Good day, ladies and gentlemen, welcome to the American Financial Group 2014 fourth quarter and full year results conference call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session, and instructions will be given at that time. If anyone should require audio assistance during the conference, please press star then zero to reach an operator. As a reminder, today's conference is being recorded. I would now like to turn the call over to Diane Weidner.
Thank you. Good morning, welcome to American Financial Group's fourth quarter 2014 earnings results conference call. I am joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group, and Jeff Consolino, AFG's Chief Financial Officer. If you are viewing the webcast from our website, you can follow along with the slide presentation if you'd like. Certain statements made during this call are not historical facts and may be considered forward-looking statements and are based on estimates, assumptions and projections which management believes are reasonable, but by their nature, subject to risks and uncertainties.
The factors which could cause actual results and/or financial conditions to differ materially from those suggested by such forward-looking statements include, but are not limited to, those discussed or identified from time to time in AFG's filings with the Securities and Exchange Commission, including the annual report on Form 10-K and the quarterly reports on Form 10-Q. We do not promise to update such forward-looking statements to reflect actual results or changes in assessments. Core net operating earnings is a non-GAAP financial measure which sets aside significant items that are generally not considered to be part of ongoing operations, such as net realized gains and losses, discontinued operations, and certain non-recurring items. AFG believes this non-GAAP measure is a useful tool for analysts and investors in analyzing ongoing operating trends and will be discussed for various periods during this call.
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, thus it may contain factual or transcription errors that could materially alter the intent or meaning of our statement. I am pleased to turn the call over to Carl Lindner III to discuss our results.
Good morning. We released our 2014 fourth quarter results yesterday afternoon. I'm assuming that our participants have reviewed our earnings release and the investor supplement posted on our website. We're pleased to report core net operating earnings per share of $1.35, a 5% increase from the comparable prior year period. These results reflect higher underwriting profit and higher net investment income in our specialty property and casualty operations, which was partially offset by lower core operating earnings in our annuity and run-off long-term care and life segments. These results set new AFG records for the fourth quarter and full year core operating earnings per share. Craig and I thank God and our management team and all of our employees for helping to achieve these results. Annualized core operating return on equity was 11.7% for the 2014 fourth quarter, compared to 11.8% for the fourth quarter of 2013.
Net earnings per diluted share were $1.41 and includes $0.06 per share of realized gains, generating a fourth quarter annualized return on equity of 12.1%. We also focused on returning capital to shareholders over the course of the year. Turning to slide four, you'll see a few highlights. We paid $169 million in dividends during the year, representing $81 million in regular common stock dividends and an $88 million special dividend paid in December of 2014. Our quarterly dividend was increased by 14% to an annual rate of $1 per share beginning in October of 2014. We repurchased $191 million of AFG's common shares at an average price per share of $57.73. We also intelligently deployed capital through the acquisition of Summit, the launch of our aviation division, and the purchase of renewal rights to grow our public sector business.
We also acted upon opportunities to grow our specialty casualty insurance businesses. We achieved 17% annual growth in average annuity investments during the year. Craig and I are very pleased with the results. Five-year compounded growth in AFG's adjusted book value per share plus dividends was 12% through year-end 2014. AFG's annualized total five-year shareholder return, representing growth in share price plus dividends, was 23%. This substantially exceeds the total return performance of the S&P 500 and the S&P Property and Casualty Index over the same period. We've established our 2015 core operating earnings guidance for AFG in the range of $5.10-$5.50 per share. Craig and I will discuss our guidance for each segment of our business later in the call. Slides five and six of the webcast include an overview of the results in our specialty property and casualty operations.
On slide five, you'll see that gross and net written premiums are up 22% and 25% respectively in the 2014 fourth quarter compared to the same quarter a year earlier, due primarily to higher premiums in our Specialty Casualty Group, which does include results from Summit, our specialty workers' comp subsidiary acquired on April 1st, 2014. Excluding Summit, our Specialty Property and Casualty gross and net written premiums grew by 8% and 7%, respectively, during the fourth quarter of 2014. Specialty Property and Casualty insurance operations generated underwriting profit of $79 million for the 2014 fourth quarter, compared to $75 million in the fourth quarter of 2013. The fourth quarter 2014 combined ratio of 92.6 was 1.3 points higher than the comparable prior year quarter and included one point of adverse prior year reserve development.
