Next presentation now. Can you guys just settle down in the back there? We're very pleased to have the management of American Financial Group with us today. 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. I know I look younger than that, but it's true. The company has continued to evolve over the past several years. AFG was able to walk away from a legacy business, buy the remaining stake in National Interstate that it didn't own, and now with nearly $1 billion of excess capital, we're interested to see how they will deploy that capital next. With that, I will turn it over to Carl. Carl.
Good afternoon. For those of you that know something about us, you know that we're a specialty insurer. Our insurance operations are members of the Great American Insurance Group, whose history dates back over 140 years. Listed on this slide are some of the brands that represent our group. Over 60% of our gross written premiums in our specialty property and casualty group are produced by Top 10 ranked businesses. We're also a Top 10 provider of fixed annuities and are ranked number one in sales of FIAs through financial institutions. We love our diversified business model and having a specialty annuity part of our business, along with 34 or so specialty property and casualty businesses. We love the diversification, we love that a lot of our businesses are top performers in their businesses, and we love businesses that also don't necessarily correlate to the general property and casualty cycle.
Our large investment portfolio, which our annuity business gives us more investment leverage than probably the average property and casualty company. We like that because we have a very skilled, in-house, talented group of investment managers that have managed money very effectively. We have, as I mentioned, 34 some specialty property and casualty businesses. They're reported in three major groupings. Results of businesses like the crop business, equine mortality or annuity business, lender-placed property. Those businesses are businesses that aren't really correlated to the general property and casualty cycle.
In addition, I think another thing you should know about our group is we have a lower relative catastrophe volatility and exposure than most companies in our industry. Our business unit autonomy allows each business unit to make its own pricing and claims decisions with strong centralized actuarial and financial controls at the parent. We like to consider ourselves to be entrepreneurial and agile and a little different than others. I like to say we have some 30-plus CEOs. Our guys really love being presidents of our individual units, and with the freedom and the creativity that we allow them and the incentives that go along with it, we have a pretty unique culture. When a company like AFG can combine superior underwriting results, superior investing talent, and intelligent deployment of capital, it results in substantial value creation over time.
It would be our objective to grow our book value double digit over time. Our value system is something that we're really proud of and the culture that we've built in our company over many years. You can see integrity is at the top of our values. Specialization, entrepreneurial spirit, accountability are several of the other foundational qualities that I think make AFG unique and a great company to work for, to do business with, and to invest in. We've got a strong work ethic that for over 20 years we've wanted our employees to have a good balance of work and family. Lindner family formed AFG in 1959, and our family continues to have a significant ownership in AFG. With about 29% of our shares held by our family executives and our retirement plan, there's a strong alignment of interests with shareholders over the long term.
In the past 20 or so years, we've sharpened our focus on businesses that we know best. We've done that through carefully selected acquisitions, quite a few startups, dispositions of businesses that we thought were non-core and wouldn't return the right returns over the long term. This timeline that you have in front of you highlights some of the more significant transactions over this time frame. On November of last year, AFG and National Interstate announced the closing of the previously announced merger, whereby AFG acquired all the remaining shares of National Interstate that we didn't currently own. We spent about $320 million on that transaction. As Co-CEOs, we view capital management and allocation of capital as one of our most important jobs. We've got a balanced approach in how we focus on things. Every year is a little bit different.
May include acquisitions, startups, organic growth opportunities, extraordinary dividends, share repurchases. We also value a consistent increase in our annual dividend. We're on our 11th consecutive annual dividend increase this past year. Five-year compounded annual rate in dividends was 12%. We've also returned $1.7 billion to shareholders in the form of share repurchases and dividends over the past five years. I think going into this year, Craig and I feel like we want to keep $200 or $300 million of dry powder in that. We've got plenty of excess capital to work with right now going into this year. Year-end, that was about $950 million. In terms of compounded shareholder return, calculated here as price appreciation plus dividends, AFG has performed very well. We're thankful to God, our talented management team, our great employees.
You can see that we perform well, and our results over five and 10-year periods exceeded those of the major indices. Taking a closer look at our specialty insurance operations, beginning with our specialty property and casualty group. This chart shows a view of the gross written premium by major P&C group last year. This year, I think we would expect our mix to remain about the same. Some of the businesses with top 10 market rankings include businesses like crop, equine mortality, our executive liability D&O operation, fidelity and crime, our lender placed property operation, Florida workers' comp, the whole nonprofit social service part of our business, passenger transportation, and National Interstate, and now. We love our spread and diversity of our business. We think it means more consistent underwriting results and profitability over time. We also like the makeup of our model from a distribution standpoint.
