Earnings Call Transcript - AFG Q4 2025

Diane P. Weidner, Vice President, Investor Relations

Thank you. Good morning, and welcome to American Financial Group's Fourth Quarter and Full Year 2025 Earnings Results Conference Call. We released our results yesterday afternoon. Our press release, investor supplement and webcast presentation are posted on AFG's website under the Investor Relations section. These materials will be referenced during portions of today's call. Joining me this morning are Carl Lindner III and Craig Lindner, Co-CEOs of American Financial Group; and Brian Hertzman, AFG's CFO. Before I turn the discussion over to Carl, I would like to draw your attention to the notes on Slide 2 of our webcast. Some of the matters to be discussed today are forward-looking. These forward-looking statements involve certain risks and uncertainties that could cause our 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 in responses to questions. A reconciliation of net earnings to core net operating earnings is included in our earnings release. And finally, if you are reading a transcript of this call, please note that it may not be authorized or reviewed for accuracy. And as a result, it may contain factual or transcription errors that could materially alter the intent or meaning of our statements. Now I'm pleased to turn the call over to Craig Lindner to discuss our results.

Craig Lindner, Co-CEO

Good morning. I'll begin by sharing the highlights of AFG's 2025 4th quarter and full year results, after which Carl will walk through more details about our P&C operations and share AFG's business plan assumptions for 2026. We'll then open it up for Q&A, where Carl, Brian and I will respond to your questions. The fourth quarter marked a strong finish to a great year for AFG. Our compelling mix of specialty insurance businesses, entrepreneurial culture, disciplined operating philosophy and highly skilled team of in-house investment professionals collectively have enabled us to outperform many of our peers and continues to position us well for the future. Carl and I thank God, our talented management team and our great employees for helping us to achieve these results. As you'll see on Slide 3, AFG's core net operating earnings were $10.29 per share for the full year 2025, generating a core operating return on equity of 18.2%. This ROE is calculated using an average of the 5 most recent quarter-end balances of shareholders' equity, excluding AOCI. We closed out the year with an exceptionally strong fourth quarter. As you'll see on Slides 4 and 5, core net operating earnings per share were $3.65 per share, producing an annualized fourth quarter core return on equity of 25.2%. Capital management is one of our highest priorities. Returning capital to our shareholders is a key component of our capital management strategy and reflects our strong financial position and our confidence in AFG's financial future. In 2025, we returned over $700 million to shareholders, which included $334 million or $4 per share in special dividends, $274 million in regular common stock dividends and $99 million in share repurchases. Over the past 5 years, dividend payments and share repurchases have totaled $6.3 billion. Additionally, we increased our quarterly dividend by 10% to an annual rate of $3.52 per share beginning in October of 2025. Now I'd like to turn to an overview of AFG's investment performance and share a few comments about AFG's financial position, capital and liquidity. The details surrounding our $17.2 billion portfolio are presented on Slides 6 and 7. Looking at results for the 2025 4th quarter, Property and Casualty net investment income was approximately 12% lower than the comparable 2024 period as lower returns from alternative investments more than offset the impact of higher interest rates and higher balances of invested assets. For the full year ended December 31, 2025, P&C net investment income, excluding alternative investments, increased 5% year-over-year. Approximately 65% of our portfolio is invested in fixed maturities. In the current interest rate environment, we're able to invest in fixed maturity securities at yields of approximately 5.25%. The duration of our P&C fixed maturity portfolio, including cash and cash equivalents, was 2.9 years at December 31, 2025. The annualized return on alternative investments in our P&C portfolio was 0.9% for the fourth quarter of 2025 compared to 4.9% for the prior year quarter. Although the overall returns on our multifamily investments continue to be impacted by an excess supply of new properties in some of our targeted markets, we are seeing signs of recovery. New starts have fallen nearly 50% since 2022, and completions peaked in 2024 and are rapidly declining. We continue to believe that in the last half of 2026, the tightening supply and significantly reduced pipeline will drive higher rental and occupancy rates. Importantly, a sizable portion of our portfolio of multifamily properties is located in desirable geographies with strong job and wage growth. Longer term, we continue to remain optimistic regarding the prospects of attractive returns from our overall alternative investment portfolio with an expectation of annual returns averaging 10% or better. Please turn to Slide 8, where you'll find a summary of AFG's financial position at December 31, 2025. During the fourth quarter, we returned $240 million to our shareholders through the payment of a $2 per share special dividend in November and a regular $0.88 per share quarterly dividend. In conjunction with our fourth quarter earnings release, we declared a special dividend of $1.50 per share payable on February 25, 2026, to shareholders of record on February 16, 2026. The aggregate amount of the special dividend will be approximately $125 million. With this special dividend, the company has declared $55.5 per share or $4.7 billion in special dividends since the beginning of 2021. AFG ended the year in a strong capital position. Our leverage ratio was less than 28%. We have no debt maturities until 2030, and our insurance company financial strength ratings are at the A+ level for AM Best and Standard & Poor's. We expect our operations to continue to generate significant excess capital in 2026, which provides ample opportunity for acquisitions, additional special dividends, or share repurchases over the rest of the year. We evaluate the best alternatives for capital deployment on a regular basis. We continue to view total value creation, as measured by growth in book value plus dividends, as an important measure of performance over the long term. For the year ended December 31, 2025, AFG's growth in book value per share, excluding AOCI, plus dividends was 17.2%. We're extremely proud of the value we've created for shareholders over time. I'll now turn the call over to Carl to discuss the results of our P&C operations and our business plan assumptions for 2026.

