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American Financial Group Inc (NYSE:AFG)
Q2 2019 Earnings Call
Aug 7, 2019, 11:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the American Financial Group Second Quarter 2019 Results Conference Call. [Operator Instructions] Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to introduce your host for today's conference, Ms. Diane Weidner. You may begin.

Diane Weidner -- Assistant Vice President of Investor Relations

Good morning and welcome to American Financial Group's Second Quarter 2019 Earnings Results Conference Call. I'm joined this morning by Carl Lindner III and Craig Lindner, co-CEOs of American Financial Group and Jeff Consolino, AFG's CFO. Our press release, investor supplement and webcast presentation are posted on AFG's website. These materials will be referenced during portions of today's call.

Before I turn the discussion over to Carl, I would like to draw your attention to the notes on slide 2 of our webcast. Certain statements made during this call may be considered forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance. Investors should consider the risks and uncertainties that could cause actual results and/or financial condition to differ materially from these statements. A detailed description of these risks and uncertainties can be found in AFG's filings with the Securities and Exchange Commission, which are also available on our website.

We may include references to core net operating earnings, a non-GAAP financial measure, in our remarks or responses to questions. A reconciliation of net earnings attributable to shareholders to core net operating earnings is included in our earnings release. If you're reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy, plus it may contain factual or transcription errors that could materially alter the intent or meaning of our statements.

Now, I am pleased to turn the call over to Carl Lindner III to discuss our results.

Carl H. Lindner -- Co-Chief Executive Officer

Good morning. We released our 2019 second quarter results yesterday afternoon. If you'd please turn to slide three of the webcast slides for an overview. AFG reported core operating earnings of $2.12 per share, reflecting strong operating profitability and investment results in both our Specialty Property & Casualty and Annuity segments. Second quarter 2019 annualized core operating return on equity was 15%. Net earnings per share were $2.31 and included $0.48 per share in after-tax net realized gains on securities and a negative impact of $0.29 per share for annuity non-core items, including the impact of fair value accounting for fixed-indexed annuities and other items related to changes in the stock market and interest rates.

Craig and I thank God, our talented management team and our great employees for helping to achieve these results. Based on results through the first six months of the year, we narrowed AFG's core net operating earnings guidance for 2019 to a range of $8.40 to $8.88 per share, from our previous range of $8.35 to $8.85 per share. We are maintaining a midpoint of $8.60 per share, however. Craig and I'll discuss our guidance for each segment of our business in more detail later in the call.

Now, I'd like to turn our focus to our Property and Casualty operations. Please turn to slides 4 and 5 of the webcast, which include an overview of second quarter results. As you'll see on slide 4, gross written premiums were flat, net written premiums were up 1% when compared to the second quarter of 2018, primarily the result of lower crop insurance premiums, delayed planting of spring crops resulted in late acreage reporting and reduced overall second quarter specialty Property and Casualty premiums. It is expected though that these delayed premiums will be included in our third quarter 2019 results. Excluding crop, second quarter 2019 gross and net written premiums grew by 6% and 4% respectively when compared to the 2018 second quarter.

Core operating earnings in AFG's P&C insurance operations were $175 million in the second quarter of 2019, slightly below the $180 million reported in the prior year period. The Specialty Property and Casualty Insurance operations generated an underwriting profit of $60 million in the 2019 second quarter compared to $73 million in the second quarter of 2018. Higher underwriting profit in our Specialty Casualty group was more than offset by lower underwriting profit in our Property and Transportation and Specialty Financial Groups. The second quarter 2019 combined ratio of 95 increased 1.3 points from the prior year period and included 3.4 points of favorable prior year reserve development and nine-tenths of a point in catastrophe losses.

Average renewal pricing across our entire Property and Casualty group was up about 3% for the quarter. Excluding our workers' comp business, renewal pricing was up approximately 5%. Both of these measures reflect a continued improvement from renewal rate increases achieved in the first quarter of this year. And overall, Specialty Property and Casualty renewal rates are the highest we have achieved in over five years, meeting or exceeding expectations in each of our Specialty Property and Casualty sub segments. I'll discuss in more detail as we review the results of each. Loss cost trends remained stable and we're keeping our eye on inflation and interest rates, though.

Now, I'd like to turn to slide 5 to review a few highlights from each of our Specialty Property and Casualty groups. Property and Transportation Group reported an underwriting profit of $4 million in the second quarter of 2019, compared to $23 million in the comparable prior year period. These results include lower favorable prior period reserve development in our agricultural and our transportation businesses and a larger year-over-year underwriting loss in our Singapore Branch. Catastrophe losses in this group were $8 million in the second quarter and $10 million in the comparable 2018 period. Second quarter 2019 gross written premiums in this group were down 6% and net written premiums were flat when compared to the prior year period, due primarily to delayed acreage reporting from insureds as a result of excess moisture and late planting of corn and soybean crops. It's expected again that these delayed premiums will be included in the third quarter 2019 results.

