Ladies and gentlemen, thank you for standing by, welcome to the American Financial Group 2019 third quarter results conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Diane Weidner. Thank you, please go ahead, ma'am.
Good morning, welcome to American Financial Group's third quarter 2019 earnings results conference call. I'm joined this morning by Carl Lindner III and Craig Lindner, Co-Chief Executive Officers of American Financial Group, Jeff Consolino, AFG's Chief Financial Officer. Our press release investor supplement and webcast presentation are posted on AFG's website. These materials will be referenced during portions of today's call. Before I turn the discussion over to Carl, 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 1995. 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 AFG's 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 our remarks or in 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. Thus, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now, I am pleased to turn the call over to Carl Lindner III to discuss our results.
Good morning. We released our 2019 third quarter results yesterday afternoon. If you'd please turn to slide three of the webcast slides for an overview. AFG reported core operating earnings of $2.25 per share, reflecting strong operating profitability and investment results in both our specialty property and casualty and annuity operations. Third quarter 2019 annualized core operating return on equity was 15.3%. Net earnings per share were $1.62 and included $0.15 per share in after-tax net realized losses on securities, a negative impact of $0.23 per share for annuity non-core items, including the impact of fair value accounting for fixed-indexed annuities, other items related to changes in the stock market and interest rates, and unlocking. Net earnings also included $0.25 per share to strengthen our A&E reserves. Craig and I thank God, our talented management team, and our great employees for helping to achieve these results.
We have narrowed the range for our expected 2019 core net operating earnings per share to $8.50-$8.70 from the range of $8.40-$8.80 announced previously, while keeping the midpoint at the same $8.60 per share. Craig and I'll discuss our guidance for each segment of our business in more detail later in the call. Now let's turn our focus to our property and casualty operations. Please turn to slides four and five of the webcast, which include an overview of third quarter results. As you'll see on slide four, gross and net written premiums in our Specialty Property and Casualty insurance operations grew by 12% and 11% respectively year-over-year. As we previously reported, delayed planting of spring crops resulted in late acreage reporting in our crop operations, which increased our overall third-quarter premiums.
When you exclude crop premiums, gross and net written premiums each increased a healthy 9% when compared to the 2018 third quarter. Core operating earnings in AFG's property and casualty insurance operations were $194 million in the third quarter of 2019, compared to $158 million in the prior year period, an increase of $36 million or 23%. The Specialty Property and Casualty insurance operations generated an underwriting profit of $88 million in the third quarter, compared to $55 million in the third quarter of 2018. Higher year-over-year underwriting profits in our Property and Transportation and Specialty Financial groups were partially offset by lower underwriting profit in our Specialty Casualty group.
The third quarter 2019 combined ratio of 94% was 1.7 points lower than the 95.7% reported in the comparable prior year period and included 1.6 points in catastrophe losses and 3.1 points of favorable prior year reserve development. Average pricing across our entire property and casualty group was up in excess of 3% for the quarter. When you exclude our workers' comp business, renewal pricing was up about 6% in the third quarter, reflecting a continued improvement from the renewal rate increases achieved during the first half of 2019. In fact, renewal pricing in our Specialty Property and Casualty group overall is the highest we've achieved in over five years. Meeting or exceeding our 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 across our Specialty Property and Casualty businesses remain stable overall, we do continue to closely monitor loss activity and the impact of social inflation, along with general loss cost inflation and interest rates. Now I'd like to turn to slide five to review a few highlights from each of our Specialty Property and Casualty business groups. The Property and Transportation group reported an underwriting profit of $38 million in the third quarter of 2019, compared to break-even underwriting results in the comparable prior year period. Nearly all businesses in this group reported higher year-over-year underwriting profits, the increase was driven primarily by higher underwriting profit in our Transportation and Property and Inland Marine businesses. And these increases were partially offset by the absence of underwriting profit in our crop business in the third quarter of 2019.
Catastrophe losses in this group were $8 million in the third quarter of this year, and $13 million in the comparable 2018 period. Third quarter 2019 gross and net written premiums were 17% and 18% higher, respectively, than the comparable 2018 period. The increase was largely the result of higher year-over-year premiums in our transportation businesses and the timing of recording of crop premiums. If you exclude crop, gross and net written premiums were very strong, increasing 13% and 14%, respectively, year-over-year. Overall renewal rates in this group increased 4% on average in the 2019 third quarter. I continue to be pleased with the broad-based rate strengthening in this group, with nearly all businesses reporting increases in the quarter and corrective rate actions in our Singapore and aviation businesses.
Excessive rainfall early in the planting season in the Midwest and the Upper Plains states have made for a challenging 2019 crop year. As I discussed last quarter, we incurred a record number of prevented planting claims due to spring flooding and excess moisture, and termed our expectations for the crop year as below average. As a result of delayed plantings, corn and soybean yields are expected to finish below their long-term averages, and a recent freeze event throughout much of the Midwest will have a meaningful negative effect on yields. Commodity pricing's held up well. It appears that the harvest discovery pricing is within 2% to 3% percentage points of the spring pricing. Based on the impact of prevented planting claims and our updated expectations from the quality of crops at harvest, we do not expect to record any crop profits in the fourth quarter of 2019.
