieving in excess of 6% rate increases
during the month of July.
Carl Lindner III stated: “Our overall Specialty P&C
underwriting results were excellent for the second quarter and
first six months of 2009. We continue to experience favorable
reserve development in many of our operations, which highlights our
disciplined underwriting and continued focus on price adequacy. We
recognize that accident year results have deteriorated due to the
softer market but, as a result of our disciplined pricing, we
continue to produce returns in the mid-teens. The diversification
in our specialty insurance portfolio has served us well as we
navigate through a soft market cycle and various aspects of an
economic turndown. Our 2009 gross and net written premiums are
lower than 2008 levels, which is in line with our expectations. In
addition, we are scaling our business growth based on our ability
to achieve adequate pricing. I believe we are well positioned to
continue our underwriting track record of outperforming the
commercial P&C insurance industry.”
Annuity and Supplemental
Insurance Core Results
The Annuity and Supplemental Insurance Group generated core
operating earnings before income taxes of $41 million for the 2009
second quarter, compared to $45 million in the 2008 period. The
decrease was primarily due to lower earnings in our supplemental
insurance operations. Core operating earnings before income taxes
for the first half of 2009 were $81 million, compared to $71
million in the same 2008 period.
Statutory premiums of $512 million and $885 million in the 2009
second quarter and first six months were 20% and 14% lower,
respectively, than the comparable periods in 2008. These results
reflect lower sales of indexed annuities in the single premium
market. This reduction in premium is consistent with our plan and
reflects our disciplined pricing in this difficult economy.
AFG’s annuity liabilities remain very stable. AFG continues to
experience very strong persistency in its annuity businesses due to
the two-tier nature and other surrender protection features in
certain of its annuity products.
A&E Reserve
Charge
During the second quarter, AFG completed the previously
announced comprehensive study of its asbestos and environmental
exposures relating to the run-off operations of its P&C group
and its exposures related to former railroad and manufacturing
operations and sites. We have completed similar studies with the
assistance of outside actuaries and specialty outside counsel every
two years with an in-depth internal study during the intervening
years. We are pleased to report that this year’s study resulted in
minor adjustments to our reserves. During the course of this year’s
study, there were no newly identified emerging trends or issues
that management believes significantly impact the overall adequacy
of AFG’s A&E reserves.
At June 30, 2009, AFG’s three year survival ratio was 10.7 times
paid losses for asbestos reserves and 9.9 times paid losses for
total A&E reserves. These ratios compare favorably with
industry data published by Conning Research and Consulting, Inc. in
June 2009, which indicate that A&E survival ratios were 8.1 for
asbestos reserves and 7.6 for total industry A&E reserves at
December 31, 2008.
Investments
AFG’s 2009 second quarter net realized gains of $10 million
after-tax include the offsetting effect of charges of $32 million
for other than temporary impairments on investments.
Improvements in market conditions, particularly with respect to
residential mortgage-backed securities and corporate fixed income
securities, have led to an improvement in after-tax unrealized
losses on investments of $372 million or $3.21 per share during the
quarter ended June 30, 2009. Our portfolio continues to be high
quality, with 92% of our fixed maturity portfolio rated investment
grade.
As we examine our investment portfolio, we continue to believe
that there are strong fundamentals in place across our investments
and that our investment strategy will enable us to realize the
underlying values of those investments. As of June 30, available
liquidity (primarily bank line of credit, cash and investments) at
the parent company was in excess of $400 million.
More information about the components of our investment
portfolio may be found in our Financial and Investment Supplements,
which are posted on our website.
About American Financial
Group, Inc.
