American Financial Group, Inc. (NYSE: AFG) (NASDAQ: AFG) today
reported net earnings attributable to shareholders of $96 million
($0.94 per share) for the 2011 third quarter, compared to $132
million ($1.21 per share) for the 2010 third quarter. Per share
results reflect the impact of share repurchases in 2011 and 2010.
The 2011 results include realized gains of $5 million compared to
realized gains of $15 million in the 2010 period. Book value per
share, excluding appropriated retained earnings and unrealized
gains (losses) on fixed maturities, increased by $0.40 to $39.09
per share during the quarter. Net earnings attributable to
shareholders for the nine month period were $234 million ($2.24 per
share), compared with $346 million ($3.11 per share) in the
comparable 2010 period. Nine month results in 2011 include realized
gains of $14 million and a special charge of $38 million resulting
from a second quarter reserve strengthening related to the
Company’s asbestos and other environmental exposures. The
comparable period in 2010 includes $24 million in realized
gains.
Core net operating earnings were $91 million ($0.90 per share)
for the 2011 third quarter, compared to $117 million ($1.07 per
share) reported in the 2010 third quarter. Core net operating
earnings for the first nine months of 2011 were $258 million ($2.48
per share) compared to $322 million ($2.89 per share) for the same
period a year ago. Lower underwriting profit and lower investment
income in our specialty property and casualty insurance (“P&C”)
operations, partially offset by increased earnings in our annuity
and supplemental (“A&S”) operations in the first nine months of
2011, contributed to these results. Nine month annualized core
operating return on equity was 9%.
During the third quarter of 2011, AFG repurchased 2.6 million
shares of common stock at an average price per share of $32.25.
Repurchases during the first nine months of 2011 totaled 7.8
million shares at an average price per share of $33.70.
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 endedSeptember
30,
Nine months endedSeptember
30,
2011 2010 2011
2010 Components of net earnings attributable to
shareholders:
Core net operating earnings (a)
$ 91 $ 117 $ 258 $
322
Realized gains
5 15 14 24
Special A&E charge (b)
- - (38 ) -
Net earnings attributable to
shareholders
$ 96 $ 132 $ 234 $ 346
Components of diluted earnings per
share:
Core net operating earnings
$ 0.90 $ 1.07 $ 2.48
$ 2.89
Realized gains
.04 .14 .13 .22
Special A&E charge (b)
- - (.37 ) -
Diluted earnings per share
$ 0.94 $ 1.21 $ 2.24 $ 3.11
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: “A continued low
interest rate environment and national and global economic
uncertainty require that our insurance professionals be more
disciplined than ever in their underwriting and product pricing
decisions. Despite these challenging circumstances, AFG produced
solid core operating results for the third quarter and first nine
months of 2011.
“We continued to repurchase shares of our common stock during
the third quarter, which were acquired, on average, at
approximately 83% of book value. We are confident in the Company’s
financial strength and liquidity. We had parent company cash of
$315 million and excess capital of approximately $725 million at
September 30, 2011. We are committed to deploying our excess
capital in a manner that creates long-term shareholder value. In
addition to using excess capital for share repurchases and
dividends, we continue to invest in healthy, profitable organic
growth through the introduction of new products and services and
look for opportunities to expand our specialty niche businesses
through acquisitions and start-ups that meet our projected return
thresholds.
“We reaffirm our core net operating earnings guidance for 2011
to be $3.30 to $3.70 per share. As has been our practice, this
guidance excludes non-core items such as realized gains and losses
as well as other significant items that may not be indicative of
ongoing operations.”
P&C Specialty Core
Results
The P&C specialty insurance operations generated an
underwriting profit of $56 million in the 2011 third quarter,
compared to $68 million in the third quarter of 2010. The combined
ratio for the 2011 third quarter was 93%, 2 points higher than the
comparable 2010 period. Results for the 2011 third quarter include
$34 million (4 points) in favorable reserve development. By
comparison, favorable reserve development in the third quarter of
2010 was $15 million (2 points). Losses from catastrophes totaled
$13 million in the third quarter of 2011, primarily related to
Hurricane Irene. Catastrophe losses in the third quarter of 2010
were $6 million. Underwriting profit for the first nine months of
2011 was $141 million, compared to $214 million in the comparable
2010 period.