Fourth quarter 2014 Property and Casualty net investment income was about 12% higher than the comparable 2013 period, reflecting the investment of cash received in connection with the Summit acquisition. Nearly two-thirds of our Property and Casualty businesses reported pricing increases during the fourth quarter, resulting in an overall renewal rate increase of approximately 2%. This is the 13th consecutive quarter that we have reported overall price strengthening. Pricing continues to keep pace with loss cost trends in many of our businesses, and loss cost trends appear to be relatively benign across almost all of our Property and Casualty businesses. On slide six, you'll see a few highlights from each of our Specialty Property and Casualty business groups. Property and Transportation Group reported an underwriting profit of $22 million in the 2014 fourth quarter, compared to underwriting profit of $17 million in the comparable prior year period.
I am pleased that focused efforts to improve results produced higher underwriting profitability in our property and inland marine operations. These results were partially offset by lower underwriting profits in our transportation business, where we continue to focus on improving pricing and risk selection within our commercial auto liability lines. Although we had anticipated break-even results in our crop insurance business, actual results were better than expected, but still below historical levels of profitability. We achieved growth in gross and net written premiums in most business units within this group during the fourth quarter, with overall net written premiums up 7% over the prior year period. Overall renewal rates increased 4% on average for the quarter, with our National Interstate sub achieving a 5% rate increase. For the full year, this group achieved a 5% rate increase overall.
Specialty Casualty Group reported underwriting profit of $36 million in the fourth quarter of 2014, compared to $32 million in the fourth quarter of 2013. Our workers' compensation businesses continued to generate strong underwriting profitability, and we're pleased with the results from Summit, which continues to meet our expectations. Nearly all the remaining businesses in this group produced strong accident year underwriting profit margins during the fourth quarter and full year 2014. I am disappointed, however, with results in our international operations. Growth has been strong in this group, the result of acquisitions and underlying organic growth. While nearly all the businesses in this group reported growth year-over-year, the acquisition of Summit, along with growth in our workers' compensation and excess and surplus lines businesses, were the primary drivers of the higher premiums.
Excluding premiums from Summit, 2014 fourth quarter net written premiums grew by 11% when compared to the fourth quarter of 2013, and 2014 full year net written premiums, excluding Summit, grew by 19%. Pricing in this group was up about 1% on average for the quarter and in line with our experience in the previous quarter. After about four years of rate increases in our workers' compensation and excess and surplus lines businesses, we're experiencing some rate deceleration as a result of excellent underwriting profit margins. Specialty Financial Group reported an underwriting profit of $18 million in the fourth quarter, slightly higher than a year ago, and a combined ratio of 85.6. Nearly all the businesses in this group continued to achieve excellent underwriting margins. Full year results in our financial institutions business, the largest business in this group, continue to be excellent.
Gross and net written premiums were down slightly in the 2014 fourth quarter when compared to the same 2013 period. Pricing was flat during the quarter. If you'd please turn to slide seven for an overview of the 2015 outlook for the Specialty Property and Casualty operations. Despite the competitive environment, we're optimistic about this year, 2015, and our guidance contemplates a further improvement in underwriting profitability. We're targeting an overall combined ratio between 92% and 94% for our Specialty Property and Casualty Group. We estimate growth in net written premiums to be in the range of 4%-8%. 2014 results include nine months of Summit's premiums. Excluding the impact of Summit premiums, growth during 2015 is expected to be between 2%-6%.
Looking at each of our Specialty Property and Casualty groups, we expect net written premiums in our Property and Transportation Group to be flat to up 4% when compared to 2014 levels. Excluding our crop insurance business, we expect growth in net written premiums to be in the range of 3%-7%. We also expect to see improvement in the combined ratio in this group and estimate it to be in the range of 94%-98%. Net written premiums in our Specialty Casualty Group are expected to grow in the range of 8%-12% during 2015. Excluding Summit, we expect growth in this group to be between 4%-8%. Our estimate for the combined ratio in this group is in the range of 90%-94%. We expect net written premiums in our Specialty Financial Group to be up 1%-5% compared to 2014.
