American Financial Group, Inc. (NYSE:AFG) (NASDAQ:AFG) today
reported net earnings attributable to shareholders of $132 million
($1.21 per share) for the 2010 third quarter, compared to $127
million ($1.09 per share) reported for the 2009 third quarter. The
2010 results reflect realized gains of $15 million compared to
realized gains of $3 million in the 2009 period. Book value per
share, excluding appropriated retained earnings and unrealized
gains (losses) on fixed maturities, increased by $1.15 to $35.99
per share during the quarter. Net earnings attributable to
shareholders for the nine month period were $346 million ($3.11 per
share), compared with $358 million ($3.07 per share) in the
comparable 2009 period. Nine month results in 2010 include realized
gains of $24 million, compared to realized losses of $14 million in
the comparable 2009 period.
Core net operating earnings were $117 million for the 2010 third
quarter, down from the record $124 million reported in the third
quarter of 2009. Earnings per share were $1.07 in each year as a
result of share repurchases in 2010. Improved results in the
annuity and supplemental insurance group were offset by lower
underwriting profit and lower investment income in our specialty
property and casualty insurance (“P&C”) operations. Core net
operating earnings for the first nine months of 2010 were $322
million ($2.89 per share) compared to a record $372 million ($3.19
per share) for the same period a year ago. Nine month annualized
core operating return on equity was 11%.
During the third quarter of 2010, AFG repurchased 1.7 million
shares of common stock at an average price per share of $29.11.
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
September 30,
Nine months ended
September 30,
2010 2009 2010
2009
Components of net earnings attributable to
shareholders:
Core net operating earnings(a)
$ 117 $
124 $ 322 $ 372 Realized
gains (losses)(b)
15 3
24 (14) Net
earnings attributed to shareholders $
132 $
127 $
346 $
358 Components of Earnings Per Share:
Core net operating earnings $ 1.07 $
1.07 $ 2.89 $ 3.19
Realized gains (losses)(b)
.14
.02 .22 (.12)
Diluted Earnings Per Share $
1.21 $
1.09 $
3.11 $
3.07
Footnotes (a) and (b) are contained in the accompanying Notes To
Financial Schedules at the end of this release.
S. Craig Lindner and Carl H. Lindner III, AFG’s Co-Chief
Executive Officers, issued this statement: “Our business units
produced profitable underwriting results for the third quarter and
first nine months of 2010 amid a continuing challenging economic
environment. AFG's investment portfolio continues to perform very
well, as we have capitalized on market opportunities over the last
several years. In a period of unprecedented turmoil in the mortgage
markets, our $3 billion non-agency residential mortgage-backed
securities portfolio has generated an annualized total return of
approximately 15% since year end 2007, significantly outperforming
fixed income indices over this same period.
“In September 2010, we completed an offering of $132 million 7%
Senior Notes due in 2050. The proceeds of this offering are being
used for general corporate purposes and provide flexibility to
allow us to respond to business opportunities that may arise.
“We continue to evaluate effective ways to deploy our excess
capital to achieve appropriate returns on shareholders’ equity.
Through the first three quarters of 2010, AFG repurchased just
under 7.4 million shares of its common stock at an average price of
$27.30 per share. These repurchases represented approximately 6% of
the 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 and
unrealized gains on fixed maturities, by 33%.
“We have increased our core net operating earnings guidance for
2010 to be between $3.70 and $3.90 per share, up from $3.55 to
$3.85 per share. As has been our practice, this guidance excludes
realized gains and losses, as well as the potential for significant
catastrophes, crop losses, unforeseen major adjustments to asbestos
and environmental reserves, goodwill write-offs, and unlocking
adjustments related to annuity deferred acquisition costs.”
P&C Specialty Core
Results
The P&C specialty insurance operations generated an
underwriting profit of $68 million in the 2010 third quarter,
compared to $108 million in the third quarter of 2009. The combined
ratio for the 2010 third quarter was 91%, 8 points higher than the
comparable 2009 period. Results for the 2010 third quarter include
$15 million (2 points) in favorable reserve development. By
comparison, favorable reserve development in the third quarter of
2009 was $78 million (12 points). Losses from catastrophes totaled
$6 million in the third quarter of 2010, compared with $3 million
in the 2009 period.
Gross written premiums declined by approximately 7% for the
quarter when compared to the 2009 period. Net written premiums for
the 2010 third quarter were 13% higher than the same quarter a year
earlier, driven primarily by decreased cessions under our crop
reinsurance agreement, partially offset by the decline in premiums
resulting from the reinsurance transaction in our Specialty
Financial group.