Carl Lindner, Co-CEO

Thank you, Craig. Please turn to Slides 9 and 10 of the webcast, which include an overview of our fourth quarter results. Fourth quarter underwriting profit set a new quarterly record for AFG, led by exceptionally strong profitability in our crop insurance operations. Nearly all the businesses in our diversified specialty P&C portfolio continue to meet or exceed targeted returns, and we continue to feel confident about the strength of our reserves. We've assembled a diversified portfolio of Specialty Property and Casualty businesses that helps us navigate the peaks and valleys of the insurance cycle and respond to changing economic conditions. The non-correlation of many of our businesses, both with each other and to the broader insurance market, has been instrumental to AFG's strong and consistent performance over many years. Turning to Slide 9, you'll see that underwriting profit in our Specialty Property and Casualty insurance businesses grew 41% and generated an outstanding 84.1% combined ratio in the fourth quarter of 2025, an improvement of nearly 5 points from the prior year period. Results for the 2025 4th quarter include 2 points related to catastrophe losses compared to 1.1 points in the 2024 4th quarter. Fourth quarter 2025 results benefited from 1.6 points of favorable prior year reserve development compared to 1.8 points of adverse prior year reserve development in the fourth quarter of 2024. Fourth quarter 2025 gross written premiums were up 2%, and net written premiums were down 1% when compared to the same period in 2024. For the full year, gross written premiums increased 2%, and net written premiums were flat. As noted, we continued to benefit from the diversification across our 36 businesses and achieved premium growth in many of them as a result of a combination of new business opportunities, a good renewal rate environment, and increased exposures, while remaining disciplined and focused on underwriting profitability in some of the more challenging markets. Average renewal rates across our Property and Casualty Group, excluding workers' comp, were up approximately 5% for the quarter, in line with the previous quarter. Average renewal rates, including workers' comp, were up approximately 4% overall. We've reported overall renewal rate increases for 38 consecutive quarters, and we believe we are achieving overall renewal rate increases in excess of prospective loss ratio trends allowing us to meet or exceed targeted returns. Now I'd like to turn to Slide 10 to review a few highlights from each of our Specialty Property and Casualty business groups. Details are included in our earnings release, so I'll focus on summary results here. The businesses in the Property and Transportation Group achieved an outstanding 70.6% calendar year combined ratio in the fourth quarter of 2025, an improvement of nearly 19 points from the comparable 2024 period. Record yields for corn and soybeans and favorable commodity pricing trends throughout the growing season contributed to a very strong crop year and lower year-over-year catastrophe losses in our property exposed businesses were drivers of these exceptional results. Fourth quarter gross written premiums for 2025 in this group increased 5% from the comparable prior year period for the fourth quarter of 2025, while net written premiums were approximately 2% lower year-over-year. The increase in gross written premiums was due primarily to growth in our crop products that are heavily ceded and to a lesser extent, growth in a transportation captive that has higher premium sessions. Overall renewal rates in this group increased approximately 6% on average in the fourth quarter of 2025, consistent with pricing in the previous quarter. Pricing for the full year for this group was up approximately 7% overall. We continue to remain focused on rate adequacy, particularly in our commercial auto liability line of business where rates were up approximately 15% in the fourth quarter and up 14% for the full year. The businesses in our Specialty Casualty Group achieved a 96.7% calendar year combined ratio overall in the fourth quarter, 5.3 points higher than the 91.4% reported in the comparable period in 2024. Combined ratios at this level for these longer-tailed lines of business typically generate returns on equity in the high teens or better. Fourth quarter 2025 gross and net written premiums increased 2% and 3%, respectively, when compared to the same prior year period. Primary drivers