Good afternoon. It's my pleasure to introduce the management team for American Financial Group. AFG focus primarily on the commercial insurance with P&C segments, as well as fixed and indexed annuity product on the life side. With us today, we have Carl Lindner and Craig Lindner, the Co-CEOs of American Financial Group. Carl oversees P&C business, and Craig runs the life business. Also with us today, we have Jeff Consolino, CFO of American Financial Group. Jeff has been with the company since 2013. Also in the audience, we have Diane Weidner, the investor relations. Today, we get to have a formal presentation from the management team, and at the end of it, we'll have a brief Q&A session. With that, I will give the floor to Carl.
Thank you. Well, good afternoon, and thanks for giving us the opportunity to talk about a subject that we like to talk about a lot, and that's American Financial Group, which we consider to be one of the premier specialty insurers out there. AFG Specialty Insurance operations are members of the Great American Insurance Group, whose history dates back over 140 years. Listed are some of the brands that represent the deep specialty knowledge and the niche focus that make up the Great American Insurance Group. Our business is comprised of specialty property and casualty and annuity operations. Over 60% of the gross premium 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 the sales of FIAs through financial institutions.
We have 31-some specialty property and casualty businesses reported in three major groupings and our annuity segment. Results of the businesses like our Crop business or lender-placed property businesses, National Interstate's captive insurance business, and our annuity businesses aren't really closely correlated to the other specialty property and casualty businesses. We're a company that has low catastrophe volatility. Our business model we're proud of. Our business unit autonomy allows each business unit to make its own decisions related to underwriting and claims and policy servicing. We think it allows us to be agile and gives us the ability to design products and do pricing segmentation in a unique way and to develop distribution strategies and build relationships in each of our markets. I like to tell people that we have 30-some plus CEOs that serve our policyholders and agents. We're a fun place to work. We have very little turnover.
One of our key competencies is our core investing talent. Our in-house team oversees a $37 billion investment portfolio that's produced returns that have consistently outperformed the industry. Substantial value creation is based off of superior underwriting results, superior investing talent, and how you deploy capital intelligently. Coupled with our culture, our entrepreneurial business model, and our incentive compensation plan, we've got a compelling structure to build long-term value for AFG shareholders. I have to say, Craig and I were very pleased as we woke up this morning to hear about the ACE Tokio deal at 19 times earnings and 1.9 times book value. Craig and I frankly think that our company's a better business than that. It really highlights the value of AFG stock, its specialty insurance niches and businesses.
If there happen to be any ACE investors in the house, maybe you should check us out. I'm going to talk about corporate culture. It's something we're extremely proud of. Integrity, as you see, is at the top of our values. Specialization, entrepreneurial spirit, accountability are several foundational qualities that make AFG a great company to work for, to do business with, and also, we think, to invest in. We've got a strong work ethic that we've been focused for some 20 years or so on the value of maintaining a healthy family work balance. All these values are really important and really the foundation of all that we do. The Lindner family formed AFG in 1959, and our family continues to have a significant ownership in AFG.
With about a third of the AFG shares held by our family executives in our retirement plan, I'd say there's a pretty strong alignment of interests with shareholders over the long run. In the past 15 or so years, we've sharpened AFG's focus on the businesses that we know best. We've done this through carefully selected acquisitions, startups, and dispositions of what we consider to be non-core businesses. Then as well as organic growth, in some cases, pretty substantial in many of our businesses. The timeline that is here highlights some of the more significant transactions over this timeframe and demonstrates some of the ways we carefully manage the company's capital. Speaking of excess capital, we view capital management as really one of the most important parts of our job.
We have a balanced approach with a focus of deployment of capital that really is focused on what opportunities provide the best long-term returns. May include, in any given year, acquisitions, startups, share repurchase, extraordinary dividend. We also deploy capital to expand or grow our existing businesses. AFG returned over $1.8 billion to shareholders in the form of share repurchases and dividends over the past five years. In August of last year, we announced a 14% increase in our regular quarterly dividend. Over five years, our compounded annual increase in dividends is about 12%. I think Craig and I always feel like we want to maintain some dry powder, either defensively for things you don't see coming or opportunistically to do things. Total value creation.