Underwriting profit of the P&C specialty insurance
operations for the first nine months of 2010 was $214 million, 34%
below the 2009 period. 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 $41 million in the 2010 third quarter, $6
million lower than the 2009 third quarter. Approximately three
fourths of this underwriting profit comes from our crop business.
Strong crop yields contributed to results in our crop insurance
operations that were consistent with 2009 third quarter results.
Continued competitive market conditions and lower favorable reserve
development contributed to the decline in underwriting profits.
Gross written premiums for the third quarter and first nine
months of 2010 declined by approximately 6% from the comparable
2009 periods primarily as a result of lower spring commodity prices
that have the effect of lowering our crop premium volume. These
declines were partially offset by additional premiums from the
Vanliner acquisition. In 2010, we returned to historical levels of
cessions under our crop reinsurance agreement, contributing to a
91% increase in this group’s net written premiums for the third
quarter of 2010 compared to the 2009 period. Excluding crop, this
group’s net written premiums for the 2010 third quarter increased
by 27% from the comparable 2009 period, primarily as a result of
additional premiums resulting from the Vanliner acquisition.
The Specialty Casualty group reported an underwriting
loss of $13 million in the 2010 third quarter, compared to an
underwriting profit of $27 million in the third quarter of 2009.
The decrease in underwriting profit was attributed primarily to $39
million in adverse reserve development related to Marketform’s
run-off Italian public hospital business.
Lower underwriting profits 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 targeted markets
operations. Other businesses in this group produced strong
underwriting profit margins, but at lower levels than in 2009.
Specialty Casualty underwriting profit in the first nine months of
2010 was $29 million, approximately $77 million lower than the
comparable 2009 period.
Declines in gross and net written premiums for the 2010 third
quarter and first nine months were primarily attributable to 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. Growth in
gross written premiums in our Marketform and environmental
operations partially offset these declines. Increased retentions in
our executive liability operations helped to offset decreases in
net written premiums for this group.
The Specialty Financial group reported underwriting
income of $36 million for the third quarter of 2010, compared to
$29 million for the same period a year ago. These results reflect
pre-tax income of approximately $8 million in connection with a
reinsurance transaction involving our exit from certain
non-residual value insurance automotive lines of business.
Additionally, higher underwriting income in our financial
institutions business and run-off lease and loan operations more
than offset lower favorable reserve development. Specialty
Financial underwriting profit was $91 million for the nine month
period, compared to $96 million in the same 2009 period. All other
lines of business in this group produced excellent underwriting
results.
Gross written premiums were down 6% and 7%, respectively, for
the third quarter and first nine months of 2010. As previously
announced, we completed the sale of certain automotive-related
lines of business during the third quarter of 2010 whereby the
unearned premium related to these businesses was ceded in a
reinsurance transaction. The sale of these unearned premiums was
the primary cause of a decrease of $106 million in net written
premiums during the third quarter.
Carl Lindner III stated, “We remain on target to reach our 2010
operating goals despite a continued soft pricing environment and
competitive market conditions in our property and casualty
businesses. Our mix of specialty P&C businesses is
advantageous, as results in several of our operations don’t
correlate with the overall P&C insurance industry. This allows
us to focus on writing profitable business in each niche area, even
when we have to compromise premium volume to do so. Pricing for the
quarter and first nine months was flat overall and we continue to
monitor rate adequacy in our markets. We want to be well positioned
for a market turn, but at the same time we have scaled business
growth based on our ability to achieve adequate pricing.”
Annuity and Supplemental Insurance Core
Results
The Annuity and Supplemental Insurance Group generated core
operating earnings before income taxes of $58 million for the 2010
third quarter, compared to $46 million in the 2009 third quarter.
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 nine months of 2010 were 17% higher than the
comparable 2009 period.
Statutory premiums of $825 million and $2.0 billion in the 2010
third quarter and first nine months were 55% and 41% higher,
respectively, than the comparable periods in 2009. These results
reflect increased sales of single premium annuities. 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.
Included in realized gains (losses) in the table on page one is
an after-tax realized loss on subsidiaries of $22 million for
goodwill impairment associated with the sale of a supplemental
health insurance career agency.
Investments
AFG recorded third quarter 2010 net realized gains on securities
of $37 million after tax and after DAC, compared to $6 million in
the comparable prior year period. This amount includes $17 million
from the sale of a portion of its common stock investment in Verisk
Analytics, Inc. AFG continues to own approximately 5.7 million
shares (pre-tax unrealized gain of approximately $125 million at
September 30, 2010) of Verisk Class B common shares that are
convertible into Class A shares on a share-for-share basis after
the expiration of holding periods.
