NU Online News Service, July 31, 3:13 p.m. EDT

After reporting an increase in second-quarter profit, American Financial Group says it has reduced its earnings guidance for 2012 over potential losses in its crop-insurance line.

Carl H. Lindner III and S. Craig Lindner, American Financial Group's (AFG) co-chief executive officers, say in a statement that drought conditions throughout the United States will “adversely impact 2012 crop insurance profitability,” and the specialty commercial insurer dropped its earnings guidance by $0.50 per share, “although the precise impact on AFG's core operating earnings is uncertain.”

AFG stock was selling at about $37.75 during the afternoon of July 31.

Carl Lindner says during an earnings conference call that the company performed stress tests on the “key premiums states” of Illinois, Indiana, Iowa, Kansas and Missouri. The guidance reduction also took into account AFG's use of quota share and stop-loss reinsurance, which the CEO says covers the insurer for a 1-in-250-year event.

When asked about pricing, Carl Lindner says he predicts the industry will “continue to see pricing traction for the rest of this year and probably into next year” due to low interest rates putting pressure on returns on equity.

AFG says three-quarters of its P&C business received price increases through the first six months of 2012.

Second-quarter net income attributable to shareholders was $99 million, compared to $48 million during the same period a year ago. As of June 30 AFG has turned a profit of $212 million compared to $136 million a year ago.

The group's property and transportation and specialty casualty operations each increased underwriting profit during the second quarter, compared to 2011's second quarter. Property and transportation booked a second-quarter underwriting profit of $6 million compared to a $3 million loss a year ago. Second-quarter net written premiums were 3 percent higher than in 2011 due to premium increases in crop, property, inland marine and ocean marine lines.

Specialty casualty recorded underwriting income of $33 million during the second quarter, compared to $17 million in 2011 during the same time. Higher premiums in workers' compensation, excess and surplus and international operation drove a 16 percent growth in second-quarter net written premiums. Pricing was up about 4 percent for the quarter, AFG says.

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AFG Drops Earnings Guidance Due to Potential Crop Losses

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