We're now prepared to call 2019 a poor crop year. I continue to be very pleased with the results in our transportation businesses, which achieved double-digit year-over-year growth in the third quarter. In addition to rate increases and exposure growth, we're seeing new business opportunities in several of our specialty transportation lines. Rate increases in our commercial auto liability book were about 9% in the third quarter. This is our eighth year of rate increase in this line of business. We've been talking about this for a long time, dating back to when we first saw an uptick in commercial auto loss severity in 2012. We were able to address issues through underwriting and rate actions and got this business back on track after years of concerted effort. We continue to obtain appropriate rate increases. We do believe our starting point is different than the industry overall.
Specialty Casualty Group reported an underwriting profit of $23 million in the 2019 third quarter, compared to $49 million in the comparable 2018 period. Higher profitability in our workers' compensation and Social Services business was more than offset by higher underwriting losses in Neon and adverse prior year reserve development in our E&S businesses. Underwriting profitability in our workers' comp business continues to be excellent. Catastrophe losses for this group were $10 million in the third quarter of 2019, compared to $12 million in the comparable prior year period. I am pleased with the healthy growth achieved in this group for the third quarter. Gross and net written premiums increased 8% and 7% respectively when compared to the same prior year period. There are two primary factors driving the growth. First, the addition of premiums from ABA Insurance Services, which was acquired in the fourth quarter of 2018.
Second, strong growth in our Excess and Surplus lines and excess liability businesses. The growth in our E&S and excess liability businesses is primarily the result of new business opportunities, rate increases, and higher retentions on renewal business. Lower premiums in Neon, primarily due to foreign currency translation, as well as lower premiums in our workers' comp businesses resulting from rate decreases, partially offset the growth in the other businesses in this group. By excluding workers' comp, year-over-year growth and third quarter gross and net written premiums was healthy in this segment, at 12% and 13% respectively. I'm very pleased with these results. Renewal pricing for the Specialty Casualty Group was up 4% during the third quarter. Excluding rate decreases in our workers' comp businesses, renewal rates in this group were up a very strong 9%.
Both measures are an improvement from renewal rate increases achieved in the second quarter of 2019 and are the highest we've seen in five years. I'm really pleased with the broad-based pricing momentum across the businesses in this group during the quarter, including double-digit increases in our excess liability and umbrella businesses. Specialty Financial Group reported an underwriting profit of $26 million in the third quarter of 2019 compared to $9 million in the third quarter of 2018. Higher underwriting profit in our financial institutions business was the primary driver of the increase. Catastrophe losses for this group were $3 million and $13 million in the third quarters of 2019 and 2018, respectively. The businesses in this group continue to produce excellent underwriting margins.
Third quarter 2019 gross and net written premiums increased by 6% and 9% respectively when compared to the same 2018 period, primarily as a result of higher premiums in our Fidelity and Crime and Equipment Leasing businesses. Renewal pricing for this group was flat during the third quarter. Please turn to slide six for a summary view of our 2019 outlook for the Specialty Property and Casualty operations. Based on results for the first nine months of the year, we now expect a 2019 combined ratio for the Specialty Property and Casualty Group overall between 93% and 94%, but we narrowed the range from our prior estimate of 92%-94%. We've also adjusted our estimate for overall growth in net written premiums to be in the range of 4%-7%, an increase from the range of 2%-5% estimated previously.
Looking at each segment, we now estimate a combined ratio in the range of 93%-96% in our Property and Transportation Group, narrowed a bit from our previous range of 93%-97%. As noted earlier, our revised earnings guidance includes the expectation that based on a poor 2019 crop year, we won't record any crop profits in the fourth quarter. The first half of 2019 included 2018 crop year earnings that were recorded as claims were settled following a strong 2018 crop year. Given our expectations for poor crop results this year, we don't expect to record any 2019 crop year earnings in the early part of 2020. Growth in net written premiums is now expected to be between 5% and 8%, an increase from the previous range of 4%-8%.
Our Specialty Casualty Group is now expected to produce a combined ratio in the range of 92%-95%, up from the range of 90%-94% estimated previously. We now expect growth in net written premiums for this group to be between 4% and 7%, an improvement from the previous range of 2% and 6%, reflecting growth opportunities and strong pricing momentum in the majority of businesses in this group. We now expect the Specialty Financial Group combined ratio to be in the range of 86%-89%, an improvement from our initial estimate of 87%-91%. Additionally, we've raised our projection for growth in net written premiums to be in the range of flat to up 3%, a change from the previous estimate of down 4% to flat year-over-year.
Thanks, Carl. I'll start with a review of our annuity results for the third quarter beginning on slide seven. Statutory annuity premiums were $1.1 billion in the third quarter of 2019 compared to $1.4 billion in the third quarter of 2018, a decrease of 22%. Higher traditional fixed annuity premiums were more than offset by lower fixed-indexed annuity premiums. In response to the continued drop in interest rates in 2019, we have implemented numerous crediting rate decreases in order to maintain appropriate returns on annuity sales, which has tempered new sales. In the second quarter of 2019, we changed the way we define annuity core operating earnings.