Additionally, $15 million of the third quarter after-tax,
after-DAC gains are related to AFG’s non-agency residential
mortgage-backed securities. The continued runoff and disposition of
securities in the non-agency RMBS portfolio, as well as generally
lower reinvestment rates will likely result in continued pressure
on investment income. We estimate that 2011 investment income in
AFG's P&C segment will be approximately 10-15% lower than in
2010. The anticipated impact of the reduction in our non-agency
RMBS portfolio is much less for our Annuity and Supplemental
insurance business. In addition, lower reinvestment rates can be
partially offset by the ability to reduce crediting rates on the
Company’s in-force business. Given the growth expected in 2011 in
the Annuity and Supplemental business, we expect this segment’s
earnings will exceed that of the current year. Our investment focus
continues to be on achieving appropriate risk adjusted returns with
a total return orientation.
After-tax, after-DAC realized gains on securities for the first
nine months of 2010 were $46 million, compared to net realized
losses of $11 million in the same period in 2009.
Unrealized gains on fixed maturities were $491 million, after
tax, after DAC, an increase of $443 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 reasons 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 company will hold a conference call to discuss 2010 third
quarter results at 11:30 a.m. (ET) tomorrow, Tuesday, November 2,
2010. Toll-free telephone access will be available by dialing
1-888-892-6137 (international dial in 706-758-4386). The pass code
for the live call is 17638863. 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 p.m. (ET) on November 2, 2010 until 11:59
p.m. (ET) on November 9, 2010. To listen to the replay, dial
1-800-642-1687 (international dial in 706-645-9291) and provide the
confirmation code 17638863.
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 November 9,
2010 at 11:59 p.m. (ET). An archived audio MP3 file will also be
available within 24 hours of the call.
-o0o-
(Financial summaries follow)
This earnings release and additional Financial 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 ended
September 30,
Nine months ended
September 30,
2010 2009 2010
2009 Revenues P&C insurance premiums $ 736 $ 622 $
1,887 $ 1,809 Life, accident & health premiums 112 112 340 331
Investment income 296 301 885 900 Realized gains (losses) on:
Securities 57 9 72 (17 ) Subsidiaries (22 ) (5 ) (22 ) (5 )
Income (loss) of managed investment
entities:
Investment income 23 - 68 -
Loss on change in fair value of
assets/liabilities
(4 ) - (44 ) - Other income
57
54 155
177 1,255
1,093 3,341
3,195 Costs and expenses P&C insurance
losses & expenses 668 514 1,685 1,489
Annuity, life, accident & health
benefits & expenses
251
236
769
727
Interest on borrowed money 21 19 57 48
Expenses of managed investment
entities
15 - 38 - Other operating and general expenses
92 121
279 354
1,047 890
2,828 2,618
Operating earnings before income taxes
208
203
513
577
Provision for income taxes(c)
82
72 199
204
Net earnings including noncontrolling
interests
126
131
314
373
Less: Net earnings (loss) attributable to
noncontrolling interests
(6
)
4
(32
)
15
Net earnings attributable to
shareholders
$
132
$
127
$
346
$
358
Diluted Earnings per Common Share
$
1.21 $ 1.09
$ 3.11 $
3.07 Average number of Diluted Shares
109.5 117.2 111.4 116.9
Footnote (c) is contained in the accompanying Notes To Financial
Schedules at the end of this release.
AMERICAN FINANCIAL GROUP, INC. AND
SUBSIDIARIES
SUMMARY OF EARNINGS, continued
(In Millions, Except Per Share
Data)
September 30, December 31, Selected Balance
Sheet Data:
2010 2009 Total Cash and
Investments $ 22,723 $ 19,791 Long-term Debt $ 954 $ 828
Shareholders’ Equity(d) $ 4,577 $ 3,781
Shareholders’ Equity (Excluding
appropriated retained earnings & unrealized gains/losses on
fixed maturities)(d)
$
3,878
$
3,733
Book Value Per Share: Excluding appropriated retained earnings $
40.55 $ 33.35
Excluding appropriated retained earnings
and unrealized gains/losses on fixed maturities
$ 35.99 $ 32.92 Common Shares Outstanding 107.7 113.4
Footnote (d) is 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
September 30,
Pct.
Change
Nine months
ended
September 30,
Pct.