Gross written premiums increased by approximately 24% and 16%
for the third quarter and first nine months of 2011 when compared
to the 2010 periods. Net written premiums for the 2011 third
quarter and first nine months were 30% and 18% higher,
respectively, than the same periods a year earlier. This growth was
driven by higher premiums in our Property and Transportation
segment, particularly our crop and transportation businesses. In
addition to these factors, higher net written premiums in 2011
reflect the impact of a third quarter 2010 reinsurance transaction
in our Specialty Financial group.
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 $5 million in the 2011 third quarter, $36
million lower than the 2010 third quarter. Lower crop profits,
higher catastrophe losses and lower underwriting profits in our
transportation businesses contributed to these results.
Underwriting profit in the first nine months of 2011 decreased
approximately $43 million from the comparable 2010 period. Most
businesses in this segment had strong underwriting margins through
the first nine months of 2011.
Gross and net written premiums for the first nine months of 2011
were 32% and 29% higher than the comparable 2010 periods. Higher
spring agricultural commodity prices, which have the effect of
increasing our crop premiums, and premiums from National
Interstate’s acquisition of Vanliner were primary drivers of this
growth.
The Specialty Casualty group reported an underwriting
profit of $20 million in the 2011 third quarter, compared to an
underwriting loss of $13 million in the third quarter of 2010. The
increase in underwriting profit was primarily attributable to a
significant reduction in prior year adverse reserve development.
Improved results in our general liability, excess and surplus, and
California Workers’ Comp businesses were offset somewhat by lower
underwriting profits in our targeted markets operations. Specialty
Casualty underwriting profit in the first nine months of 2011 was
$43 million, approximately $14 million higher than the comparable
2010 period. Higher underwriting profit in our excess and surplus
lines and improved prior year favorable reserve development more
than offset underwriting losses in a block of program business.
Most businesses in this group produced strong underwriting profit
margins through the first nine months of 2011.
For the third quarter of 2011, gross and net written premiums
were down 3% when compared to the comparable 2010 period. Gross and
net written premiums for the first nine months of 2011 were down 3%
and 5%, respectively, from the comparable prior year period,
consistent with our expectations. The non-renewal of two major
programs that did not meet our return thresholds and a decision to
exit the excess workers’ compensation business resulted in lower
premiums in both 2011 periods.
The Specialty Financial group reported underwriting
profit of $23 million for the third quarter of 2011, compared to
$36 million for the same period a year ago. Higher catastrophe
losses in our financial institutions business and lower favorable
reserve development in our run-off automotive residual value
insurance (“RVI”) business impacted 2011 results. Additionally,
third quarter 2010 results reflect pre-tax income of approximately
$8 million in connection with a reinsurance transaction involving
the sale of unearned premiums related to our automotive lines of
business. Specialty Financial underwriting profit was $46 million
for the nine month period, compared to $91 million in the same 2010
period, primarily the result of lower favorable RVI reserve
development and the 2010 reinsurance transaction. Almost all lines
of business in this group produced excellent underwriting profit
margins through the first nine months of 2011.
Increases in net written premiums in the 2011 third quarter and
nine month periods were the result of a third quarter 2010
reinsurance transaction that involved the sale of unearned premiums
related to our automotive lines of business. These increased
premiums were offset to some extent by lower premiums in our
financial institutions business, as a result of our reduction in
coastal and near-coastal exposures.
Carl H. Lindner III stated, “Our commitment to carefully manage
wind-exposed property coverages has resulted in some loss of
premium, but has also been instrumental in helping us to contain
losses from storms that have produced billions of dollars of losses
for our industry. I’m pleased that AFG’s third quarter catastrophe
losses represented only two points on our combined ratio.
