American Financial Group, Inc. (AFG) Q4 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the American Financial Group 2018 Four Quarter 2018 Results Conference Cal. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference may be recorded. I would now like to introduce your host for today's conference, Diane Weidner, Assistant Vice President, Investor Relations. Ma'am, you may begin. M'aa'm, please go ahead.

Thank you, Wes. Good morning, and welcome to American Financial Group’s Fourth Quarter 2018 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 Web site. 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. And finally, if you're reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. Thus, 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.

Good morning. We've released our 2018 fourth quarter and full year results yesterday afternoon. If you turn slide 3 and 4 of the webcast slides, for an overview. Craig and I were pleased to report record AFG core operating earnings of $8.40 per share for the full year of 2018, up 28% from last year and generating a core return on equity in excess of 15%. Returning capital to our shareholders is an important component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future. We paid $397 million in dividends during the year, representing $130 million in regular common stock dividends and $267 million in special dividends. And quarterly dividend was increased by 14% to annual rate of $1.60 per share beginning in October of 2018. AFG's five year total shareholder return representing growth in share price plus dividends was approximately 88% exceeding the total return performance of the S&P 500, S&P Property and Casualty Index and S&P Life and Health Index over that same period. Turning to slide 4, fourth quarter core net operating earnings were $1.75 per share compared to $2.20 per share in the year ago quarter. A significant downturn in the financial markets in the fourth quarter tempered results in our annuity segment and profitability in our property and casualty segment was lower year-over-year. These results were partially offset by the benefit of a lower corporate tax rate. Fourth quarter 2018 annualized core operating return on equity was 12.6%. A net loss of $0.33 per diluted share in the fourth quarter included $2.08 per share and realized losses on securities. Accounting rules require that all equity securities are reported at fair value. So it's important to note that $2 per share of this amount related to holding losses on securities that AFG continue to own at December 301st, 2018. Craig will discuss this in morning detail later in the call. Craig and I thank God, our talented management team and our great employees for their work and helping us to navigate the challenges of market volatility in a heighten level of natural disasters across the industry. We have established initial 2019 core operating earnings guidance for AFG in the range of $8.35 to $8.85 per share. Craig and I will discuss our guidance for each segment of our business in more detail later in the call. Now I would like to turn our focus to our Property and Casualty operations. Please turn to slides 5 and 6 of the webcast which include an overview of fourth quarter results. As you will see on slide 5, gross and net written premiums on our specialty property and causality insurance operations grew by 3% and 4% respectively. A change in the timing of the renewal of two large transportation accounts from the third and fourth quarter impacted reported growth in the quarter. If you exclude those -- the timing of those policy renewals overall, specialty property and causality gross net written premium grew by 1% and 2%, respectively from the year ago quarter. Property and Causality operating earnings in the fourth quarter were 8% lower year-over-year primarily related to higher catastrophes, which added three points to the combined ratio in the fourth quarter, compared to 0.6 in the prior year period. Overall, renewal pricing in our specialty property and causality group was up 2% during the fourth quarter and above our overall loss ratio trend, which is about 1.5%. Loss cost trends remain stable and we are keeping an eye on inflation and interest rates. Now excluding our workers' comp businesses, overall renewal pricing was up approximately 4% during the quarter. We are getting rate increases in the businesses where we need them to achieve our targeted returns. Now if you turn to slide 6 to review a few highlights from each of our specialty property and causality groups. Property and transportation group reported an underwriting profit of $64 million in the fourth quarter of 2018 compared to $84 million in the comparable prior year period. Higher underwriting profits in our transportation, property and inland, marine and ocean marine businesses were more than offset [Technical Difficulty] Our crop insurance operations reported strong profitability during the 2018 fourth quarter albeit at a lower levels than the very strong results reported in the prior year fourth quarter. Strong yields in eastern Corn Belt helped to mitigate the impact of commodity price declines. Catastrophes losses for this group had a favorable impact of $2 million in the fourth quarter of 2018 compared to a favorable impact of $3 million in the 2017 fourth quarter. With catastrophes losses reported from the previous quarter developing favorably in the fourth