We are very pleased to, once again, have the management of American Financial Group at our conference. Presenting for the company will be the Co-CEOs, Carl and Craig Lindner. Also with the company, Keith Jensen is here, and Diane Weidner, who is head of investor relations. AFG has a very unique business mix, a unique approach to the business, obviously all a specialty focus, and it's always a pleasure to have the company here to go through their story. Carl?
Thanks, Jay. Good morning, and thanks for giving us an opportunity to share our story. We're certainly enthusiastic about it, about AFG, which we feel is one of the premier specialty insurance groups in the world. Why invest in American Financial Group? Here are the reasons we're going to talk about a little bit today. Craig and I are going to spend a little time on each of these subjects. We're a strong, diversified, specialty niche insurance business with strong brand leadership. We've got pricing momentum and premium growth momentum, and we're excited about that in our property and casualty business. Our annuity business is coming on. We have the combination of superior underwriting talent, and our culture, and our superior investment talent will show you means good things in the property and casualty business.
Intelligent use of excess capital, growth in book value, our shareholder returns, and if there was a number 9, it would probably be our stock's undervalued compared to our peers. As you can see, we have a great spread and diversity of business. None of the 23 Specialty Property and Casualty businesses exceed 16% of net written premium. Results of large specialties like our Crop Hail business, equine business, National Interstate's captive part of our business, and our annuity business aren't really correlated to the rest of our Specialty Property and Casualty businesses. In a year of drought, in a year of Superstorm Sandy, it was really nice that our Specialty Casualty and our Specialty Financial segments stepped up with good years, and our annuity business had record earnings. We like our business model.
Nearly half of our property and casualty gross written premium is produced by businesses with top 10 market ratings, and we're a top 5 in fixed annuity sales through bank and independent producer channels. We're number 1 in fixed annuity sales through PNC and Regions Bank, and we're top 5 in several other banks. We're continuing to see good momentum in property and casualty pricing and in premium growth. I'm probably more excited than I have been for a while moving into this year. We achieved a 4% renewal price increase overall in our property and casualty book in the fourth quarter. That's a sequential improvement as we've kind of moved through all of 2012, and we're targeting overall increases of about 4%-6% in this year.
In the fourth quarter, for instance, our California workers' comp business, we had the first double-digit price increase that we've had all year at about 11%. In our D&O and related lines, we had about a 9% pricing increase in the fourth quarter. I'm enthusiastic going into 2013 as far as pricing opportunities and opportunities to grow our business. Here a little later you'll see our growth range of 6%-10% is probably the highest range that we've had out there for a while. Craig's going to talk about annuity momentum a little later on, so I'm going to skip over that. We're proud of our stellar underwriting performance that comes from our superior underwriting talent. Our culture puts a priority on underwriting profit before growth for growth's sake.
Craig, again, will talk more about our superior investing talent and our fixed income results, our track record there. Here's what happens in the property and casualty business if you have superior investment results and talent and superior underwriting. You can end up on top. This is against what we consider to be a Dowling exhibit. I think it's overall pre-tax returns on stat capital and that. We're very proud of that. We'd like to work hard at staying there. We feel that we are intelligently using our excess capital, which is about $625 million at year-end. After keeping about $100 million-$200 million of powder dry or dry powder, we're deploying excess capital in a number of different ways. Opportunistic share repurchases. As I mentioned before, I think we have an opportunity for greater organic growth in the property and casualty side, in particular.
We've had a consistent increase in our dividends. I think our five-year compound annual growth in dividends is about 12.5%. That'll continue to be a focus. We've always been very prolific on doing new startups, and doing small to medium-sized acquisitions, and starting new products. Here's one of our favorite slides. You can see over five years, $1.5 billion has been returned to shareholders mostly through repurchases, but through a growing dividend stream also. When you look over that five years, that's about 31% of our outstanding shares that have been repurchased, and we repurchased them at about 86% of average book value. We think that's a pretty wise use of capital. Adding intelligent utilization of excess capital to superior underwriting talent and superior investment talent leads to strong compounded growth and book value per share, as you can see, surpassing our peers.
