American Financial Group, Inc. (NYSE: AFG) (NASDAQ: AFG) today
reported net earnings attributable to shareholders of $108 million
($0.97 per share) for the 2010 second quarter, compared to $127
million ($1.09 per share) reported for the 2009 second quarter. The
2010 results reflect realized gains on investments of $6 million,
compared to $10 million in the 2009 period. Book value per share,
excluding appropriated retained earnings, increased by $2.02 to
$37.48 per share during the quarter. Net earnings for the first six
months of 2010 were $214 million ($1.90 per share) compared to $231
million ($1.98 per share) for the same period a year ago.
Core net operating earnings of $102 million ($0.91 per share)
for the 2010 second quarter were consistent with our expectations,
but down 13% percent from the record results in the 2009 comparable
period. Improved results in the annuity and supplemental insurance
group were offset by lower underwriting profit in our specialty
property and casualty insurance (“P&C”) operations resulting
from higher weather-related losses and lower investment income.
Core net operating earnings for the first six months of 2010 were
$205 million ($1.82 per share) compared to $248 million ($2.13 per
share) for the same period a year ago. Six month annualized core
operating return on equity was 10%.
During the second quarter of 2010, AFG repurchased 2.7 million
shares of common stock at an average price per share of $27.82.
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 ended
June 30,
Six months ended
June 30,
2010 2009 2010
2009 Components of net earnings attributable to
shareholders:
Core net operating earnings
(a)
$ 102 $ 117 $ 205 $ 248 Realized
investment gains (losses)
6 10
9 (17 ) Net
earnings attributable to shareholders $ 108
$ 127 $ 214 $ 231
Components of EPS:
Core net operating earnings $
0.91 $ 1.01 $ 1.82 $ 2.13 Realized
investment gains (losses)
.06 .08
.08 (.15 ) Diluted
EPS $ 0.97 $ 1.09 $ 1.90
$ 1.98
Footnote a is 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: “AFG’s results for the second
quarter and first six months of 2010 demonstrate our ability to
navigate continued challenges in the insurance marketplace. The
specialty nature and mix of our insurance businesses serve us well
in this environment. We have posted solid core operating earnings
and continue to see a meaningful improvement in the market value of
our investment portfolio.
“We continue to evaluate effective ways to deploy our excess
capital to achieve appropriate returns on shareholders’ equity.
Through June 30, 2010, AFG has repurchased over 5.6 million shares
of its common stock, representing approximately 5 percent of shares
outstanding at the beginning of 2010. We believe that purchasing
shares at attractive prices is an effective use of our excess
capital, producing a favorable effect on our earnings per share and
book value per share. Growth in AFG’s book value per share is a key
strategic benchmark in measuring value creation for our
shareholders. Since the end of 2007, AFG has grown its book value
per share, excluding appropriated retained earnings, by 40%.
“Earlier today, we renewed our $500 million bank line, which
strengthens our financial flexibility. The financial leverage and
capital in our insurance businesses are at levels that fully
support our operations and are consistent with our commitments to
rating agencies.
“Based on our results for the first half of the year, we
increased our 2010 core operating earnings guidance to $3.55 to
$3.85 per share, up from $3.30 to $3.70 per share. As has been our
practice, this guidance excludes realized gains and losses, as well
as the potential for significant catastrophe and crop losses and
unforeseen major adjustments to asbestos and environmental
reserves, and unlocking adjustments related to annuity deferred
acquisition costs.”
Business Segment
Results
The P&C specialty insurance operations generated an
underwriting profit of $68 million in the 2010 second quarter,
compared to $112 million in the second quarter of 2009. The reduced
profit in 2010 is primarily the result of $34 million (6 points on
the combined ratio) in catastrophe losses, compared to $11 million
(2 points) in the 2009 second quarter. Favorable reserve
development was $62 million (11 points) compared to $80 million (13
points) in 2009. Underwriting profit of the P&C specialty
insurance operations for the first six months of 2010 was $145
million, 33% lower than the comparable 2009 period.
Gross and net written premiums were lower in the 2010 second
quarter and first six months compared to the 2009 periods. Further
details of the P&C Specialty operations may be found in the
accompanying schedules.