quarter of both those years. Fourth quarter 2018 gross and net written premiums in this group were 4% and 6% higher respectively than the comparable prior year period. The increase was largely the result of the change and the timing of the renewal of two large accounts mentioned previously. Excluding the impact of the timing of these policy renewals both gross and net written premiums in this group were up about 1% year-over-year. Lower year-over-year premiums in our crop insurance business and underwriting actions on underperforming accounts in our Singapore branch both tempered fourth quarter premiums. Our overall renewal rates in this group increased 3% on average in the both 2018 fourth quarter and for the full year. Specialty casualty group reported an underwriting profit of $22 million in the fourth quarter compared to $58 million in the comparable 2017 period. Lower year-over-year underwriting profit within Neon was the primary driver of these results, specifically higher 2018 catastrophes losses and lower year-over-year favorable reserve development due to the fourth quarter 2017 Neon reinsurance to close transaction. Lower profitability in our workers comp businesses contributed to a lesser extent. Despite lower year-over-year profits in our workers comp operations, these businesses achieved excellent underwriting margins in the fourth quarter. Higher underwriting profit in our Excess and Surplus Lines and targeted markets partially offset these results. Last quarter we shared our plans to acquire ABA Insurance Services, a market leading provider of D&O and other complementary insurance solutions for banks, small businesses and non profit organizations, with a lot track record of underwriting success in profitability. We are pleased that the transaction closed at the end of November. And we welcome this business to the AFG family. Results for this business for the month of December reported within specialty casualty group. Catastrophes losses for this group were $28 million in the fourth quarter of 2018 and $18 million in the comparable 2017 period. Gross and net written premiums increased 6% and 5% respectively for the fourth quarter of 2018 when compared to the same prior year period. Our year-over-year premiums within Neon resulting from the group of its portfolio and targeted classes of business, along with the growth in several other businesses and the addition of ABA Insurance Services were partially offset by lower premiums in our workers comp businesses. Renewal pricing for this group was flat in the fourth quarter and was down approximately 1% overall for the year. Excluding our workers comp businesses, renewal rates in this group were up approximately 4% in the fourth quarter and 3% for the year. And the specialty financial group reported and underwriting profit of $20 million in the fourth quarter of 2018 compared to $19 million in the fourth quarter of 2017. Lower year-over-year profitability in our financial institutions business primarily the results of higher catastrophes losses is partially offset by higher profitability within our fidelity, crime and our equipment leasing businesses. And higher favorable reserve development and runoff businesses. All businesses in this group achieved excellent underwriting margins. Gross and net written premiums declined by 12% and 9% respectively in the 2018 fourth quarter when compared to the same 2017 period, primarily due to the timing of several new accounts in our lending and leasing businesses in the prior year. Renewal pricing in this group was up 5% during the fourth quarter and for the full year of 2018. Now please turn to slide 7 for summary review of our 2019 outlook for the specialty property and casualty operations. We expect a 2019 combined ratio for the specialty property and causality group overall between 92% and 94%. Specialty property and causality group's calendar year GAAP combined ratio has been between 92% and 94% in each of the five preceding years. Our expectations remained consistent with our past results. Net written premiums are expected to be flat to up 3% for the year. Looking at each segment, we estimate a combined ratio in the range of 92% to 96% in our property and transportation group. Net written premiums in this group are estimated to be up 3% to 7% for the year. Our guidance assumes a normal level of crop earnings. We expect our specialty casualty group to produce a combined ratio in the range of 91% to 95%. Net written premiums are expected to be down 2% to up to 2%. Net written premiums guidance includes low [Technical Difficulty] in our workers comp businesses. And these items will be offset by a full year premiums from ABA Insurance Services. Specialty financial group combined ratio is expected to in the range of 86% to 90%. Our projections for growth in net written premiums are in the range of 3% to 7%. We expect modest growth across all of the businesses in this group and continued strong results. Net investment income is expected to be flat to up 4% year-over-year. As noted earlier, 2018 results were exceptionally strong primarily due to the strong performance of limited partnerships and similar investments, which we don't expect to continue. We expect overall property and causality renewal pricing in 2019 to be flat to up 2%. [Technical Difficulty] discussion over to Craig to review the results in our annuity segment and AFG's investment performance.