Additionally, I am encouraged that we have rate increases in some
of our businesses. We know that our underwriting and pricing
discipline serve us well today, and will continue to do so years
from now. We remain on target to achieve our 2011 operating
goals.”
Annuity and Supplemental Insurance Core
Results
The A&S Group generated pretax core operating earnings in
the first nine months of 2011 of $157 million, 6% higher than in
the first nine months of 2010. However, for the third quarter,
pretax core operating earnings were $49 million in 2011, compared
to $58 million for the comparable 2010 period. Higher third quarter
earnings due to asset growth and lower expenses were more than
offset by the impact of the third quarter 2011 decrease in the
stock market and, to a lesser extent, the accounting impact of
lower interest rates on the Company's fixed indexed annuity (“FIA”)
operations.
A 14% decline in the S&P 500 Index during the third quarter
of 2011 had a negative impact on variable and FIA results of
approximately $8 million. FIA results for the 2011 third quarter
were also adversely impacted by approximately $4 million due to a
decline in interest rates. AFG expects that much of this negative
impact will reverse over time. There was no impact on earnings in
the third quarter of 2010 because the positive impact of an 11%
increase in the S&P 500 Index was offset by a decline in
interest rates.
AFG performs a review (“unlocking”) of its major actuarial
assumptions throughout the year, including management's expectation
of long-term reinvestment rates. Given current market conditions,
the effect of any such unlocking is not expected to be material to
AFG. Excluding the potential impact of any unlocking, AFG now
expects that full year 2011 A&S core operating results will be
12-15% higher than 2010, down from earlier guidance of 15-20%.
Statutory premiums of $992 million and $2.8 billion in the 2011
third quarter and first nine months were 20% and 40% higher,
respectively, than the comparable periods in 2010. The third
quarter results reflect increased sales of FIAs in the single
premium market due primarily to the introduction of new products
and features. Nine month results also reflect higher FIA sales as
well as increased sales of annuities through banks as a result of
the addition of several new banks to the distribution network.
Sales of annuities have slowed since early September as AFG has
lowered its crediting rates in response to the significant decrease
in market interest rates.
Investments
AFG recorded third quarter 2011 net realized gains of $5 million
after tax, compared to $15 million in the comparable prior year
period. After-tax, realized gains for the first nine months of 2011
were $14 million, compared to $24 million in the same period in
2010. Unrealized gains on fixed maturities were $465 million, after
tax, after DAC, at September 30, 2011. Our portfolio continues to
be high quality, with 90% of our fixed maturity portfolio rated
investment grade and 96% with a National Association of Insurance
Commissioners’ designation of NAIC 1 or 2, its highest two
categories.
During the first nine months of 2011, P&C investment income
was 14% lower than the comparable 2010 period. As disclosed
previously, the continued runoff and disposition of higher-yielding
securities in the non-agency residential mortgage-backed securities
portfolio and generally lower reinvestment rates were primary
factors contributing to the decrease. We expect 2011 P&C
investment income to be about 12% lower than in 2010.
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 of approximately $35 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 and indexed annuities and a variety of
supplemental insurance products, such as Medicare Supplement. 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 and/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 and inflation rates,
currency fluctuations 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, 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 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; 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 and
policy terms; 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 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 website at
www.AFGinc.com. The company will hold a conference call to discuss
2011 third quarter results at 11:30 am (ET) tomorrow, Wednesday,
October 26, 2011. 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 15891727. Please dial in five to
ten minutes prior to the scheduled start time of the call.
A replay will also be available following the completion of the
call, at approximately 2:00 pm (ET) on October 26, 2011 and will
remain available until 11:59 pm (ET) on November 2, 2011. To listen
to the replay, dial 1-800-585-8367 (international dial in
404-537-3406) and provide the conference ID 15891727.
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 2,
2011 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 Supplements are
available in the Investor Relations section of AFG's website:
www.AFGinc.com.
