Good morning. My name is Kina, and I'll be your conference operator today. At this time, I would like to welcome everyone to the American Financial Group 2012 first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star one on your telephone keypad. To withdraw your question, press the pound key. Thank you. Ms. Weidner, you may begin your conference.
Good morning, welcome to American Financial Group's first quarter 2012 earnings results conference call. I'm joined this morning by Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group. 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 are 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 quarterly reports on Form 10-Q.
We do not promise to update such forward-looking statements to reflect actual results or changes in assumptions or other factors that could affect these statements. 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 or losses on investments, effects of certain accounting changes, discontinued operations, significant asbestos and environmental charges, and certain non-recurring items. AFG believes this non-GAAP measure to be 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. Now, I'm pleased to turn the call over to Carl Lindner III to discuss our results.
Good morning, thank you for joining us. We released our 2012 first quarter results yesterday afternoon and are pleased with another quarter of strong operating earnings in our specialty property and casualty and Annuity and Supplemental businesses. I'm assuming that the participants on today's call have reviewed our earnings release and the supplemental materials posted on our website. I'm going to review a few highlights and focus today's discussion on key issues. I'll also briefly discuss our outlook for 2012. Let's start by looking at our first quarter results summarized on slides three and four of the webcast. Prior year financial results have been adjusted to reflect the impact of the adoption of a new FASB standard regarding the accounting for costs associated with acquiring insurance contracts. This resulted in a reduction in AFG's December 31, 2011, shareholders' equity of approximately $134 million, which is about 3%.
Net earnings were $1.14 per share for the quarter, including realized gains of $0.28 per share, primarily from the sale of a portion of our remaining interest in Verisk Analytics. Core net operating earnings for the quarter were $85 million, or $0.86 per share, compared to the prior year's results of $91 million, or $0.85 per share. Our profit in our Annuity and Supplemental Group was more than offset by lower underwriting profit in our specialty property and casualty operations and lower property and casualty investment income. Both periods reflect the effect of share repurchases. Our annualized core operating return on equity was approximately 9%. We have continued to deploy our excess capital in ways that enhance shareholder value.
We repurchased 1.5 million shares of our common stock during the first quarter at an average price of $37.91 per share, or approximately 95% of March 31, 2012, book value per share. As of April 30, 2012, there are approximately 6.5 million shares remaining under our repurchase authorization. In addition to share repurchases and dividends, we continue to seek other alternatives for the deployment of excess capital. We've invested excess capital when we see potential for healthy, profitable organic growth and by introducing new products and services. We're always looking for opportunities to expand our specialty niche businesses through startups or acquisitions where it makes sense. As you'll see on slide four, AFG's book value per share, excluding appropriated retained earnings and unrealized gains and losses on fixed maturities, increased 4% during the quarter to $40.07.
Tangible book value on a comparable basis was $37.69 at March 31, 2012. Our capital adequacy, financial condition, and liquidity remain strong and are key areas of focus for us. We maintain sufficient capital in our insurance businesses to support our operations at a level such that capital adequacy is not a matter of concern to the rating agencies. We're pleased that during the first quarter, AM Best changed the outlook on several Great American property and casualty companies from stable to positive. Our excess capital was approximately $770 million at March 31, 2012, which included cash at the parent company of approximately $380 million. On slide five, you'll see summary results for our specialty property and casualty operations.
The property and casualty specialty insurance operations turned in another strong period, recording an underwriting profit of $48 million for the first quarter of 2012 and generating a combined ratio of 92%, one point higher than the comparable period in 2011. Gross and net written premiums were up 9% and 4% respectively in the 2012 first quarter compared to the same quarter a year earlier, due primarily to increased premiums in our Specialty Casualty Segment. We're seeing solid evidence of price increases in selected property and casualty markets, with overall property and casualty pricing increases in back-to-back quarters for the first time in a few years. About two-thirds of our property and casualty business units achieved increases in the first quarter of 2012. I'm really encouraged by the momentum in price increases that we're achieving, and I feel good about the opportunity for sequential increases in pricing in subsequent quarters.
We expect to achieve a 3%-5% increase in our overall average renewal rates in 2012. I'd like to discuss a few highlights from each of our specialty business groups on slide six. Property & Transportation Group, our largest segment, reported an underwriting profit of $27 million during the first quarter of 2012, 25% lower than the 2011 first quarter. Improved results in our crop insurance operations were more than offset by lower underwriting profits in our property and inland marine and transportation businesses, primarily the result of lower favorable prior year reserve development. We are pleased that catastrophe losses in this group were nominal. Gross written premiums were up 3% during the first quarter of 2012, primarily due to higher winter wheat commodity prices and market firming in our property and inland marine businesses.