Thank you, Carl. I'll start with the review of our annuity results for the fourth quarter beginning on slide 8. Statutory annuity premiums were $1.48 billion in the fourth quarter of 2018, an increase of 63% from the prior year period establishing a new record for premiums in a quarter. Significant growth in sales of FIAs in the broker-dealer and retail markets, as well as higher year-over-year sales in our financial institutions channel, contributed to these record results. I am also pleased to report record sales of $5.4 billion for the full year which we achieved while maintaining pricing discipline. Production in our retail and broker-dealer markets continuously particularly strong due to the launch of several new products and our efforts to expand our distribution within both of these channels. Turning to annuity results. Pretax annuity earnings were $20 million in the fourth quarter of 2018 compared to $97 million in the fourth quarter of 2017. Pretax annuity earnings before fair value accounting for fixed index annuities and unlocking were $71 million in the fourth quarter of 2018, down 36% from the prior year period. The fourth quarter decrease in the S&P 500 had an unfavorable impact of $57 million on pretax annuity earnings compared to a favorable impact of $16 million in the four quarter of 2017. I will review this in more detail as we discuss slides 9 and 10. On slide 9, you will find components of pretax earnings before fair value accounting for FIS and unlocking. The S&P 500 Index decreased 14% in the fourth quarter of 2018. This poor stock market performance adversely impacted pretax annuity earnings before fair value accounting for FIS particularly FIS would guarantee benefits by $30 million or $0.26 per share. If the stock market performance reverts back to our long-term expectation over the life of these policies, a substantial portion of this unfavorable impact would be expected to reverse. The components of fair value accounting for FIS are shown on slide 10. Under GAAP rules, a portion of the reserves for fixed index annuities is considered to be an embedded derivative and is recorded at fair value based on the estimated present value of certain expected future cash flows. Assumptions used in calculating this fair value include projected interest rates, option cost, surrenders, withdrawals and mortality. Variances from these assumptions as well as exchanges in the stock market were generally resulting at a change in fair value. Items such as changes in interest rates and performance of the stock market are not economic in nature for the current reporting period, but rather impact the timing of reported results. The impact of fair value accounting for Fixed Index Annuities includes an ongoing expense for annuity interest accreted on the FIA embedded derivative reserve. The amount of interest accreted in any period is generally based on the size of the embedded derivative and current interest rates. We expect both the size of the embedded derivative and interest rates to rise, resulting in continued increases in interest on the embedded derivative liability. In the fourth quarter of 2018, the 14% decline in the S&P 500 Index contributed to a significant unfavorable fair value accounting impact of $27 million, or $0.24 per share for the quarter. The majority of this impact is non-economic and is expected to reverse over time, even in the absence of a stock market recovery. By comparison, in the fourth quarter of 2017, the benefit of a higher stock market resulted in a $9 million favorable impact. The fourth quarter of both years reflected lower than expected changes in interest rates, resulting in negative, non-economic impacts on earnings. I am pleased that our annuity segment earned an after tax operating return on equity in access of 12% for the full year of 2018 despite the impact of the poor stock market performance in the fourth quarter and the year. For additional analysis of fair value accounting, see our quarterly investor supplement which is posted on AFG's website. Turning to slide 11, you'll see that AFG's quarterly average annuity investments and reserves grew approximately 12% and 10% respectively year-over-year. A benefit of this growth was partially offset by the runoff of higher yielding investments. Please turn to slide 12 for a summary of the 2019 outlook for the annuity segment. We expect annuity earnings before the impact of fair value accounting for FIS and unlocking to be in the range of $435 million to $465 million. We estimate the pretax annuity earnings will be in the range of $365 million to $425 million. Finally, we expect that our 2019 full year annuity premiums will be down slightly from the $5.4 billion reported in 2018. Although our guidance reflects the introduction of new products and opportunities to grow our business and the registered index advisor and broker dealer markets, we continue to emphasis earnings the appropriate return on our new sales regardless of the competitive environment. Additional information on the annuity segment earnings, premiums, investments and reserves can be found AFG's quarterly investor supplement posted on our website. Please turn to slide 13 for a few highlights regarding our $48.5 billion investment portfolio. AFG reported fourth quarter 2018 net realized losses on securities of $188 million after tax and after deferred acquisition costs. This compares the net realized gains on securities of $4 million in the fourth quarter of 2017. Approximately $179 million of the realized losses recorded in the fourth quarter of 2018 pertain to securities at AFG continued to hold at December 31, 2018. Through January 29, 2019, the equity securities hold at December 31, 2018 have increased in value by approximately $100 million after tax and after DAC effectively reversing more than half of the fourth quarter loss. As of December 31, 2018, net unrealized gains on fixed maturities were $83 million after tax and after DAC. As you will see on slide 14, our portfolio continues to be high quality with 91% of our fixed maturity portfolio rated investment grade and 98% within NAIC rating of 1 or 2, its highest two categories. We provided additional detailed information on the various segments of our investment portfolio in the quarterly investor supplement on our website. I'll now turn the discussion over to Jeff; he will wrap our comments with an overview of our consolidated fourth quarter 2018 results and share a few comments about capital and liquidity.