of growth included new business opportunities, favorable renewal pricing in our targeted markets business, new business opportunities in our mergers and acquisition business, growth in our workers' comp businesses, and new premiums from one of our start-up businesses. Growth was tempered by lower year-over-year premiums in our executive liability and excess and surplus lines business, where we experienced heightened competitive pressures for both new and renewal business. Overall, renewal pricing in this group was up about 5% during the fourth quarter. Average renewal pricing, excluding workers' comp, was up 6% in the fourth quarter. For the full year, pricing excluding workers' comp was up about 8%. I continue to be pleased that we continue to achieve renewal rate increases of 10% or better during the quarter and several of our social inflation exposed businesses, including our social services and excess liability businesses, with full-year increases across these lines in the range of 13% to 15%. In addition, our workers' compensation businesses collectively achieved a modest pricing increase during the quarter, similar to our results in the third quarter. Moving on to the Specialty Financial Group continued to achieve excellent underwriting margins reported an excellent 83 combined ratio for the fourth quarter of 2025, 2.3 points higher than the prior year period. Fourth quarter 2025 gross and net written premiums in this group decreased by 4% and 10%, respectively, when compared to the same prior year period. Higher year-over-year premiums in our European operations were more than offset by lower premiums in our financial institutions business, which has produced very strong growth over the past several years. Net written premiums were tempered by our decision to cede more of the coastal exposed property business in our financial institutions business beginning in the second quarter of 2025. Now as we look to 2026 in lieu of providing formal earnings guidance, we have provided several key assumptions underlying our 2026 business plan, which you'll see summarized on Slide 11. We believe these assumptions are among the most relevant and helpful to analyst investors in modeling AFG's business and informing an investment thesis. These assumptions for 2026 include growth in net written premiums of 3% to 5% from the $7.1 billion reported last year, a combined ratio of approximately 92.5%, a reinvestment rate of approximately 5.25%, and an annual return of approximately 8% on our $2.8 billion portfolio of alternative investments. We expect that performance in line with these assumptions would result in core net operating earnings per share of approximately $11 in 2026 and generate a core operating return on equity, excluding AOCI, of approximately 18%. As we consider our outlook on growth, we're optimistic about several of our start-up businesses and the near completion of numerous underwriting actions taken in our Specialty Casualty businesses. However, we're mindful of pockets of softening rates and continued competitive conditions, and we'll maintain our disciplined bottom line focus as we pursue opportunities to grow profitably in 2026. Our assumptions include an average crop year. So we believe that the combination of our reserve strength, a continued healthy rate environment, prudent growth and the ability to invest at a rate that exceeds our current portfolio yield positions us well as we enter 2026. Craig and I are pleased to report these exceptionally strong results for the fourth quarter and full year, and we're proud of our proven track record of long-term value creation. Our insurance professionals have exercised their Specialty Property and Casualty knowledge and experience to skillfully navigate the marketplace, and our in-house investment team has been both strategic and opportunistic in the management of our $17.2 billion investment portfolio. We look forward to continuing to build long-term value for our shareholders this year and beyond. I will now open the lines for the Q&A portion of today's call. Craig, Brian, and I would be happy to respond to your questions.

Operator, Operator

Our first question comes from Hristian Getsov from Wells Fargo.

Hristian Getsov, Analyst

My first question is on the 2026 business plan. I guess, what does that business plan assume in terms of rates relative to the 5% P&C renewal pricing ex comp we saw in the Q4, and is there any assumption of prior period releases in the 92.5% combined ratio target?