Excluding crop insurance, 2019 gross and net written premium growth in this group was strong and was up 12% and 10% respectively when compared to the 2018 second quarter. The growth was primarily attributable to new business opportunities in our transportation businesses. Overall renewal rates in this group increased 5% on average in the 2019 second quarter, an improvement over renewal rates increases achieved in the first quarter of 2019. I continue to be pleased with the broad based rate strengthening in this group, which includes our commercial auto liability business, as well as corrective rate actions in our Singapore Branch and aviation businesses.

AFG's updated earnings guidance reflects our current expectations of a below average crop year, which I'll discuss in more detail. The 2019 growing season will go on record as one of the most challenging planting seasons on record due to spring flooding and excess moisture across the Midwest. As a result, we're processing a record number of prevented planting claims. It's still too early to know how the crop year will play out. In addition to the ultimate impact of prevented planting, other key considerations that will influence our crop insurance results include conditions throughout the remainder of the growing season and commodity prices.

This week's USDA reports indicate that the percentage of corn and soybean crops in good or excellent condition is estimated to be 13 to 14 points lower than last year at this time. So, keep in mind, 2018 yields were exceptionally strong. Corn Futures are currently trading up about 3% from the spring discovery price and soybeans are down 9%. Trade concerns with China are probably already being factored into the commodity pricing and the commodity prices today seem to be performing just fine. On a more positive note, our winter wheat and our rainfall index business should perform better than average this year due to higher levels of precipitation countrywide. We will have a more complete picture with regard to our crop insurance business when we report our third quarter results.

The Atlas Financial Holdings transaction is progressing nicely. National Interstate will begin to issue policies in the third quarter and we expect this business to add $20 million in gross written premium in the second half of 2019. We expect gross written premiums produced by our wheel space businesses consisting of National Interstate, [Indecipherable] and Great American Trucking and with the addition of the Atlas paratransit business, this business will reach $1 billion this year. The specially Casualty Group reported an underwriting profit of $47 million in the 2019 second quarter compared to $29 million in the comparable '18 period. Higher profitability in our workers' compensation and public sector businesses was partially offset by lower year-over-year profitability in our excess and surplus lines businesses.

Underwriting profitability in our workers' comp business continues to be very strong. Catastrophe losses for this group were $1 million in both the second quarters of 2019 and '18. Gross and net written premiums for the second quarter of 2019 both increased 4% when compared to the second quarter of 2018. The addition of premiums from ABA Insurance Services, which we acquired in the fourth quarter of 2018, as well as growth in our excess and surplus lines, executive liability and social services businesses were the primary drivers of the higher premiums. Lower premiums in our workers comp businesses and within Neon primarily due to foreign currency translation partially offset this growth.

Renewal pricing for this group was up 3% during the second quarter. Excluding rate decreases in our workers comp businesses, renewal rates in this group were up approximately 7%. Both measures again our improvement from renewal rate increases achieved in the first quarter of this year and the highest we've seen in five years. I'm pleased to see double-digit rate increases for Neon and strong pricing momentum in our excess liability, umbrella, surplus lines, public D&O and social services businesses.

I would like to take the opportunity today to welcome Jim Slate to Great American Insurance Group. Jim will lead our newly formed accident and health division, which becomes our 35th Specialty Property and Casualty business and a new addition to the Specialty Casualty Group. Jim and his team will build upon Great American's existing array of accident and health insurance coverages, focusing on customized coverages for organizations and educational institutions.

The Specialty Financial Group reported an underwriting profit of $21 million in the second quarter of 2019, compared to $22 million in the second quarter of '18. Higher underwriting profitability in our equipment leasing and surety businesses was more than offset by lower underwriting profitability in our financial institutions business. Catastrophe losses for this group were $3 million in both the second quarters of 2019 and 2018. Second quarter 2019 gross written premiums were down 2% and 6% respectively when compared to the same 2018 period primarily as a result of lower premiums in our financial institutions business. Renewal pricing in this group was up approximately 1% for the quarter.

Now, if you turn to slide 6 for a summary view of our 2019 outlook for the specialty property and casualty operations. Although we continue to expect an overall combined ratio between 92% and 94%, we've adjusted our estimates for the combined ratios within each of our Specialty Property and Casualty groups. We've also adjusted our estimate for overall growth in net written premiums to be in the range of 2% to 5% now, an increase from the range of flat to up 3% estimated previously.

Looking at each segment, we now estimate a combined ratio in the range of 93% to 97% in our Property and Transportation Group, a point higher than the range of 92% to 96% previously estimated. As I noted earlier, while it's too early to project our crop results for this year, this adjustment takes into account a record number of preventing planting claims in our expectations for a below average crop year. We now expect growth in the net written premiums in this group to be between 4% and 8%, an increase from the previous range of 3% to 7%.

Our Specialty Casualty Group is now expected to produce a combined ratio in the range of 90% to 94%, a slight improvement from our previous estimate of 91% to 95%. And we now expect growth in net written premiums for this group to be between 2% and 6%, an improvement from the previous range of down 2% to up 2%, reflecting growth opportunities and strong pricing momentum in the majority of businesses in this group. And we now expect the Specialty Financial group combined ratio to be in the range of 87% to 91%, a slight improvement from our initial estimate of 88% to 92% and based on the results for the first half of 2019, net written premiums are now expected to be down 4% to flat year-over-year, a decrease from the previous expectations of growth in the range of 3% to 7%.