Our estimate for the combined ratio in this group is in the range of 86%-90%. We're targeting overall average renewal rates in 2015 for the Specialty Property and Casualty Group to be flat to up 2%. Our assumptions include continued rate increases in our Property and Transportation Group. Pricing that's flat year-over-year in our Specialty Casualty and Specialty Financial Groups. We expect property and casualty net investment income to grow by 5% in 2015. Now I'll turn the discussion over to Craig to review the results in our Annuity segment and AFG's investment performance.
Thank you, Carl. The Annuity segment reported core pre-tax operating earnings of $85 million in the 2014 fourth quarter, compared to $92 million in the comparable 2013 period. An 8% decrease is shown on slide eight. This decrease was largely the result of the impact of fair value accounting on our fixed-indexed annuities. Annuity earnings before the impact of fair value accounting were $93 million during the fourth quarter, which compares to $86 million in the fourth quarter of 2013, an 8% increase. AFG's 2014 earnings continued to benefit from growth in the annuity sales and a favorable impact of lower than expected surrenders. Our quarterly average annuity investments and reserves grew approximately 14% and 15% respectively year-over-year. The impact of this growth was partially offset by the runoff of higher yielding investments.
In addition, fourth quarter earnings in both years benefited from unanticipated investment and other income. In 2014 and 2013, AFG conducted a detailed unlocking review of the major actuarial assumptions underlying its annuity operations. The results of the unlocking review were immaterial in both the fourth quarters of 2014 and 2013. Interest rate and stock market fluctuations have an impact on the accounting for fixed-indexed annuities, and these accounting adjustments are recognized through AFG's reported core earnings, as shown on slides eight and nine. In the fourth quarter of 2014, the combination of an increase in the stock market, but a decrease in longer term interest rates, as measured by the corporate A2 rate, resulted in an unfavorable impact on earnings.
Conversely, in the fourth quarter of 2013, the combination of a much larger increase in the stock market and a moderate increase in long-term interest rates resulted in a favorable impact on earnings. Additional information about the components of spreads for AFG's fixed annuity operations can be found in AFG's quarterly investor supplement posted on our website. Turning to premiums. Annuity premiums were $971 million in the fourth quarter of 2014. Although this represents a decrease of 30% from the comparable prior year period, it represents an increase of 20% from the third quarter of 2014. Despite the low interest rate environment, AFG's $3.6 billion of annuity premiums in 2014 represent the second highest level of annuity premiums in the company's history. We're very proud of this achievement. Please turn to slide 10 for an overview of the 2015 outlook for the Annuity segment.
We expect average fixed annuity investments and average fixed annuity reserves to grow in the range of 8%-12% in 2015. The decrease in interest rates in January is likely to put pressure on core annuity earnings in the first quarter due to fair value accounting for fixed-indexed annuities. For the full year of 2015, we expect reported core pre-tax annuity operating earnings to be in the range of $310 million-$340 million, compared to the $328 million reported for the full year of 2014. For the full year of 2015, we estimate that our net spread earned, which is the basis for GAAP reported earnings, will be 100-135 basis points, compared to 141 basis points achieved for the full year of 2014. This estimate reflects the January 2015 decrease in interest rates.
Excluding the impact of fair value accounting, we estimate that our net spread earned in 2015 will be 20-25 basis points lower than in 2014, reflecting the impact that low interest rates are expected to have on our investment portfolio. Furthermore, 2014 annuity results include a significant amount of favorable items related primarily to net investment income, including unusually strong partnership income, additional income from early redemptions and prepayments of fixed income investments, as well as several other items. While we tend to have similar items every year, our annuity plan does not reflect the sizable reoccurrence of such items in 2015. In addition, 2014 included a significant benefit from the impact of lower surrenders than expected. Based on information currently available, we expect premiums for the full year of 2015 will be flat to slightly down from the $3.7 billion reported in 2014.
Significant changes in interest rates and/or the stock market from today's level could lead to additional positive or negative impacts on the annuity segment's results. AFG's run-off long-term care and life segment reported a core pre-tax operating loss of $7 million in the fourth quarter of 2014, compared to a core pre-tax operating loss of $3 million in the comparable prior year period. Included in the results for the fourth quarter of 2014 is a $5 million loss on the commutation of a long-term care reinsurance agreement. In the fourth quarter of 2014, with the assistance of an external actuarial consulting firm, we completed our review of the major actuarial assumptions for AFG's run-off long-term care business, which resulted in no charge to earnings and an updated net loss recognition margin of $11 million.