When you put all this together, when you take superior underwriting, superior investing talent, intelligent deployment of capital within the framework of a well-designed business model that promotes and rewards desired results, we outperform our peers. Compounded annual growth rate and tangible book value plus dividends shows that we're number 4 in a list of 40 other insurers, a result we're real proud of. Our goal over time is to achieve double-digit compounded growth and total value creation. On compounded shareholder return, it's calculated here as price appreciation plus dividends. We also perform very well over time. With results over five and 10-year periods exceeding those of pretty much all the major indices. We're proud of our track record of success, and let me talk a little bit about specialty property and casualty itself.
These charts provide a view of gross written premium for 2014 with the inclusion of the Summit acquisition for three quarters. As you can see, our premium's distributed across our specialty and property and casualty groups, 43% property and transportation, 46% specialty casualty, 11% specialty financial. A sampling of our specialty property and casualty businesses with top 10 market rankings include Crop, Equine, Executive Liability, Fidelity and Crime, Florida workers' comp, the Nonprofit Social Services arena, Passenger Transportation, Surety, Trade Credit, Trucking. We love the nice spread and diversity of business that we've got really across our whole business. We think it helps provide more consistent underwriting profits over time. One thing I think that also helps us be a little bit unique. It is less than 10% of our 2014 gross written premium was produced by the top three U.S. brokers.
That means we've got a great spread and diversity of how our business is distributed versus a lot of other insurers. Our deep specialty knowledge within those 31 property and casualty businesses has allowed us to achieve superior underwriting results that have outperformed the commercial lines industry by an average of nine-some percentage points for the past 10 years. Rewards based off of on underwriting profitability for individual business units with annual bonus plans, as well as a unique five-year long-term incentive compensation plans, we think are really key to our success. We love direct accountability and direct rewards for what people are accountable for. Our annual plans are paid out over two to three years and include some consideration of operating strategies in addition to underwriting targets.
Long-term incentive compensation is based off of cumulative accident year underwriting profit over a five-year period of time. It's paid out over the following four to five years. Required returns on equity are used to determine our target accident year combined ratios. Factors vary some business by business based off the tail, whether something's short tail, long tail. Our expectations for our businesses over time are that. Those grids are set at a range of after-tax returns of 12%-20%. A pretty tough hurdle. Our guys running our businesses don't get anything unless they're achieving combined ratios that earn at least a 12% after-tax return. That motivates people. 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 the outstanding returns that you're seeing.
We definitely take more of a long-term view as we manage the property and casualty cycle. Our unique knowledge of each of our businesses and our entrepreneurial positioning helps out. We generally are conservative in the reserving strategy that we deploy. We have a good understanding of how our loss experience develops. We're tough pricers. We're not afraid to walk away from business and let a business decline if that's what the market conditions are, or as we did a couple of years ago in California workers' comp, when everybody else was bleeding, we got healthy quicker, and we've grown double-digit rate during 2013 and 2014. We're opportunistic. We love to enter businesses when it makes sense, even when others don't see the silver lining, and sometimes we'll get out quicker.
Although the property and casualty market is becoming more and more competitive, we're still finding ways to grow our business. Last year, net written premium was up 20%, excluding our acquisition of Summit, that was about 8%. Our 2015 outlook includes the expectation of growth in the 4%-8%, probably excluding Summit in the 2%-6%. Now I'm going to turn things over to Craig to talk about the annuity business and investments a little bit.
Thank you, Carl. Our product focus in the annuity business is sales of fixed and fixed-indexed annuities, which also allows us to optimize our core competency in investing. These products are sold in 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 credited rates. Our business is different than some others 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 at a fiduciary capacity and generally sell very compliant business. This gives you a snapshot of our business highlights. It shows you the distribution of our annuity premium. In 2014, 94% of our premium was generated from sales of fixed single premium products.
