Once again, we are pleased to have the management of American Financial Group. From the company are Co-CEOs, Carl and Craig Lindner, along with CFO Jeff Consolino. I've been following AFG for more than 20 years. Some of you are shocked because I look so young, but that is the case. The company has clearly evolved over that time, but there have been some constants that have gone throughout this time. Focus on underwriting, thoughtful capital deployment, and a core skill of investment management as well. With ongoing excess capital, changes in the operating environment, you kind of see the future being pretty interesting as well. I just want to mention, last night, a company that AFG formed, I think it was 1989 if my memory is correct, IPCC sold itself to
Kemper
Kemper for a very nice price. That business was formed by AFG. You can probably tell more about it if you want, but I will turn the podium over to, I guess, Craig? Carl? Carl.
Good afternoon. Yeah, back then I hired Dick Haberlin, who had a falling out with Peter Lewis at Progressive, and that was the start of our non-standard auto group, which eventually was IPO'd out as Infinity. Thanks for joining us today. Again, we are AFG, not AIG. AFG, we're a specialty insurer whose main brand is the Great American Insurance Group, whose history goes back to 140 years. One thing that's unique about our business model is we're made up of 33 different specialty property and casualty niche businesses. We love our diversified portfolio of businesses, including the annuity business. Between the annuity business and businesses like crop-hail and equine mortality and lender placed property, probably about 60% of our allocated capital to businesses are in businesses that aren't correlated to the general property and casualty cycle. We like that.
Over 60% of our gross written premiums are produced by top 10 ranked businesses. We're a top 10 writer of fixed annuities and are ranked number 1 in FIAs through financial institutions. No one business in any given year can pop up and kill our results. We love our business model and diversification. Large investment portfolio in our annuity business allows us to have a highly skilled investment group that's consistently outperformed over many years. Our business model, I like to say we've got 30-plus CEOs in our business, because we allow our businesses to operate with creativity, to be opportunistic, to do their pricing, their own claims, and they basically specialize in each of the businesses that they're focused on. If it's equine mortality, in our equine mortality business, I think half the people own horses, are involved in the equine business in some fashion or another.
We love specialization, we love that type of focus, we think it means a big difference in knowing the business and connecting with the customers and having a different kind of result over a long period of time. When you have a company like AFG that combines superior underwriting results, superior investment results, if you allocate and have an intelligent use of capital over time, it really means good things in growth and book value. It means good things in pre-tax returns that you can achieve. Those things are keystones to being successful in the property and casualty business and the annuity business. One thing that makes us unique is the significant insider ownership. The Lindner family, which formed AFG in 1959, along with executives and our management team, we own 29% of the shares.
Most of our net worth is riding on the line and the decisions that we make day by day, and we're on the same page with our shareholders. Over the past 20 years, we've continued to sharpen our focus that we know best. We have a very acquisitive appetite to add to our businesses. If businesses we don't think can earn the right returns long term, we're not bashful about discontinuing or selling businesses in that. 2017, you can see there's no 2017 up there. 2017 was really more of a year of kind of opportunistic organic growth opportunities due to market disruptions or starting things in that. With one company's problems, we were able to pick up a couple of large buffer workers' comp accounts in California, and that we had some unusual rate increases in our Florida workers' comp business last year.
We made some headway in our Singapore branch, which we opened up. Last year was really about kind of market opportunities and startups versus any major acquisition or so. As Co-CEOs, Craig and I, we really view capital management as really one of our most important jobs, we've got a balanced approach. Every year is a little bit different in how we use capital. There are years where we had some fairly major acquisitions. There are years where we've had major share repurchases. Back in the recessionary period of time, we repurchased shares, about a third of the company back at book value. Every year is a little bit different. As you can see, we've returned to shareholders over five years, $1.6 billion in either share repurchases or dividends, and that.
This past year, we actually paid $3.50 in special dividends, as well as continuing to increase, create a good track record of a compounded 12% in five-year increase in our annual dividend. We realize those things are important to investors in that. In terms of compounded shareholder return, calculated here as price appreciation plus dividends, AFG has performed very well with results over five and 10-year periods exceeding those of the major indices. We're very proud of our track record. Taking a closer look at our specialty P&C insurance operations, you can see a view of the gross written premium breakout there. There's a sampling of some of our top 10 businesses there. We have a nice spread and diversity of business. Less than 10% of our business, interestingly enough, is produced by the top three U.S. brokers. We think that's just fine.