Thank you, Craig. Slide 15 summarizes AFG's fourth quarter consolidated core operating earnings results. AFG reported core EPS of $1.75 in Q4, 2018. Core net operating earnings in the quarter were $159 million. The year-over-year decrease in core earnings in the 2018 fourth quarter from the record levels in 2017 fourth quarter was primarily the results of the lower operating earnings in our insurance businesses which Carl and Craig have detailed for you earlier in the call. This is partially offset by lower interest and other corporate expenses and a lower effective tax rate. Interest and other corporate expenses had a favorable variance of $18 million. Parent company interest expense decreased by $4 million year-over-year as a result of our 2017 debt re-financings. The impact of lower expenses related to certain employee benefit plan was a primary driver of $14 million reduction in other expenses year-over-year. As a reminder, starting in Q1 of 2018, this line also includes income and expenses related to AFG's previously reported runoff lines of business. The impact of fair value accounting for FIS is a notable item on this page 15, and we further enhanced our investor supplement. For those of who you are making estimates in the quarter for the impact of fair value accounting, this appears in the supplement as a new page 14. A general rule of thumb, for a parallel shift in rate each 10 basis points change in the average 5 and 15 year corporate A2 rate as compared to the expected change indicated by the forward curve at the outset of each month, impacts fair value accounting by $7 million pretax. Another rule of thumb is that the impact of a 1% change in the S&P 500 impacts fair value accounting by approximately $2 million pretax. Applying these rules of would allow our users to estimate those components of the fair value accounting adjustments attributable to changes in interest rate, changes in the stock market. In addition, we've also added a new supplement page 13 which shows you the impact on annuity earnings of certain other variable items. Note there is an addition of 1% stock market change rule of thumb that impacts annuity earnings before fair value accounting by an addition of $1 million to $2 million, bringing the total estimated rule of thumb impact on overall annuity earnings of 1% change in the S&P 500 to combined $3 million to $4 million. A portion before of fair value accounting and a portion included within fair value accounting. We've also added a new page 26 to the supplement which analyzes investments mark to market through investment income and investment accounted for using the equity method. For example, fourth quarter 2018 property and causality net investment income of $115 million exceeded our expectations due to the 13.8% annualized yield recorded from these investments in the quarter. Compared to our normalized assumptions of 8% to 10% for these assets, which consist primarily of investments in limited partnerships and similar investments in invested private equity, real estate and other opportunities and which are accounted for using the equity method. Slide 16 provides a reconciliation of core net operating earnings to net earnings. AFG have adopted ASU2016-01 effective January 1st, 2018 which requires holding gains or losses on equity securities to be recognized in net earnings. The impact to our income statement will vary each quarter depending on the performance of the securities held in our equity portfolio. In the fourth quarter of 2018, AFG recognized the $188 million or $2.08 per share in net after tax realized losses. Turning to slide 17, AFG's adjusted book value per share was $54.86 as of December 31, 2018. Growth in book value per share post dividend was a strong 10.8% for the full year 2018. We've returned $170 million to our shareholders in the fourth quarter with the payment of our regularly quarterly dividend and a payment of $1.50 per share special dividend. Share repurchases totaled $6 million in the quarter. Parent cash was $160 million at the end of the fourth quarter. We maintained sufficient capital in our insurance businesses to meet our commitment to rating agencies. Our excess capital stood at approximately $690 million at December 31, 2018. Remember, we plan to hold an approximately $200 million to $300 million in dry power to maintain flexibility for opportunities as they arrive. Our management team reviews all opportunities for deployment of capital on a regular basis. To wrap up, page 18 shows a single page presentation of our updated 2019 core earnings guidance. Our guidance assumes an effective tax rate of approximately 20% on core pretax operating earnings. AFG's expected 2019 core operating results excluding non-core items such as realized gains and losses and other significant items that may not be indicative of ongoing operation. Now we would like open the lines for any questions.