Brian Hertzman, CFO

When considering our overall combined ratio, we are not specifically accounting for any prior year development. Historically, AFG has been conservative and has experienced favorable development in most periods. While we are not immune to adverse development, we are optimistic that our reserving strategy positions us for a greater likelihood of favorable development rather than adverse. Looking ahead to 2024 through 2026, we have seen unexpected favorable development in workers' compensation for 2024 and 2025, although this has been counterbalanced by adverse development and social inflation in certain businesses as we approach 2026. While we cannot predict the future, we anticipate that workers' compensation may not maintain the same level of favorable development it has shown in the past. However, due to the measures we have taken regarding rate adjustments and reserving, we do not expect to see a recurrence of adverse development in our casualty lines. Regarding pricing, we are confident that we can continue to achieve beneficial price increases where necessary. Some sectors, like our financial institutions, have seen a moderation in rate increases, but they remain very profitable and at manageable levels.

Hristian Getsov, Analyst

Got it. For the quarter, we observed a notable increase in the casualty underlying loss ratio. Was there any change in loss picks, or was this primarily a reflection of a conservative approach due to ongoing high loss trends? Additionally, was there something specific in the quarter that contributed to this change? Would this pick be something we could expect to maintain going forward? Any further insights would be appreciated.

Brian Hertzman, CFO

Sure. When you examine the accident year loss ratio, excluding catastrophes for the Casualty Group this quarter, you'll notice ongoing caution regarding our businesses exposed to social inflation, such as our central services, public entity, and certain excess liability operations where we have observed some small adverse developments recently. Therefore, we are being careful in our current selections. Additionally, considering our relatively small portfolio in California workers' compensation insurance, particularly with the current legal landscape and issues like cumulative trauma, we are also exercising caution in our accident year selections there. Coupled with the rate increases we have achieved and are achieving, we are optimistic that these loss selections will enhance our chances for favorable developments in future periods.

Operator, Operator

Our next question comes from Gregory Peters from Raymond James.

Gregory Peters, Analyst

I guess I just wanted to follow up on the workers' comp comments, Brian. Was there something unusual in the frequency or medical trend in a particular state this year that led to the results you reported, or was this across the book? And I was interested in your comment about cumulative trauma. I know that's popped up and is on the radar for other workers' comp companies. I wonder if you could provide some color on how you're viewing that risk right now.

Carl Lindner, Co-CEO

For the most part, our loss ratio trends continue to be favorable, and the positive trends in frequency and severity are not unusual. Our overall results for workers' comp, both on a calendar year and an accident year basis in 2025, remain excellent. However, the calendar year combined ratio for our overall workers' comp business in 2025 was a few points higher than last year, which I've noted regularly. We expect a similar trend to occur in 2026. The good news is that results continue to be strong, and we anticipate that workers' comp will remain a very profitable line, with California being the exception. The industry in California likely has a combined ratio exceeding 120. In September, there was an approval for a rate increase of about 8.7%, and we're looking at a 10% price increase in the fourth quarter. This indicates a growing strength in the competitive environment in California, which is encouraging. While our combined ratio is not over 120, we are not satisfied with it and are actively working to improve it. California is likely the only state with this issue. The cumulative trauma does affect our California comp subsidiary, but we have been considering this in our loss reserve estimates for years, so it's not a surprise. Last year, our workers' comp business overall grew about 1%, and we experienced a modest price increase in the fourth quarter. Looking ahead, we expect to see 3% to 5% overall growth in workers' comp this year, which is positive. I hope this answers your questions.

Brian Hertzman, CFO

Just to add on that same subject, just to size that California workers' comp business, is less than $200 million of net written premium for the year.

Carl Lindner, Co-CEO

Yes. It's less than 15%.

Brian Hertzman, CFO

It's not a real big portion of our workers' comp business that in our overall business, but we do react to what we're seeing in the environment overall, both in setting our reserve picks and also, more importantly, informing us what we need to do from rate increases, leading to things like the near 10% in the fourth quarter.

Gregory Peters, Analyst

Got it. During your comments, you also highlighted start-up businesses. Could you spend a minute sharing more information about what's driving the start-up businesses and your expectations, especially considering that the broader property and casualty market seems to be softening? I'm curious about the areas of the market where you see potential opportunities.

