Cincinnati, OH -(BUSINESS WIRE)- American Financial Group, Inc. (NYSE/NASDAQ: AFG) today reported 2012 first quarter net earnings attributable to shareholders of $113 million ($1.14 per share), compared to $88 million ($0.83 per share) reported for the 2011 first quarter. Per share results reflect the impact of share repurchases in 2012 and 2011. The 2012 first quarter results include $28 million in net realized gains compared to $3 million in net realized losses in the prior year period. Book value per share, excluding appropriated retained earnings and unrealized gains on fixed maturities, increased by $1.44 to $40.07 per share during the quarter.
Core net operating earnings were $85 million ($.86 per share) for the 2012 first quarter, compared to $91 million ($0.85 per share) for the 2011 first quarter. Higher profit in our Annuity and Supplemental Insurance (“A&S”) Group was more than offset by lower underwriting profit in our Specialty Property and Casualty Insurance (“P&C”) operations and lower P&C investment income. Our annualized core operating return on equity was 9%.
Effective January 1, 2012, AFG retrospectively adopted new guidance issued by the Financial Accounting Standards Board related to the accounting for costs associated with acquiring or renewing insurance contracts. Accordingly, results for 2011 have been adjusted to reflect the impact of the adoption, which resulted in a reduction in AFG’s December 31, 2011 shareholders’ equity of approximately $134 million (3%).
During the first quarter of 2012, AFG repurchased 1.5 million shares of common stock at an average price per share of $37.91.
AFG’s net earnings attributable to shareholders, determined in accordance with generally accepted accounting principles (“GAAP”), include realized investment gains and losses and may not be indicative of its ongoing core operations. The following table 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.
S. Craig Lindner and Carl H. Lindner III, AFG’s Co-Chief Executive Officers, issued this statement: “AFG reported strong results in the 2012 first quarter, demonstrating the effectiveness of our specialization strategy and the discipline of our business leaders. The year is off to a good start with solid property and casualty insurance profitability and record earnings in our Annuity and Supplemental operations.
“We remain committed to deploying excess capital in an effective manner. AFG’s share repurchases during the first quarter of 2012 were made at approximately 95% of the Company’s March 31, 2012 book value per share. With approximately $770 million in excess capital at March 31, 2012 (including parent company cash of $378 million), our financial strength also positions us for healthy, profitable organic growth through the introduction of new products and services, and for opportunities to expand our specialty niche businesses through acquisitions and start-ups that meet our return thresholds.
“Based on results in our A&S Insurance Group for the first three months of 2012, we have increased our 2012 core net operating earnings guidance to $3.40 – $3.80 per share, up from $3.30 – $3.70 per share. As has been our practice, this guidance excludes realized gains and losses, as well as other significant items that may not be indicative of ongoing operations.”
Specialty Property and Casualty Insurance Results
The P&C specialty insurance operations generated an underwriting profit of $48 million in the 2012 first quarter, compared to $55 million in the first quarter of 2011. The combined ratio was 92%, compared to 91% in the comparable prior year period. Lower profits in our Property and Transportation Group were offset somewhat by improved results in our Specialty Casualty Group.
Gross and net written premiums were up 9% and 4%, respectively, in the 2012 first quarter compared to the same quarter a year earlier, due primarily to increased premiums in our Specialty Casualty segment. 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 $27 million in the first quarter of 2012, compared to $36 million in the first quarter of 2011. Improved results in our crop insurance operations were more than offset by lower underwriting profits in our property and inland marine and transportation businesses, primarily the result of lower favorable prior year reserve development. Catastrophe losses in this group were nominal, compared to $5 million in the comparable 2011 period. Gross written premiums were up 3% in this group during the first quarter of 2012 primarily due to higher winter wheat commodity prices and market firming in our property and inland marine businesses, which were offset somewhat by lower gross written premiums in our transportation businesses. Net written premiums were down 2% resulting from increased cessions of our winter wheat business. Pricing was up approximately 2% for the quarter, our biggest quarterly increase in this group in six years.
The Specialty Casualty Group reported an underwriting profit of $4 million in the first quarter of 2012, compared to $1 million in the first quarter of 2011. Higher profitability in our international, general liability and workers’ compensation businesses were largely offset by lower favorable reserve development in our excess and surplus lines and executive liability businesses. Gross and net written premiums for the first quarter of 2012 were both up 15%. While nearly all businesses in this group reported growth, our workers’ compensation and excess and surplus businesses were primary drivers of the higher premiums. Increased business opportunities arising from increased exposures and general market hardening have contributed to the increased premiums recorded in this group. Pricing was up approximately 4% for the quarter, representing the highest increase in this group since mid-2005.
The Specialty Financial Group reported an underwriting profit of $16 million in the first quarter of 2012, virtually unchanged from the comparable 2011 period. Nearly all of the businesses in this group achieved excellent underwriting margins during the quarter. Higher gross written premiums resulted primarily from a service contracts business initiated in the second quarter of 2011. All of these premiums were ceded under a reinsurance agreement. Additionally, planned reductions in coastal and near-coastal property exposures in our financial institutions business contributed to decreases in both gross and net written premiums for the quarter. Pricing in this group was flat for the first quarter of 2012.
Carl Lindner III noted: “I am encouraged by the momentum in price increases that we are achieving and feel good about the opportunity for sequential increases in pricing in subsequent quarters. A large dose of patience, coupled with a commitment to appropriate pricing and careful risk selection have served us well and continue to be focus areas, especially as we see new business opportunities and hardening of rates in many of our markets. Almost all of our businesses continued to achieve solid underwriting profits.”
Annuity and Supplemental Insurance Results
The A&S Insurance Group reported record first quarter pretax operating earnings of $67 million in 2012, compared to $54 million in the comparable 2011 period. The 2012 results reflect higher earnings in our fixed annuity operations as well as improved results in our supplemental insurance lines. Higher profitability in our fixed annuity operations was primarily the result of a larger base of invested assets. In our supplemental insurance lines, Medicare supplement results were significantly higher than last year due primarily to improved loss experience and lower policy lapses. In addition, the significant stock market increase in the first quarter of 2012 had a positive impact on results in our variable and fixed indexed annuity blocks.
Statutory premiums of $906 million in the first quarter of 2012 were 16% higher than the first quarter of 2011 primarily due to increased sales of fixed indexed annuities. Sales of traditional single premium annuities and annuities sold in the 403(b) market were lower when compared to the first quarter of 2011.
Craig Lindner explained: “Based on the first quarter 2012 results, we now expect the A&S Insurance Group’s full year 2012 pretax core operating earnings to be 15-20% higher than the 2011 results, up from the increase of 10-15% we previously estimated. Despite the challenging investment and economic environments, our teams have remained focused on developing consumer-friendly products that are appealing to the market, adding more agents and expanding our distribution channels. Above all, we will continue to maintain the financial strength and stability that is important to our policyholders and agents.”
AFG recorded first quarter net realized gains of $28 million after tax, primarily from the sale of a portion of our remaining interest in Verisk Analytics. AFG continues to hold 2.5 million shares of Verisk with an unrealized gain of $113 million as of March 31, 2012. Unrealized gains on fixed maturities were $541 million, after tax, after DAC, an increase of $82 million since year end 2011. Our portfolio continues to be high quality, with 88% 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. P&C investment income was approximately 5% lower than the comparable 2011 period, in line with our expectations.
The complete earnings release is available here: American Financial Group, Inc. First Quarter Earnings