These favorable upward trends were offset somewhat by lower gross written premiums in our transportation businesses. Net written premiums were down 2%, resulting from increased sessions of our winter wheat business. Average renewal rates in Property & Transportation Group were up 2% in the first quarter of 2012, our biggest quarterly increase in this group in six years. The Specialty Casualty Group reported an underwriting profit of $4 million in the 2012 first quarter, up from $1 million reported in the comparable 2011 period. Higher profitability in our international general liability and workers' comp businesses were largely offset by lower favorable reserve development in our excess and surplus lines and executive liability businesses. We experienced growth across the board in this segment and are seeing more business opportunities here arising from increased exposures and general market hardening.
We're particularly pleased that nearly all businesses in this group achieved pricing increases during the first quarter, with the overall group achieving a blended 4% increase for the quarter. This is the highest increase for this group since mid-2005. Gross and net written premiums for the first quarter of 2012 were both up 15%. While nearly all businesses in this group reported growth, our high-deductible workers' compensation and excess and surplus lines businesses were primary drivers of the higher premiums. Specialty Financial Group reported underwriting profit of $16 million for the first quarter of 2012, unchanged from the comparable 2011 period. Nearly all the businesses in this group achieved excellent underwriting margins during the quarter. Higher gross written premiums resulted primarily from a service contracts business initiated in the second quarter of 2011, where all the premiums were ceded under a reinsurance agreement.
Planned reductions in coastal and near-coastal property exposures in our financial institutions business contributed to decreases in both gross and net written premiums for the quarter. Pricing in this group was flat for the first quarter of 2012. Let me move on to a review of our Annuity and Supplemental Insurance Group on slide seven. The Annuity and Supplemental Insurance Group reported record first quarter pre-tax operating earnings of $67 million in 2012, a 24% increase over the comparable 2011 period. The 2012 results reflect higher earnings in our fixed annuity operations, as well as improved results in our supplemental insurance lines. Higher profitability in our fixed annuity operations were primarily the result of a larger base of invested assets. In our supplemental insurance lines, Medicare Supplement results were significantly higher than last year, due primarily to improved loss experience and lower policy lapses.
In addition, the significant stock market increase in the first quarter of 2012 had a positive impact on results in our variable and fixed indexed annuity blocks. Statutory premiums of $906 million in the first quarter of 2012 were 16% higher than the first quarter of 2011, primarily due to the increased sales of fixed indexed annuities. Sales of traditional single premium annuities and annuities sold in the 403(b) market were lower when compared to the first quarter of 2011. AFG's sales of annuities through banks have grown substantially since entering this market in 2007 and comprise about 30% of the Annuity and Supplemental Insurance Group's premiums in the first quarter of 2012. While we have achieved rankings as a top three annuity provider in several large regional banks, we also continue to expand distribution in super regional banks, which have assets in excess of $25 billion.
Please turn to slide eight for a few highlights regarding our investment portfolio. During the first quarter of 2012, AFG recorded net realized gains of $28 million, primarily on the sale of a portion of our remaining interest in Verisk Analytics. As of March 31st, 2012, we still held 2.5 million shares with an unrealized gain of approximately $113 million. Net unrealized gains on fixed maturities were $541 million, an increase of $82 million since December 31st, 2011. The vast majority of our investment portfolio is held in fixed maturities with approximately 88% rated investment grade and 96% with a designation of NAIC 1 or 2. We have provided additional detailed information on the various segments of our investment portfolio in the investment supplement on our website. I'd like to cover our outlook for 2012 on slide nine.
Based on the first quarter of 2012 results, we now expect 2012 full year pre-tax core operating earnings in our Annuity and Supplemental Insurance Group to be 15%-20% higher than in 2011. Accordingly, we've raised AFG's full year 2012 core net operating earnings guidance to $3.40-$3.80 per share. Expectations for growth in net premiums and guidance for combined operating ratios for each of our specialty property and casualty operations is outlined on slide nine. These 2012 expected results exclude the potential for significant catastrophe and crop losses, significant adjustments to asbestos environmental reserves, large gains or losses from asset sales or impairments, and significant unlocking adjustments in the Annuity and Supplemental Insurance Group. Thank you. We'd like to open the lines for any questions.
At this time, if you'd like to ask a question, press star one on your telephone keypad. We'll pause for a moment to compose a Q&A roster. Your first question comes from Matthew Warman, KBW.
Hey, guys. Good morning. First question. Carl, is it fair to say that with winter wheat and obviously soy has done well year-to-date, that the crop results perhaps are a little bit better than you expected so far into 2012?
