Q2 2019 Earnings Call
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I would now like to introduce your host for today's conference Ms., Diane Weidner you may begin.
Good morning, and welcome to American Financial group's second quarter 2019 earnings results Conference call.
I'm joined this morning by Carl when there was a third and Craig Lindner co Ceos of American Financial group, and Jeff Consolino ask <unk> CFO .
Our press release Investor supplement and webcast presentation are posted on <unk> web site.
These materials will be referenced during portions of todays call.
Before I turn the discussion over to Karl I would like to draw your attention to the notes on slide two of our webcast.
Certain statements made during this call may be considered forward looking statements as defined under the private Securities Litigation Reform Act of 995. These statements are not guarantees of future performance.
Investors should consider the risks and uncertainties that could cause actual results and or financial condition to differ materially from these statements.
A detailed description of these risks and uncertainties can be found in <unk> filings with the Securities and Exchange Commission, which are also available on our website.
We may include references to core net operating earnings a non-GAAP financial measure in her remarks or responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release.
If you are reading a transcript of this call. Please note that it may not be authorized or reviewed for accuracy. That's it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.
Now I'm pleased to turn the call over to Carl Lindner, the third to discuss our results.
Good morning.
Oh really start 2000, and I change second quarter results yesterday afternoon, if you'd please turn to slide three of the webcast slides for an overview.
Hey, Apache reported core operating earnings of $2.12 per share.
Oh, reflecting strong operating profitability and investment results from both our specialty property and casualty and annuity segments.
Second quarter 2019 annualized core operating return on equity was 15%.
Net earnings per share were $2.31 and included 48 cents per share in after tax net realized gains on securities and a negative impact of 29 cents per share.
For annuity noncore items, including the impact of fair value accounting for fixed indexed annuities and other items related to changes in the stock market and interest rates.
Craig and I, Thank God, our talented management team and our great employees for helping to achieve these results.
Based on results through the first six months of the year, we narrowed day of cheese core net operating earnings guidance for 2019 to a range of eight hours and 40 cents to eight hours and 88 cents per share from our previous range of eight hours and 35 cents to eight hours and 85 cents per share.
We are maintaining a midpoint of $8.60 per share however.
Greg and I will discuss our guidance for each segment of our business in more detail later in the call.
Now I'd like to turn our focus to our property and casualty operations.
Please turn to slides four and five of the webcast, which include an overview of second quarter results.
As you'll see on slide four.
Gross written premiums were flat net written premiums were up 1% when compared to the second quarter of 2018, primarily the result of lower crop insurance premiums.
Delayed planting of spring crops resulted in late acreage reporting and reduce overall second quarter specialty property and casualty premiums.
It is expected, though that these to Wade premiums will be included in our third quarter 2019 results.
Hi, excluding crop.
A second quarter 2019, gross and net written premiums grew by 6% and 4% respectively.
When compared to the 2018 second quarter.
Core operating earnings in the area of cheese PNC insurance operations were $175 million in the second quarter of 2019 slightly below the $180 million reported in the prior year period.
The specialty property and casualty insurance operations generated an underwriting profit of $60 million in the SEC into 2019 second quarter compared to $73 million in the second quarter 2018.
Higher underwriting profit in our specialty casualty group.
It was more than offset by lower underwriting profit in our property and transportation and specialty financial groups.
The second quarter 2019 combined ratio of 95.
<unk> increased 1.3 points from the prior year period and included 3.4 points of favorable prior year Reserve development and nine tenths of a point and catastrophe losses.
Average renewal pricing across your entire property and casualty group was up.
About 3% for the quarter.
Excluding our workers comp business renewal pricing was up approximately 5%.
Both of these measures reflect a continued improvement from renewal rate increases achieved in the first quarter.
Oh this year.
And overall specialty property and casualty renewal rates are the highest weve achieved in over five years meeting or exceeding ex expectations in each of our specialty property and casualty sub segments.
I'll discuss in more detail as we review the results of each.
Loss cost trends remain stable and we're keeping our eye on inflation and interest rates, though.
Now I'd like to turn to slide five to review a few highlights from each of our specialty property and casualty groups.
Property and transportation group reported an underwriting profit of $4 million in the second quarter 2019, compared to $23 million in the comparable prior year period.
These results include lower favorable prior year prior period reserve development in our agricultural and our transportation businesses and a larger year over year year over year underwriting loss in or Singapore branch.
Catastrophe losses in this group were $8 million in the second quarter.
And 10 million in the comparable 2018 period.
Second quarter 2019, gross written premiums in this group were down 6% and net written premiums were flat.
When compared to the prior year period, due primarily to delayed acreage reporting from insurance as a result of excess moisture.
Late planting of corn and soybean crops.
It's expected again that these delayed premiums will be included in the third quarter 2019 results.
Excluding crop insurance 2019, gross and net written premium growth in this group was strong.
And was up 12% and 10%, respectively, when compared to the 2018 second quarter.