Our guidance with regard to net investment income has change with results in 2019 expected to be up 2% to 6%, an improvement from our previous estimate of flat to up 4% year-over-year. Given the broad based improvements noted in renewal pricing across many of our Specialty Property and Casualty businesses, we now expect overall renewal pricing -- P&C renewal pricing to be up to 2% to 4% this year, an improvement from the previous range of 1% to 3%. Excluding workers' comp, we expect renewal rate increases to be in the range of 5% to 6%.

And I'll now turn the discussion over to Craig to review the results in our Annuity segment and AFG's investment performance.

Craig Lindner -- Co-Chief Executive Officer

Thank you, Carl. I'll start with a review of our Annuity results for the second quarter, beginning on slide 7. Statutory annuity premiums were $1.35 billion in the second quarter of 2019 compared to $1.4 billion in the second quarter of 2018, a decrease of 4%. Higher traditional fixed annuity premiums in the financial institutions channel were more than offset by lower FIA premiums in the retail and broker-dealer channels. In response to the continued drop in market interest rates in 2019, we've implemented several rate decreases in order to maintain appropriate returns on annuity sales, which has begun to temper new sales.

As previously announced in the second quarter of 2019, we changed the way we define annuity core operating earnings. Beginning with the second quarter, annuity core operating earnings exclude the impact of items that are not necessarily indicative of operating trends, such as the impact of fair value accounting for fixed-indexed annuities, unlockings and other items related to changes in the stock market and interest rates. Core operating earnings will now include an expense for the amortization of FIA option costs, which is a better measure of the cost of funds for FIAs. We believe these changes will provide investors with a better view of the fundamental performance of the business and a more comparable measure of the Annuity Segment's business compared to its peers.

Turning to slide 8, you will see the components of pre-tax annuity core operating earnings under this new definition, results for the prior -- for the periods prior to the second quarter

of 2019 are shown at a comparable format to the new definition of our annuity core operating earnings and are reconciled to previously reported annuity core operating earnings. Growth in average invested assets contributed to higher year-over-year annuity earnings, which were more than offset by lower earnings from investments mark-to-market through operating earnings and higher option costs.

Earnings from investments mark to market vary from quarter-to-quarter based upon the reported results of the underlying partnerships and investments. Higher amortization of option costs reflects growth in AFG's annuity business as well as higher renewal option costs related to in-force business.

Turning to slide 9, you'll see that our quarterly average annuity investments and reserves both grew by approximately 12% year-over-year. AFG spreads in the second quarter of 2019 were lower than in the second quarter of 2018 as spreads in 2018 reflect exceptionally high returns on certain investments that are mark to market through operating earnings as well as the impact of higher option costs in 2019.

Please turn to slide 10 for a summary of the 2019 outlook for the annuity segment. Taking into account the new definition of annuity core operating earnings, beginning in the second quarter and based on $194 million of core operating earnings reported by the annuity segment in the first six months of 2019, we have narrowed the range of our 2019 guidance for pre-tax annuity core operating earnings to $375 million to $405 million from the range of $365 million to $425 million, estimated previously. Our revised guidance reflects renewal option costs in line with recent purchases and a return of 8% to 10% on investments required to be mark to market through operating earnings. For reference, these investments earned 11% in the first half of 2019.

In addition, guidance assumes that lower long-term reinvestment rates will have a negative impact on the runoff of the annuity segment's investment portfolio as well lower short-term rates are expected to have a negative impact on the annuity segment's net investments in cash, short-term investments and floating rate securities, which were approximately $4 billion at June 30, 2019. Fluctuations in these items could lead to positive or negative impacts on the annuity segment's results. Finally, we are modifying our previously announced annuity premium guidance based on sales through the first six months of the year.

We believe that recently implemented rate decreases on our annuity products and a continued focus on pricing discipline will temper new sales as we remain committed to achieving appropriate returns on new business. As a result, we now expect that our 2018 annuity sales will be down 5% to 10% from our record $5.4 billion of premiums in 2018. Additional information on the annuity segment's earnings, premiums, investments and reserves can be found in AFG's quarterly investor supplement posted on our website.

Please turn to slide 11 for a few highlights regarding our $53 billion investment portfolio. AFG reported second quarter 2019 net realized gains on securities of $45 million after tax and after deferred acquisition costs. This compares to net realized gains on securities of $25 million in the second quarter of 2018. Approximately $29 million of the realized gains recorded in the second quarter of 2019 pertain to securities that AFG continue to hold at June 30, 2019. As of June 30, 2019, net unrealized gains on fixed maturities were $812 million after tax and after DAC.

As you'll see on slide 12, our portfolio continues to be high quality with 91% of our fixed maturity portfolio rated investment grade and 98% with an NAIC designation of one or two of its highest two categories. We've provided additional detailed information on the various segments of our investment portfolio in the quarterly investor supplement on our website.

I will now turn the discussion over to Jeff who will wrap up our comments with an overview of our consolidated second quarter 2019 results and share a few comments about capital and liquidity.