On slide 11, you'll see a progression of the net loss recognition margin from the $64 million reported at 12/31/2013, and the primary factors contributing to the $53 million decrease. Changes in rate increase assumptions increased the margin and partially offset the decreases caused by changes in assumptions related to claim costs, reinvestment rates, and expenses. The table on slide 12 illustrates the impact of the net loss recognition margin of changes in key loss recognition assumptions. The result of each assumption change represents a change in the net loss recognition margin that would result from using the changed assumption. Favorable changes in the assumptions would increase the net loss recognition margin. Unfavorable changes would decrease the margin and potentially result in a net loss recognition charge to earnings. Each item reflects a change to a single assumption without changes to other assumptions.
These amounts are valid for a point in time and will change in future periods as the in-force block ages and as actual performance deviates from the assumptions used at 12/31/2014. We have added a two-page appendix to our investor supplement this quarter that includes information about our long-term care net loss recognition margin and interest rate assumptions used in long-term care recognition testing and annuity unlocking. Please turn to slide 13 for a few highlights regarding our $36 billion investment portfolio. AFG recorded fourth quarter 2014 net realized gains on securities of $5 million after tax and after deferred acquisition costs, compared to $41 million in the comparable prior year period. Unrealized gains on fixed maturities were $604 million after tax, after DAC, at 12/31/2014, an increase of $163 million from year-end 2013.
Unrealized gains on equities were $139 million after tax at 12/31/2014, an increase of $18 million from year-end 2013. As you'll see on slide 14, our portfolio continues to be high quality with 87% of our fixed maturity portfolio rated investment grade and 97% with an NAIC designation of 1 or 2, its two highest categories. We've provided additional detailed information on the various segments of our investment portfolio in 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 fourth quarter 2014 results.
Thank you, Craig. We've been through a lot of detail in a very pleasing quarter and on our 2015 earnings guidance. I'm going to tie it all together in a few slides before we open up the lines for questions. Slide 15 shows our fourth quarter consolidated results by segment. Core net operating earnings per share in the quarter were a record $1.35. $1.35 is based on core net operating earnings in the quarter of $122 million. Looking at core pre-tax operating earnings by segment, you'll see our P&C segment improved by $10 million against last year's quarter. On slide five, Carl showed you that the Specialty P&C Group's underwriting profits increased by $4 million.
You can see on page four of the investor supplement that Q4 2014 investment income for the P&C segment was $8 million higher than the prior year, thanks to the increase in average P&C invested assets resulting from the Summit acquisition. Other expenses within the P&C segment increased by about $2 million in the quarter. This is primarily the amortization of Summit's acquisition intangibles, which run about $7 million per year. The sum of these three items produces the $10 million improvement in the P&C segment core pre-tax operating earnings. We closed on the Summit acquisition at the beginning of the 2014 second quarter. Q1 2015 will be the final quarter where our Specialty P&C segment's quarterly comparatives are affected by the Summit transaction. Craig previously covered our annuity segment earnings, which were $7 million lower quarter-over-quarter, thanks to the vagaries of fair value accounting.
Interest expense of parent holding companies increased $2 million due to the hybrid debt offering in September of 2014. Other expense was lower by $12 million than the year ago fourth quarter, largely as a result of third-party fee income paid to our American Money Management Corporation subsidiary, lower accruals associated with certain employee benefit plans, as well as other miscellaneous items. You may recall that the third quarter other expense comparison was also favorable for 2014 against 2013. Our guidance range, however, does not anticipate similar beneficial impacts in 2015. Turning to slide 16, you'll see that realized gains contributed $0.06 per share to diluted earnings per common share. On slide 17, you'll see that AFG's adjusted book value per share was $48.76 at December 31st, 2014, its highest level ever.
Our excess capital stood at approximately $810 million at December 31st, 2014, and included $290 million of parent company cash. We earned net income of $127 million in the fourth quarter and returned $174 million to our shareholders through dividends and through share repurchases. Approximately 4.5 million shares remain under our repurchase authorization as of February 2nd, 2015. We plan to continue returning excess capital to our shareholders through the course of 2015. On slide 18, you'll find a single-page summary of our 2015 guidance. It shows AFG's core net operating earnings guidance of $5.10-$5.50 per diluted share, as well as guidance reviewed earlier in the call for key financial measures in the Specialty Property and Casualty Group and for the annuity segment.