Less than 10% of our 2016 gross premiums written are produced by the top three U.S. brokers. You can see our deep knowledge within the 34 or so specialty P&C businesses has allowed us to achieve superior underwriting results that have outperformed the commercial lines industry by an average of more than 10 percentage points over the past 10 years. Strong alignment creates superior underwriting results. We're very careful on the message and the incentives that we give the folks operating our businesses. Rewards are really based off of underwriting profitability on an annual basis and with our long-term incentive compensation plans in that. Basically, they're based off of either one-year or five-year average underwriting profit. Their returns on equity that are required are pretty substantial. Our businesses, generally, if they don't earn 12% after-tax return on equity, there's not much reward, and the grid goes up to 20%, generally.
We love true accountability. Where we're counting on our guys running our businesses to be fully accountable, we want to fully incentivize them when they do well. Our strategy with regard to our specialty property and casualty business is based on a few key principles and key result areas and has enabled us to achieve some pretty great returns over time. You can see we're proud of this chart, which shows over the past five years, from 2011 to 2015. We'll update this when we get the 2016 data. You can see that we produced excellent property and casualty pre-tax returns during that period, and they're very high up in the rankings. We try to take a long-term view of our business, which allows us to manage the cycles better.
We feel like each of our business leaders and their teams have a pretty good knowledge as specialists within their given market. Generally, we have a pretty conservative reserving strategy. We always want to get pricing right and not have any deficiencies. I think we're pretty opportunistic. When there's opportunities to step on the accelerator in growth, we're not afraid to do that. When it's time to pull back, you'll find us generally being quicker to pull back. On September 2016, Fitch released its special report titled Statutory Performance Rankings by U.S. Property and Casualty Insurers. It reviews statutory financial results over a five-year period of time. We were pleased that AFG was rated in the top three for the strongest long-term statutory operating performance for U.S. operations from a group of about 35 property and casualty companies.
Over the last five years, AFG's achieved nearly a 10% compounded annual growth in net written premiums. After experiencing quite a few years of healthy growth, the property and casualty market's become more competitive. You can see in our outlook that we expect our net written premium growth to be in the range of 2%-6%. Craig's going to talk a little bit about the annuity business and our investment.
Thank you, Carl. Our annuity business has experienced a significant transformation since 2009. We have a consumer-centric business model that has enabled us to become a market leader while producing strong statutory earnings, resulting in excess capital and dividend-paying capacity to American Financial Group. The annuity segment strengths include the support of our in-house investment management team, American Money Management, which has consistently outperformed the market. We will discuss more about American Money Management later in the presentation. Our ratings agency ratings, our ALIRT rating, which is the rating that is the principal rating that financial institutions look at as financial institutions become more and more important in distributing our product. That ALIRT rating is critical, and we are very consistently ranked in the top five out of 50 companies that we compare ourselves to. Our business is focused on what we do best, sales of fixed and fixed-indexed annuities.
We enjoy a long history in the industry, have long-term agent relationships, and a reputation for simple, consumer-friendly products. Our disciplined product management and operations have enabled us to maintain a consistent crediting rate strategy and a low-cost structure. Our specialty knowledge and focus on the fixed market has allowed us to build a compelling business model. We have achieved an 18% compounded annual growth rate in annuity assets since the beginning of this business in 1974. We project that annuity investments will grow by 8% to 9%, and reserves will grow by 9% to 10% in 2017. The charts on the following page illustrate the growth we have achieved in the annuity segment's earnings, premiums, and assets. We are very pleased with the earnings that we have achieved in our annuity business. Results in 2016 included record full-year GAAP pre-tax operating earnings of $368 million.
Under fair value accounting for fixed-indexed annuities, a portion of the FIA reserves are discounted using current market rates. In general, an increase in interest rates will have a positive impact on reported earnings and vice versa. This affects the timing of reported earnings, not necessarily the true economics. In 2016, accounting for fair value accounting resulted in a $27 million unfavorable impact on core pre-tax annuity earnings. 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, but not as much as expected due to continued investment outperformance by American Money Management. In 2016, record annuity premiums of $4.4 billion were 7% higher than the prior year. Annuity assets have more than doubled since 2009.