The growth is primarily attributable to new business opportunities in our transportation businesses.
Overall renewal rates in this group increased 5% on average in the 2019 second quarter, an improvement over renewal rates.
Increases achieved in the first quarter of 2019.
I continue to be pleased with the broad based rate strengthening in this group, which includes our commercial auto liability business as well as corrective rate actions enter Singapore branch in aviation businesses.
They have cheese updated earnings guidance reflects our current expectations of a below average crop year.
Which I'll discuss in more detail.
The 2019 growing season.
Well go on record as one of the most challenging planting seasons on record.
Due to spring flooding in excess moisture across the Midwest.
As a result, we're processing a record number of prevented planting claims.
It's still too early to know how the crop year play out.
In addition to the ultimate impact or prevented planning other key considerations that will influence our crop insurance results.
Include conditions throughout the remainder of the growing season and commodity prices.
This week's U.S.D.A. reports indicate that the percentage of corn and soybean crops in good or excellent condition is estimated to be 13 to 14 points lower than last year. At this time, though keep in mind, a 2018 yields were exceptionally strong.
Corn futures are currently trading up about 3% from the spring discovery price.
And soybeans are down 9%.
Trade concerns with China.
Are probably already being factored into the commodity pricing and.
Commodity prices today are seem to be performing just fine.
On a more positive note or winter wheat, a in a rainfall index business should should perform better than average this year.
Due to higher levels of persist precipitation countrywide.
We will have a more complete picture with regard to our crop insurance business. When we report our third quarter results.
The Atlas financial Holdings transaction is progressing nicely.
National Interstate will begin to issue policies in the third quarter and we expect this business to add $20 million in gross written premium in the second half of 2019.
We expect gross written premiums produced by our wheels based businesses.
Consisting of National Interstate Dan liner and Great American trucking.
And with the addition of the Atlas Paratransit business.
This business will reach a billion dollars this year.
Oh, the specialty casualty group reported an underwriting profit of $47 million in the 2019 second quarter compared to $29 million in the comparable 18 period.
Higher profitability in our workers compensation and public sector businesses was partially offset by lower year over year over year profitability in our excess and surplus lines businesses.
Underwriting profitability in our workers comp business continues to be very strong.
Catastrophe losses for this group for $1 million in both the second quarters of 2019 and 18.
Gross and net written premiums for the second quarter of 2019, both increased 4% when compared to the second quarter of 2018.
The addition of premiums from Avi A. insurance services, which we acquired in the fourth quarter of 2018, as well as growth in our excess and surplus lines executive liability and social services businesses were the primary drivers of the higher premiums.
Lower premiums in our workers comp businesses and within neon primarily due to foreign currency translation.
Partially offset this growth.
Renewal pricing for this group was up 3% during the second quarter.
Excluding rate decreases in our workers comp businesses renewal rates in this group were up approximately 7%.
Both measures you enter an improvement from renewal rate increases achieved in the first quarter of this year and the highest we have seen in five years.
I'm pleased to see double digit rate increases for neon.
And strong pricing momentum in our excess liability umbrella surplus lines public Dino and social services businesses.
I would like to take the opportunity.
Today to welcome Jim slate.
Great American insurance group, Jim will lead our newly formed accident, and health division, which becomes or 35th specialty property and casualty business and a new addition to the specialty casualty group.
Jim and his team will build upon great Americans existing array of accident and health insurance coverages, focusing on customize coverages organizations.
And educational institutions.
The specialty financial group reported an underwriting profit of $21 million in the second quarter of 2019 compared to $22 million in the second quarter of 18.
Higher underwriting profitability in our equipment leasing and surety businesses was more than offset by lower underwriting profitability in our financial institutions business.
Catastrophe losses for this group were $3 million in both the second quarters.
2019 and 18.
Second quarter 2019, gross written premiums were down two and 6% respectively.
When compared to the same 2018 period, primarily as a result of lower premiums in our financial institutions business.
Renewal pricing in this group was up approximately 1% for the quarter.
Now if you turn to slide six for a summary view of our 2019 outlook for the specialty property and casualty operations.
Although we continue to expect an overall combined ratio between 92 and 94% we've adjusted our estimates for the combined ratios within each of our specialty property and casualty groups.
We've also adjusted our estimate estimate for overall growth in net written premiums to be in the range of 2% to 5% now an increase from the range of flat to up 3% estimated previously.
Looking at each segment.
We now estimate a combined ratio in the range of 93% to 97% and our property and transportation group a point higher than the range of 92% to 96% previously estimated.
As I noted earlier, while it's too early to project our crop results for this year. This adjustment takes into account a record number of preventing plant in claims and our expectations for a below average crop year.
We now expect growth in the net written premiums in this group to be between four and 8% an increase from the previous range of 3% to 7%.
Our specialty casualty group is now expected to produce a combined ratio in the range of 90% to 94% a slight improvement from our previous estimate of 91% to 95%.