The graphs on this slide provide a five-year view of our annuity premiums by product line, distribution channel, and tax qualification type. Over this period of time, you can see the growth in sales of fixed-indexed annuities, particularly in the financial institutions markets. The overall distribution of sales of qualified and non-qualified annuities has remained fairly consistent. Our specialty knowledge and focus on the fixed market has allowed us to build a compelling business model. We've achieved an 18% compounded annual growth rate in annuity assets since the beginning of this business in 1974. We project that assets and reserves will grow at 10%+ in 2015. We're pleased with the premium growth and earnings that we've achieved in this business. Results in 2014 included annuity premiums of $3.7 billion, the second highest in our company's history, and pre-tax operating earnings of $328 million.
Under fair value accounting for fixed-indexed annuities, a portion of our 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. It affects the timing of reported earnings, not necessarily the economics of the business. In 2014, accounting for fair value accounting resulted in a $34 million unfavorable impact on core pre-tax annuity earnings. Conversely, in 2013, the impact of fair value accounting resulted in a $15 million favorable impact on core pre-tax annuity earnings. Although core pre-tax annuity earnings were flat year-over-year in 2014, earnings before the impact of fair value accounting were actually up 16% year-over-year. 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 run-off of higher yielding investments.
The recent increase in interest rates is expected to have a very beneficial impact on our annuity earnings. If rates continue to rise, we'll see a positive impact on our spread as well as a favorable impact on fair value accounting. Now let's turn to the investment portfolio or investment operation. This gives you a view of the $37 billion investment portfolio in American Financial Group. Fixed income investments make up approximately 93% of the portfolio. 87% 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 $1.7 billion of outperformance over the seven-year period ending 12/31/2014. This time period captures the beginning of the global financial crisis.
The industry results shown on this 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. As a result, the duration of our fixed maturity portfolio is shorter than that of the life industry overall, we believe by about two years. We've significantly outperformed over the past seven years in spite of a shorter duration versus peers at a period of declining interest rates. Approximately 75% of the portfolio related to the annuity business and the remaining 25% to the property and casualty business. The average liability duration is approximately three years for the P&C group and about six years for the annuity group.
You may have seen it, this morning we put out an announcement that we sold one of our real estate investments. We sold a hotel based in New Orleans for a gain of $25 million after tax. We have a couple hundred million dollars invested in real estate, and from time to time we like to harvest the gains, and we were pleased with getting a very good price for that hotel. With that, we'd be happy to answer any questions you might have.
Thank you very much. We do have mic going around. If you have any question, please raise your hand or you have right one here.
You compared your performance to certain indices, and I think one of them was an S&P life insurance index. You're not really in the life insurance business, are you?
We're in the annuity business.
Annuity.
The bulk of those assets in that industry would be annuity assets.
Okay.
Just to follow on the topic of industry consolidation, a recent question I have is that, do you think the consolidation in the reinsurance space will spread into the private market? I guess we get answer of that this morning. For yourself, are there particular line of business or geographies you will be interested in growth through acquisitions?
I think the good news with us is we like pretty much all the 31 different property and casualty businesses that we're in, and we also have room to expand geographically and add onto those businesses, sure. We're not big on adding goodwill to the balance sheet, if we can do talent acquisitions or pay fair prices for entities that can add to any of those 30 or 31 businesses, we'd love to do that. We're also continually looking for additional new specialty segments, and we're also expanding our business internationally some. An example of that would be, I believe today we announced we're beginning to write business in our new Singapore branch, which is focused on ocean marine and property and a few other lines.
Given the choices of acquisition or you have experience at starting a company by yourself, which one would you prefer?
Any at all. The key thing is whether it's an opportunity that'll provide the right long-term returns and growth and will be worth your effort.
Okay. On capital management, can you talk about your excess capital position and what's the priority for the capital management?
We announced at the first quarter earnings release that AFG had $790 million of excess capital. Craig further indicated that at the closing of the long-term care sale, which we announced, that would add $80 million to $90 million of additional excess capital. The company's record over the past several years has been a approach really to look at all the tools to deploy capital, from share repurchase to dividend increases, to special dividends, and starting up businesses and making acquisitions. Management likes to look at the full range of alternatives available and determine which one is the most advantageous for our shareholders.