Beginning with the 2019 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 now include an expense for the amortization of fixed-indexed annuity option costs, which is a better measure of the cost of funds for fixed-indexed annuities. We believe these changes provide investors with a better view of the fundamental performance of the business and a more comparable measure of the Annuity segment's business compared to its peers. Turning to slide eight, you'll see the components of pre-tax annuity core operating earnings under this new definition.
Beginning with the 2019 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 now include an expense for the amortization of fixed-indexed annuity option costs, which is a better measure of the cost of funds for fixed-indexed annuities. We believe these changes provide investors with a better view of the fundamental performance of the business and a more comparable measure of the annuity segment's business compared to its peers. Turning to Slide 8, you'll see the components of pre-tax annuity core operating earnings under this new definition.
Results for the periods prior to the second quarter of 2019 are shown at a comparable format to the new definition of 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 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 on the reported results of the underlying partnerships and investments. Higher amortization of option costs reflects growth in AFG's annuity business, as well as higher renewal option costs related to the in-force business. Turning to Slide 9, you'll see that our quarterly average annuity investments and reserves both grew by approximately 11% year-over-year.
AFG spreads in the third quarter of 2019 were lower than in the third quarter of 2018, as spreads in 2018 reflect higher returns on certain investments that are mark-to-market through operating earnings, as well as the impact of higher option costs in 2019. I'm pleased with our results in this challenging interest rate environment. Our third quarter annuity segment results reflect a core operating return on equity in excess of 12%. Due to the significant decrease in both long-term and short-term interest rates throughout 2019, AFG performed a detailed review or unlocking of the actuarial assumptions underlying its annuity operations in the third quarter of 2019. This review resulted in a net after-tax unlocking charge of $1 million or $0.01 per share.
This unlocking charge is excluded from annuity core operating earnings and takes into account the negative impact of lower interest rates, which resulted in negative impacts related to lower expected future investment income and higher assumed persistency on certain blocks of business, as well as the positive impact related to lower expected costs for fixed-indexed annuity renewal options, including anticipated renewal rate action. AFG monitors the major actuarial assumptions underlying its annuity operations throughout the year. Historically, the company's conducted detailed reviews or unlocking of its assumptions in the fourth quarter of each year. Beginning this year, AFG will conduct this review in the third quarter of each year. We believe that this timing is consistent with the norm for our publicly traded life and annuity peers. Please turn to Slide 10 for a summary of the 2019 outlook for the annuity segment.
Taking into account the new definition of annuity core operating earnings beginning in the second quarter of 2019, and based on the $294 million of operating earnings reported by the annuity segment in the first nine months of 2019, AFG now expects its full-year 2019 pre-tax annuity core operating earnings to be in the range of $380 million-$400 million. This compares to the most recent guidance of $375 million-$405 million. Incorporated in our guidance is an assumed annualized return of 8% in the fourth quarter on investments required to be mark-to-market through operating earnings, in contrast to the 10.5% earned on an annualized basis in the first five months of 2019. Our guidance also reflects the impact of lower interest rates, in particular, the impact of lower short-term rates, which will have a negative impact on the annuity segment's approximately $3 billion net investment in floating rate securities.
In response to the continued drop in market interest rates in 2019, we've implemented numerous crediting rate decreases on our products in order to maintain appropriate returns on annuity sales. Based on the results to date, we now expect 2019 annuity sales will be down 9%-10% from our record $5.4 billion of premiums in 2018. In addition to rate decreases on new annuity sales, we've also begun implementing renewal rate decreases on certain in-force annuity blocks of business. Please turn to Slide 11 for a few highlights regarding our $54 billion investment portfolio. AFG reported third quarter 2019 net realized losses on securities of $14 million after tax and after deferred acquisition costs. This compares to net realized gains on securities of $27 million in the third quarter of 2018.
Approximately $20 million of the realized losses recorded in the third quarter of 2019 pertain to securities that AFG continued to hold at September 30, 2019. As of September 30, 2019, net unrealized gains on fixed maturities were $920 million after tax and after DAC. As you'll see on Slide 12, our portfolio continues to be high quality, with 91% of our fixed maturity portfolio rated investment grade and 98% with an NAIC designation of 1 or 2, its highest 2 categories. We have provided additional detailed information on the various segments of our investment portfolio in the quarterly investor supplement on our website. I'll now turn the discussion over to Jeff, who will wrap up our comments with an overview of our consolidated third quarter 2019 results and share a few comments about capital and liquidity.
Thank you, Craig. Slide 13 summarizes AFG's third quarter consolidated core operating earnings results. AFG reported core EPS of $2.25 in Q3 2019. Core net operating earnings in the quarter were $205 million. The year-over-year increase in core earnings in the 2019 third quarter was primarily the result of strong operating earnings and investment results in our insurance businesses. Interest in other corporate expenses were $2 million higher year-over-year. Parent company interest expense increased by $2 million from Q3 2018. This is the result of the March 2019 issuance of $125 million principal amount of hybrid 40-year, 5 7/8% subordinated debentures. Other expenses were flat year-over-year. Slide 14 provides a reconciliation of core net operating earnings to net earnings. In the third quarter of 2019, AFG recognized $14 million or $0.15 per share in net after-tax realized losses on securities.