Jeff Consolino -- Chief Financial Officer

Thank you, Craig. Slide 13 summarizes AFG's second quarter consolidated core operating earnings results. AFG reported core EPS of $2.12 in Q2 2019. Core net operating earnings in the quarter were $192 million, $7 million higher than the year ago quarter. Higher year-over-year core operating earnings in the Annuity segment under our new definition were offset by lower operating earnings in our Specialty P&C insurance operations. As Craig discussed earlier in the call, AFG's annuity core operating earnings for the second quarter of 2019 exclude the impact of items that are not necessarily indicative of operating trends and include an expense for the amortization of FIA option costs.

We believe this better reflects the cost of funds for fixed-indexed annuities and AFG's evaluation of the financial performance of our annuity business. Items previously reported as a component of annuity core operating earnings are noted on this slide for the comparable prior year period. Interest and other corporate expenses were $6 million lower year-over-year. Parent company interest expense increased by $1 million as compared to Q2, 2018 as a result of the March 2019 issuance of $125 million principal amount hybrid 40 year 5.875% subordinated debentures due in 2059. Other expenses were $7 million lower year-over-year, reflecting a normal run rate in the 2019 second quarter.

Slide 14 provides a reconciliation of core net operating earnings to net earnings. In the second quarter of 2019, AFG recognized $45 million or $0.48 per share in net after-tax realized gains on securities. Annuity non-core items reduced net earnings attributable to shareholders by $27 million or $0.29 per share.

Turning to slide 15, AFG's adjusted book value per share was $58.49 as of June 30, 2019. Our annualized growth and adjusted book value per share plus dividends was a very strong 16.3% in the second quarter of 2019. We returned $170 million to our shareholders in the second quarter with the payment of our regular quarterly dividend and $1.50 per share special dividend during the quarter. Parent cash was approximately $135 million at the end of the second quarter.

We maintain solid levels of capital in our insurance businesses to meet our commitments to the rating agencies. Our excess capital stood at approximately $1 billion at June 30, 2019. We plan to hold approximately $200 million to $300 million as dry powder to maintain flexibility for opportunities as they arise. Our management team reviews all opportunities for deployment of capital on a regular basis. Wrapping up, page 16 shows a single page presentation of our updated 2019 core earnings guidance. Our guidance assumes an effective tax rate of approximately 20% on core pre-tax operating earnings. AFG's expected 2019 core operating results exclude non-core items such as realized gains and losses, annuity non-core earnings and other significant items that may not be indicative of ongoing operations.

Now, we'd like to open the lines for any questions.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Amit Kumar with Buckingham Research. Your line is now open.

Amit Kumar -- Buckingham Research -- Analyst

Thanks and good afternoon. Just a few questions. Maybe starting with the annuity piece first. Did you talk about how quickly you plan to change the crediting rates based on the interest rate outlook in your opening remarks?

Craig Lindner -- Co-Chief Executive Officer

Hi Amit, this is Craig. First of all, as it relates to new sales, we are constantly adjusting credited rates to earn our targeted rate of return. I think we've hedged some 5 or 6 adjustments so far year-to-date and obviously with the move, we've seen here in the last couple of days, we're preparing to make another change as it relates to new business. As it relates to the in-force, we are fortunate that we have approximately 120 basis points of difference between the current credited rates and the guaranteed minimums, about approximately $30 billion to reserves. So if we remain in this environment for an extended period of time, we have a lot of room to adjust the credit rates on in-force.

Amit Kumar -- Buckingham Research -- Analyst

Got it. That's helpful. The second part to, I guess, the same discussion is, I know in the past, I think in Q4, although you've had interim periods, you look at the actuarial assumptions and there is sometimes noise from unlocking. Is there any way to think about that right now?

Craig Lindner -- Co-Chief Executive Officer

Yeah. Amit, typically we have done a very, very thorough review in the fourth quarter, given the recent move in interest rates, we're looking to do that in the third quarter of this year. I guess, I can't give you a prediction of the outcome, but let me tell you how I would think about it. On the negative side, clearly, rates are lower than what we projected when we did the last unlocking. So we're going to put new assumptions in place related to future reinvestment rates and the period that it takes to get to the ultimate, so obviously, given the current level of rates, that is a negative. Now mitigating that impact, we have the ability to reduce credited rates and currently we will reduce credited rates beyond what was assumed in the last unlocking, any other mitigating factor is lower interest rates drive lower option costs. So those two items are positives, obviously, the current level of reinvestment rates is a negative.

Amit Kumar -- Buckingham Research -- Analyst

Got it. That's helpful. And switching to P&C and then I will stop. Maybe let's start with the crop insurance book. Historically, if you were to look at in the previous sort of crop years, what would you quantify as an average year, would that be 2014, 2015. Is there any way to sort of think about your historical crop results and how 2019 is shaping up to be?

Craig Lindner -- Co-Chief Executive Officer

As you know, we don't separately disclose that as a segment, Amit, but the last couple of years have been above average. This year, we're saying it's going to be below average in the whole scheme of things. Jeff, you have any other perspective on that?