The Property and Transportation group reported an
underwriting profit of $8 million in the second quarter of 2010,
compared to $26 million in the second quarter of 2009. This
decrease is largely attributable to a $22 million increase in
catastrophe losses resulting primarily from hail storms in Oklahoma
during the month of May. Favorable reserve development served to
offset these results somewhat. Underwriting profit in the first six
months of 2010 decreased approximately $34 million from the
comparable 2009 period. Gross written premiums for the second
quarter and first six months of 2010 were impacted by a competitive
pricing environment as well as lower spring commodity prices that
have the effect of lowering our crop premium volume. In 2010, we
returned to historical levels of cessions under our crop
reinsurance agreement, contributing to an 8% increase to this
group’s net written premiums for the first half of 2010 compared to
the 2009 period. Excluding crop, this group’s net written premiums
for the first six months decreased by 1% from the prior year.
The Specialty Casualty group reported an underwriting
profit of $23 million in the second quarter of 2010, compared to
$38 million in the second quarter of 2009. Underwriting profit in
the first six months of 2010 decreased approximately $37 million
from the comparable 2009 period. Both periods include the results
of our California Workers’ Compensation business, which was
previously reported as a separate operating group. Lower
underwriting results in our general liability operations,
(primarily those that serve the homebuilders industry), excess and
surplus lines and our California workers’ compensation businesses
were offset somewhat by improvements in our executive liability and
targeted markets operations. Many businesses in this group produced
strong underwriting profit margins, but at lower levels than in
2009. Gross and net written premiums for the first six months of
2010 were down 8% and 7%, respectively, from the same 2009 period.
A soft pricing environment and competitive market conditions in the
excess and surplus markets and California workers’ compensation
business, as well as volume reductions resulting from decreased
demand for general liability coverages in the homebuilders market
contributed to these declines. Growth in gross and net written
premiums in our Marketform, executive liability and environmental
operations partially offset these declines.
The Specialty Financial group reported underwriting
profits of $33 million in the second quarter of 2010 compared to
$54 million in the same 2009 period. Improvements in used car sales
prices resulted in $13 million in favorable reserve development in
this group’s automobile residual value insurance (RVI) business,
compared to $39 million of favorable development in the second
quarter of 2009. Our remaining $23 million of Canadian RVI reserves
relate to leases that terminate through the end of 2010. Specialty
Financial underwriting profits were $54 million for the six month
period, compared to $67 million in the same 2009 period. All other
lines of business in this group produced excellent underwriting
results, but at lower levels than the prior year. Gross and net
written premiums decreased approximately 8% and 13%, respectively,
from the 2009 first six months primarily due to economic conditions
affecting the automotive industry. In addition, net written
premiums were impacted by a decision to exit certain automotive
lines of business during 2009.
Carl Lindner III stated, “Increased catastrophes during the
second quarter coupled with a continued soft pricing environment
and competitive market conditions have been challenging for our
property and casualty businesses; however, we remain on target to
achieve our 2010 operating goals. We continue to focus on writing
quality business that will produce appropriate returns. Through the
first six months of 2010, our businesses continued to achieve solid
underwriting profits, albeit at lower levels than in 2009. Pricing
for the quarter and first six months was flat overall and we
continue to monitor rate adequacy in our markets. We know that it
is important to gauge business growth based on our ability to
achieve adequate pricing, but we also want to be well positioned
for a market turn.”
Annuity and Supplemental
Insurance Core Results
The Annuity and Supplemental Insurance Group generated core
operating earnings before income taxes of $46 million for the 2010
second quarter, compared to $42 million in the 2009 period. The
increase was primarily attributable to higher operating earnings in
the fixed annuity and supplemental insurance operations, which were
partially offset by lower earnings in our variable annuity
operations. Core operating earnings before income taxes for the
first half of 2010 were 11% higher than the comparable 2009
period.
Statutory premiums of $671 million and $1.2 billion in the 2010
second quarter and first six months were 31% and 32% higher,
respectively, than the comparable periods in 2009. These results
reflect increased sales of single premium annuities and higher
sales in the bank market.
Due to the two-tier nature and other surrender protection
features in certain of its annuity products, AFG continues to
experience strong persistency in its annuity businesses.
A&E Reserve
Study
During the second quarter, AFG completed an internal review 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 conduct similar
studies with the assistance of outside actuaries and specialty
outside counsel every two years and perform an in-depth internal
study during the intervening years. This year’s study resulted in a
net reserve adjustment of less than $5 million on an after-tax
basis. 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, 2010, AFG’s three year survival ratio for property
and casualty exposures was 9.6 times paid losses for asbestos
reserves and 8.5 times paid losses for total A&E reserves.