Carl Lindner, Co-CEO

Yes. We've every year, we make investments, and we start up businesses in that. And I think after making some investments and grinding through the early start-ups and a few things, so we're beginning to see some success and progress in things like specialty construction. We have E&S binding business, we would expect to see some more premium in that area. So areas like that, we have 4 or 5 different start-ups that I think will begin to show more progress in that. And the Embedded Solutions area, I think, is an area, a new area for us that we're excited about, and we think will bear some fruit this year.

Gregory Peters, Analyst

My final question, and I know you've commented on this before, but the crop business. Is there any spillover into the first half of '26 from the results of the 25-year crop year?

Carl Lindner, Co-CEO

Yes. There always is based off of area coverage results for a reinsurance year or some citrus and that type of thing. We obviously had a very strong year, and so usually, there's always a true-up in the first quarter, and I think we'd be positive that there will probably be some positive true-up as the crop reinsurance here. And as you know, we're kind of in the February discovery period for commodity prices and that. And I mean, so far, as it relates to spring discovery, if the prices kind of remain kind of where they've been, it looks like corn is discovery futures price down maybe 3%, soybeans up 2%, but that would mean good things as far as stability on the premium base. I think if we have that kind of a scenario, I think we'd be looking at seeing the crop business maybe even grow a little bit, assuming spring discovery prices stay in the range that they are right now.

Operator, Operator

Our next question comes from Michael Zaremski from BMO.

Dan, Analyst

It's Dan on for Mike. My first one, just sticking with the Property and Transportation segment. So is the current accident year improvement this quarter just driven by favorable crop, or what are you seeing in the other businesses in that segment? I understand maybe those are performing a little bit better, too. I'm just trying to get a better sense of the run rate there.

Brian Hertzman, CFO

Certainly. The significant reason for the lower loss ratio and expense ratio in Property and Transportation is the strong crop results. The other businesses in that segment are performing well and are stable. In our annual statements, you will notice that we remain cautious in our loss estimates for commercial auto liability, similar to our approach in casualty. However, we are seeing very strong results overall in this segment. In commercial auto liability, even with our cautious approach to loss estimates, we are still achieving a small underwriting profit for the year. To normalize things, the strong performance can be attributed to this year's above-average crop, while we anticipate 2024 to be more average and then look ahead to 2026, where our models account for an average crop year compared to this year's strong results.

Dan, Analyst

Okay. That's helpful. Then switching gears maybe to Specialty Financial and specifically on the lender-placed business there. Just curious about what drove the inflection in pricing a little bit sequentially from plus 1 from minus 2 in the prior quarter. And then bigger picture just with increased political focus on personal lines profitability. Is there any concern about that business just from a political lens on the lender placed?

Carl Lindner, Co-CEO

No, I don't think we have any concerns on the political side. The farm bill has actually been extended until September 2026, and it has support from both Republicans and Democrats. Regarding pricing, our customers typically consist of large groupings of properties, which can vary from quarter to quarter. For instance, a client with coastal property may require a higher price compared to an account without such exposure. So, there's always going to be some variability in pricing. That said, this business remains highly profitable, and I believe rates have stabilized. There is an ongoing effort to focus on replacement cost value rather than unpaid mortgage balance, which is beneficial for the business. As I noted, in the second quarter of last year, we decided to reduce our exposure to coastal properties, which impacted us primarily in the latter half of the year. This year, we anticipate low single-digit growth in this business, all factors considered.

Operator, Operator

Our next question comes from Paul Newsome from Piper Sandler.

Jon Paul Newsome, Analyst

I was hoping if you could give us a little bit more color about some of the social inflation-related businesses that you're remediating in the last year. So it sounds like those businesses are maybe stabilized. Are you in a position where you can now grow those businesses? Or are they just sort of stabilized? So maybe little bit of thoughts on that and whether those businesses take a little longer before they go back to a growth potential.

Carl Lindner, Co-CEO

Yes. As we've indicated before, we believe we have navigated through a cycle of corrective measures in our nonprofit and excess liability businesses, which included reducing average limits and adjusting prices. Notably, in the fourth quarter, Specialty Casualty experienced low single-digit growth, which is encouraging. Overall, the excess liability business also showed growth. This suggests that this year may present an opportunity for mid-single-digit growth in both the excess liability and nonprofit sectors. I anticipate that these businesses will begin to return to growth and that Specialty Casualty will generally continue to perform well.