And we now expect growth in net written premiums for this group to be between two and 6% an improvement from the previous range of down 2% to up 2%, reflecting growth opportunities and strong pricing momentum in the majority of businesses in this group.
And we now expect to spud it specialty financial group combined ratio to be in the range of 87% to 91%.
A slight improvement from our initial estimate of 88% to 92%.
And based on the results for the first half of 2019 net written premiums are now expected to be down 4% the flat year over year, a decrease from the previous expectations of growth in the range of 3% to 7%.
Our guidance with regard to net investment income is change with results in 2019 expected to be up 2% to 6%.
An improvement from our previous estimate of flat to up 4% year over year.
Given the broad based improvements noted and renewal pricing across many of our specialty property and casualty businesses.
We now expect overall renewal pricing PNC renewal pricing to be up 2% to 4%.
This year, an improvement from the previous range of 1% to 3%.
Excluding workers comp, we expect renewal rate increases to be in the range of 5% to 6%.
Now I'll now turn the discussion over to Craig.
To review the results in our.
Annuity segment.
And they have cheese investment performance.
Thank you Carl.
I will start with a review of our annuity results for the second quarter beginning on slide seven.
Statutory annuity premiums were $1.35 billion in the second quarter of 2019.
Compared to $1.4 billion in the second quarter of 2018, a decrease of 4%.
Hi, or traditional fixed annuity premiums and the financial institutions channel were more than offset by lower FDIC premiums in the retail and broker dealer channels.
In response to the continued drop in market interest rates in 2019, we've implemented several rate decreases in order to maintain appropriate returns on annuity sales, which has begun to temper new sales.
As previously announced in the second quarter of 2019, we changed the way we define annuity core operating earnings.
Beginning with the second quarter annuity core operating earnings exclude the impact of items that are not necessarily indicative of operating trends such as the impact of fair value accounting for fixed indexed annuities unlockings and other items related to changes in the stock market and interest rates.
Core operating earnings will now include an expense for the amortization of five a option costs, which is a better measure of the cost of funds for five days.
We believe these changes will provide investors with a better view of the fundamental performance of the business at a more comparable measure of the annuity segments business compared to its peers.
Turning to slide eight you will see the components of pre tax annuity core operating earnings under this new definition.
Results for the prior for the periods prior to the second quarter of 2019 are shown at a comparable format to the new definition of our annuity core operating earnings and are reconciled to previously reported annuity core operating earnings.
Growth in average invested assets contributed to higher year over year annuity earnings.
Which were more than offset by lower earnings from investments Mark to market through operating earnings and higher option costs.
Earnings from investments Mark to market vary from quarter to quarter based upon the reported results of the underlying partnerships and investments.
Higher amortization of option costs reflects growth in a F.G.'s annuity business as well as higher renewal option costs related to enforce business.
Turning to slide nine you'll see that our quarterly average annuity investments and reserves both grew by approximately 12% year over year.
Hey, you have g. spreads in the second quarter of 2019 were lower than in the second quarter of 2018.
As spreads in 2018 reflect exceptionally high returns on certain investments that are working we're good through operating earnings as well as the impact of higher option costs in 2019.
Please turn to slide 10 for a summary of the 2018 outlook for the annuity segment.
Taking into account the new definition of annuity core operating earnings beginning in the second quarter and based on $194 million of core operating earnings reported by the annuity segment and the first six months of 2019, we've we've narrowed the range of our 2019 guidance for pre tax annuity core operating earnings to 375 million to $405 million from the range of 365 million to 425 million estimated previously.
Our revised guidance reflects renewal option costs in line with recent purchases and a return of 8% to 10% on investments required to be mark to market through operating earnings.
For reference these investments around 11% and the first half of 2019.
In addition guidance assumes that lower long term reinvestment rates will have a negative impact on the run off of the annuity segments investment portfolio.
As well as lower short term rates are expected to have a negative impact on the annuity segments net investments and cash short term investments and floating rate securities, which were approximately $4 billion at June 32019.
Fluctuations in these items could lead to positive or negative impacts on the annuity segments results.
Finally, we are modifying our previously announced annuity premium guidance based on sales through the first six months of the year.
We believe that recently and implemented rate decreases on our annuity products and a continued focus on pricing discipline will temper new sales as we remain committed to achieving appropriate returns on new business.
As a result, we now expect that our 2018 annuity sales will be down 5% to 10% from our record $5.4 billion of premiums in 2018.
Additional information on the annuity segments earnings premiums investments and reserves can be found in or you have to use quarterly investment investor supplement posted on our website.
Please turn to slide 11 for a few highlights regarding our 53 billion dollar investment portfolio.
Hey, you have GE reported second quarter 2019, net realized gains on securities of $45 million after tax and after deferred acquisition costs.
This compares to net realized gains on securities of $25 million in the second quarter of 2018.
Approximately $29 million of the realized gains recorded in the second quarter of 2019 pertaining to securities at a FG continued to hold at June 32019.
As of June 32019, net in net unrealized gains on fixed maturities.