AFG achieved about a 10% growth in book value in 2012, that we were proud of despite some headwinds. You'll notice that the book value numbers exclude unrealized gains. We think that's the right way to look at things. You can see our five and 10-year compounded shareholder returns, including dividends, have surpassed the overall market and property and casualty stocks overall. We feel AFG stock is undervalued, particularly against our peers. I think because annuity companies are valued a little bit below the property and casualty in general, I think that accounts for a little bit of an overall discount. We still are at a discount, particularly to our specialty peers. Here's a few financial highlights. As you can see, our business model performed pretty well in 2011, which was a disaster year for the property and casualty industry in general.
Even in a tough year, in 2012, we ended up, despite Sandy and a drought, with pretty solid results. Our goal is to be back on an upward trajectory on earnings driven again by improving pricing in the property and casualty part of our business and continued growth in our annuity earnings. You can see that we also had record net earnings. We're not against growing book value, whether it's investing and taking gains or resolving tax matters. We'll take it whatever way we can get it in that. In 2013 forward, Craig and I and our team would like to continue to see book value plus dividends grow 10% plus. Let me just talk a little bit about our specialty property and casualty here for a minute. Here's a snapshot of the mix of our specialty property and casualty business.
You can see, we have some 23 different niches that are categorized into 3 main groups, with property and transportation being the greatest at 53%. One important fact to us is our specialty property and casualty business comes from over 8,000 agents and brokers with only 9%, about, coming from the top 3 national producers. We like that spread, and we like that. I think the national producer-driven business is definitely more price sensitive. Here's our specialty property and casualty strategic focus. Already talked about pricing increases. I don't need to repeat that. Improving our market position in our existing businesses and adding new niches globally, that will be an important part of continuing to increase our franchise value over time.
We're big on aligning annual bonuses and long-term incentive compensation for the guys running our businesses based off of their results, and in particular, off of accident year underwriting profitability, paid out over time with look-backs and clawbacks and where there's direct accountability. The guys that run property and marine, they have long-term incentives and annual incentives that are tied to accident year profitability in 1 year and over 5 years, and it does influence behavior, I can tell you that. I think that's a crucial part of our strategy. We feel good about our reserve position today, and we're capitalized in our subsidiaries towards the upper end of the rating ranges for the ratings that we have. One thing unique about our company is generally, we have a lower catastrophe volatility than our peers, and that's on purpose. I think it's very difficult. I'm a Christian.
If you believe there's a sovereign God that can do whatever he wants, wherever he wants, it's hard to price coastal property. We do it, but I think we try to write less catastrophe-exposed business than most companies. A 1 in 500-year event on a hurricane would probably be $127 million after tax, or about 3.3% of equity. That's not by chance. That's kind of our philosophy. With the exception of our specialty property and transportation segment in 2012, we've had strong underwriting results the last couple of years in each of our 3 main segments. I mentioned Sandy and the drought were the reasons this past year on that segment in 2012. Our guidance for 2013 is for a strong underwriting profitability in each of the 3.
If there's any part of our business where I think we need to focus a bit more price increase and underwriting focus, it would be on some of the property businesses, excluding our crop business in that. I think we need to be a bit more aggressive there in that and improve our returns there. Our overall specialty property and casualty guidance is 91%-95% combined ratio. With a firming property and casualty marketplace, 2013 looks like it's going to provide the opportunity for stronger organic growth, as I mentioned before. That's driven by price increase, an improving economy, and I think in lines that we feel real good about, which are a lot of our businesses, an opportunity maybe to pick up a little bit of share in them, particularly in specialty casualty, as you can see.
With that, I'm going to turn things over to Craig to talk about our annuity business and investments.
Thank you, Carl. We're pretty pleased with the performance of our annuity business in 2012. We reported record operating earnings, actually reported 36% growth in our pre-tax core earnings, and record levels of capital at the end of the year. Over the last couple of years, we've generated after-tax returns on new business in the low to mid-teens. We made a decision to exit the health insurance business. It was a business that was not one of our core businesses. We were a pretty small player there and decided to exit the business. We sold our Med supp and critical illness business to Cigna, closed in August of 2012, and reported a gain of $114 million after tax on that sale.