Change
2010 2009 2010
2009 Gross written premiums
$ 1,273 $
1,369 (7 %)
$ 2,828
$ 3,037 (7 %)
Net
written premiums $ 703
$ 620 13 %
$
1,844 $ 1,794
3 %
Ratios (GAAP): Loss & LAE ratio 61 %
48 % 55 % 46 %
Expense ratio 30
% 35 %
34 % 36
% Combined Ratio(Excluding A&E)
91 % 83
% 89 %
82 % Total Combined Ratio
91 % 83
% 89 %
82 %
Supplemental:(e)
Gross Written Premiums: Property & Transportation $ 809
$ 864 (6 %) $ 1,450 $ 1,541 (6 %) Specialty Casualty 335 368 (9 %)
998 1,089 (8 %) Specialty Financial 129 137 (6 %) 379 409 (7 %)
Other
- - -
1 (2 )
-
$ 1,273 $
1,369 (7 %)
$ 2,828
$ 3,037 (7 %)
Net
Written Premiums: Property & Transportation $ 450 $ 236 91
% $ 912 $ 662 38 % Specialty Casualty 227 250 (9 %) 676 731 (8 %)
Specialty Financial 10 116 (91 %) 212 349 (39 %) Other
16 18 (11 %)
44 52 (15 %)
$ 703 $
620 13 %
$ 1,844
$ 1,794 3 %
Combined Ratio (GAAP): Property & Transportation 90 % 81
% 90 % 82 % Specialty Casualty 106 % 89 % 96 % 85 % Specialty
Financial 60 % 77 % 74 % 75 % Aggregate Specialty Group 91 %
83 % 89 % 82 %
Three months ended
September 30,
Nine months ended
September 30,
2010 2009 2010
2009 Reserve Development
Favorable/(Unfavorable): Property & Transportation $ (2 ) $ 8 $
22 $ 47 Specialty Casualty (3 ) 25 47 91 Specialty Financial 16 37
39 78 Other
4 8
14 6 $
15 $ 78
$ 122 $ 222
Points on Combined Ratio: Property &
Transportation - 3 3 7 Specialty Casualty (1 ) 11 7 13 Specialty
Financial 18 29 11 20 Aggregate Specialty Group 2 12 6 12
AMERICAN FINANCIAL GROUP, INC.
ANNUITY & SUPPLEMENTAL INSURANCE
GROUP
STATUTORY PREMIUMS
(In Millions)
Three months
ended
September 30,
Pct.
Change
Nine months
ended
September 30,
Pct.
Change
2010 2009 2010
2009 Annuity premiums: Fixed annuities $ 280 $
129 117 % $ 650 $ 349 86 % Indexed annuities 249 140 78 % 589 387
52 % Bank annuities 170 137 24 % 366 288 27 % Variable annuities
17 17 -
56 68 (18 %) 716 423 69 % 1,661
1,092 52 % Supplemental insurance 100 98 2 % 303 290 4 %
Life insurance
9 10 (10 %)
29 34 (15 %) Total
statutory premiums
$ 825 $
531 55 %
$ 1,993
$ 1,416 41 %
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
September 30,
Nine months ended
September 30,
2010 2009 2010
2009 P&C operating earnings $ 135 $ 183 $
423 $ 556
Annuity & supplemental insurance
operating earnings
58 46 148 127 Interest & other corporate expense
(14 ) (34
) (75 )
(98 )
Core operating earnings before income
taxes
179
195
496
585
Related income taxes 62 71 174
213 Core net operating earnings
$ 117 $
124 $ 322
$ 372
b) AFG’s realized gains (losses) consisted of the following (in
millions) net of tax:
Three months ended
September 30,
Nine months ended
September 30,
2010 2009 2010
2009 Realized gains (losses) on securities $ 37
$ 6 $ 46 $ (11 ) Realized losses on subsidiaries
(22 ) (3
) (22 )
(3 ) Realized gains (losses)
$ 15 $ 3
$ 24 $
(14 )
The realized loss on subsidiaries in 2010 represents the
impairment of goodwill associated with the sale of a supplemental
health insurance career agency.
c) Operating income before income taxes includes $4 million and
$37 million in non-deductible losses attributable to noncontrolling
interests related to managed investment entities in the third
quarter and first nine months of 2010, respectively.
d) Shareholders’ Equity at September 30, 2010 includes $491
million ($4.56 per share) in unrealized gains on fixed maturities
and $208 million ($1.93 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.
e) 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, 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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