$812 million after tax after DAC.
As you will see on slide 12, our portfolio continues to be high quality with 91% of our fixed maturity portfolio rated investment grade and 98% within FDIC designation.
Of one or two its highest two categories.
We've provided additional detailed information on the various segments of our investment portfolio and the quarterly investor supplement on our website.
I will now turn the discussion over to Jeff who will wrap up our comments with an overview of our consolidated second quarter 2018 results and share a few comments about capital and liquidity.
Thank you Craig.
Slide 13 summarizes apps, you second quarter consolidated core operating earnings results.
After you reported core S. The $2.12.
In Q2 2019.
Core net operating earnings in the quarter.
Were $192 million.
$7 million higher.
Than the year ago quarter.
Higher year over year core operating earnings.
And the annuity segment.
Under our new definition.
Were offset.
By a lower operating earnings in our specialty PNC insurance operations.
As Craig discussed earlier in the call.
After she is annuity core operating earnings for the second quarter of 2019.
Excluding the impact.
Of items that are not necessarily indicative of operating trends.
And include an expense.
For the amortization of F.I.A. option costs.
We believe.
This better reflects the cost of funds.
For fixed indexed annuities.
And the F.G.'s evaluation of the financial performance.
Of our annuity business.
Items previously reported.
As a component of annuity core operating earnings.
Are noted on the slide.
For the comparable prior year period.
Interest and other corporate expenses were 6 million lower year over year.
Parent company interest expense increased by $1 million.
As compared to Q2 2018.
As a result of the March 2019 issuance.
Of 125 million principal amount hybrid 40 year, five and seven 8% subordinated debentures.
Due in 2059.
Other expenses were $7 million lower year over year.
Reflecting a normal run rate.
In the 2019 second quarter.
Slide 14 provides a reconciliation of core net operating earnings.
Net earnings.
In the second quarter of 2019.
AFG recognized $45 million or 48 cents per share.
In net after tax realized gains on securities.
Annuity noncore items.
Reduced net earnings attributable to shareholders.
By $27 million.
Or 29 cents per share.
Turning to slide 15.
F.G.'s adjusted book value per share was $58.49.
As of June Thirtyth 2019.
Our annualized gross.
And adjusted book value per share plus dividends.
It was a very strong 16.3%.
In the second quarter of 2019.
We returned $170 million to our shareholders in the second quarter.
With the payment of our regular quarterly dividend.
And $1.50 per share special dividend during the quarter.
Parent cash was approximately $135 million.
At the end of the second quarter.
We maintained solid levels of capital in our insurance businesses.
To meet our commitments to the rating agencies.
Our excess capital.
Stood at approximately $1 billion at June Thirtyth 2019.
We plan to hold approximately 200 million to $300 million of dry powder.
To maintain flexibility for opportunities as they arise.
Our management team reviews, all opportunities for deployment of capital on a regular basis.
Wrapping up.
Page 16 shows a single page presentation of our updated 2019 core earnings guidance.
Our guidance assumes an effective tax rate of approximately 20%.
On a core pre tax operating earnings.
After she is expected 2019 core operating results.
Excluding non core items.
Such as realized gains and losses.
Annuity noncore earnings.
And other significant items that may not be indicative of ongoing operations.
Now, we'd like to open the lines for any questions.
Ladies and gentlemen, I have a question at this time. Please press. The Star then the number one key on your Touchtone telephone. If your question has been answered or you wish your major yourself on the Hill. Please press the pound key.
Again that is star and then one to ask a question.
Our first question comes from Amit Kumar with Buckingham Research. Your line is now open.
Hi, Thanks, and good afternoon.
Just a few questions maybe starting bid.
The annuity piece.
First.
Did you talk about.
How quickly you plan to change.
The crediting rates based on.
The interest rate outlook.
And their opening remarks.
Yes, I admit this is Craig.
First of all on as it relates to new sales.
We are.
Constantly adjusting credited rates to earn our targeted rate of return I think we've had some five or six adjustments.
So far year to date, you Didnt, obviously with the move we've we've seen here. The last couple of days, we're preparing to make another change as it relates to two new business.
Is it relates to the enforce.
We were fortunate that we have.
Approximately 120 basis points of.
Of difference between the current credited rates and the guaranteed minimums on approximately $30 billion of reserves. So if we remain in this environment for for an extended period of time, we have a lot of room to adjust the the creditor to raise rates on in force.
Got it that's helpful.
The second.
Our two I guess the the same discussion is.
I know in the past I think in in Q4, other you've had interim periods.
You look at the actuarial assumptions and there is sometimes noise from unlocking.
Is there any way to think about that right now.
Yes, I mean, typically we have done to the very very thorough review in the fourth quarter.
Given the recent move in interest rates we are.
Yeah, we're looking to do that in the third quarter of this year I guess I guess.
I can't I can't give you a prediction of the outcome, but let me let me tell you how I would think about it.
On the negative side clearly rates are lower than.