Annuity non-core items reduced net earnings attributable to shareholders by $21 million or $0.23 per share. Annuity segment non-core items include the negative impact of the decrease in market interest rates during the third quarter of 2019, as well as the $1 million unlocking charge that Craig referred to earlier. AFG's net earnings were reduced by an A&E reserve strengthening of $23 million or $0.25 per share. According to data provided by AM Best, industry three-year survival ratios for asbestos and environmental reserves were 7.3 times paid losses as of year-end 2018. The three-year survival ratio for AFG's P&C insurance businesses now stands at 15.6 times paid losses. As indicated on Slide 15, AFG's adjusted book value per share was $59.65 as of September 30, 2019.
Annualized growth in adjusted book value per share plus dividends was a very strong 18.2% for the first nine months of 2019. We returned $36 million to our shareholders in the third quarter with the payment of our regular quarterly dividend. In August 2019, we announced an increase in our regular annual dividend by 12.5% from $1.60 per share to $1.80 per share. AFG has increased its dividend in each of the last 14 years. The increased quarterly dividend was paid on October 25th. Parent cash was approximately $270 million at the end of the third quarter. We maintain solid levels of capital in our insurance businesses to meet our commitments to the rating agencies. Our excess capital stood at approximately $865 million as of September 30, 2019. We'll plan to hold approximately $200 million-$300 million as dry powder to maintain flexibility for opportunities as they arise.
We'll evaluate our excess capital position before the end of the year. We note that the $1.50 per share special cash dividend paid in May does not preclude our consideration of additional special dividends or opportunistic share repurchases for the balance of 2019. To conclude, page 16 shows a single-page presentation of our updated 2019 core earnings guidance. At the top of the page, you can see we're keeping the midpoint of our 2019 core EPS guidance the same at $8.60 per share, have narrowed the range to $8.50-$8.70.
Our guidance assumes an effective tax rate of approximately 20% on core pre-tax operating earnings. AFG's expected 2019 core operating results exclude non-core items such as realized gains and losses, annuity non-core earnings and losses, other significant items that may not be indicative of ongoing operations. We'd like to open the lines for any questions.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Paul Newsome with Sandler O'Neill. Your line is now open.
Good morning, and congratulations on the call. I wanted to ask about on the life side, there's some investigations in the teachers' annuity business, and obviously you have a relatively small part of that business. Any thoughts or ramifications on your relationship and how you do business with the teachers on the annuity side that could be similar or different from VALIC or some of the other companies?
Yep. Paul, this is Craig. We have not received any kind of a notice related to that. As a matter of fact, we're not licensed in New York, is my understanding at least the recent announcement was related to business being done in New York. To our knowledge, it's not an issue at all with us.
Right. Switching over to the property casualty side. Obviously, the topic du jour of this quarterly earnings has been what happened to Travelers with their commercial auto business. I think they're arguing at least that besides the relevant point of where you start from a profitability point, your starting point, that there seems to be an acceleration of attorney involvement in claims that have been really over 2018. As you probably saw, they put some slides out there that suggest that. Is that something you're seeing as well in your business, that acceleration in the tort environment? Or is it just not in your-- or maybe there's something else going on in your business that is different from a trend line on the claims side?
This is Carl. I think we've seen an uptick in severity going back to 2012. Hard to say whether there is an acceleration over the past year. We identified the first uptick, like I said, back in 2012, and we're in our eighth year of rate increase, in underwriting actions, and I think that's why we're blessed to be where we are profitability-wise at National Interstate and in our Great American Trucking. That said, we continued in the commercial auto liability part of the business. We continue to see the severity trend up, and that's the reason why we took 9% in price in the quarter, and because of those trends, we'll continue to be aggressive on price.
That's one part of our commercial auto business there at National Interstate that we feel we want to improve our underwriting profitability on, even though we're making probably a small underwriting profit.
Great. Thank you. I'll let some other people ask questions, appreciate the answers and help.
Thank you. Our next question comes from the line of Greg Peters with Raymond James. Your line is now open.
Good afternoon. I'll focus on two questions in the property casualty business and then give Craig a chance to have another sip of water and ask an annuity question. First, in your comments, Carl, you mentioned how the 2019 year included some earnings benefit from crop business from 2018. Then you went forward and said, it's reasonable to assume that because of the poor results of the 2019 crop year, you won't see that same sort of benefit in 2020. Now, assuming I heard you correctly, I was wondering if you could give us some numbers around that.
We don't give specific crop numbers in that. We don't break those out. You heard correctly. A lot of times we've not settled all the claims for a given year until the next year. There's always the potential for favorable development or unfavorable development, either way. Generally, we're fairly conservative, so there have been years where we've had favorable development when previous years turn out to be very good. That was the case this past year. Since we're saying this year we feel like we're not going to make any money. It's a zero crop profit year. There's nothing at this point we feel that would get carried over into next year in the first half.