Our first question comes from the line of Greg Peters with Raymond James. Your line is now open.

Thank you and good afternoon. Thanks for taking my questions. I had a couple of questions for you on the property casualty business and a question on the annuities; property-casualty-- a number of companies have reported results so far for the fourth quarter and commercial auto seems to be quite topical and you don't know whether it's travelers whether it's Travelers, Old Republic or others have talked about achieving additional rate increases and in continuing rate inadequacy an outline, I thought maybe you could spend a minute and talk about your experience in commercial auto?

Hi, Greg. This is Carl, happy to do that. Overall we are very pleased with the performance of our commercial auto business center or transportation part of our business. National Interstate and Great American trucking are achieving our combined--our combined ratio targets and our return targets in that. We have been at that for a while where 2018 was our seventh year of rate increase and we are continuing to take rate, so hope that answers your question.

Okay. I know Jeff answered-- addressed this little bit on the third quarter call, but it's worth coming back and revisiting looking at some of the disclosures and the supplements on the expense ratios for the property transportation casualty and specialty businesses are all up, if you look at it on year-over-year and I'm wondering if 2018 levels the expense ratio levels reported for the full year 2018 represents sort of the new normal going forward?

Hey, Greg this is Jeff. Thanks for the question. As related to the expense ratio if you look at on an annual basis that there's a lot that goes into that-- that is related to business mix. I think we talked about it last quarter but property and transportation, the crop business was down slightly and crop carried an inherently lower expense ratio and proportionate P&G represented by crop diminishes the expense ratio tends to drift upwards. In the specialty casualty segment, neon has grown. And Neon, by virtue of operating, it always has a higher expense ratio than the rest of our specialty casualty business and tends to cause that expense ratio to rise. Summit has performed very well in the specialty casualty segment. Last quarter we talked about how that means that all policyholder dividends that we bought in the expense ratio would tend to rise and also some of the employee compensation recruit there as well. And then finally international institutions that are generally stable, it really depends on what the underlying loss ratio is with specialty financial do tend to move opposite directions. In terms of going forward you know we certainly projected our business mix and as we look at it that will migrate, but I think you are much on solid ground if you-- if you stick at that level and as a business mix of all, and that certainly could cause things to change.

Great. Thank you for the color. Greg, real quickly in your commentary and guidance on-- I would like to focus on just the sales results, it looks like you reported nice gains in most of the channels for the full year except for the financial institutions channel. So I was wondering if you could provide us some color about what's going on in that specific channel and I recognize it was up quarter-over-quarter but for the full year it was down, and then, you don't use that as a sort of a launching pad, just give us some more perspective on why your projecting sales seems to be flat to down slightly for 2019?