Okay. Any questions from the audience? All right. Given the prospects of Fed rate potential, Fed are going to probably raise rates later this year. How do you position your investment portfolio? Where do you see the rising interest rate impact both of your annuity business as well as the P&C business?
Yeah. A gradual rise in rates will have a very positive impact on both of our businesses. On the annuity side of the company, we've kept the duration of assets somewhat shorter than the duration of liabilities. At year-end, we were about a year and a quarter shorter than the liabilities. This pop-up in rates is giving us an opportunity to kind of narrow that gap, invest in a little bit more money in longer term paper. We've recently put some swaps on some floating rate paper that we had purchased over the last few years. We think it's going to have a meaningful positive impact on the company and on the earnings.
Question down there.
Just within your guidance range as well, you have an uptick in the investment income, which is very unusual for anybody in the P&C space, obviously, even the current environment. Can you just talk about within what the rate market is going to be doing, why as well your outlook is more positive than peers?
One thing that needs to be recognized is we closed on the acquisition of Summit in the first quarter of last year, actually April 1st. As part of that transaction, we obtained $1 billion of investable assets, as well as making a capital injection into the company. When you look at total P&C investment income year-over-year, we only had nine months or three quarters of the year invested with that additional capital. When you compare year-over-year 2015 versus 2014, that's why we have an uptick in investment income. It's not attributable to rates. Overall, our tax equivalent yields have held in there but have been declining as the portfolio has turned over.
On P&C pricing, the industry is under some pressure in terms of commercial on P&C pricing, given the competition in the marketplace. Do you see that in your particular line of business, and how do you think that would impact the improvements in your core combined ratio?
Yeah, in a sense, we have some 31 different specialties. It varies across our businesses. Generally, the price increase that we're getting today is pretty much all in the specialty property and transportation part of the business. It's concentrated particularly in commercial auto, and for a reason. National Interstate results have needed price increase and have needed improvement. A good bit of the rate activity in that is coming in the commercial auto side in order to improve the results. Our guidance for combined ratio in the property and transportation side would point you to some improvement this year from rate increase and actions taken in the past and better Crop results. I think that in our guidance, that would be baked in.
Not a lot of price activity and not much in the way of price increase in specialty casualty and specialty financial at this point. The market is generally probably more competitive than maybe what it was a year ago. That said, I think we'll have mid-single digit growth this year. That's kind of what our perspective is there. I think the prospect for solid margins, again, in specialty casualty and financial are reflected in our guidance for those two segments.
Next question. Over here.
Yeah, you have a 9% ROE and you're trading around book values. How do you think about the dynamics of taking all the excess capital you have, investing it in your core business versus higher dividend versus buying shares back? How do you make that determination on what's the right allocation given the size of your excess capital?
You want to comment?
First, I don't recognize the 9%. I believe our return on average equity on an operating basis is approaching 11% currently. Quarter by quarter, there is some seasonality in our business because of the Crop business. We want to use our excess capital to the benefit of our shareholders, we also want to have some discipline around how we use it. To lack of a better term, it's not burning a hole in our pocket, and we'll be willing to put up with the implied ROE drag of that excess capital as we work through the decision of dividends, repurchases, new business initiatives, and/or acquisitions.
Lastly, could you give update on your Crop book of business?
On Crop?
Yes.
I feel good about this Crop year so far. Granted, it's very early, growing conditions have generally been pretty favorable. Soybeans in some states have come in a little bit slow. Soybeans are a pretty vibrant type of plant, and farmers can still do well even if they're planted a little bit late. The other thing that we watch very closely is what's happening with commodity prices. The futures prices for soybean and corns versus April. Those are down some mid-single digit right now. That seems to be fine. We don't get too concerned unless commodity prices are down 17%-20% or so in a given year. That can lead to less profit depending on the particular year. So far so good. I think we have a pretty positive Crop profit outlook right now.
Well, with that, I'm afraid we're running out of time.