Amit Kumar -- Buckingham Research -- Analyst

Apologies for the siren. I was trying to ask is, obviously in your initial guidance, you had an average crop year and I was wondering if there was a closing of proxy where you could say yes, average would be 2013 or 2014. And obviously '18 and '17 and '16 were materially above expectations. I was just trying to come up with some sort of a thought process, in terms of what is the closest proxy for how you define what is an average crop year without breaking the numbers.

Jeff Consolino -- Chief Financial Officer

I'm sorry. We really can't be more specific than that. But anything else, we gave you Amit would be going into information we just haven't disclosed in the past. Apologies.

Amit Kumar -- Buckingham Research -- Analyst

Okay. The only other question is and I'll stop here is, on the discussion on, you're talking about the trends. I guess two parts, one, any thoughts on the child victims act and its impact on you and separate from that, are you seeing any sort of noise or any change in trend line from the emerging discussion on the tort climate? Thanks.

Carl H. Lindner -- Co-Chief Executive Officer

I think that's something that we're watching, obviously, in our non-profit book, that would be the part of our business where those types of claims are things that we would watch closely. I'm not sure we're a real heavy insurer in the state of New York itself, but of course we watch those trends in that. So that's something that we're keeping our eye on.

Amit Kumar -- Buckingham Research -- Analyst

And separately on the tort climate, any thoughts on that, overall, in terms of jury awards and more attorney involvement?

Carl H. Lindner -- Co-Chief Executive Officer

I think nothing new. There is -- in the commercial auto side of things, we continue to take pretty good rate. I think we took 9% in our commercial auto liability side that reflects an increase in the tort environment for, in the commercial auto side and I think we're also, as far as some above average loss cost trend, the other place would be in the D&O side of things, as we don't write a lot of public. So I don't think our -- we're not seeing the same trend lines as those that would write a lot of public D&O in that. I think those are, that's nothing new in our case, but those would be a few places that we would see, things, and excess Liability actually, the loss costs increase there would be a little bit higher than other lines, commercial auto when I ask our guys, what's driving that it's commercial auto claims that are pushing up into the umbrella and excess levels.

Amit Kumar -- Buckingham Research -- Analyst

Yeah, wow. Interesting. That's very helpful. Thanks for all the answers and color and good luck for the future.

Carl H. Lindner -- Co-Chief Executive Officer

Thank you.

Operator

Our next question comes from Jay Cohen with Bank of America Securities. Your line is now open.

Jay Cohen -- Bank of America Securities -- Analyst

Thank you. Wanted to just follow up on the crop side. I guess, my assumption is that the reduced premiums there, because of the planting issue, would have had some impact on your second quarter expense ratio, is that fair?

Jeff Consolino -- Chief Financial Officer

Jay, this is Jeff . Yes, that would be correct.

Jay Cohen -- Bank of America Securities -- Analyst

And obviously your comments would suggest that might reverse in the third quarter, given the flow of premiums that we should see then?

Jeff Consolino -- Chief Financial Officer

Absolutely, to the extent we're recognizing a greater level of premium in Q3. Our expense ratio would tend to decline as you have a greater denominator you're dividing it into. I would gratuitously throw in, when you look at the seasonalization of our expense ratio. Jay, we've tended to have a low expense ratio in the fourth quarter as crop profitability and contingent commissions related to that tend to come in, clearly, putting down the marker that Carl has on a below average year, you probably won't see the same reduction in expense ratio in the fourth quarter for Property and Transportation or across our whole business if indeed that comes to pass and our crop profitability is below average.

Jay Cohen -- Bank of America Securities -- Analyst

That is helpful. Thank you for mentioning that. And I guess the second topic and overall, the transportation businesses, you seem to suggest that you had less favorable development

in the segment, partly because of less favorable development or even adverse development in your transportation businesses. If you could kind of talk about the claims trends you're seeing and then zero in maybe on the pricing you're seeing in different parts of that business, because it's a big business for you now.

Carl H. Lindner -- Co-Chief Executive Officer

Jeff, do you want to address the reserves and I can talk a little bit about the pricing.

Jeff Consolino -- Chief Financial Officer

Absolutely. Jay, as you mentioned, transportation is a business we like, it's one and that we've got bigger in. Carl just had mentioned in the call that with the Atlas paratransit transaction, what we call our wheels business, which is the transportation business, could crest $1 billion growth this year. In terms of development, let's go back to our previous struggles with National Interstate which emerged in 2012. At that point, we felt like we didn't see other companies reporting the same trends. So when we had the uptick in severity, we were concerned and we've been working on rate for 7 consecutive years since then, part of the prescription there was to increase reserves in National Interstate, which happened and then ultimately the rate has turned our combined ratio around where we feel like the transaction where we bought in the minority is giving us an appropriate return on capital.

Given all the rate and given the other actions we've taken, we feel like National Interstate's in a strong reserve position at this point. And it is true that in our transportation businesses, we're showing year-over-year-lower level of favorable development when you compare Q2 of '18 to Q2 of '19. But we're still showing favorable development in that segment, which is a comment that I want to take many other companies in our industry can say. So I know it's a problem spot and a hot topic with others. We certainly feel like commercial auto needs the rate that Carl cited and we are about 9% year to date. But we do have what we believe are prudently strong reserves for that business. And even though the quarterly comparison is lower '19 versus '18, we still are showing favorable development.