AMERICAN FINANCIAL GROUP, INC. AND
SUBSIDIARIESSUMMARY OF EARNINGS(In Millions, Except
Per Share Data)
Three months endedSeptember
30,
Nine months endedSeptember
30,
2011 2010 2011
2010 Revenues P&C insurance premiums $ 835 $ 736 $
2,043 $ 1,887 Life, accident & health premiums 107 112 324 340
Investment income 310 296 916 885 Realized gains 8 35 24 50
Income (loss) of managed investment
entities:
Investment income 27 23 78 68
Gain(loss) on change in fair value of
assets/liabilities
1 (4 ) (54 ) (44 )
Other income
47 57
136 155 1,335 1,255
3,467 3,341 Costs and expenses P&C insurance losses
& expenses 779 668 1,952 1,685
Annuity, life, accident & health
benefits & expenses
280
251
811
769
Interest on borrowed money 21 21 63 57
Expenses of managed investment
entities
17 15 53 38 Other operating and general expenses
83 92
269 279
1,180 1,047
3,148 2,828
Operating earnings before income taxes
155
208
319
513
Provision for income taxes(c)
48 82
126 199
Net earnings including noncontrolling
interests
107
126
193
314
Less: Net earnings (loss) attributable to
noncontrolling interests
11
(6
)
(41
)
(32
)
Net earnings attributable to
shareholders
$
96
$
132
$
234
$
346
Diluted Earnings per Common Share
$
0.94 $ 1.21
$ 2.24 $
3.11 Average number of Diluted Shares
101.3 109.5 104.1 111.4
Footnote (c) is contained in the accompanying Notes To Financial
Schedules at the end of this release.
AMERICAN FINANCIAL GROUP, INC. AND
SUBSIDIARIESSUMMARY OF EARNINGS, continued(In
Millions, Except Per Share Data)
September 30, December 31,
Selected Balance Sheet Data:
2011 2010
Total Cash and Investments
$
24,954
$ 22,670 Long-term Debt
$
937
$ 952 Shareholders’ Equity(d)
$
4,465
$ 4,470
Shareholders’ Equity (Excluding
appropriated retained earnings & unrealized gains/losses on
fixed maturities)(d)
$
3,850
$
3,948
Book Value Per Share:
Excluding appropriated retained earnings
$
43.81
$ 40.64
Excluding appropriated retained earnings
and unrealized gains/losses on fixed maturities
$
39.09
$ 37.54 Common Shares Outstanding
98.5 105.2
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 monthsendedSeptember
30,
Pct.Change
Nine monthsendedSeptember
30,
Pct.Change
2011 2010 2011
2010 Gross written premiums
$ 1,575 $
1,273 24 %
$ 3,277
$ 2,828 16 %
Net
written premiums $ 915
$ 703 30 %
$
2,168 $ 1,844
18 %
Ratios (GAAP): Loss & LAE ratio 66 %
61 % 61 % 55 %
Expense ratio 27
% 30 %
32 % 34
% Combined Ratio(Excluding A&E)
93 % 91
% 93 %
89 % Total Combined Ratio
93 % 91
% 96 %
89 %
Supplemental:(e) Gross
Written Premiums: Property & Transportation $ 1,104 $ 809
36 % $ 1,918 $ 1,450 32 % Specialty Casualty 325 335 (3 %) 967 998
(3 %) Specialty Financial 146 129 13 % 391 379 3 % Other
- - -
1 1 -
$
1,575 $ 1,273
24 %
$ 3,277 $
2,828 16 %
Net Written Premiums:
Property & Transportation $ 575 $ 450 28 % $ 1,175 $ 912 29 %
Specialty Casualty 220 227 (3 %) 645 676 (5 %) Specialty Financial
103 10 930 % 297 212 40 % Other
17
16 6 %
51
44 16 %
$ 915
$ 703 30 %
$
2,168 $ 1,844
18 %
Combined Ratio (GAAP): Property &
Transportation 99 % 90 % 96 % 90 % Specialty Casualty 91 % 106 % 93
% 96 % Specialty Financial 77 % 60 % 85 % 74 % Aggregate
Specialty Group 93 % 91 % 93 % 89 %
Three months endedSeptember
30,
Nine months endedSeptember
30,
2011 2010 2011
2010 Reserve Development
Favorable/(Unfavorable): Property & Transportation $ (3 ) $ (2
) $ 23 $ 22 Specialty Casualty 23 (3 ) 50 47 Specialty Financial 9
16 9 39 Other
5 4
10 14
Aggregate Specialty Group 34 15 92 122
Special A&E Reserve Charge-P&C
Run-off
- - (50 ) - Total Reserve
Development Including A&E $ 34 $ 15 $ 42 $
122
Points on Combined Ratio: Property &
Transportation (1 ) - 2 3 Specialty Casualty 11 (1 ) 8 7 Specialty
Financial 9 18 3 11 Aggregate Specialty Group 4 2 5 6
Footnote (e) is contained in the accompanying Notes To Financial
Schedules at the end of this release.