I guess since you're not giving us the numbers, it's probably not material to your overall consolidated financial position. At least that's what I'm going to infer. If I can pivot to the casualty business, I noticed a bunch of comments around pricing, about growth, it usually came along with the caveat excluding workers' comp. I was wondering if you could update us on your views on your workers' comp business. Is this a growth business for you? Is the rate environment still attractive for you to grow the business, or give us a perspective on how you're viewing that business, please.
Sure, I'm happy to. Just to put things in perspective, workers' comp is a little under 19% of our overall direct written premium that we're projecting for 2019. Our overall nine-month results for this year are very good. A healthy accident year combined ratio and a very healthy calendar year combined ratio through 9 months. The outlook is the same for the whole year. Gross and net written premiums overall are down low single digits for 9 months and will be about the same through year-end, mainly reflecting the price decreases that there have been in some of our larger states in that. When you look at the pieces of our business, the large entities that make up or the acquisition of Summit, we're making a small accident year underwriting profit, a healthy calendar year underwriting profit. Price premiums down 3%-4%, price is down about 11%.
The loss cost trends continue to be very favorable. In California, which is a smaller part of our business these days, premiums are down about 9% with pricing down 11% this year. We're projecting a modest accident year underwriting loss for our California business and about a break-even calendar year number. We feel California's a stable claims environment. We feel our reserves are strong in both our Summit, Republic parts of our business. Loss cost trends in California seem to be in control. The other part of our business, National Interstate's comp business, is doing well. Our Strategic Comp, the large deductible part of our business, very healthy. Accident year, calendar year, a little bit of growth there. I think what's really driving the premium change are really because the experience from the prior years has been continuing to improve over the past couple years.
That's brought about rate declines in a large number of states. I think because of the rate declines, we don't foresee really there being a lot of growth. In fact, as I mentioned before, through nine months, our premiums are down low single digit. Does that help?
Yeah, it does. Thank you, Carl. Would you characterize your rate decreases in workers' comp as being in line or better than what is coming out of NAIC?
I think it's generally in line.
Okay. Thank you for that answer. I thought I'd just pivot to Craig. It sounded like you had a frog in your throat during your prepared remarks. Anyways, on slide 15 of your supplement, you provide a very detailed breakout of premium by segment, by financial institutions, by retail, by broker, et cetera. It's noted because of what you said about the interest rate environment that your total premium volume is down pretty meaningful as it compared to certainly the third quarter last year, then of course the fourth quarter and first quarter of this year. I'm just trying to gauge looking forward because it seems like there's further rate decreases that are possible. Is there going to be another step down in premium production?
I suppose it's contingent upon how the rest of the competitors are on the market, but maybe you could give us some perspective on that, Craig.
Sure. First of all, thanks for letting me rest my voice for a couple of minutes. I appreciate that. The environment has been pretty competitive this year, Greg. We historically have been faster to change rates on the downside and the upside when we see significant changes in interest rates. Some of our competitors, frankly, wait much, much longer than we do. Some of them don't make changes for, in some cases, three, four or five months, no matter what rates are doing. We are much quicker to make changes, and therefore, when interest rates are declining, we're reducing credited rates faster. It has an impact on our premiums. It has a negative impact on our premiums.
When rates are going the other direction, we historically have been quicker to increase rates, again, to hit our targeted rates of return, and consequently, in those periods, our premiums typically grow faster than the industry's. My experience in the business is that over time, most competitors become rational. If you look at our history, typically, after a couple of very strong premium years, there can be declines for some period of time. I think we have a great relationship with our distribution partners. I think on the investment side, we're among the best in terms of the performance, and I think our costs are competitive with about anybody in the industry. Long term, I believe our premiums are going to be just fine, and our market position is going to be just fine.
I can't predict it quarter to quarter, but I feel very confident that certainly over the next couple of years, premiums will regain a growth trend.
Thank you for your answers.
Sure.
Thank you. Our next question comes from the line of Amit Kumar with Buckingham Research Group. Your line is now open.
Thanks, good afternoon. Just a few questions, maybe starting with P&C. I want to go back to, I guess, Paul's question on Travelers comments. Is your book different versus what a Travelers commercial auto book might be? Can you just maybe talk a bit more about the quality or the nature of the book versus some other players?
Well, our book obviously is heavier passenger transportation, and probably, I'm not a student of Travelers business, but Travelers probably is, their book would be probably smaller to medium-sized risks for the biggest part, would be my guess. That would be my understanding of the differences in that. Again, we're focused on passenger transportation and different niches within the transportation side.
Okay. That's helpful. The second question I had was on Neon. Again, we've had a bunch of conference calls, so I might have missed if you made any opening remarks. Any thoughts on that going forward? I know there was a lot of comments in the trade press previously on that. I'm curious if you had an update or how should we think about that going forward?