Carl H. Lindner -- Co-Chief Executive Officer

Yeah, well said, Jeff. I'm not sure I have a whole lot to add. Overall rate increase in National Interstate's in the quarter was 7%, with commercial auto liability being 9%. I think [Indecipherable] we got 3% and Great American Trucking 2% overall and National Interstate, that includes some decline in workers' comp pricing. So I think we're pleased with the performance of our commercial auto or transportation business. We're achieving our overall combined ratio targets, those I mentioned before with a severity trends in commercial auto liability. We're continuing to take rate there. And I think our house is in order there, and I think we're growing our business double -- we're growing this transportation business double digit through six months. I think we're taking advantage of being -- having our house in order and being in a market in a correction mode and are very excited about the Atlas transaction and expect it to, as I mentioned before, to begin adding to our premiums in the second half.

Jay Cohen -- Bank of America Securities -- Analyst

I guess it just helps when you see trends a bit earlier than others and you move quicker. Thanks for those comments both of you. Very helpful.

Operator

Our next question comes from Greg Peters with Raymond James. Your line is now open.

Greg Peters -- Raymond James -- Analyst

Good afternoon. Carl, in your opening comments, you specifically called out the operations in Singapore, called out your aviation operations and then in financial institutions and your specialty financial segment. I was wondering if you could spend an additional minute providing some additional context on those three businesses, whether it's the type of business being written in each of those sub-segments and the order of magnitude of their effect on your second quarter results.

Carl H. Lindner -- Co-Chief Executive Officer

Yeah. Hi, Greg. FIS is still making a solid underwriting profit, just not quite as profitable at least in the first six months is what they have -- were in the prior period. FIS, that business, we've achieved some rate increase, not a lot of -- much rate in the first six months. I think our guys are expecting for that to move up through the rest of the year and that -- but that's been a very good business for us over a long period of time. I think that they've been tougher on some of the collateral protection accounts and they've been doing a little bit of reunderwriting to try to get back to the profitability, the great profitability that we've been used to over time.

On the aviation business, it's a business we started a number of years ago. We, like others in the industry, have had profitability problems in that. We've been working hard over the past 6 to 12 months to adjust our underwriting appetite and also rates. Rates in the second quarter in aviation went up 23%, they are up about 21% for the year. Right or wrong, or otherwise, we've chosen to adjust our underwriting appetite, increase rates and try to work our way through in a market that's correcting pretty well in that. So we'll see where that goes.

A little bit the same in Singapore. Singapore is a business we started, a branch we started a a number of years ago. We got a pretty good start on the premium side, I think they might have been up to $50 million, 60 million. We wrote an Uber like account called [Indecipherable] that really bit us hard and that we got off of, I think, a while ago and that market seems to be correcting, we're getting pricing in Singapore of about 7% right now. So very similar, we've been taking underwriting actions as well as increasing price in Singapore, in order to correct the results.

Greg Peters -- Raymond James -- Analyst

As a follow-up.

Jeff Consolino -- Chief Financial Officer

Hey, Greg, this is Jeff, you had said in your question, you were hoping for some quantification. Just a couple of notes I would make to put some numbers around Carl's commentary, with respect to the financial institutions business or FIS, that's in our Specialty Financial segment, it is a major component there, it's the biggest by premium and just to echo Carl's comment, it's a good business, it's operating at combined ratio below 90. So very appropriate and good margins.

With respect to Aviation, we've talked for several quarters in a row, including last year about the severity and the loss trends that's brought about. I would not single out aviation in the second quarter of 2019 as contributing any variance to our combined ratio in the quarter as compared to last year. Their margins, in terms of dollars, are roughly comparable, actually materially better. And then Singapore, which is in property and transportation, you'll note that our Property and Transportation sub segment, accident year combined ratio rose by about 1.7, 1.8 points in the quarter. Singapore is the major contributor to that. So that would be driving the uptick in that sub-segment.

Greg Peters -- Raymond James -- Analyst

As a follow-up on the aviation account where you're reporting substantial rate, is that a general aviation type business or is there some commercial and other aspects included?

Carl H. Lindner -- Co-Chief Executive Officer

Yes, that's what we would call kind of more of a non-standard general aviation type of a book. That's our niche, it's not the commercial, large commercial.

Greg Peters -- Raymond James -- Analyst

Got it. Thank you for those answers. Craig, I'd like to ask you a question or two about your segment in your results. I was looking through page 15 of your supplement and listening about your comments on pressure on sales and it looks like you've seen the most pressure on new sales in the broker dealer single-digit, or single premium indexed annuity business, not as much in the financial institutions piece. Do you think your market actions are going to bleed and be to a decline in that larger piece of your new sales?

Craig Lindner -- Co-Chief Executive Officer

Greg, time will tell, it really depends upon what our competitors do in terms of adjusting credited rates. We've been surprised that some of the competition has been as slow as they've been to adjust credited rates, but it really is going to be a function of whether our competitors are interested in earning the appropriate rate of return or whether they're going to accept returns that we would not.