There's plenty of opportunity with the right opportunities with other brokers. We think that we like our model of doing business with lots of agents across a broad territory, probably has a tendency to be. Those aren't as price competitive as the three or four major brokers. As you can see, we're very proud of our underwriting track record. You can see over time that we've beat the industry by about 11 percentage points on the underwriting side. The midpoint of our guidance for our Specialty Property and Casualty businesses for 2018 is 93%. This might be my favorite slide here. I've got one other one, though, also. You can see how pleased we are with the performance we had last year, a year of record industry cats. As a company, we had record catastrophes also, but we still managed to outperform.
You can see there that we had, if not the lowest, one of the lowest combined ratios for 2017. We think it's a validation of our diversified business model, and the businesses and the specialization and the consistency that we put together in that. If you look at core net operating earnings also, we'd be among a handful of companies that actually had an increase in core net operating earnings in 2017. That's pretty strong, I got to tell you.
By halfway through the year, I wouldn't have told you that that would be the case, but I'm proud of our management team, and again, the diversity in our business, the strength of a strong crop here, our workers' comp business that was more profitable than what we'd projected, and really kind of all and good performance from most of our other businesses offset a record catastrophe year for us. Pretty strong. We really believe one of the core beliefs we have is accountability, pure accountability to results. Every one of our so-called 30-plus CEOs and their management teams have great incentives. They're really tied to underwriting profitability both on annual bonus plans and five-year long-term incentive compensation. They're tied to action a year underwriting profits measured over a five-year period of time in that.
The required returns on those plans are historically been in the 12%-20%. With tax reform, frankly, which improves returns, we're probably going to increase the return on equity hurdles somewhat in our compensation plans to make sure we're just not simply competing that extra margin away. We have very little turnover in our management ranks, and I think one reason is the incentive plans that track very closely and incentivize performance in each of the individual business units, and they act as substantial incentives to really keep people. We just don't lose very many people. I believe we have a culture that really people enjoy working within, too. That may be as important. This might be my other favorite slide. This is a Dowling exhibit. Sorry about that, Jay, but this hadn't been updated yet.
As you can see, as I mentioned earlier again, superior underwriting plus superior investment results and good allocation, intelligent allocation, and deployment of capital mean really good things with regards to pre-tax returns. You can see there, from 2012-2016, we rank pretty high. I think when the 2017 table comes out, my guess is that it'll be as good or better in that. Something we're very proud of. Here's a premium growth chart. Over the last five years, even in a competitive market, through organic growth, acquisitions, starting things up, you can see we've achieved over 10% annual compounded growth in net written premiums, which is pretty strong, while maintaining underwriting profitability that we've had. We're estimating growth this year to be in the range of 3%-7%.
In 2017, I'm excited by how our businesses are postured to take this market on. I think with some of the continuing blood on the floor and problems that other companies are having in correcting results, I think that could provide some interesting opportunities for us in that. I think even on the M&A front, where because of us being at a disadvantage under the old tax situation, now instead of competing with guys that have a tax advantage, I think we can be more competitive even potentially on the M&A side. I am encouraged by what I see as some commentary by others in pricing in the marketplace. When we look at our own January pricing, last year, we had about a 1% price increase in January. Again, we've got to be careful. One month doesn't make a quarter, it doesn't make a year.
In the month, we had about 1.7% increase in price. That was really better than what it looks like because we're fairly large in California and Florida comp, and there's some rate declines there this year. If you look at specialty casualty, excluding our comp business, our prices are up 3% in the month of January. In the property and transportation segment part of our business, which is mainly reflecting commercial auto liability increases, that was at 4% in January. I like that trend, and I'm hopeful that continues. With that, I'll turn things over to Craig to talk about the annuity part of our business. Thank you.
Thanks, Carl. Our annuity business has experienced a significant transformation since 2009. Given our focus on fixed and indexed annuities, we avoided some of the problems experienced by the large variable writers. We were also in a nice position during and after the financial crisis to be well-capitalized, to be part of a well-diversified company. We had the capital to grow our business at a time when we could get very attractive returns, and a number of our competitors were capital constrained. We have a consumer-centric business model that's enabled us to become a market leader while producing strong statutory earnings, resulting in excess capital and dividend-paying capacity to the parent. We had strong premiums and record earnings in 2017. Some of the annuity segment strengths, the support of our in-house investment management team, American Money Management Corp, has consistently outperformed the market.