AFG's expected 2015 results exclude non-core items such as realized investment gains and losses, as well as other significant items that may not be indicative of ongoing operations. We'd like to open the lines for any questions.
Ladies and gentlemen, if you have a question at this time, please press the star key, followed by the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. To ask a question, please press star one. The first question comes from Amit Kumar from Macquarie.
Thanks, good morning, congrats on another strong quarter. Just a few quick questions. Number one, just going back to the discussion on adverse development in international. Did you expand on the cause for that reserve development or not?
Hi, Amit. This is Jeff Consolino. We did not expand on it, I'm prepared to expand on it a little bit here, if you like. First of all, I think it's important to note that we believe our reserves are as adequate at the year-end December 2014 date as they were at the beginning of the year. That's to say that our balance sheet is as strong at year-end as it was when we began the year. I make this comment after considering the growth in our reserves during the year, including the growth attributable to Summit.
Overall, Specialty P&C Group prior year development in the quarter was unfavorable by just under $10 million, $9.9 million. Again, I know we're talking about a specific quarter, but in the context of this, please consider that we had favorable development in the Specialty P&C Group for the whole year. Among our subsegments, Specialty Financial is still showing favorable development. We had modest unfavorable development in Property and Transportation, mainly attributable to a reserve change in our non-National Interstate transportation business. So out of the $14 million of unfavorable reserve development in the Specialty Casualty sub-segment, $11 million of that was associated with our international operations. In those international operations, management made a year-end adjustment to reserves. Some people have asked the question, so I'll answer it. The adjustment was not related to Italian public hospital business.
The adjustment spans a number of lines of business in the international business, and I really can't single out any one line as something that contributed more than others. That's the lion's share of what happened in that Specialty Casualty sub-segment. Again, within that segment, we had favorable development in the aggregate for our workers' comp units, favorable development in the aggregate for our E&S, and specialty liability units. Outside international, we did strengthen reserves somewhat for some other items, such as extra contractual obligations or discontinued profit centers, and that would be the balance outside of international and what you saw in that move.
Got it. Net-net, it was more a change in, I guess, methodology versus any specific meaningful adverse trend. Is that correct?
I don't want to say a change in methodology. The methodology remains broadly the same. There was a year-end adjustment, and that year-end adjustment covered a lot of the lines of business in international, and that's where we chose to book it.
Okay. That's helpful. The other question I had is on the commercial auto. This was sort of a go-forward, sort of broader question. Some reports are out there which predict that U.S. commercial auto will grow for 2015. Can you sort of talk about how you're thinking about loss cost trends for commercial auto and maybe the correlation they might have with gas prices?
Yeah. Since you're the chairman of National Interstate, you want to talk about loss cost trends within National Interstate?
Sure. Hi again, Amit. First, I would encourage you to dial in to the National Interstate earnings call at the end of February if you'd like to hear from management on the business directly from them. National Interstate did put out a pre-announcement last night that talked about their expectations for the fourth quarter and full year 2014. Embedded in that is the commentary that they had adverse severity coming through in the quarter. Amit, that has been at issue with National Interstate in many, but not all quarters.
Going back a couple of years. It really is severity that we're having, in that unit, a harder time getting our arms around rather than frequency. In terms of loss cost trends, what you will see when the company reports its full-year results is a continued migration upwards in the accident year combined ratios, both 2014 and some of the recent years. National Interstate has been assertive in obtaining appropriate rate increases. It's been a focus for management. They've been diligent in non-renewing the business that they didn't think would be profitable for them. When faced with an escalation in severity and skimming of margins, I think you'll hear from management that they're going to redouble their efforts there, and they're going to need to continue to get rate. It's clear that the rate is available.
It's clear that these trends are affecting more companies than just National Interstate, but they really do need to keep working to restore the business to a level of profitability that management would be proud of and we as shareholders would be proud of.
Got it.