Greg Peters -- Raymond James -- Analyst

Right. As a follow-up, you commented about the opportunity to reduce crediting rates. It seems, in some respects, there is some headwind in your annuity business as we look beyond this year, look to 2020 and I guess my question and I know you're not going to provide guidance on 2020 numbers yet, but is the annuity business in this current environment, especially what's transpired in say the last month or two, should we still think about the annuity business as a growth business for AFG or is it possible that it may stagnate for the year?

Craig Lindner -- Co-Chief Executive Officer

And I don't know quite sure what you mean by stagnate. First of all, we're going to price our product to earn the right rate of return. That's one of the beauties of being involved in a highly diversified company where if the environment in one line of business really isn't conducive to earning rate returns or investing more capital, we have the ability to kind of weight things at that given line of business until conditions change and they always do. So, you saw our guidance on premium is being down 5% to 10%, but it still drives growth in the guidance on growth in reserves and investments is 9% to 11%. So, still very healthy growth in reserves and investments. I wouldn't call that stagnant, there may be periods when premiums decline, we're OK with that, we're going to be disciplined with our pricing. But the guided level of premiums still generates a very healthy growth in investments and reserves.

Greg Peters -- Raymond James -- Analyst

I don't want to give you the wrong impression. I guess when I was -- what I'm looking at would be on slide 10 in your annuity outlook where you talk about the core earnings, the guidance that you provided for the year. And when I, I'm just trying to get a sense, is it the opportunity with the credited rates that will help lead to and the growth in your investments lead to growth in the pre-tax earnings as reported for 2020 or are the market conditions, such that it's possible that it might not grow next year?

Craig Lindner -- Co-Chief Executive Officer

Yes, we have not given guidance, Greg, on next year yet, but we feel pretty confident we're going to continue to earn attractive returns in the annuity business. I'd just say that.

Greg Peters -- Raymond James -- Analyst

Yeah. Got it, thanks.

Operator

Our next question comes from Paul Newsome with Sandler O'Neill. Your line is now open.

Paul Newsome -- Sandler O'Neill -- Analyst

First I have what I think is a bit of an accounting question. So Jeff said that the premium recognition in the crop business wouldn't change due to the slow planting. I was wondering if there is something about your business of your accounting that might be different. geographic trends or whatever that would create a difference in accounting from a premium perspective?

Jeff Consolino -- Chief Financial Officer

It's an interesting question, Paul. Unfortunately, we're not in a position to comment on accounting policies. So I think that you can take Carl's guidance about the recording of premium and the timing as reflective of our business and how it's accounted for and I can't really stray off of that territory.

Paul Newsome -- Sandler O'Neill -- Analyst

Okay, fair enough. And then could we hone a little bit in on the workers' comp business. I think you said the profits were actually up. Pricing has been widely talked about as being down for just about everybody. So I guess that either moves, you're expanding your workers comp business quite a bit of our premium perspective or you're remarkably having negative clean inflation. Maybe you could just talk about sort of how that is holding up, as well as it is?

Carl H. Lindner -- Co-Chief Executive Officer

Yeah. Workers comp will probably be a little under 19% of our overall direct written premium projected for this year. Our six month results overall for this year are very good. We have a healthy accident year combined ratio and a very healthy calendar year combined. The outlook, I think, is the same for the whole year. Overall gross and net written premiums have been down a little for six months. And I think they'd probably be down low-single digit for the '19 year. As I think we've said before, we look at parts of our, I mean, from a loss cost trend standpoint, very pleased with what we're seeing on the loss cost trend side.

Our overall loss or loss cost trend at Summit is about up 1%, republics is pretty flat, strategic comp is, not much going on there, so loss cost inflation, we're very pleased with it. So very pleased with the overall results. Republic as to be expected after the adjustments in rates, including current pricing being down 11%. I think for six months and for the whole year, we'll probably have a small underwriting accident year underwriting loss at Republic, so we're continuing because of the strong reserve position to have a small underwriting gain to probably break even results on the combined ratio for Republic.

Again keep in mind that, we're earning 20% returns on equity even at 100% combined ratio in California. Summit continues to do very well. I'd expect Summit to make a small accident year underwriting profit, a healthy calendar year underwriting profit even with price being down 11%, premiums will be down 2% to 4%, good about the reserve position in that part of our business. And so I mentioned for strategic comp has very healthy accident year and calendar year profit for six months and is projected this year, they are actually growing in that part of our large deductible kind of part of our business and actually getting a little bit of rate increase through the first six months. So I'm -- we're very pleased with our workers' comp business right now.

Paul Newsome -- Sandler O'Neill -- Analyst

Great, thank you very much.

Operator

Our next question comes from Christopher Campbell with KBW. Your line is now open.

Christopher Campbell -- KBW -- Analyst

Yes, hi, good afternoon. I guess, the expense ratios were up in all three segments and it sounds like Property and Transportation might be a little bit of crop related, but what's driving the higher expenses in the other two segments.