What we projected when we did the last unlocking so we're going to put new assumptions in place.
Related to future reinvestment rates and the period that it takes to get to the ultimate So obviously given the current level of rates that as a negative now.
Mitigating that impact we have the ability to reduce credited rates and currently we will reduce credited rates beyond what was assumed in the last unlocking.
It's helpful and switching to PNC, and then I will stop.
Maybe lets start with the crop insurance book Historically, if you were to look at.
You know the the previous sort of crop year, which.
What would you quantify as an average year would that be 2014 2015.
Is there any way to sort of think about your historical crop results and how 29 thing its shape shaping up to be.
Well as you know we don't separately.
Disclose that as a segment of method.
You know the last couple of years have been above average.
This year, we're saying, it's going to be below average in the whole scheme of things.
Jeff do you have any other perspective on that.
Yes.
Go ahead sorry.
No go ahead, Matt.
Yeah.
Apologies for the siren.
I was trying to ask is obviously in your initial guidance you had an average.
Crop here and I was just wondering if there was a close enough proxy where you could say yeah. You know average would be 2013 or 2014, and obviously 18 in 17 and 16 were materially above expectations. I was just trying to come up with some sort of a top process in terms of what is a close as a proxy for how are you.
Define what is an average crop year without breaking the numbers.
Im sorry, we really can't.
Any more specific than that but.
Anything else, we gave you on that would be.
Going on to information, we just haven't disclosed in the past.
Apologies.
Okay.
The only other question and then I'll stop here is on the discussion on that you're talking about the trends I guess two parts, one any or any thoughts on the child victims Act.
And its impact on you and.
Separate from that are you seeing.
Any sort of noise or any change in trend line from the emerging discussion on the towards climate. Thanks.
I think the <unk>.
So that's something that we're watching obviously in our non profit book.
You know that would be.
Part of our business where.
You know those types of claims are things that we would.
Watch closely I'm not sure. We're you know real heavy insurer in the state New York itself, but.
Of course, we watch those trends and.
In that so.
That's something that.
We're keeping our eye on.
And on the that separately on the total climate any thoughts on that overall in terms of jury awards and more attorney involvement.
Hi, Thank you know nothing nothing new.
There's.
In the commercial auto side of things.
We continue to.
Take pretty good rate I think we took 9% in our commercial auto liability side that reflects an increase in the tort environment for.
In the commercial auto side.
Yes, I think you know we're also as far as some above average.
Loss cost trend the other the other place would be in the Dnos side of things.
As we don't write a lot of public so I don't think our we're not seeing the same trend lines is those that would write a lot of public Dino.
And that.
I think you know those are.
That's nothing new.
In our case, but those would be a few places that we would we would see things in excess liability actually.
You know the trend the loss costs.
Increase there would be a little bit higher than other lines.
Commercial auto you know when I ask our guys, what's driving that it's a commercial auto claims that are pushing up.
Into the Umbro in excess levels.
Oh Wow.
Interesting.
That's very helpful. Thanks for all the answers and color and good luck for the future.
Thank you.
Our next question comes from Jay Cohen with Bank of America Securities. Your line is now open.
Thank you your one just follow up on the crop side.
I guess my assumption is that the reduced premiums there are because of the planting issue would have had some impact on your second quarter expense ratio is that fair.
Jay This is Jeff, yes that would be correct.
And obviously your comments would suggest that might reverse in the third quarter given the the flow of premiums that we should we should see then.
Absolutely to the extent, we're recognizing a greater level of premium in Q3, our expense ratio would would.
And to decline as you have a greater denominator, you're dividing it into.
I would gratuitously throw in that when you look at the Seasonalization of our expense ratio.
Hi, Jay we've tended to have a lower expense ratio in the fourth quarter.
As crop profitability in contingent commissions related to that tend to come in.
Clearly putting down the marker that Carl has on a a below average year.
Probably won't see the same reduction in expense ratio in the fourth quarter.
For property and transportation or across our whole business.
Yes, indeed that comes to pass in our crop profitability is.
Quote below average.
That is helpful. Thank you for mentioning that and I guess, the second topic and I'm, just kind of overall that the transportation businesses.
You seem to suggest that you had a less favorable development in the segment, partly because of less favorable development already been adverse development.
And your transportation businesses, if you could kind of talk about the claims trends youre seeing.
And then zero and maybe on the pricing that you're seeing in different parts of that business because it's a big business for you now.
Jeff you want to address the reserves and I can talk a little bit about the.
You know the pricing though.
Absolutely.
Jay as you mentioned transportation is.
The business, we like it.
Gotten bigger and Carl just mentioned.
In the call that a with the Atlas paratransit transaction.
What we call our wheels business, which is the transportation business.
Crest a billion dollars gross this year.
In terms of.
Development, let's go back to our previous struggles with national Interstate.
Which emerged in 2012.
You know at that point, we felt like we didnt see other companies reporting those same trends.