As you know, the annuity business is a spread business, having strong performance on the investment side is critical, and we've outperformed over a long period of time. We've enjoyed strong ratings. The bank market or financial institutions market has been a great growth market for us. There is a barrier to entry in that market. They have certain minimum ratings requirements, and it keeps some of the more aggressive pricers out of that segment. The ALIRT rating is the most important rating to banks, we've consistently ranked in the top couple in ratings in terms of the alert score. Our business is focused on what we do best, fixed and fixed-indexed annuities. We have a long history in the industry, long-term agent relationships, and a reputation for simple, consumer-friendly products.
Our business model played very well with all the noise related to the Department of Labor rule last year. Our model actually was a big advantage compared to some others who had high cost, high commission type models. Our disciplined product management and operations have enabled us to maintain a consistent crediting rate strategy and a low-cost structure. Carl has some favorite charts. This is one of my favorites that goes back to the beginning of our annuity business. As you can see, over that period of time, we've achieved an 18% compounded annual growth rate in annuity assets. We project that this year the annuity investments and reserves will each grow by 8%-10% in 2018. Based on this guidance, we expect annuity assets to end the year at around $40 billion.
These charts show the change in premium mix in the annuity industry over the last five years. In 2012, variable annuity premiums accounted for almost two-thirds of total premiums, with fixed and fixed-indexed annuities accounting for the balance. In the first nine months of 2017, variable premiums have accounted for 44% of total premiums, while fixed and fixed-indexed annuities account for more than half. Our business, as we've talked, is focused on fixed and fixed-indexed annuities, so we participated in a major way in the growth in these segments. The reasons for the shift in the market include principal preservation available with fixed and fixed-indexed annuities and a growing awareness of the high fees associated with variable annuities. As we've grown, we've been able to significantly reduce unit costs and have significantly improved our return on equity.
We're proud of the fact that we didn't experience any ratings downgrades during the recession. We've actually had several upgrades since that period of time, one by Standard & Poor's and one from Moody's. Since 2009, we have tripled earnings, tripled premiums, and nearly tripled assets. The charts on the following slide illustrate the growth we've achieved in the annuity segment's earnings, premiums, and assets. In 2017, our annuity premiums of $4.3 billion were 2% lower than the prior year. We're actually pretty pleased with that result because industry sales of fixed and fixed-indexed annuities are estimated to have been down 9%. I believe it was a lot of the noise from the Department of Labor rule that caused industry premiums to decline. That just a very low level of interest rates.
Hopefully, with the noise going away this year and with interest rates moving up, hopefully we'll see industry sales grow at a little healthier rate. Our earnings continue to benefit from growth in annuity assets as well as the favorable impact of stronger than usual investment results. These items were partially offset by the impact of lower investment yields on the runoff of our portfolio, but not as much as expected due to continued investment outperformance by our investment group. As you can see, annuity assets have nearly tripled since 2009. Our products that we sell are sold in financial institutions, retail, and the education markets. In retail, we have over 5,000 agents who last year wrote at least one policy. In financial institutions, we have approximately 5,000 agents representing 35 financial institutions who wrote at least one policy.
Our products are simple, easy to understand with lower upfront costs, upfront commissions, and bonuses, which allows us to pay higher annual crediting rates. While AFG continues to achieve top 10 rankings in financial institutions and retail channels, we emphasize the importance of growing business appropriately, meaning selling products at the right price. If we can continue to achieve the appropriate returns on our products, we plan to grow premiums by increasing market share in existing channels, adding new distribution partners, and creating opportunities in new channels. Interest in the pension risk transfer and registered indexed annuity products appear to be accelerating. These new product opportunities may serve to bolster our existing strong growth in bank and independent broker-dealer channels for years to come. We have significant protection from rising interest rates. 80% of the in-force has some surrender penalty.
In addition to that, we have other product features that we believe will protect us in a rising interest rate environment. About 19% of the reserves have a guaranteed minimum interest rate of 3% or more. 25% of our reserves have an MVA or longevity rider. Almost 40% of new sales are electing some form of trail or multi-year commission. We have kept asset durations a bit shorter than liability durations over the last couple of years. At year end, the asset duration was seven tenths of a year shorter than the liability duration. At year end, the bond portfolio hit a market value of about 104% of book value. I'm not sure that we need to worry too much about falling interest rates at this point in time, but you never know.
We do have the ability to lower credited rates by 92 basis points on $25 billion of reserves. We also have lower upfront costs because we're a low commission, low bonus, or no bonus, generally, company. We have lower upfront costs to recover. This gives you a view of our portfolio, our investment portfolio, a $46 billion portfolio. Fixed income investments make up approximately 91% of the portfolio. 90% of the fixed maturity portfolio is rated investment grade, with 98% rated NAIC 1 or 2, the two highest categories. Our in-house team of investment professionals has consistently produced returns over time that outperform industry indices. We achieved $2 billion of total return outperformance in our fixed income portfolio over the nine-year period ending 12/31/2016. This time period captures the beginning of the global financial crisis.