Sure Greg. There clearly is more competition in the financial institutions channel as a result of a couple of things. Some of the-- a couple of the very large variable annuity players have now focused on indexed annuities and have recently entered that market and are competing against us and the some of the banks where we sell FIAs. I'm a little bit surprised if some of the banks have allowed a few lower rated companies that price very aggressively to sell through their channel well I was hoping that--that would not happen but there are some lower rated companies that are now selling in that bank channel. So I guess the combination of those two things that is resulting in a bit more of a competitive environment in that channel. In terms of the overall guidance of down slightly it's a-- it's a couple of things mainly we are comparing it to a fantastic premium year-- last year the premiums were well beyond their expectation or original guidance. We benefited last year from a couple of things. We are a bit quicker to change pricing on our annuities than many of our competitors. We are very disciplined in maintaining pricing that results in what we consider to be appropriate profitability appropriate returns. So in a rising interest rate environment like we experienced last year, we are quicker to make changes which helps us competitively-- that clearly helped premiums last year. Who knows what interest rates are going to do this year? We are starting out with a slight decline in rates and so we are not assuming we are going to benefit again from rates that are increasing at a reasonable rate. But the main thing Greg is we are comparing to a year of extremely strong premiums and look I hope that works up again this year, time will tell but anyway we thought it was prudent to assume the premiums are going to be down a little bit.

I understand them, they make sense. With your discussion around increased competition particularly in the financial institutions channel and I guess you noted that this may be broader based than the some of the other channels as well and indeed you mentioned in the commentary about your 12% return on equity is-- clearly you are focused on sustaining that, do you think there is going to be longer term structural dollar pressure on returns on capital in this business as a result of this competition?

I don't think so, Greg I don't think so, I think we are to be disciplined and we expect to continue to produce reality level of premiums at the appropriate rate of return.

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

Hi. Good afternoon gentlemen. I guess my first question is just on the guidance, so you are finishing the year by 840 but the midpoint of the guidance of the guidance-- new guidance is only about 2% higher year-over-year. I guess just what's kind of limiting your ability to grow this more in 2019?

Christ, this is Craig. One of the things that is a be in terms of guidance is for assuming a more than normal return year on assets that are mark to market-- last year was extraordinarily strong and we are assuming a more normal 8% to 9% return on the other significant assets that are mark-to-market.

Got it. And just, I guess like kind this is not one for you Craig, it's just-- what interest rate in spread-- assumptions do you have patent to the current guidance?

In the current guidance we are assuming that there's a moderate rise in corporate A2 rates, a rise of 15 to 25 basis points up from year-end levels which is in line with the forward curve when we put guidance in place. We are assuming a 7% increase in the S&P 500, 4% in the first quarter and then 1% in each subsequent quarter. And I just mentioned we are assuming returns on private equity and other investments that are mark to market of 8% to 9% versus a much higher number in 2018.

Okay Craig, that's very helpful. And then just and then on the P&C side, I don't know if it's Jeff or Carl but I guess what pricing trends are you guys seeing at Lloyds?

First, Christ welcome to our conference call. Great to have you. Pricing trends at Lloyd's are moving upwards that by design Lloyd just gone through a process designed to constrict capacity and in many cases had caused syndicates to exit various lines of business. And, so it in the fourth quarter we saw a rate increase across our book of business of 8% and Neon which we think is favorable. The market as a whole though needs to get more rates and so we look forward to seeing appropriate rate increases as we come through the odds. And Christ, in fact I can double back on your guidance question, two observations, in think you phrased the question what's limiting our ability to grow, we certainly have ample capital to grow our business. I don't think this is a growth limitation per se. Bear in mind I think you are focused on a point within $0.50 range that we issued for the upcoming year, and so at this point in time we assume things like a normal crop year, which you need to have a range of some scale to show how that goes. I think that also it's why at this point we are assuming catastrophe year for the business which for us tended to be about 1.5 points on a combined ratio over a very long period of time. And then, given all the discussion we had about our fair value accounting and when you look at the guidance range in annuity segment is promulgated in the DAC, it's wise to have a range for that. So we will able to give more specific about the range in subsequent quarters that we usually are, but right now I would just point to the fact that you can see in that range from outside. Overall thought it's one last observation if we come in at the midpoint of that guidance that's 15.5% after-tax return on capital, which is consistent with this year and we think that's a very competitive in our industry in our peer group.