So when we had the uptick in severity, we were concerned and we've been working on rate for seven consecutive years.
Since then.
A part of the prescription there.
Was to increase reserves and national Interstate which happened.
And then ultimately the rate has turned our combined ratio around to where we feel like the transaction, where we bought in a minority is giving us an appropriate return on capital.
Given all the rate and given the other actions we've taken we feel like national Interstates and a strong reserve position at this point.
It is true that in our transportation businesses were showing.
A year over year, although or level of favorable development. When you compare Q2 of 18 into Q2 of 19.
But were still showing favorable development in that segment, which has a comment that I don't think many other companies in our industry can say.
So I know, it's a problem and spot in a hot topic with others.
We certainly feel like commercial auto needs the rate that Carlos I didn't we're at about 9% year to date.
But we do have what we believe are prudently strong reserves for that business.
And even though the quarterly comparison is lower 19 versus 18.
We still are showing favorable development.
Yeah, well said, Jeff I'm not sure I have a whole lot to add you overall rate increase in national Interstate's, but the quarter was 7%.
With a commercial auto liability being nine Ah think band line or we got 3% in grid American trucking, 2% overall and Nash Winter said it that includes Ah some decline in workers comp.
Pricing.
So.
I think we're pleased with the performance of Ah or or commercial auto or transportation business.
We're achieving our overall combined ratio targets, though as I mentioned before with the severity trends in commercial auto liability were continuing to you know take rate there.
And I think I think our houses in order there I think we're.
Oh, we're growing our business doubled we're growing this transportation business a double digit through six months I think we're taking advantage of being having our house in order and.
Being in a market and in correction mode and.
I'm very excited about the Atlas transaction and are expected to as I mentioned before to.
Begin, adding you know to our premiums in the second half.
I guess it just helps when you see trends a bit earlier than others and you and you move quicker. Thanks for those comments about the very helpful.
Our next question comes from Greg Peters with Raymond James Your line is now open.
Good afternoon.
Karl in your opening comments, you specifically called out the operations in Singapore.
I called out your aviation operations, and then in financial institutions and your specialty financial segment.
I was wondering if you could spend an additional minute providing some additional context on those three businesses.
Whether it's the type of business being written in each of those so sub segments.
And the order of magnitude of their effect on your second quarter results.
[noise].
Yes, Hi, Greg.
Yep Yep, I guess is still making a.
You know a solid underwriting profit just not quite as profitable as you know at least in the first.
Six months is what they have you know were in the prior period.
EPS is like you know that business, we've achieved some rate increase not a lot of much rate you know in the first six months.
I think our guys are expecting for.
That to move up through the rest of the year.
And that but that's been a very a good business for us over a long period of time Mike.
I I think that they've been.
Tougher on some of the collateral protection accounts and they've been doing a little bit of a re underwriting that try to.
Get back to the profitability you know the great profitability that we've been used to over overtime.
On the aviation business, it's a business we started a number of years ago.
We like others in the industry, you know have had profitability problems and that.
We've been working hard over the past.
You know six to 12 months to adjust our underwriting appetite and also rates.
Rates in the second quarter, and aviation went up 23% and they're up about 21% for the year.
Were you.
Right or wrong or otherwise, we've we've chosen to adjust or underwriting appetite increase rates and and try to work our way through in a market, that's a correcting pretty well.
In that so we'll see where that goes.
A little bit the same in Singapore, Singapore is.
As a business we started a branch we started a number of years ago.
We got a pretty good start on the premium side I think.
They might have been up to.
50 $60 million.
We wrote a and Hooper like account called called grab that really bid as hard.
And that we got off of I think.
A while ago and.
That market seems to be a correcting you know we're getting.
Pricing in Singapore.
About 7%.
You know right now.
So very similar you know.
We've been taking underwriting actions as well as increasing price in Singapore in order to to correct. The results.
As a follow up.
Hey, Greg. This is Jeff you had said in your question you are hoping for some quantification just to.
Couple of notes I would make to put some numbers around carls commentary.
With respect to the financial institutions business or S. I S.
That's in our specialty financial segment. It is a major component there.
The biggest I premium.
And just to Echo Echo Carls comment it's a good business.
Operating a combined ratio below 90.
So very appropriate and good margins.
With respect to aviation Weve talked for several quarters in a row, including last year about the.
Severity and the loss trends that's brought about.
I would not single out aviation.
In the second quarter of 2019 as contributing any variance to our combined ratio in the quarter.
As compared to last year.
Their margins in terms of dollars or roughly comparable.
Actually materially better.
In Singapore, which is in property and transportation.
Now you'll note that our property and transportation sub segment accident year combined ratio rose by about.
Call. It 1.71 0.8 points in the quarter.
Singapore is the major contributor to that.
So that would be driving the uptick in that sub segment.
It's a follow up on the aviation account, where you're reporting substantial rate.
Is that a general aviation type business or is there some commercial.
In other aspects included.
Yes, that's what we would call kind of more of a non standard general aviation type of a book.