Hello, Amit. This is Jeff. Clearly, we don't endorse or comment on speculation in the trade press or things of that nature. I really don't have anything to say about that. We were disappointed with Neon's results this quarter. It's disappointing because the third quarter of 2018 was one of Neon's better quarters. You'll see in the press release, it contributed to a little bit of negative variance in our specialty casualty segment. We did hold our full cat load in the quarter to evaluate Dorian and other events that happened. We didn't have cat earnings in the quarter, which is the heaviest cat quarter of the year. We were impacted by large losses in our bloodstock and some other areas that were above our expectations, as well as some expenses related to the management changes that we announced there earlier in the year.
We're working hard on the business. We believe that Lloyd's can be a good place to be a specialty insurance and reinsurance company. AFG is an excellent specialty insurance company. We're working towards making Neon be the kind of business that's consistent with the results we can generate in our businesses here. If we can get the appropriate return on capital there, Neon can be a part of our business for a very long time.
Got it. That update is actually helpful. The other question, this might be for you, Jeff. On the excess capital, in the opening remarks, you talked about nothing would preclude you from a special dividend in Q4. Can you talk about your appetite for what's out there? I'm curious just based on how the market has been, how the valuations are in the P&C space. Probably, should we lean more towards a special dividend at this stage, or how should we think about that?
Amit, this is Jeff. As the CFO, I provide analysis, and our CEOs determine what to do with
With excess capital. I'm going to invite Carl or Craig to comment on that.
I think the only thing we'd say at this point, Amit, is that we're going to take a look at what our capital demands are over the next month or so, and we'll determine whether we want to do another special dividend at that time. That's probably the best I can do.
Okay. That's helpful. The other question I had was on your investment portfolio. You have CLOs and there's obviously been a lot of discussion on CLOs going forward. I was curious if you had any thoughts on that asset class, and how should we be thinking about your exposure to CLOs, going forward?
Yeah, Amit, this is Craig. We do have investments in CLOs. The vast majority of the investments are in the very highly rated tranches, and we're very comfortable with the credit quality. We do invest a small amount of money in the equity portions, where, in most cases, we're actually the manager of the CLOs. It's been a great business for us. If you include the fees that we get for managing that activity, the returns have been extraordinarily strong. I don't think you're going to see a big change in our position there. It's something that we obviously monitor very closely, but we're pretty comfortable with our position there.
Got it. I guess staying on the topic of annuity segment, can you remind us with every 25 basis point shift, what is the impact on your sales and how should we think about that impact on the book for 2020?
When you say, you mean 25 basis point change in interest rates?
Yes, sir.
As it relates to premiums, it really depends upon what our competitors do with their credited rates. We're going to do our best to adjust credited rates to earn our targeted rates of return, and hopefully our competitors are going to do the same thing. Historically, over time, they get disciplined, and our expectation would be that will be the case again this time around. Certainly from the standpoint of industry sales of traditional fixed and indexed annuities, the environment is better in a higher interest rate environment than a lower interest rate environment. In terms of our competitive position with a decrease in rates, we're trying to predict what impact on premiums might be. That's tough for me to do unless I know what the competitors are going to do with their credited rates.
Got it. That's helpful. Last question on P&C. Again, going back to Paul's question. Broadly, when you look at the tort climate, the social inflation, the jury awards, there's obviously a differentiated commentary coming from different players regarding how to think about margin expansion from here. I'm curious if you had any thoughts, or are you thinking about your loss picks differently, versus maybe one or two quarters ago when you look at the climate out there? Thanks.
Yeah, Amit. We do actuarial reviews in all of our businesses and have discussions with management every quarter. As we see changes in trends or severity or frequency up or down, severity up or down, numerous times during the year, we're making whatever adjustments we feel are necessary to conservatively project what we think our current accident year profitability is business by business. We're always thinking about those things, and we have a pretty specific process to address those changes in that. In our case, sure, we have some concerns on more aggressive and effective attorney activity and the jury awards. Seems like the desensitization of jury awards as it impacts various businesses. I think in our case, we really see that more so in a few places. Only overall our loss cost trends were very stable.
It would be commercial auto liability, which I've kind of already talked about, and we've seen that for a long time. Actually, we continue to take a pretty big rate increase in the commercial auto liability part of our business to keep up with things. That business is meeting our profit targets today. In fact, we look at that as an opportunistic area as we have our house in order, and whether it's the Atlas transaction or being able to grow double-digit organically even outside of that. We think we've been at that a long time. The D&O area is probably the second area that we kind of see the impact of those trends. Of course, we're adjusting our perspective on things in that.
In the D&O side, I think the good news, bad news for us, the good news is public D&O is really kind of where we're seeing those trends the most. In our case, public D&O only represents about 15% of our D&O premium in our executive liability business. And our limits are low. Our average net limit's under $5 million. We are adjusting rates, retentions, limits, along with the market there. And as with our commercial auto liability or commercial auto business, our overall D&O business is performing fine. It's the public D&O part that we'd like to see performing better. I think it's probably going to take a couple of years, even with the size of the rate increases for the industry to achieve rate adequacy with some of the trends that everybody's seeing in D&O.