AMERICAN FINANCIAL GROUP,
INC.ANNUITY & SUPPLEMENTAL INSURANCE
GROUPSTATUTORY PREMIUMS(In Millions)
Three monthsendedSeptember
30,
Pct.Change
Nine monthsendedSeptember
30,
Pct.Change
2011 2010 2011
2010 Retirement annuity premiums: Fixed
annuities $ 112 $ 154 (27%) $ 316 $ 514 (39%) Indexed annuities 517
249 108% 1,280 589 117% Bank annuities - direct 63 165 (62%) 278
361 (23%) Bank annuities – indirect 181 131 38% 542 141 284%
Variable annuities
17 17 -
52 56 (7%) 890 716 24% 2,468 1,661 49%
Supplemental insurance 96 100 (4%) 290 303 (4%) Life
insurance
6 9 (33%)
24
29 (17%) Total statutory premiums
$
992 $ 825 20%
$2,782
$1,993 40%
“Bank annuities – direct” represent premiums produced by
financial institutions appointed directly by the Company. “Bank
annuities – indirect” represent premiums produced through banks by
independent agents or brokers appointed by the Company.
AMERICAN FINANCIAL GROUP,
INC.Notes To Financial Schedules
a) GAAP to Non-GAAP
Reconciliation-Components of core net operating
earnings:
In millions
Three months endedSeptember
30,
Nine months endedSeptember
30,
2011 2010 2011
2010 P&C operating earnings $ 120 $ 135 $
340 $ 423
Annuity & supplemental insurance
operating earnings
49 58 157 148 Interest & other corporate expense
(33 ) (14
) (101 )
(75 )
Core operating earnings before income
taxes
136 179 396 496 Related income taxes 45 62
138 174 Core net
operating earnings
$ 91
$ 117 $
258 $ 322
b) Reflects the following effect of a special A&E charge
reflected in nine month 2011 results($ in millions, except per
share amounts):
A&E Charge:
Pre-tax
After-Tax
EPS
P&C insurance runoff operations Asbestos $ 28 $ 18
Environmental
22
14
$ 50 $ 32 $ .31 Former railroad & manufacturing operations
Asbestos $ 3
$
2
Environmental
6
4
$ 9 $ 6 $ .06
c) Operating income before income taxes includes $8 million of
non-taxable income and $47 million of non-deductible losses
attributable to noncontrolling interests related to managed
investment entities in the third quarter and first nine months of
2011, respectively, and $4 million and $37 million of
non-deductible losses in the third quarter and first nine months of
2010, respectively.
d) Shareholders’ Equity at September 30, 2011 includes $465
million ($4.72 per share) in unrealized gains on fixed maturities
and $150 million ($1.52 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, 2010 includes $326 million ($3.10 per share)
in unrealized gains on fixed maturities and $197 million ($1.87 per
share) of retained earnings appropriated to managed investment
entities.
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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