Now that's our our niche.
It's not the commercial.
Large item or your one concern.
Thank you for those answers Craig I'd like to ask you a question or two about your segment in your results.
I was looking through page 15 of your supplement.
And listening.
About your comments on.
Pressure on sales.
And it looks like.
Are you seeing the most pressure on new sales and the broker dealer or single digit our single premium indexed annuity business.
Not as much in the financial institutions piece.
Do you think your market actions are going to bleed over in.
And.
B to a decline in that in that.
Larger piece of your new sales.
You know, Greg time will tell what it really depends upon what our competitors do in terms of adjusting credited rates we've been surprised that.
Some of the competition has been as low as they've been to.
Hi, just credited rates, but.
It really is going to be a function of.
Whether or.
Our competitors or.
Interested in earning the appropriate rate of return or whether they're going to accept the returns that we would not.
Right.
As a follow up at you.
Commented about the opportunity to reduce crediting rates.
It seems in some respects there is some headwind in your annuity business as we look beyond this year look to 2020.
And I guess my question and I know, you're not going to provide guidance on 2020.
Numbers, yet but.
Is the annuity business in this current environment, especially what's transpired in say the last month or two.
Should we still think about the annuity business as a growth business for AFG or.
Is it possible that.
It may stagnate for the year.
And I I don't know quite sure what you mean by stagnate.
First of all we're going to price your product to earn the right return that's one of the.
Beauties of being involved in a highly diversified company, where if a.
The environment in one line of business or really isn't conducive to.
Earning the right returns are investing more capital we have the ability to Oh got to.
Wait things out in a headache that given line of business until conditions change and they always do.
So so.
You saw in our guidance on a premium is being down 5% to 10%.
But it still drives growth in the guidance on growth in reserves and investments is 9% to 11%. So still very healthy growth in the reserves and investments. So I wouldn't call that stagnant there may be periods when premiums decline. We're okay with that we are going to be disciplined with our pricing.
But the guided level of premiums.
Still generates a very healthy growth in investments and reserves.
Well I don't want to give you the wrong impression I guess when I was I'm what I'm looking at you know would be on slide 10 in your annuity outlook, where you talk about the.
Core earnings.
The guidance that you provided for the year and when I I'm, just trying to get a sense is it that the opportunity with the crediting rates that will.
Help.
Lead to and the growth in your investments lead to growth in the pre tax earnings as reported for 2020 or.
Our the market condition such that.
It's possible that it might not grow next year.
Yes, we have not given guidance, Greg on next year, yet but.
Uh Huh, we feel pretty confident we're going to continue to earn attractive returns in the annuity business I'll just say that.
Yep got it thanks.
Our next question comes from Paul Newsome with Sandler O'neill. Your line is now open.
First I have what I think is a bit of an accounting question.
It showed chubb said that the premium recognition the crop business wouldn't change due to the.
Hello planting.
I was wondering if there is something about your business or you're counting it might be different.
Unigraphic trends or whatever.
That would create a difference in accounting from a premium perspective.
It's an interesting question, Paul Unfortunately were not in a position to comment on jobs accounting policies.
So.
I think that you can take carls guidance about the recording of premium and the timing.
As reflective of our business and how it's accounted for and I can't really stray off of that territory.
Fair enough and then.
Could we home a little bit in on the workers comp business.
Well I think you said the profits were actually up.
Pricing has been widely talked about as being down for just about everybody.
So I.
Yes, I guess that either means you're expanding your workers comp business quite a bit in appropriate perspective, where your remarkably habig negative.
Clean cost inflation.
Maybe you could just talk about sort of how that is holding up as well as it is.
Yeah.
Workers comp will probably be a little under 19% of our overall direct written premium projected for this year.
Our six month results overall for this year are very good.
Oh, we have a healthy accident year combined ratio at a very healthy calendar year combined the outlook I thinks the same for the whole year.
Overall gross and net written premiums to be down on and are down a little for six months.
And I think it will probably be down low single digit.
For the the 19 year.
Yes, I think we've said before we look at.
Parts of our I mean from a loss cost trend standpoint.
I'm very pleased with what we're seeing on the loss cost trend side.
Our overall.
A loss or loss cost trend at summit is about up 1% republics pretty flat strategic comp is.
You know not much going on there so loss cost inflation, we're very pleased with it.
So a very very pleased with the overall results.
Republic <unk> as to be expected after a you know the adjustments in rates.
Including current pricing being down 11%.
Thank god for six months and and for the whole year, we'll probably have a small underwriting accident year underwriting loss at Republic.
No we're continuing because of the strong reserve position to have a small underwriting gain to probably breakeven results on the combined ratio for our Republic.
Again keep in mind that you know, we're earning 20% returns on equity even at a 100% combined ratio.
And in California.
Summit continues to do very well.
I'd expect a summit to make.
Small under accident year underwriting profit a healthy calendar year underwriting profit, even with the price being down 11%.
Our premiums will be down 2% to 4%.