For the full year in 2017, we expect annuity earnings, as reported, to be in the range of $375 million-$395 million. Turning to our annuity operations, our product focus is sales of fixed and fixed-indexed annuities, which also allows us to optimize our core competency in investing. These products are sold in the retail, financial institutions, and education markets. Our products are simple, easy to understand, with lower upfront commissions and bonuses, which allows us to pay higher annual crediting rates. Our business is different in that almost 80% of our sales are through banks and broker-dealers, compared to less than 40% for the industry. Banks and broker-dealers are acting in a fiduciary capacity and generally sell very compliant business. We believe we have significant protection from changes in interest rates, whether the move is up or down. Let's talk about the rising interest rate environment.
87% of our in-force annuities have some surrender penalty. 66% of the annuity reserves have a surrender charge of 5% or higher, including 11% of the annuity reserves that are 2-tier in nature, with an average surrender charge of 14%. Other product features that will encourage stronger persistency and discourage lapses are the fact that 23% of the reserves are in policies that have a 3% GMIR or higher. That's guaranteed minimum interest rate. That compares to a 1% GMIR on current business that's being sold. 24% has a market value adjustment or a longevity rider. Almost 35% of new sales elect some form of trail or multi-year commission as opposed to an upfront commission. The agent obviously has some incentive to leave the business on the books.
The asset duration of the portfolio is about a half a year shorter than the duration of the liabilities. Now, in the event of declining rates or prolonged low interest rate environments, we have the ability to lower credited rates by 80 basis points on $22 billion of our reserves. Between 2015 and 2030, the U.S. population aged 65 and over is projected to increase from 48 million to 74 million, reaching nearly 100 million in 2060. That is our target demographic. This trend underscores the considerable opportunities that lie ahead in the annuity industry. We've heard that the Department of Labor last week sent a request to the Office of Management and Budget for a six-month delay to the effective date of the Department of Labor rule.
We believe the banks and IMOs that distribute our products are making changes regardless of whether or not the DOL rule is delayed, revised, or repealed. There has been speculation that repeal or revisions to Dodd-Frank could cause disruptions in the FIA market. The Harkin amendment that is part of Dodd-Frank has allowed FIAs to be sold by insurance-only agents. There's been some discussion about the SEC adopting a fiduciary-type rule that would replace the DOL rule. We don't believe that either changes to Dodd-Frank or a new SEC fiduciary rule would result in insurance-only agents no longer being able to sell FIAs. We believe the new Department of Labor proposal will have the greatest impact on sales of IRAs through independent or retail agents as compared to channels such as banks and registered reps.
As a result, less than 10% of our annuity sales are most likely to be impacted by the new rules. Shown here is a breakout of our annuity sales by type. Slices that appear in blue are subject to the Department of Labor rule. This slide gives a view of our $41 billion investment portfolio. Fixed income investments make up approximately 92% of the portfolio. 89% of our fixed maturity portfolio is investment grade, with 97% rated NAIC 1 or 2, the two highest levels. Our in-house team of investment professionals has consistently produced returns over time that outperform industry indices. We've had approximately $2 billion of outperformance over the eight-year period ending 12/31/2015. This time period captures the beginning of the global financial crisis.
The industry results shown on the slide reflect actual industry life and annuity and P&C returns, which are weighted by AFG's annuity and P&C portfolio mix. These results are particularly compelling given that most life company peers do not 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 the overall industry, we believe by approximately two years. American Financial Group has approximately $600 million invested in real estate. Over the years, we've demonstrated an ability to purchase underperforming or out-of-favor assets, develop and manage them, and sell them when we believe the value has been maximized. As communicated on our fourth quarter conference call, these are the assumptions that are being used for the 2017 guidance.
Based on current information, we expect core net operating earnings in 2017 to be between $6.20 and $6.70 per share. Our core earnings guidance assumes no change in the corporate tax rate of 35%. We're extremely pleased to be projecting earnings growth in 2017, and providing guidance that is well above what the Street expected. These are some of the key considerations underlying the 2017 guidance. We are looking for higher Property and Casualty operating earnings, driven by improved results in our Neon operation, offset by lower crop profitability following 2016's very strong results. The acquisition of the 49% of National Interstate that we didn't own previously, obviously taking 100% of their earnings to our bottom line is nicely accretive, and higher overall Property and Casualty investment income. On the annuity side, we're looking for improvement in the impact from fair value accounting for FIAs in 2016.
