Cincinnati, OH – American Financial Group, Inc. (NYSE: AFG) recently reported 2016 third quarter net earnings attributable to shareholders of $109 million ($1.23 per share) compared to $63 million ($0.71 per share) for the 2015 third quarter. Net earnings for the quarter include after-tax charges of $26 million ($0.30 per share) to strengthen the Company’s asbestos and environmental (“A&E”) reserves and $1 million ($0.02 per share) in after-tax realized gains. Comparatively, net earnings in the 2015 third quarter included net after-tax charges of $60 million ($0.67 per share). Details may be found in the table below. Book value per share increased by $1.88 to $59.45 per share during the third quarter of 2016. Annualized return on equity was 9.9% and 5.9% for the third quarters of 2016 and 2015, respectively.
Core net operating earnings were $134 million ($1.51 per share) for the 2016 third quarter, compared to $123 million ($1.38 per share) in the 2015 third quarter. The $1.51 per share established a new high for third quarter core EPS. The improved results were attributable to significantly higher operating earnings in our Annuity Segment and higher net investment income in our Specialty Property and Casualty (“P&C”) insurance operations, which were partially offset by lower Specialty P&C underwriting profit. Book value per share, excluding unrealized gains on fixed maturities, increased by $1.51 to $51.73 per share during the third quarter of 2016. Core net operating earnings for the third quarters of 2016 and 2015 generated annualized core returns on equity of 12.2% and 11.6%, respectively.
During the third quarter of 2016, AFG repurchased approximately 358,000 shares of common stock at an average price per share of $73.98.
The Company also announced today that it declared a special cash dividend of $1.00 per share of American Financial Group Common Stock. The dividend is payable on December 7, 2016 to shareholders of record on November 23, 2016. The aggregate amount of this special dividend will be approximately $87 million. This special dividend is in addition to the Company’s regular quarterly cash dividend of $0.3125 per share, which was increased in August 2016 for the eleventh consecutive year.
AFG’s net earnings attributable to shareholders, determined in accordance with U.S. generally accepted accounting principles (“GAAP”), include certain items that may not be indicative of its ongoing core operations. The table below identifies such items and reconciles net earnings attributable to shareholders to core net operating earnings, a non-GAAP financial measure. AFG believes that its core net operating earnings provides management, financial analysts, rating agencies and investors with an understanding of the results from the ongoing operations of the Company by excluding the impact of net realized investment gains and losses and other special items that are not necessarily indicative of operating trends. AFG’s management uses core net operating earnings to evaluate financial performance against historical results because it believes this provides a more comparable measure of its continuing business. Core net operating earnings is also used by AFG’s management as a basis for strategic planning and forecasting.
S. Craig Lindner and Carl H. Lindner III, AFG’s Co-Chief Executive Officers, issued this statement: “We are pleased with our core net operating earnings for the quarter, which include record earnings in our Annuity Segment and strong profitability in our P&C operations. We believe these results showcase the solid fundamentals underlying our business and the value within our diversified specialty insurance franchise.
“Returning capital to shareholders in the form of a $1.00 special cash dividend reflects AFG’s strong financial position and our confidence in the Company’s financial future. AFG had approximately $1.1 billion of excess capital (including parent company cash of approximately $170 million) at September 30, 2016. Our excess capital will be deployed into AFG’s core businesses as we identify potential for healthy, profitable organic growth, and opportunities to expand our specialty niche businesses through acquisitions and start-ups that meet our target return thresholds. Our recently announced agreement to purchase the outstanding minority shares of National Interstate, which is subject to approval in a vote of National Interstate shareholders next week, will use approximately $300 million of AFG’s excess capital. In addition, share repurchases, particularly when executed at attractive valuations, are an important and effective component of our capital management strategy. We will continue to make opportunistic share repurchases and return capital to shareholders through dividends.”
“Based on results for the first nine months of 2016, we now estimate that AFG’s core net operating earnings will be in the range of $5.55 to $5.75 per share, revised from the range of $5.35 to $5.75 announced previously. Our revised guidance includes the estimated impact of losses from Hurricane Matthew. Our core earnings per share guidance excludes non-core items such as realized gains and losses as well as other significant items that are not able to be estimated with reasonable precision, or that may not be indicative of ongoing operations.”