Jeff Consolino -- Chief Financial Officer

Hey Chris, it's Jeff Consolino. So overall, I would say, our expense ratio is up, but only modestly. I can throw some numbers at you. I'll try to dissect that by sub segment. I just want to lay the hands on the right analysis here. We talked about Property and Transportation subsegment and the impact crop was having in the current quarter. In our Specialty Casualty segment, our expense ratio has moved up by about eight-tenths of a point. The major contributor there, we have a number of longer-tail casualty operations there. And there -- in some cases, retaining more of their premium and buying less reinsurance. Since they're so profitable when they do buy reinsurance, they get a very healthy seeding commission and so the act of buying lesser reinsurance, let's just keep more underwriting profit, but kind of counter intuitively would tend to tick up the expense ratio if the seeding commission is in excess of our original acquisition cost, that's what's contributing to what's going on within the Specialty Casualty segment.

We talked earlier in response to a different question about our financial institutions business inside Specialty Financial sub segment that financial institutions business is the biggest piece of that. We've talked about the nature of that business in past calls, where there is a, what I would characterize as a variable commission for our production sources there, profit commission that if we have very little loss ratios, the originating agents can receive higher commissions. In 2018, with an active CAT year, profit commissions were lower for our financial institutions business. This year in a more normal CAT environment and we're back to paying a more normal level of profit commissions. So that's why you'd see the expense ratio moving up in that segment by about 1.6 points, but you really wouldn't see a concomitant increase in the accident year combined ratio because it's somewhat offset by a lower loss ratio in the sub-segment.

Christopher Campbell -- KBW -- Analyst

Okay, great, thanks for that color. Specialty Casualty reserve releases were up year-over-year. I guess what products and accident years are contributing to those?

Jeff Consolino -- Chief Financial Officer

Workers' compensation is the biggest piece, Chris. And accident years, generally it's going back 3, 4, even more years when you look at the accident years these are emanating from.

Christopher Campbell -- KBW -- Analyst

So like 16 and prior?

Jeff Consolino -- Chief Financial Officer

If you go back to '16 and prior, that's more than 100% of the reserve release.

Christopher Campbell -- KBW -- Analyst

Okay, got it. Big picture question, I guess, what would be AFG's potential liability exposure to opioid distributors and manufacturers, do you guys have any exposure there?

Carl H. Lindner -- Co-Chief Executive Officer

Give me a second here, I don't have any notes on that. No, I don't think that's a -- I don't think that's a big area of concern for us. We just don't -- we're not a large insurer of chemical, pharmaceutical, manufacturing companies and those types of risks. So obviously, something that we're keeping our eye on in that, but I wouldn't say that.

Christopher Campbell -- KBW -- Analyst

Okay, got it. And then no repurchases this quarter. I guess, how should we think about modeling those going forward, given the recent pullback in the shares?

Jeff Consolino -- Chief Financial Officer

We did just pay $1.50 special dividend, which was a substantial commitment of our capital. Our CEOs and our board are very focused on returning capital to shareholders in the most appropriate way, if we can deploy it growing organically or making sensible acquisitions. I think our actions have demonstrated a recent bias toward special dividends, rather than repurchases. But it's all subject to the financial analysis at a point in time.

Christopher Campbell -- KBW -- Analyst

Okay. Got it. And then I guess how fast is the excess capital growing, because I mean if you're pulling back in life, right, if there is going to be less life premium growth, that's obviously there is -- that's a good guide in terms of excess capital, but then you're growing P&C, which you'll need capital there to grow. I guess just combining those two, how should we think about excess capital generation over time in modeling that?

Jeff Consolino -- Chief Financial Officer

Chris, we did report $1 billion of excess capital with this earnings release. So even after paying that substantial dividend, we've built ourselves back up because we started the quarter at where we ended previous quarter in $1.1 billion before that special dividend. We've said over time, I think, Craig, is pleased with the annuity business being a generator of excess capital rather than consumer of excess capital. With the P&C business, our aftertax returns are north of 15%, if you look back at the most recent year and we're not growing organically at 15%. So unless we find a way to reinvest that and things like the paratransit transaction or the ABAIS transaction, P&C will continue to generate excess capital for us. We've got good flexibility and ideally, we'll have the opportunity to deploy it in a sensible way and if not, we'll be returning to shareholders.

Christopher Campbell -- KBW -- Analyst

Okay, great. Well, thanks for the color. Best of luck in the third quarter.

Operator

At this time, I'm showing no further questions. I would like to turn the call back over to Diane for any closing remarks.

Diane Weidner -- Assistant Vice President of Investor Relations

Thank you all for joining us this morning and we look forward to talking with you again when we release next quarter's results.

Operator

[Operator Closing Remarks]

Duration: 66 minutes

Call participants:

Diane Weidner -- Assistant Vice President of Investor Relations

Carl H. Lindner -- Co-Chief Executive Officer

Craig Lindner -- Co-Chief Executive Officer

Jeff Consolino -- Chief Financial Officer

Amit Kumar -- Buckingham Research -- Analyst

Jay Cohen -- Bank of America Securities -- Analyst

Greg Peters -- Raymond James -- Analyst

Paul Newsome -- Sandler O'Neill -- Analyst

Christopher Campbell -- KBW -- Analyst

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