We'll be increasing that part of our business with rate and increase our appetite cautiously as we feel rates are getting more adequate. But I think it's going to be a couple of years. And then the other part of our business that's very profitable today and that we're pleased with, but we're watching the loss cost trends, which are a little above normal for some of these same reasons, is the excess liability and umbrella area of our business. In particular, when we look at our book, it's accounts with underlying commercial auto liability exposures that seem to be contributing to the severity in the excess layers. And we're taking a significant rate and taking underwriting actions also in our habitational part of our business there that we see some of those trends affecting.
Overall, very pleased with our excess liability and umbrella business, and it's probably those two pieces of the business that we're seeing those trends impact the most. I think as we're opportunistic and entrepreneurial, I think it's giving us some opportunities in that area. Frankly, we're growing double digit, and our renewal rate increases are double digit in our overall excess liability and umbrella business. I see that as an area of opportunity for us. Again, another example, kind of like commercial auto, where I think we have our house in order, and it's just a few pieces of the business that we're paying more attention to. Does that help?
Yes, that color is very helpful. I will stop here. Thanks for all the answers and your time.
All right.
Thank you. Our next question comes from the line of Christopher Campbell with KBW. Your line is now open.
Yes. Hi, good morning. My first question is on property and transportation. Were there any benefits from Atlas this quarter?
We're early on into the Atlas renewal transaction. There were some small amount of premiums in the quarter from Atlas, but I think it'll be more significant as we move into the fourth quarter and next year.
Okay, got it. How much is that premium estimated? Is that about $100 million annually?
Christopher, this is Jeff. What was disclosed as part of the transaction and by Atlas is the paratransit book is approximately $120 million. So we've got the right to go through and work with them to write the business on our price and terms. We hope to write it at the rates that we're comfortable with, and we'll renew whatever business sticks at what we consider to be the right rate. That'll be a 12-month cycle from start all the way through.
Yeah, Christopher, if I were to put a dollar amount on it, I think probably in the fourth quarter, we might see $10 million-$15 million of business. As we're working through some systems transition in that, which I think will improve our ability to renew the business going into 2020.
Okay, great. That's helpful. Also within property transportation, you guys had some core loss ratio improvement this year, which has been the first time we've seen that get better year-over-year in a while. I guess, what are the big drivers there?
Well, I think the transportation results continue to be very strong. Property and marine, I think, there's been some improvement.
Chris, we improved in the quarter on the accident year ex-cat loss ratio by about two points. Property and marine, our unit there was responsible for the majority of that. In aviation, it's not the result we're hoping for, but compared to a year ago's quarter, we've seen improvement there as well.
Okay, great. Switching over to specialty casualty. I think the press release noted, part of the growth was driven by E&S, you also had an adverse charge in that. I guess just how do you feel comfortable growing that business and feeling that you're rate adequate right now?
Chris, can you repeat the question about the adverse charge, please?
Yeah. I was just wondering is a big part of the growth this quarter in specialty casualty was called out to be E&S, excess and surplus, within the press release. You also had a reserve charge within that. I'm just trying to get a sense of where you guys feel you are in terms of rate adequacy.
Well, I'd default to what Carl just said. Overall, we're very pleased with the excess and umbrella businesses that operate within that. They're performing at a high level. There are places we're taking a look at and making sure that we're applying our underwriting criteria appropriately and writing the business we want at the rate we want. That's ongoing. Overall, I think Carl's comment was we feel like our house is in order there, and we've got the opportunity to grow that business.
Okay. Got it. Just what loss cost assumptions do you have on the overall book? I know some competitors have said, 3%-4%, and they've increased those to maybe 4.5%. Where do you guys sit in general on that book? What's the long-term loss cost assumption that you guys bake into pricing?
I think probably in the range of 3.5% to 4%, something like that, on a loss ratio trend. For just that segment.
Got it. Would that be similar overall, or would that be slightly higher with commercial auto or, I guess, just
Chris, probably commercial auto is seeing the highest loss ratio trend, but when Carl was talking in response to Amit's earlier question, and recognizing social inflation, D&O is one place where we're seeing it, but that excess and umbrella business is certainly a place where we're seeing it as well. It's a double-edged sword. You need to make sure that you've properly reflected it to maintain reserve adequacy and pricing integrity. Since these trends are well-known, that creates the rate opportunity that we're seeing. Since we believe that we are prudently reserved and well aware of the loss cost trends, we feel like in a lot of ways, we're in a position to grow effectively in that kind of environment because we're not, for the most part, dealing with big problems.
Okay. Got it. If you're thinking about commercial auto or the rates like, our loss cost trend like high single digits? I think Carl said you guys were at target profitability, and then looking to grow. Are you guys taking rates in line with that, and you guys think you can grow because everybody else in the industry needs to take more? I guess just what's the opportunity to take market share in commercial-
Well, again, we're in our eighth year of rate increase. National Interstate, I think we got about 5% in the quarter, and we had 9% commercial auto liability. Overall, National Interstate loss ratio trends are four percentage, a little higher than average. Again, was one of the areas that I mentioned that severity is higher and that we're appropriately continuing to take rate. We'd like to improve our commercial auto liability combined ratio even more, even though we're profitable today. We feel our house is in order, and we're able to continue to take advantage of opportunities. We're pleased to have the opportunity on the Atlas transaction at our prices. We're pleased to have an opportunity as the market is in disruption, with lots of people taking care of business. We're opportunistic.
