A&E Charges Dent American Financial 2Q

American Financial Group saw second-quarter net income nearly cut in half, with more than $50 million in charges to strengthen asbestos and environmental reserves contributing heavily to the decline.

Last night, the Cincinnati-based specialty insurer reported net income of $67.0 million, or 54 cents per share, for the 2007 second quarter, compared with $122.9 million, or $1.02 per share, in second-quarter 2006.

The second-quarter 2007 result included the impacts of an A&E reserve charge of $28.7 million related to property-casualty operations in runoff, and an additional $27.7 million A&E charge for exposures related to former railroad and manufacturing operations and sites.

In second-quarter 2006, $25.8 million in real estate gains also helped the bottom line. The absence of similar gains this year contributed to an unfavorable year-over-year comparison.

Excluding the impacts of the real estate gains and A&E charges, core earnings for the second quarter grew 22 percent to $114.2 million, or 93 cents per share, compared with $93.4 million, or 77 cents per share in second-quarter 2006.

Favorable developments on prior-year reserves for non-asbestos and non-environmental liabilities amounting to $45 million helped push underwriting profits to $114.6 million overall. In the 2006 second quarter, such prior-year favorable developments only amounted to $12.2 million.

A lower level of catastrophe losses helped the company record better underwriting results for core operations in second-quarter 2007. Catastrophe losses were $5 million in second-quarter 2007, compared with $12.2 million in second-quarter 2006.

Including the impacts of favorable developments and catastrophe losses, but not the A&E charges, the second-quarter combined ratio improved 5.7 points overall--to 81.8 from 87.5 in last year's second quarter.

The reserve releases took 7.1 points off the combined ratio in second-quarter 2007, and 2.0 points off the second-quarter 2006 combined ratio.

The two A&E charges taken together added 7.1 points to American Financial Group's overall second-quarter 2007 combined ratio, which was 81.8 excluding the charges and 88.9 including them.

On the top line, American Financial reported gross written premiums of $972 million, down 1 percent from $980 million in second-quarter 2006. Net premiums edged up slightly--to $681 million in second-quarter 2007 compared with $672 in second-quarter 2006.

The company noted that even though California workers' compensation was its smallest business segment--accounting for just 8 percent of overall net premiums--the impact of rate declines in this $57 million business was significant. Excluding this business, net premiums increased 4 percent, the company reported.

With a combined ratio of 80.2, California comp was the second most profitable business line for the company. The specialty casualty business segment, consisting of excess and surplus, general liability, professionally liability and custom programs, with premiums of $209 million, was the most profitable, posting a combined ratio of 68.3 in the second quarter.