Unfortunately, Cigna was not interested in the long-term care block. We ended up with a runoff long-term care block. At year-end, did a thorough evaluation of that block of business with the help of an outside actuarial firm, and that resulted in a $99 million after-tax charge. The biggest part of that charge was driven by a change in assumptions on reinvestment rates, with a smaller impact from changes in expected claims, persistency, and expenses. We have a very strong position in the bank and indexed annuity markets. We're top five or six in each of these markets. The interest rate environment is a bit challenging. With interest rates where they are today, it's a bit challenging for fixed annuity writers. We would very much like to see a rise in rates and think that we're very well positioned for that. Here's a three-year look at our results.
You can see we had very strong growth in premiums from 2010 to 2011. The premiums flattened out in 2012. We would expect 2013 premiums to be flattish. We do have some new competition. There are some new players in our space, specifically the Fixed Indexed Annuity business, who are very aggressive in the pricing. We're going to have discipline in our pricing and demand the right returns on product, and that's resulting in a flattening out of the sales. You can see the operating earnings have grown at a very healthy clip. This is a five-year picture of premium growth and earnings growth. You can see that we had very substantial growth in premiums over that period of time. It was a period of time when a lot of companies in the industry were really retrenching. Fortunately, we had adequate capital.
We did not receive a ratings downgrade during that period. As a matter of fact, we received an increase in our ratings. It gave us a great opportunity when other companies were retrenching to grow our business at pretty attractive rates of return. You can see that operating earnings over that five-year period of time, due to strong growth in new premiums and maintenance of spreads, operating earnings grew from $105 million in 2008 to $256 million in 2012. These pie charts just give a breakdown of annuity premiums and annuity assets. You can see the Indexed Annuities are becoming a much more important product for us and really responsible for the biggest part of the growth over the last couple of years. Now I want to talk about the consolidated investment portfolio of American Financial Group. In other words, both annuities and PNC portfolios combined.
We invest principally in high-quality fixed income maturity securities. 86% is rated investment grade, 96% rated NAIC 1 and 2. We've been very opportunistic investors over the last four or five years in certain segments. When the residential mortgage-backed securities market was in real disarray, we did take an outsized position, principally in the senior-most position in the securitizations. We did it at a very large discount to par. Didn't rely upon the ratings agencies ratings. We had a credit staff that did their own analysis of the underlying value of the collateral. We felt we had tremendous subordination given the position that we were in, the senior position, and given the entry price, and I think our average cost was $0.80 on the dollar or something like that. That's worked out very well for us.
We did the same thing in the commercial mortgage-backed securities market when that market hit the fan. We were also opportunistic investors in the muni market when it got hit several years ago. We had almost no exposure in munis and became pretty significant investors at what we thought was a pretty good time. This next chart is one that we're pretty proud of. It shows a five-year picture of total return on the portfolio compared to our peers. We put a custom composite together of, I think it's some 40 or 45 companies in the annuity business as well as the PNC business. We did it kind of in proportion to the mix of our businesses. As you can see, we outperformed over that five-year period on a total return basis by 1.6% or 160 basis points.
That amounted to a $1.6 billion in pre-tax dollars of outperformance on the investment side. We're pretty proud of that. I think that our talents on the investment side give us a real competitive advantage. With that, Carl and I be happy to answer any questions you have.
I'll start out with a couple. The first one is, when you talk about excess capital, you also mention wanting to hold some dry powder. Should I take that number away from the, quote, "excess capital," or is that in addition to the $625?
That's a part of the $625, that you can look at it any way you want, Nick. You can have changes in the rating agency models that can change your requirements in a given year by x, $100 million. It's an ongoing type of thing where offensively, there may be an acquisition that may be a little larger or there may be something that's extraordinary that we step up for. Our focus is going to be, after kind of keeping that powder dry, as I said before, on opportunistic share repurchases, dividends. I'm hoping we might see some more organic growth opportunities maybe that come in this marketplace that may not have been there the last couple of years.
Great. The other question I had was on a business that you probably don't get a lot of questions about. That's the specialty finance business.