We had a $27 million negative impact from fair value accounting. Our assumption is that will be zero this year in our guidance. That's partially offset by lower yields on our investment portfolio. Now we'd be happy to answer any questions that you might have.
Let's talk about the business mix. I'm not aware of other companies that have specialty insurance and fixed annuities. Aside from your view that both of those businesses are attractive, what are the benefits of having both together? Are there any synergies?
Yeah, we think there are a number of benefits. One of the key benefits is it has allowed us to put a very talented team of investment professionals in place. The annuity business obviously has much more investment leverage. I think some 70%-75% of our investable assets are in the annuity business. That gives us the scale on the money management side to put a very talented team in place, which has been very beneficial to the property casualty investment returns.
As I mentioned before, having businesses that don't correlate to the general property and casualty cycle, I mentioned a number of those businesses, but I consider annuity to be one of those also, I think is a real strength in producing consistent results and profitability over time. I think we have a pretty good track record. It may not work for others, but if you look at our stock performance and our growth in book value over time, I think it works for us.
Do you get diversification credit by owning those two different businesses? In other words, would each business have to hold more capital if they were independent?
Jay, that is true. I don't want to somehow sell that as the key rationale for having the two together, which I think transcends just what a rating agency capital model would say, but that is another feature of it.
Just on your guidance, I could see how your guidance was different than my numbers, but relative to the Street, could you get a sense of what people were underestimating relative to your 2017 numbers?
Do you have any thoughts on that?
I think Craig did a good job of describing those pieces. Certainly on the annuity side, I think analysts have done a perhaps underwhelming job of understanding the business and consistently kind of missed the earnings power that Craig's operation has. That's on both a pre and a post fair value accounting basis. With respect to the property and casualty business, we do have a couple key drivers here that Craig touched on, the ownership of 100% of National Interstate. Effectively by acquiring half the business, we were acquiring two-thirds of the earnings. There were acquisition-related expenses in 2016 that won't be present in 2017. Ideally, as the new management team at Neon gets a grip on the business and starts turning that around, that should improve the results within our specialty casualty sub-segment in P&C.
Those are some of the key items right there, Jay.
My annuity earnings were spot on, by the way.
I said some others, not Jay Cohen.
The other question I had was on the DOL fiduciary rule, are you getting feedback from your distribution partners yet? I know it's early, it has not been actually put in place yet, but they're having probably some sense of how this could affect sales. What kind of feedback are you getting from your distribution partners?
Everything that we hear and read would indicate that the rule is going to be pushed back by six months or so. The question is, will it be modified? Will it be repealed? Time will tell. Clearly, the impact on us will be stronger premiums than what we put into our guidance.
Right.
We think that our business model was very well suited for the new Department of Labor rules, if they were implemented. Our consumer-friendly, low-cost model, simple products to understand, no trickery, low conditions. It was going to be very easy for us, compared to many of our competitors, to conform to the new rules. Having said that, it was going to be disruptive. Clearly, for a couple of quarters, it was going to be disruptive to our sales. In the event that it is delayed by six months, I think you'll see premiums coming from our annuity operation that will be above last year's, as opposed to our guidance of flat to down 10%.
Okay.
One more about sort of opportunities in less attractive areas in commercial insurance. It seems the overall premium rates are rising less than loss cost inflation. Where do you see opportunities, and where are you avoiding?
I think the market overall is generally pretty competitive today, though we're pleased with the profitability of almost all of our businesses today. I think our profitability is in good shape. I think in the area of commercial auto, with AIG's announcement on the reserves, and commercial auto being a part of that, and Maiden's announcement today on commercial auto, we want to believe that that market has to continue to tighten up and maybe continue to allow price increases and that, which would be good for us. We've been at improving National Interstate's results for four or five years now, and we're showing improvement in the combined ratio. I think the wild card there is if that market tightens up and our shop's in order, there might be some good opportunities for us to take advantage of in that whole arena. We love disruption.
We love those kinds of things happening because we're opportunistic and can take advantage of some of those things.
Any last questions? All right, well, thanks guys, very much. Great presentation.