Feel good about the reserve position and in that part of our business and.
So I mentioned was for strategic comp has very healthy accident year in calendar year profit for six months and is projected this year they are actually growing.
In that part of our large deductible.
Kind of part of our business and actually getting a little bit a rate increase.
Through the first six months so.
I'm I'm, we're very pleased with our workers comp business right now.
Great. Thank you very much.
Our next question comes from Christopher Campbell with KBW. Your line is now open.
Yes, hi, good afternoon.
Yes, the expense ratios were up in all three segments and it sound like our property and transportation might be a little bit and crop related but what's driving the higher expenses and the other two segments.
Hey, Chris it's Jeff constantly now.
So overall.
I would say our expense ratio is.
Yes, but only modestly.
I can throw some numbers that you try to dissect that by sub segment.
And on the.
Right and Dallas is here.
[noise].
We talked about property and transportation sub segment and the impacts crop was having in the current quarter.
In our specialty casualty segment.
Our expense ratio has moved up by about eight tenths of a point.
The major contributor there we have a number of a longer tail casualty operations there.
And there.
In some cases retaining more of their premium in buying less reinsurance.
Since they're so profitable when they do buy reinsurance to get a very healthy ceding Commission.
And so the act of buying a lesser reinsurance.
Let's just keep it more underwriting profit.
Kind of counter intuitively I would tend to tick up the expense ratio. If the ceding commission is in excess of our original acquisition cost.
That's what's contributing to what's going on within the specialty casualty segment.
We talked earlier in response to a different question about our financial institutions business inside the specialty financial sub segment.
Financial institutions business is the biggest piece of that.
We've talked about the nature of that business in past calls.
Where there is a what I would characterize as a variable commission.
For our production sources there.
Profit Commission that if we have very little loss ratios.
The originating agents can receive higher commissions.
In 2018 with an active cat year profit commissions were lower for our financial institutions business.
This year in a more normal cat environment.
We're back to paying a more normal level of profit Commission.
So that's why you see the expense ratio moving up in that segment by about 1.6 points.
But you really wouldn't see a concomitant increase in the accident year combined ratio because it's somewhat offset by a lower loss ratio in the sub segment.
Okay, great thanks for that color.
Specialty casualty reserve releases were up year over year, I guess, what products and accident years are contributing to those.
[noise] Workers' compensation is the biggest piece Chris.
And accident years.
Generally its.
Going back three four even more years.
And when you look at the accident years. These are emanating from.
So like 16 and prior.
If you if you go back to.
In prior that's more than a 100% of the reserve release.
Okay got it.
Yeah Big picture question, I guess, we'll all be AFG has potential liability exposure to opioid distributors and manufacturers do you guys have any exposure there.
Oh, Yeah give me a.
You know me a second here.
If I have any notes on that.
[noise].
No I don't think that's a uh huh.
I don't think that's a big area of concern for us.
Yeah, we just don't we're not a large ensure of.
Chemicals, you know to pharmaceutical manufacturing companies and.
And those types of.
RIS so.
Obviously, something that we're keeping our eye on that but I wouldn't say that.
Okay.
Yeah got it and then no repurchases this quarter I guess, how should we think about modeling those going forward given the recent pullback in the shares.
We did just pay $1.50 special dividend, which was a substantial commitment of our capital.
You know or Ceos, and our board are very focused on returning capital to shareholders in the most appropriate way, if we can't deploy a growing organically or making sensible acquisitions.
I think our actions have demonstrated a recent bias towards special dividends.
Rather than repurchases, but it's all subject to financial analysis at a point in time.
Got it and then I guess, how fast is the excess capital growing because I mean, if you're pulling back in life right. If there is going to be less life premium growth that obviously, there. There's you know thats a good guy in terms of excess capital, but then you're growing PMC, which you'll need capital there to grow I guess, just combining those two how should we think about.
Excess capital generation, you know overtime and modeling that.
Chris We did report.
Billion dollars of excess capital with.
Earnings release.
So even after paying that substantial dividend, we've we've built ourselves back up.
Because we started the quarter.
Oh, well we ended the previous quarter billion won before that special dividend.
We've said over time I think Craig is pleased with.
Nobody business being a generator of excess capital.
Rather than consumer of excess capital.
With the PNC business, our after tax returns.
Our north of 15% if you look back at say the most recent year.
And we're not growing organically at 15%, so unless we find a way to.
Reinvest that and things like that paratransit transaction or the <unk>.
<unk> transaction.
He is he will continue to generate excess capital for us.
No we've got good flexibility.
And Uh huh.
We will have the opportunity to deploy it.
In a sensible way and if not.
Well look at returning it to shareholders.
Okay, great well, thanks for the color about the lock in the third quarter.
At this time I'm showing no further questions I would like to turn the call back over to Diane for any closing remarks.
Thank you all for joining us this morning, and we look forward to talking with you again, when we release next quarter's results.
Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program you may now disconnect everyone have a great day.