On the Great American side, a lot of the business is physical damage. The loss cost trend on that business is probably more around 2% or so in that. I don't think we consider ourselves experts as to the impact on lower gas prices on our business. My gut would say that it has a potentially larger impact on private passenger auto which may tie directly more towards increased miles driven in that. I think we're still trying to figure out how much or how little impact that has on our overall commercial auto business in that. Clearly, lower gas prices have to help the profitability of our customers in that. I think that's probably a positive.
Okay. Just finally, and I'll stop. In terms of the outlook, I know it's too early right now, but I guess the commodity prices for some of the crops down double digits versus prior year. Maybe it's too early, but can you sort of give the early view on your crop insurance book, and are you thinking about reinsurance differently based on the pricing outlook in the reinsurance market? Maybe use more reinsurance for crop. That's the final question I have. Thanks for all the answers.
Sure. If you look at our Property and Transportation guidance for 2015, you'll see our overall guidance for that is 0%-4%. If you exclude crop, that range turns into 3%-7%. If you look between the lines there, roughly the crop right now, when you look at spring discovery prices from last year, and when you take a look at futures prices as they are right now, that and considering the commodity price decrease being offset by business we pick up, rough and dirty, I think right now we're thinking that our crop premium might be down 7%, 8%, something like that. As far as how much we reinsure in that's something that we're really kind of setting the strategy on right now as we move forward.
Got it. That's very helpful. Thanks for all the answers and good luck for the future.
The next question comes from Vincent D'Agostino from KBW.
Hi, good morning, everyone. Just to start with the trade credit kind of notation in the press release. I'm assuming that relates in some way to U.S. dollar strengthening here up until year-end, if that's correct?
I wouldn't assume that, Vincent.
Just on National Interstate, just a clarification. Was the rate increase there 5% for fourth quarter 2014, or did I get that wrong?
Sorry, say that again, Vincent.
On the National Interstate rate increase for the quarter, did you mention that the pace was 5% for fourth quarter 2014?
Correct.
Yeah, that's correct.
I would also refer you to National Interstate's pre-announcement, which talks about average rate increases throughout the year of approximately 7%.
Okay. We'll look forward to that call. Craig, on the annuity side, is there any opportunity just from a top-line standpoint for just any new intermediary expansion as far as growth as an opportunity?
We certainly are focusing on the bank market, Vincent, and establishing new relationships there. That is the segment that we're pretty optimistic about. There is somewhat of a barrier to entry. You need a certain minimum level of ratings to get in most of the big banks. That's the area that we're really focusing on in this environment for growth.
Sticking with you, Craig, and then I guess Jeff, if it makes sense. On the long-term care disclosure, first, thank you very much for the additional disclosures and the teach-in on the mechanics. I recall last quarter there was some discussion around assumptions on interest rates, and then kind of coaching us to not think about just doing a complete level set change and really assuming some normalization on the out year. On the $34 million, can we kind of dive into what the two parts were on the initial and the out year assumptions, and then kind of where the current assumptions on reinvestment are today?
If you flip to, we did make a disclosure in the supplement. I don't know whether you saw that or not.
Page 28, 29? There we go.
Page 29. Our assumption is this year we're going to have a net reinvestment rate of a 452, and that will climb to a six and a quarter over a seven-year period of time. I would make the point to you that the duration of the liabilities in long-term care is very long, so it does give us the opportunity to buy some things in the long-term care operation that wouldn't be appropriate for the annuity business.
Okay. Makes sense. Just lastly for me, Carl, on the P&C guidance as far as top-line, the X Summit numbers we have, I'm assuming though that there is no assumed benefit from any M&A activity into the current top-line forecast.
That's correct. There's no additional acquisitions that are figured in that.
Okay, just from an M&A standpoint, clearly we're seeing a lot more press releases. Those are some pretty big transactions. On the smaller side, are you guys seeing the pipeline is still looking pretty good?
We always get a shot at a lot of different opportunities, so I think it's about the same as it has been.
Okay. All right. Well, thanks, guys, and congrats on the good year, too.
Thank you.
The next question comes from Ryan Byrns from Janney Capital.
Great. Thanks. Good afternoon, everybody. Just had a question with the long-term care. There was, again, a $40 million positive coming from rate changes. Have those rate changes been passed or are those proposed rate changes? Just wanted to see when those changes come into effect.
it's both. The last couple of years, we have been quite a bit more successful in achieving rate increases than what we had assumed when we did our last major review back at the end of 2012. It does incorporate what we've experienced over the last several years and our kind of updated judgment of what we're going to experience going forward.