American Financial Group is an insurance holding company, based
in Cincinnati, Ohio with assets in excess of $25 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, indexed and variable annuities and a variety of
supplemental insurance products. 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 and investment
activities; 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 or financial condition could differ materially
from those contained in or implied by such forward-looking
statements for a variety of factors including but not limited to:
changes in financial, political and economic conditions, including
changes in interest rates and extended economic recessions or
expansions; performance of securities markets; our ability to
estimate accurately the likelihood, magnitude and timing of any
losses in connection with investments in the non-agency residential
mortgage market, especially in the subprime and Alt-A sectors; new
legislation or declines in credit quality or credit ratings that
could have a material impact on the valuation of securities in our
investment portfolio, including mortgage-backed securities; the
availability of capital; regulatory actions; changes in legal
environment affecting AFG or its customers; tax law and accounting
changes; levels of natural catastrophes, terrorist activities
(including any nuclear, biological, chemical or radiological
events), incidents of war 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; the unpredictability of
possible future litigation if certain settlements of current
litigation do not become effective; trends in persistency,
mortality and morbidity; competitive pressures, including the
ability to obtain adequate rates; changes in AFG's credit ratings
or the financial strength ratings assigned by major ratings
agencies to our operating subsidiaries; and other factors
identified in our 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 2009 second
quarter results at 11:30 a.m. (ET) tomorrow, Wednesday, July 29,
2009. Toll-free telephone access will be available by dialing
1-888-892-6137 (international dial-in 706-758-4386). The conference
ID for the live call is 18189726. Please dial in five to ten
minutes prior to the scheduled start time of the call. A replay of
the call will also be available at approximately 1:30 p.m. (ET) on
July 29, 2009 until 11:59 p.m. on August 5, 2009. To listen to the
replay, dial 1-800-642-1687 (international dial-in 706-645-9291)
and provide the conference ID 18189726.
The conference call will also be broadcast over the Internet. To
listen to the call, go to the Investor Relations page on AFG’s
website, www.AFGinc.com, and follow the instructions at the Webcast
link. An archived webcast will be available immediately after the
call via a link on the Investor Relations page until August 5, 2009
at 11:59 pm (EDT). An archived audio MP3 file will also be
available within 24 hours of the call.
This earnings release and additional Financial and Investment
Supplements are available in the Investor Relations section of
AFG's web site: www.AFGinc.com.
AMERICAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF EARNINGS
(In Millions, Except Per Share
Data)
Three months endedJune
30,
Six months endedJune
30,
2009
2008 2009 2008
Revenues P&C insurance premiums $ 612 $ 619 $ 1,187 $ 1,254
Life, accident & health premiums 110 108 219 217
Investment income
299 271 599 537 Realized investment gains (losses) 15 (63 ) (26 )
(143 ) Other income
60
82 123
154
1,096 1,017
2,102 2,019
Costs and expenses P&C insurance losses & expenses 504 554
975 1,067
Annuity, life, accident &
healthbenefits & expenses
240
222
491
454
Interest & other financing expenses 13 17 29 36 Other expenses
133 124
233 236
890 917
1,728 1,793
Operating earnings before income
taxes
206
100
374
226
Provision for income taxes
74
37 132
82
Net earnings including
noncontrolling interests
132
63
242
144
Less: Net earnings attributable
tononcontrolling interests
(5
)
(3
)
(11
)
(8
)
Net earnings attributable to shareholders
$
127
$
60
$
231
$
136
Diluted Earnings per Common Share
$
1.09 $ .52
$ 1.98 $
1.16 Average number of Diluted
Shares 116.5 116.3 116.5 116.9 June 30,
December 31,
Selected Balance Sheet Data:
2009 2008 Total Cash and Investments $
17,949 $ 16,871
Long-term Debt,
Including Payable to Subsidiary Trusts
$ 915 $ 1,030 Shareholders’ Equity $ 3,067 $ 2,490
Shareholders’ Equity (Excluding
unrealized gains (losses) on fixed maturities)
$
3,489
$
3,210
Book Value Per Share $ 26.48 $ 21.54
Book Value Per Share (Excluding
unrealized gains (losses) on fixed maturities)
$
30.12
$
27.77
Common Shares Outstanding 115.8 115.6
AMERICAN FINANCIAL GROUP,
INC.
P&C SPECIALTY GROUP
UNDERWRITING RESULTS
(In Millions)
Three months
ended
June 30,
Pct.
Change
Six months
ended
June 30,
Pct.