Specialty Property and Casualty Insurance Operations
The Specialty P&C insurance operations generated an underwriting profit of $78 million in the 2016 third quarter, compared to $84 million in the third quarter of 2015. Higher underwriting profitability in our Property and Transportation Group was more than offset by lower underwriting profitability in our Specialty Casualty and Specialty Financial Groups. The third quarter 2016 combined ratio of 93.2% was slightly higher than the 92.9% reported in the comparable prior year period. Results in the third quarter of 2016 include 1.1 points of favorable prior year reserve development, compared to 1.2 points in the comparable prior year period. Third quarter 2016 results include 1.2 points in catastrophe losses, compared to 0.9 points in the 2015 third quarter.
Gross and net written premiums were down 3% and 4%, respectively, for the third quarter of 2016, when compared to the same period in 2015. Pricing across our entire P&C Group was up 1% for the quarter. Further details of AFG’s Specialty P&C operations may be found in the accompanying schedules.
The Property and Transportation Group reported an underwriting profit of $44 million in the third quarter of 2016, compared to $20 million in the third quarter of 2015. Higher underwriting profits in our crop, transportation and property & inland marine businesses were the drivers of the improved results. Catastrophe losses for this group were $7 million in the third quarter of 2016, comparable to the prior year period.
Gross and net written premiums for the third quarter of 2016 were 7% and 4% lower, respectively, than the comparable 2015 period. The decrease was largely the result of lower year-over-year premiums in our crop businesses, primarily the result of lower spring commodity pricing and timing differences in the recording of crop premiums. Excluding crop, third quarter 2016 gross and net written premiums were virtually unchanged from the prior year period. Overall renewal rates in this group increased 4% on average for the third quarter of 2016, including a 6% increase in National Interstate’s renewal rates.
The Specialty Casualty Group reported 2016 third quarter underwriting profit of $13 million, compared to $31 million in the third quarter of 2015. Higher underwriting profitability in our workers’ compensation businesses, primarily the result of higher favorable prior year reserve development, was more than offset by higher adverse prior year reserve development in our excess and surplus lines businesses, lower underwriting profitability in our targeted markets businesses and continued underwriting losses in our Lloyd’s business, Neon.
Gross and net written premiums decreased 2% and 8%, respectively, for the third quarter of 2016 when compared to the same prior year period. Higher premiums in our workers’ compensation businesses were more than offset by Neon’s exit of certain lines of business and implementation of tougher underwriting standards at Neon. In addition, net written premiums were impacted by higher ceded premiums within Neon. Renewal pricing for this group decreased by 1% in the third quarter, including a decrease of approximately 4% in our workers’ compensation businesses. Excluding workers’ compensation, renewal pricing in this group was up approximately 1% for the quarter.
The Specialty Financial Group reported an underwriting profit of $19 million in the third quarter of 2016, compared to $26 million in the third quarter of 2015. The decrease was due primarily to lower underwriting profit in our financial institutions business, primarily the result of August storms and flooding in Louisiana. Nearly all of the businesses in this group continued to achieve excellent underwriting margins.
Gross and net written premiums increased 13% and 9%, respectively, in the 2016 third quarter when compared to the same 2015 period, primarily as a result of higher premiums in our financial institutions business. Renewal pricing in this group was flat for the quarter.
Carl Lindner III stated, “Results in each of our Specialty P&C Groups have been very good through the first nine months of year. Based on these results, we continue to expect an overall 2016 calendar year combined ratio in the range of 92% to 94%, and net written premium growth for the full year of 2016 in the range of 0% to 2%. Our combined ratio guidance includes the estimated impact of losses from Hurricane Matthew.”
Further details about AFG’s Specialty P&C operations may be found in the accompanying schedules and in its Quarterly Investor Supplement, which is posted on its website.
The complete earnings release is available here: American Financial Group, Inc. Third Quarter 2016 Results