In addition, our equity portfolio achieved a total return of approximately 14% per year, outperforming the S&P 500 index by about 7% per year, worth approximately $200 million to AFG. The industry results shown on the slide reflect actual industry life and annuity P&C returns, which are weighted by AFG's annuity and P&C product portfolio product mix. These results are particularly compelling given that most life company peers don't have a similar mix of business because of our focus on fixed annuities and FIAs. The duration of our fixed income portfolio is shorter than that of most of the life industry, we believe, by approximately two years. AFG has also invested several hundred million dollars in real estate. Over the years, we've demonstrated an ability to purchase underperforming or out-of-favor real estate assets, develop and manage them, and sell when we believe that the value has been maximized.
We've actually generated some fairly meaningful real estate gains over the last four or five years. All right, the last slide gives you our outlook for 2018. You see we recently gave guidance of earnings per share of $7.90-$8.40 a share. Our core earnings guidance assumes an effective corporate tax rate of approximately 20%. You see some of the assumptions that we're using that go into the guidance. A couple that aren't on this page as it relates to annuity guidance. We're assuming that the S&P 500 will increase by 4% in 2018, so 4% not including dividends. We're assuming that corporate P/E to rates will rise by 50-60 basis points in the calendar year. With that, we'd be happy to take any questions that you have.
I have a couple for Craig, actually. The annuity sales, from my standpoint, held up better than I might have expected given the DOL change. How did you feel about it relative to your initial expectations?
Jay, we were pretty pleased. We weren't surprised. We expected to outperform the industry, frankly, because of our consumer-centric model. Our model of lower commissions, low or no bonuses, very simple products, lots of transparency in the products played really well with the Department of Labor rules. The thing I really objected to with the Department of Labor rule was the proposed requirement to sign a contract, which really would have put a target on our back and everybody's back for the attorneys to file suits if the market went down or things didn't work out exactly as a policyholder expected. Given our model, our consumer-centric model, I expected to outperform the industry on premiums.
Thank you. The other question I had, you talked about the pension risk transfer market and the opportunity there. Can you flesh that out a little bit? I'm not sure I've heard you guys talk too much about that in the past.
Sure. We're just sticking our toe in the water right now in that business. There are a lot of companies that would love to figure out a way to move the responsibility for their pension plans to someone else. As interest rates move up and as insurance companies have the ability to invest at higher rates, you're going to see more and more companies move the pension responsibility, basically get rid of that, transfer assets to insurance companies to kind of be done with that responsibility. There are a couple of companies that have been major players there. We're kind of sticking our toe in the water right now, given our competency or given the strength of our investment group. We think it's a business that potentially is a very good fit for us. We're just looking right now at small accounts.
We've been successful on a couple very small transactions. We're going to do it very carefully. We think that the potential is there for us to create a new business line that will generate attractive returns.
For Carl, workers' compensation. You had mentioned Florida seeing a rate decrease in 2018. Can you quantify that?
A little bit, I think roughly half of Summit's business, that's our Southeastern workers' comp entity is in Florida. This past, in 2017, rates went up 14%. In our mix of business, there was a rate filing the other way in January, rates will go down 7% this year. Summit's had great underwriting profitability and heavy use of predictive analytics and they handle claims in a really excellent fashion. We're still very enthusiastic about Summit's ability to have good underwriting profits, to make good returns in that. Florida itself, I think we'll probably make a small underwriting profit in Florida comp in that with the combination of the rate increase, then rate decline.
In California, you had mentioned some pricing pressure as well?
In California, it's kind of good news, bad news. The good news is when you look back at the results for the industry, and particularly for us, the accident years just kind of kept getting better, and that. From a reserve standpoint, our reserves are very strong in that. On the rate side, last year we probably had an 11% decline in price, and I think in January, I think there's another 4% that's being applied. I think in spite of that, again, Republic will continue to make a small underwriting profit and good, healthy returns. If Republic is going to make a small accident year underwriting profit on an accident year basis this year, that means there's going to be a lot of pain probably everywhere else because our Republic subsidiaries generally outperform the industry by five points plus. Who knows?
Maybe there'll be some opportunities there in that.
Makes sense. Any other questions? All right. Great run-through. Thanks, guys. Appreciate it.