The margins have been very good. What I don't really get a chance to see is how much equity is allocated to that business and thus the kind of returns in that business you're generating. In addition, if you could spend a little time on some of the lender services businesses.
Sure.
Exactly what you're doing there.
Yeah. Generally, at those ranges, we're operating at double-digit plus returns in specialty casualty, specialty financial in that.
Crop business is a great business in a normal crop year. As I mentioned, we want to improve the returns in some of the other than crop businesses, and specialty financial business. We're the fifth largest writer of Fidelity and Crime. Some of the specialties within that would be things like casinos, armored cars. We're expanding that business globally. Been a good, profitable, good returning business over a long period of time. The Export Credit business, generally over 20 years, you write a small book of that. It's more one-off, kind of larger transactions versus kind of the consumer, smaller, big volume kind of transaction in that. Generally, that business has been good over 20 years. With some of the volatility, I think we had our first underwriting loss, it was either maybe two years ago in 20 years.
Part of it had to do with some of the credit volatility throughout the world. We like that business, and would like to have opportunities to grow it. We do some lender. There's $130 million of mortgage force-placed business. There's been quite a bit of buzz around that because of Assurant and Balboa and some of the subpoenas, and we've had no subpoenas. We generally have operated with a cleaner model in that. That said, California's, and generally, we've operated not at as high rates as our competitors. Our model has been more to work with a producer and have a sliding scale commission, and more lock in a good profit margin rather than try to take exorbitant profit margins and spread all the goodies around.
Our approach is try to lock in a healthy margin, and if we do better, then we share some of that. In California, for instance, I think our rates are going down 28%. We wrote $4.5 million. That's like $1.3 million, and I haven't had the chance to figure out how it would impact on the sliding scale commission, but we probably don't lose all that $1.3 on the profit side in that. There's probably some offset in that. We write $130 million of that. On that part, we write some business in New York. There may be a few other states that may get aggressive and take rates down. Bottom line is, I think that'll continue to be a business that will have a good solid return for us. I could get surprised in that because we haven't been in the headlines as much.
We might end up picking up a few clients that may be tired of being in the headlines in that. That would be a unexpected, but a positive thing might happen. Those are probably the main businesses there.
Had a question on the annuity business. You talked about expecting flat premiums this year there, and the aggressive new competition you're seeing in Indexed Annuities. I'm just wondering why you wouldn't want to shrink that business if competition's that aggressive. You got good growth on the P&C side, but maybe there's other pieces that are offsetting there.
If we can't achieve what we think are the right returns, we will shrink the business. We don't price to hit a certain premium volume. We price to hit a return that is satisfactory to us. I'm just taking a guess at what the premium result is going to be. It is possible that it could shrink a bit. I'd sure rather see it not shrink if we can get the right rate of return.
Again, he's targeting a 10%-13% return on new business, that's pretty healthy with rates were there.
I have one other question. I'm getting asked these days about the crop season coming up, people mention to me the lack of moisture in certain areas, I grew up in suburban Connecticut. I don't know much about real agriculture. I had a garden in my backyard. That was about it. Is it simply too early to form any conclusions?
Yeah. It's way early. I would say this. The majority of our corn and soybean business is in the eastern, more the eastern states, and those seem to be states that seem to be coming out of the drought with more moisture. It's kind of the plains and the western kind of growing states that still seem to be in a drought condition. We write some business there. Winter wheat is kind of dormant, and we don't know where that'll all end up. That may or may not be in great shape. That's 10% of our business, and frankly, that's a part of our business we always cede more to the government bucket. Our net position, even though our gross percentage would be 10% of our business on a net basis, it would probably be a 5% or approximately that.
Those are probably the data points that would be most meaningful at least to me right now. It looks like the prices that are being averaged as we speak during this month that will determine kind of the premium and the strike prices, spring discovery prices and all that, don't seem to be in corn are a whole lot different than last year's, and soybeans may be up a little bit. Our premium's going to be flat to downish, down a couple points, I think, would be my best guess. The hardest part to figure is after a drought like we had last year, will more farmers buy than have bought in the past? Will the ones that have bought last year, will they buy more? That's the part you don't know until you kind of go through.
That's great.