These ratios compare favorably with industry data published by
Conning Research and Consulting, Inc. in May 2010, which indicate
that A&E survival ratios were 8.2 for asbestos reserves and 7.7
for total industry A&E reserves at December 31, 2009.
Investments
AFG recorded second quarter 2010 net realized gains of $6
million after tax and after DAC, compared to $10 million in the
prior year period. After-tax, after-DAC realized gains for the
first six months of 2010 were $9 million, compared to realized
losses of $17 million in the same period in 2009. Unrealized gains
on fixed maturities were $287 million, after tax, after DAC, an
increase of $239 million since December 31, 2009. Our portfolio
continues to be high quality, with 91% of our fixed maturity
portfolio rated investment grade and 95% with a National
Association of Insurance Commissioners’ designation of NAIC 1 or 2,
its highest two categories.
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 $30 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; AFG’s ability to
estimate accurately the likelihood, magnitude and timing of any
losses in connection with investments in the non-agency residential
mortgage market; 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, including
mortgage-backed securities; the availability of capital; regulatory
actions (including changes in statutory accounting rules); 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 AFG’s 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 information in this press release should be read in
conjunction with financial and investment supplements that are
available in the Investor Relations section of our web site at
www.AFGinc.com. The company will hold a conference call to discuss
2010 second quarter results at 11:30 am (ET) tomorrow, Tuesday,
August 3, 2010. 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 87161611. 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 two hours from the
conclusion of the call, at approximately 1:30 pm (ET) on August 3,
2010 until 11:59 pm (ET) on August 10, 2010. To listen to the
replay, dial 1-800-642-1687 (international dial in 706-645-9291)
and provide the conference ID 87161611.
The conference call will also be broadcast over the Internet. To
listen to the call via the Internet, go to AFG’s website,
www.AFGinc.com, and follow the instructions at the Webcast link
within the Investor Relations section. An archived webcast will be
available immediately after the call via a link on the Investor
Relations page until August 10, 2010 at 11:59 pm (ET). An archived
audio MP3 file will also be available within 24 hours of the
call.
(Financial summaries follow)
This earnings release and additional Financial and Investment
Supplements are available in the Investor Relations section of
AFG's web site: www.AFGinc.com.
AFG10-07
AMERICAN FINANCIAL GROUP, INC.
AND SUBSIDIARIES
SUMMARY OF EARNINGS
(In Millions, Except Per Share
Data)
Three months ended
June 30,
Six months ended
June 30,
2010 2009 2010
2009 Revenues P&C insurance premiums $ 572 $ 612 $
1,151 $ 1,187 Life, accident & health premiums 113 110 228 219
Investment income 294 299 589 599 Realized investment gains
(losses) 11 15 15 (26 ) Income (loss) of managed investment
entities: Investment income 23 - 45 - Loss on change in fair value
of assets/liabilities (15 ) - (40 ) - Other income
54
60 98 123
1,052 1,096
2,086 2,102 Costs and
expenses P&C insurance losses & expenses 509 504 1,017 75
Annuity, life, accident &
health benefits & expenses
265
240
518
491
Interest on borrowed money 18 13 36 29 Expenses of managed
investment entities 14 - 23 - Other operating and general expenses
88 133 187
233 894 890
1,781 1,728
Operating earnings before income
taxes
158
206
305
374
Provision for income
taxes(b)
58 74 117
132 Net earnings including
noncontrolling
interests
100
132
188
242
Less: Net earnings (loss)
attributable
to noncontrolling interests
(8
)
5
(26
)
11
Net earnings attributable to
shareholders
$ 108
$ 127
$ 214
$ 231
Diluted Earnings per Common Share
$ 0.97
$ 1.09 $ 1.90 $
1.98 Average number of Diluted Shares 111.8
116.5 112.5 116.5 June 30, December 31, Selected
Balance Sheet Data:
2010 2009 Total Cash
and Investments $ 20,927 $19,791 Long-term Debt $ 851 $ 828
Shareholders’ Equity
(c) $ 4,285 $ 3,781
Shareholders’ Equity (Excluding
appropriated
retained earnings &
unrealized
gains/losses on fixed
maturities)(c)
$ 3,786 $ 3,733 Book Value Per Share: Excluding appropriated
retained earnings $37.48 $33.35 Excluding appropriated retained
earnings and unrealized gains/losses on fixed maturities $ 34.84 $
32.92 Common Shares Outstanding 108.6 113.4
Footnotes b and c are contained in
the accompanying Notes To Financial Schedules at the end of this
release.