Yeah, I think the winter wheat crop seems to have turned out pretty well. That said, our company takes a little bit more defensive position than most, quite a bit of that business is seeded in the government bucket.
Okay, got you.
Overall, I'd say it's real early for our crop business, crop planting conditions seem to be in pretty good shape right now. It doesn't seem like there's any particularly troublesome issues right now.
Okay, great. Just any color that you can provide on the maybe slightly slower growth or margins in the Transportation business?
I think that in the Great American Transportation business, we're focusing on improving profitability there versus growth. We're emphasizing rate over premium growth. The National Interstate management team can probably address that question better than me. I think also they want to continue their stellar combined ratio that they've had there over time. They're focused also on profitability along with some make sense growth this year.
Okay, great. Just last quick numbers question. I know that the catastrophe losses were small in the quarter. Was that $4 million in Property and Transportation, or is it elsewhere?
I think the biggest part of that is in Property and Transportation. Have we got any losses, Diane?
Matt, this is Diane. There were also some losses in our Specialty Financial segment related to our financial institutions book. Again, obviously very small overall.
Okay, great. Thanks so much, guys.
Your next question comes from Ryan Burns, Macquarie.
Hi, good morning, everybody. Just a quick question on the high-deductible workers' compensation book. What kind of rate increases are you guys seeing in that book? I guess obviously, how does that compare to loss cost trends? Maybe just to focus on which states you guys are seeing these increases or writing the new business. Thanks.
Yeah. Ryan, on the Strategic Comp business, that's again, our large deductible business is kind of a pot of business outside of California. That is both on new and renewal business there. That may be one of the places where it seems like we're getting greater pricing on new business versus renewals.
Okay. Just for loss cost trends, how is that book faring? Just trying to get a view into how margins are looking.
I think on the Strategic Comp side, probably lower frequency and some higher severity in 2010 and 2011. That would tie along with what we're seeing on the ability to get price increase. It is an area of opportunity for us. We're getting price increase, and we're able to grow our business in a make-sense way there.
Okay. Thanks. Just quickly, obviously, you guys also mentioned that your E&S book is growing right now. Are there any kind of lines in particular you're seeing or you're seeing attractive submissions right now?
Probably a couple of different things. We're seeing a lot of New York and other contracting liability type of business. It seems like the market on where there were accounts that required fairly large primary liability layers, there seems to be a little bit less capacity than there was, and the ability to write some buffer types of layers that maybe weren't there before.
Okay. Quickly, this last one from me is, obviously your capital management obviously continued in the first quarter, just trying to figure out what type of market conditions would cause you to slow your capital management program. Say rates continue to be up 5%-6%, 7%. What causes you guys to slow it down?
You mean slow repurchase activity?
Yes, exactly. For repurchase activity. Yep.
Well, with $750 million of excess capital, we got plenty of flexibility to do plenty of share repurchase, to do small to medium-size acquisitions, and flexibility to keep powder dry right now. I think the bigger factor is where is our stock trading at? As long as our stock is trading below book value, and we're getting price increases in our property and casualty book and seeing growing earnings in our annuity business, we think it's a smart thing to continue to repurchase a fairly significant chunk of our stock, particularly if it sells below book.
Sure. Okay, great. I appreciate the answers, guys.
Again, to ask a question, press star one. Your next question comes from Jay Cohen, Bank of America, Merrill Lynch.
Morning, Jay.
Good morning. Most of my questions were actually already asked, one other question, and that is, in the Specialty Casualty business, can you talk about claims trends outside of workers' compensation? What are you seeing in some of those lines of business?
Surprisingly, overall in our business, loss cost trends appear to be pretty benign. In the Specialty Casualty Group in particular, I think I mentioned Strategic Comp. I think in our D&O book, probably some lower frequency, higher severity, it may be tied to our Canadian book. California workers' comp, pretty stable, pretty benign on the frequency and indemnity side. Mid-Continent, where we specialize in home builders' liability, the frequency and severity there are probably lower, just because of the soft economy, particularly as it impacts home builders in that. Overall in our business, pretty benign. No common increase in frequency or severity across our business.
It doesn't seem like on the surety side either, with all the economic pressures, especially in the construction business, that you've seen any pressure there. Is that a fair assessment?
Yes. Jay, it's Diane. I would say that that is a fair assessment. We really haven't seen any discernible trends in that line.
Very good. Thank you.
There are no further questions at this time. Are there any closing remarks?
I'd like to thank you all for joining us this morning, and we look forward to talking with you again when we report our second quarter results. Thanks, and have a great day.
This concludes today's American Financial Group 2012 First Quarter Earnings Conference Call. You may now disconnect.