Gotcha. Great. Thanks. Also, I noticed that in the quarter that the results from the runoff in the long-term care, again, they were worse than usual. Was that a result of any of the actual changes, or is that just a kind of a one-time blip? Just trying to, from a modeling perspective, think about that segment.
The biggest part of it was the commutation of a reinsurance agreement.
Okay.
A $5 million GAAP loss related to that.
Gotcha. Again, as interest rates have dropped another 50 basis points in January, what kind of year-end outlook is baked into your assumption for the annuity block? Just trying to figure out what you guys, I realize it's your best guess, but just trying to figure out what you guys are using for your estimate.
As it relates to reinvestment rates? We're assuming that we're going to earn something in the neighborhood of 3.5% on new money. If you turn to page 29, you'll see the assumption that we're using related to reinvestment rates for this year and progressing out over the next seven years.
Great. Thanks a lot, guys.
All righty.
The next question comes from Paul Newsome from Sandler O'Neill.
Good morning. Thanks for the call. Congratulations on the earnings. I think we've got some more pieces here. With the new disclosure, could you talk about the ROE of your businesses with and without the excess capital and the runoff businesses and how those compare?
Sure. This is Carl. If you look at the rough and dirty, the Specialty Casualty Group part of our business earns about a 17% return on equity based on kind of a calendar year basis. Specialty Financial Group around 18%, Property and Transportation Group around 5%, which the total is roughly 13% in the P&C side.
That's terrific. Is it similar on the life side or?
In the annuity business, if you look at the core operating earnings, it was a little over 11%. I think it was around 11.5% last year. That doesn't include realized gains, and the numbers Carl just gave you don't include realized gains. Typically, that's additive to the returns.
I think it's an upward battle to get credit for that with insurance investors. Could you also just review kind of how you think about the excess capital piece? I think there's a little bit of a buffer there that you like to keep, but your most recent views on how much excess capital you like to keep at the holding company as well as in other places within the corporate structure?
Paul, this is Carl. It's not too much different than what we've kind of talked about in the past. We like to keep $200 million of dry powder both for defensive reasons and offensive reasons, opportunistically. The rest, basically every year is a little bit different. If you take a look at last year versus the year before, every year we're very opportunistic. We're opportunistic repurchasers of our shares. We try to do that opportunistically. We've paid special dividends when we thought that made sense. We've increased our dividend at a double-digit rate pretty much. We're out there looking at starting businesses and acquiring businesses, we're always looking for the highest and best use of our capital in that. I don't see this year as any different.
Fantastic. Thank you very much.
Again, ladies and gentlemen, if you would like to ask a question, please press the star key followed by the one key on your touch tone telephone. The next question comes from Jay Cohen from Bank of America Merrill Lynch.
Thank you. A couple questions. The first is, I guess the one part of the guidance which was a little surprising to me on the positive side was the property casualty investment income moving higher. Are you making any changes in the portfolio that will protect the yield to some extent?
Jay, this is Jeff. We're certainly very proud of our American Money Management subsidiary, who've done an excellent job for AFG over time. The major factor there is we closed on Summit April 1st, 2014. That involved a $400 million investment into the P&C group, plus all of the reserve balances being invested for Summit. We'll have higher average P&C invested assets in 2015 than we would have in 2014 because we only had nine months worth of that for 2014 versus a full year. Absent that, there's no special thing. In fact, we've taken a very close look, as Craig was saying, about reinvestment rates and tried to make sure they reflect current market when we went ahead and prepared our guidance.
Got it. The other question, Carl, you had just given us these ROE figures for the different pieces of the business. I assume you were referring to specifically 2014 results?
That's correct, Jay.
Oh, okay. I didn't know if those were normalized or not, and that Property and Transportation seemed a little low, but certainly I understand what happened in 2014.
Yeah. National Interstate is a pretty large chunk there, that kind of pulled the average down.
Got it. Thank you.
I am showing no further questions.
Thank you for joining us this morning. We look forward to talking with you again as we share our first quarter results in 2015. This concludes our call for today.
Ladies and gentlemen, that does conclude the conference for today. Again, thank you for your participation. You may all disconnect. Have a good day.