With our house in order, we feel that we can carefully grow our business, and we're growing at double digit today. Also pick up some opportunities on the M&A side. Does that answer your question?
Yes, it does. Thank you. That's very helpful. Then one on annuity. Is $95 million a good quarterly run rate going forward, like, as we think about modeling into 2020? What factors could put that at risk or either way, right? What could help drive out performance, then what could lower that run rate?
Sure. First of all, growth in the assets and reserves obviously is additive. That's a plus factor. Swings in mark to market on the investments that are in that category that are mark to market quarter to quarter, those investments continue to grow. The returns have been very strong historically over the last couple of years, our hope is that that will continue. That can obviously impact the quarterly numbers. Then the negative impact of lower short-term rates on our little over $3 billion of floating rate securities, we do hold some cash in addition to that. I think as a starting point, the number that you threw out is probably a reasonable number, then you have to make adjustments for growth on the positive side, impact of lower short-term rates on the negative side.
Obviously a lot of moving pieces that impact the profitability, just reinvestment rates run off of the existing portfolio and reinvestment at lower rates. I guess I would say the flip side to the negative impact of lower short-term rates is there certainly are some investments that we've made over the last three, four years that are big beneficiaries of the lower rates. We've been a fairly meaningful investor in real estate, specifically apartments, over the last several years, cap rates on the apartments just continue to come down. Most of those are held in partnerships that are mark to market. If I were taking a guess on the marks, assuming interest rates remain low, I think the marks on those investments should be pretty positive going forward. It's not all negative in terms of impact on investment income.
There are some investments that we've made that will benefit from the lower rates.
Okay, great. Thanks for all the answers. Best of luck in the fourth quarter.
Sure. Thanks.
Thank you. Our next question comes from the line of Jay Cohen with Bank of America. Your line is now open.
Thanks for keeping the call going for me. I think I know the answer to this, but just for my modeling purposes, on the crop business, the benefit you had in the first quarter from the 2018 year, that all showed up in favorable prior year development, is that correct?
Not entirely, Jay. Some of that would show up in commission adjustments, which would show up in acquisition costs.
Okay. I think I got that, though. All right, good. The other question, specialty casualty. As we look into 2020, it seems as if the E&S business, given the rate increases, has the potential to improve margins. One would suspect Neon, given the actions you're taking, should see better margins and price increases, better margins next year. Arguably, the workers' comp business could feel some pressure on margins. All in, just directionally, do you think the margins in that business should improve in 2020 versus 2019, forgetting any big catastrophes?
Jay, we haven't issued guidance for 2020, and we generally try to do a pretty accurate, thoughtful job when we discuss that. We haven't issued that. As far as your assumptions, with rate should come margin improvement where we're getting rate ahead of loss cost trends. That would be accurate. In workers' comp, as rates move down, I think it's a good assumption that even though our workers' comp underwriting profitability is excellent, that we probably won't earn the same margins going forward. I think all those things will get, as we thoughtfully consider what our guidance should be segment by segment, sure, we'll pack all those things into the guidance that we'll issue.
Got it. I will await that guidance when we hear it. Thank you.
Thank you. Our last question comes from the line of Larry Greenberg with Janney Montgomery Scott. Your line is now open.
Good afternoon, and thanks. I really just have one question, and it also relates to crop and maybe picks up a little bit where Greg and Jay left off. If I look at the Property and Transportation unit over the last four years, so 2016 and then inclusive of this year, the first quarter almost always had the biggest reserve releases. I guess two questions. One, was there favorable crop in each of these 2016 to 2019 years? Two, is it reasonable to assume that the difference between the first quarter reserve development versus the other quarters of the year is mainly attributable to the crop contribution?
Larry, this is Jeff. I have to say that I'm not walking around with quarterly development going back all the way to 2016, so I'm not really comfortable giving you a specific answer on that. I think directionally, you would've seen favorable crop development making a big contribution to last year's quarter. Maybe just taking a step back, why did we feel like it was appropriate to make a comment about crop, given that we're not issuing guidance for 2020 yet?
Well, if we're saying we have zero crop earnings in the fourth quarter, if we don't say that we're not likely to see favorable claims development early in 2020, we just didn't want you all to say, "Well, crops are zero this year, but we're going to throw some amount in 2020, and that's going to be significant growth," because you need to be aware of the fact there was favorable development in the first half of 2019. We'll give you a thoughtful answer on guidance, which I know Jay is eagerly awaiting, and we'll put that out when we put out our earnings in February.
Thanks. You could pass on this one too. Just conceptually, would the difference between the first quarter and other quarters of the year be largely attributable to crop?
Larry, it depends on the year, we've had favorable reserve development from other units within property and transportation over time, I wouldn't want to isolate that just to crop.
Okay, fair enough.
Thank you. That does conclude today's question and answer session. I would now like to turn the call back to Diane Weidner for any further remarks.
Thank you all for joining us this morning. We look forward to talking with you again as we share our results for the fourth quarter. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.