Got it. It's very helpful. And just kind of one final question on the share repurchases, I meant not a ton in quarter, but I guessed you guys are buying back about mid 93 which would be about [1.7] multiple, I guess is it a fair assumption that, I mean that prices are much different now, that if you think about modeling buy-back, at these levels?

I mean what I would-- this is Craig, Chris what I would say is we are always evaluating different alternatives to put our excess capital to work and I mean I think with the purchases indicated that we thought that was a pretty attractive value to repurchase share. Having said that, we are always going to be comparing that to other opportunities to grow the business to make acquisitions and so forth.

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

Thank you. Almost all of my questions were answered. The only thing I had was on the other earnings. I guess you talked about lower employee benefit cost. I guess assumption is that was temporary thing. We shouldn't assume that to number that we saw in the fourth quarter continues going forward.

Hi, Jay. This is Jeff. And you are absolutely correct. When we look at that slide, the interest fees that's the new run rate after the debt refinancing. So that's where we will be but in terms of when you look at the supplement the previous quarter is more representative of a run rate than the fourth quarter. We would expect that to run somewhere in the $25 million to $28 million range per quarter.

Got it. I guess one of the questions and that is when the US corporate tax rate was reduced there were all kinds of theories of how that might affect the business. Are you seeing any repercussions from the corporate tax rate being reduced as far as the competitive environment goes?

This is Carl. I don't believe so. Again, we are -- when you look at our four quarter, we were able to take rate actually up to 2%. We are maintaining the margins at pretty substantial returns on equity overall and within the property and causality group. If anything those competitors that lost the low tax advantage maybe have had to price a little bit forward in order to achieve even the same returns.

Yes. And I had the same observation. It's interesting again and lot of theories going into this but we will see things change but thanks for that insight, that's helpful.

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

I think there is a little bit follow up to the annuity returns on these asset portfolios. If I look at the ratio of net investment income to your annuity benefits, it looks like a peaked in third quarter and then sort of it consistently fallen. But -- and I am just sort of scratching my head just because it -- if I look at some other folks it's been more consistently up as people rolled over to into higher interest rates. Is that reflective of this sort of investment partnership income that you are talking about or are there things in there? And are we kind of today at the run rate or is that run rate lower than it would normally be?

Yes, Paul, this is Craig. I have going to have take a look at that. I mean obviously assets are growing at a pretty good clip. Reserves are growing at a pretty good clip. So I am going to have to take a look at that because I think the trend in investment income is going to be up. Now, if you are looking quarter-by-quarter you can't get some swings as a result of different returns on mark-to-market assets. And for the annuity groups the returns although they were still decent returns, they were lower in the fourth quarter than the previous three quarters. We give that in schedule and the supplement, let me just -- let me see if I have that.

I am kind of looking at page 16 of the supplement.

Go to -- go to page 26 of the supplement for a minute and you'll see that in the fourth quarter of the investment accounted for by using the equity method returns 7.1% in the quarter versus 12.4% for the full year. So higher numbers in previous quarters this year. Let me go to the schedule that you are talking about. See if I can figure it out.

So I guess that would match up more or less with the schedule 116

Yes. So, Paul, this is Jeff. I have to say it's always great to get somebody else's perspective because what you calculated is ratio; we will get arithmetically not as a division so that page 16 presents investment income as a percent of investment and interest credited. And what you with this ratio if you look at in that spread, so you are right that ratio or that spread would have crested in previous quarters of 2018. So when you look at the interest credited, it's fairly stable. So all of that changes in that ratio or net spread are driven by what Craig just went through which is the changes underlying in investment income. So I think we've come to conclusion on what you are looking at. With that disclosure on the mark-to-market assets, helped you look over a bit deeper as what's going on there.

And Paul if you look year-to-year, look at the comparison over in the right hand side, it's 473 versus -- in 2018 versus 463 in 2017.

Our next question comes from DeForest Hinman with Walthausen. Your line is now open.

Hi. Thanks for taking the questions. You guys been at through on kind on the annuity side, big picture question, slight yield curve doesn't happen often but in course of your careers it probably happened couple times. Can you kind of fill us all in, in terms of how that might impact behavior in the annuity business from a new product development, surrender charges, surrender fees, maybe why don't we start there?