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
2010 2009 2010
2009
Gross written premiums
$ 811 $ 850 (5 %)
$1,555 $1,668 (7 %)
Net written premiums $ 575 $
589 (2 %)
$1,141
$1,174 (3 %)
Ratios (GAAP):
Loss & LAE ratio 52 % 45 % 52 % 46 %
Expense
ratio 36 % 37
% 36 % 36
% Combined Ratio(Excluding A&E)
88 % 82 %
88
% 82 % Total
Combined Ratio 89 % 82 %
88 % 82 %
Supplemental:(d)
Gross Written Premiums:
Property & Transportation $ 364 $ 361 1 % $ 641 $ 677 (5 %)
Specialty Casualty 316 352 (10 %) 663 721 (8 %) Specialty Financial
128 137 (7 %) 250 272 (8 %) Other
3
- -
1 (2 ) -
$ 811 $ 850 (5 %)
$1,555 $1,668 (7 %)
Net Written Premiums: Property & Transportation $ 246 $
224 10 % $ 462 $ 426 8 % Specialty Casualty 211 233 (9 %) 449 481
(7 %) Specialty Financial 104 114 (9 %) 202 233 (13 %) Other
14 18 -
28
34 -
$ 575 $
589 (2 %)
$1,141
$1,174 (3 %)
Combined Ratio
(GAAP): Property & Transportation 96 % 88 % 91 % 83 %
Specialty Casualty 90 % 84 % 91 % 83 % Specialty Financial 74 % 59
% 79 % 74 % Aggregate Specialty Group 88 % 82 % 88 % 82 %
Three months ended
June 30,
Six months ended
June 30,
2010 2009 2010
2009
Reserve Development
Favorable/(Unfavorable):
Property & Transportation $ 15 $ 11 $ 24 $ 39 Specialty
Casualty 31 34 50 66 Specialty Financial 13 40 23 41 Other
3 (5 )
10 (2 )
$ 62 $ 80 $ 107
$ 144
Points on Combined
Ratio:
Property & Transportation 7 5 6 9 Specialty Casualty 14 14 11
14 Specialty Financial 10 31 9 16 Aggregate Specialty
Group 11 13 9 12
Footnote d is contained in the accompanying Notes To Financial
Schedules at the end of this release
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
2010 2009 2010
2009
Retirement annuity premiums:
Fixed annuities $ 218 $ 128 70 % $ 370 $ 220 68 % Indexed annuities
180 117 54 % 340 247 38 % Bank annuities 142 133 7 % 196 151 30 %
Variable annuities
19 25 (24 %)
39 51 (24 %) 559 403 945 669
Supplemental insurance 101 97 4 % 203 192 6 % Life insurance
11 12 (8 %)
20
24 (17 %) Total statutory premiums
$
671 $ 512 31 %
$ 1,168 $
885 32 %
AMERICAN FINANCIAL GROUP,
INC.
Notes To Financial
Schedules
a) GAAP to Non GAAP Reconciliation -
Components of core net operating earnings:
In millions
Three months ended
June 30,
Six months ended
June 30,
2010 2009 2010
2009 P&C operating earnings $ 139 $ 185 $
288 $ 373 Annuity & supplemental insurance operating
earnings 46 42 90 81 Interest & other corporate expense
(30 ) (41 )
(61
) (64 )
Core operating earnings before
income taxes
155
186
317
390
Related income taxes
53 69
112 142 Core net
operating earnings
$ 102 $ 117
$ 205 $ 248
b) Operating income before income taxes includes $13 million and
$33 million in non-deductible losses attributable to noncontrolling
interests related to managed investment entities in the second
quarter and first six months of 2010, respectively.
c) Shareholders’ Equity at June 30, 2010 includes $287 million
($2.64 per share) in unrealized gains on fixed maturities and $212
million ($1.96 per share) of retained earnings appropriated to
managed investment entities. The appropriated retained earnings
will ultimately inure to the benefit of the debt holders of the
investment entities managed by AFG. Shareholder’s Equity at
December 31, 2009 includes $48 million ($.43 per share) in
unrealized gains on fixed maturities.
d) Supplemental Notes:
- 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.
- Specialty Casualty
includes primarily excess and surplus, general liability, executive
liability, umbrella and excess liability and customized programs
for small to mid-sized businesses and workers’ compensation
insurance, primarily in the state of California.
- 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.
- Other includes an
internal reinsurance facility.
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