Change
2009
2008
2009
2008
Gross written premiums $
850 $ 955 (11
%)
$ 1,668 $
1,813 (8 %)
Net written premiums
$ 589 $
661 (11 %)
$ 1,174
$ 1,319 (11 %)
Ratios (GAAP): Loss & LAE ratio 45 % 54 % 46 % 50
%
Expense ratio 37 %
34 % 36
% 34 %
Combined Ratio(Excluding A&E) 82
% 88 %
82
% 84 %
Total Combined Ratio 82 %
90 %
82 %
85 %
Supplemental:
Gross Written Premiums: Property & Transportation $ 361
$ 425 (15 %) $ 677 $ 743 (9 %) Specialty Casualty 310 321 (3 %) 624
660 (5 %) Specialty Financial 137 154 (11 %) 272 290 (6 %)
California
Workers’ Compensation
42
54
(21
%)
97
122
(20
%)
Other
- 1 -
(2 )
(2 ) -
$
850 $ 955 (11
%)
$ 1,668 $
1,813 (8 %)
Net Written Premiums:
Property & Transportation $ 224 $ 261 (14 %) $ 426 $ 508 (16 %)
Specialty Casualty 197 204 (4 %) 397 426 (7 %) Specialty Financial
114 128 (11 %) 233 239 (2 %)
California
Workers’ Compensation
36
49
(26
%)
84
112
(25
%)
Other
18 19 -
34 34 -
$ 589 $
661 (11 %)
$ 1,174
$ 1,319 (11 %)
Combined Ratio (GAAP): Property & Transportation 88 % 94
% 83 % 89 % Specialty Casualty 81 % 78 % 79 % 77 % Specialty
Financial 59 % 96 % 74 % 91 %
California
Workers’ Compensation
101
%
75
%
100
%
78
%
Aggregate Specialty Group 82 % 88 % 82 % 84 %
Supplemental Notes:
1. Property & Transportation includes primarily
physical damage and liability coverage for buses, trucks and
recreational vehicles, inland and ocean marine,
agricultural-related products and other property coverages.
2. Specialty Casualty includes primarily excess and
surplus, general liability, executive liability, umbrella and
excess liability and customized programs for small to mid-sized
businesses.
3. Specialty Financial includes risk management
insurance programs for lending and leasing institutions (including
collateral and mortgage protection insurance), surety and fidelity
products and trade credit insurance.
4. California Workers’ Compensation consists of a
subsidiary that writes workers’ compensation insurance primarily in
the state of California.
5. Other includes primarily an internal
reinsurance facility.
AMERICAN FINANCIAL GROUP,
INC.
ANNUITY & SUPPLEMENTAL
INSURANCE GROUP
STATUTORY PREMIUMS
(In Millions)
Three months
ended
June 30,
Pct.
Change
Six months
ended
June 30,
Pct.
Change
2009
2008
2009
2008
Retirement annuity premiums: Fixed annuities $ 128 $ 157 (18
%) $ 220 $ 248 (11 %) Bank annuities 133 153 (13 %) 151 153 (1 %)
Indexed annuities 117 199 (41 %) 247 372 (34 %) Variable annuities
25 21 19 %
51 44 16 % 403 530 669 817
Supplemental insurance 97 96 1 % 192 191 1 % Life insurance
12 14 (14 %)
24 26 (8 %) Total statutory
premiums
$ 512 $
640 (20 %)
$ 885
$ 1,034 (14 %)
AMERICAN FINANCIAL GROUP,
INC.
Notes To Financial
Schedules
GAAP to Non GAAP
Reconciliation:
(a) Components of core net
operating earnings:
In millions
Three months endedJune
30,
Six months endedJune
30,
2009 2008 2009
2008 P&C operating earnings $ 185 $ 155 $
373 $ 357
Annuity & supplemental
insurance operating earnings
41 45 81 71 Interest & other corporate expense
(40 )
(25 )
(64 )
(52 ) Core operating
earnings before income taxes 186 175 390 376 Related income taxes
69 64
142 137 Core
net operating earnings
$ 117
$ 111 $
248 $ 239
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