Yes. DeForest, this is Craig. First of all, our product is generally are quite a bit shorter than many of our competitors. Our commissions that we pay are somewhat lower I think on average they are 0.5 lower than the average commission paid by our competitors. In terms of change in product development, I don't know that there is a big change, there appears to be demand for even shorter products. We are rolling out -- we just rolled out a three year product that we think is going to going to sell pretty well. But I don't know that there is any huge change in product. There is only, frankly as a result of the current flattening of the yield curve.

Okay. And maybe just a different way of asking the same question. You guys have your own outlook, once again I am not looking at it little bit different than you but I love to hear your opinion. Short term CD market, brokered CD there seen some pretty attractive yield. Are we playing in a different space? Are we going to be competing with the same money when it comes to bank partners or some of our brokers' relationships where they maybe have more options than they have had in the past? And is that factored into that outlook for annuity volumes into 2019?

Yes. It's factored into -- in our outlook and our guidance.

Our next question comes from the line of Amit Kumar with Buckingham Research.

Thanks and good afternoon. Just, I guess, 2 quick follow-ups. I know we are coming up on the hour. The first question goes back to the comment, I think, you made on the Singapore branch. I think you mentioned some re-underwriting actions, et cetera. And I just wanted to get some more color around it and how should we think about that piece going forward? That's question one.

Yes, we've -- in our Singapore -- this is Carl, Amit. Our Singapore branch is a start-up unit. It's in its early stages. We -- we probably built the unit a little bit more rapidly and broader than we wanted initially. And we've had to backtrack some, which has caused the premiums to decline this past year, and as we've taken some actions both pricing and underwriting-wise in that. And so our focus is on big improvement in that business going forward. From an expense ratio standpoint, it is only a couple of years old so it takes you a while to get where you want when you have a start-up business like that. So we're working on it.

Got it, that's helpful. The second question I had was I guess the somewhat of beating the dead horse and going back to the discussion on commercial auto. And I was wondering if you could just revisit or maybe expand on the trend difference between smaller commercial and the long haul piece of it?

Amit, this is Jeff. Are you asking about the differential and competitive dynamics?

All for you, both, both would be helpful.

National Interstate and the Great American Trucking, they are two primary units that are operating in that space. The Great American Trucking focuses on independent contractors and physical damage coverages. So that wouldn't really be a factor. And National Interstate, they are -- their secret sauce, if you will is the captive model and the two third of the business there has ARG element to it which helps us in risk collection. The history of National Interstate is they started and passed through transportation and do have a trucking component. But we feel like the AIRT where you are banding together homogenous customers who all have skin in the game and interest in good performance kind of insulates us from that competitive dynamic. Bigger picture by reputation, big fleet trucking which is a low margin business has a reputation is intensely competitive because every dollar spent on insurance cuts into those razor thin margins. So we don't want to play where we don't have an edge or an opportunity to make out quick returns.

Got it. That's helpful. The final question I had was I know someone else had talked about the pricing component. And could you just sort of flush out, I guess, the comp piece of it? And how should we think about that pricing going forward? Thanks.

Yes, I mean, overall, very -- we're, obviously, very pleased with our combined workers' comp book. This past year had a very healthy accident year and a healthy calendar year on the business in that. Our perspective next year kind of build into guidance premiums will probably be down some. Rates in Florida and in California, rates would probably -- with pricing changes, there could be another double-digit -- 10%-ish to 12%-ish price decline in California comp and in the Florida component of Summit in that. I think in 2019, premiums will be down low single digit. And -- but I think we're still going to make a small accident year underwriting profit and a pretty healthy calendar year underwriting profit this year. Our businesses have a very nice strong reserve position, and so continue to be very pleased with workers comp. End of Q&A

And I am showing no further questions in queue at this time. I'd like to turn the call back to Ms. Diane Weidner for closing remarks.

Thank you and thank you all for joining us this morning as we review our fourth quarter and full year results. We look forward to talking with you all again next quarter.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. And you may now disconnect. Everyone have a great day.