Jon Paul Newsome, Analyst

Makes sense. I wanted to ask a little bit of an extra question on the alternative investment portfolio. You're obviously hoping for expecting a higher return this next year, but maybe not quite as high as it's historically been. Are there certain maybe macroeconomic things or particular things about the portfolio that as an outsider, we should be looking towards that would signal that extra couple of percent back to normal.

Craig Lindner, Co-CEO

Paul, this is Craig. As I think you know, around 50% of the alternative portfolio is in multifamily. And there has been a big oversupply the last couple of years of new multifamily properties that have been delivered. And the absorption rate is actually very strong, but we think it's probably going to take another couple of quarters to get back to a more normal environment. Historically, even with the poor returns in the recent past, over the last 5 years, we've still earned between 10% and 11% total return on our multifamily investments and Goodyear's significantly above that. So to get back to the historical levels of returns on the alternatives, it is going to require the multifamily properties to have a better rate environment, which, as I said in the conference call script, we're seeing clearly a bottoming, and we're seeing some favorable signs in terms of absorption and new stores at a 10- or 12-year low. So we think sometime in the last half of the year, we're going to see a better environment in 2027 and going forward for some number of years; we think is going to be a pretty favorable environment for multifamily. But that's what is going to be required to get back to our historical return levels on alternatives.

Jon Paul Newsome, Analyst

So the insights.

Carl Lindner, Co-CEO

The group is addressing the issue of lender-placed property and its political exposure. I was referring to the crops on the lender side. When examining the regulation of this business, it has largely been handled on a state-by-state basis. However, I don't perceive significant political risk concerning lender-placed property. This service is primarily for the lenders, especially since much of the business arises from cancellations of homeowner's insurance policies. It acts as a solid backstop for financial institutions to ensure there is coverage, so I don't see much political risk in this area.

Operator, Operator

Our next question comes from Meyer Shields from KBW.

Meyer Shields, Analyst

My first question is on the premium growth. Business turn assumption of 3% to 5%. Just curious if you guys could elaborate on which specific business lines are seeing the most favorable pricing getting into 2026? And what you see the greatest opportunities for profitable growth within our 3% to 5% premium growth assumption?

Carl Lindner, Co-CEO

Yes. I think the good news is that at this point for the vast majority of our businesses, we think that we have an opportunity for premium growth this year. I think also when you look at the profitability of our businesses. Almost all of our businesses are really meeting or exceeding the targeted returns that we require. So I think we'd love to have as much opportunity as we can get within pretty much all of our businesses in that.

Brian Hertzman, CFO

Yes. We started that in the second quarter, '25. So that book would have rolled on a different reinsurance basis through the first half of this year. If you're familiar with us, historically, we're a company that's had a relatively lower catastrophe exposure than our peers, and we've had a lower appetite for coastal property, pure earthquake risk, et cetera. So I think we carefully manage FIS, which is probably the business that has our biggest property exposure. So we very carefully manage that to what our coastal exposures to what our overall company philosophy is. And when you look at our 1 in 250 or 1 in 500 exposure to capital, Brian, 1 in 500 exposure today for hurricane. Yes, it's less than 3%. So compared to industry numbers that might be closer to double digits.

Operator, Operator

Our next question comes from the line of Andrew Andersen from Jefferies.

Andrew Andersen, Analyst

You had previously been doing some re-underwriting on Casualty around social services and I think within some pockets of E&S. Are you done with these underwriting actions as we head into 2026, and they're no longer headwind?

Carl Lindner, Co-CEO

Yes, we may have a few million dollars in business that will not be renewed this year, especially in the daycare sector. We have largely completed the non-renewal actions in housing accounts. Last year, the premium decreased, but I believe we can expect some modest premium growth in this business this year.

Andrew Andersen, Analyst

And then, Brian, if we go back to Specialty Casualty and the underlying loss ratio there, I'm just trying to understand the $69 million in the quarter. Was there an intra-year catch-up in the fourth quarter? I suppose I'm just trying to get better color on what was the true underlying trend and what is maybe the kicking-off point for '26 underlying?

Brian Hertzman, CFO

Sure. So we look at our loss picks every quarter and make adjustments throughout the year. So in some of those units, things haven't been adjusted all year. The one that probably had a larger adjustment in the fourth quarter was the California workers' comp. But again, that's on the business that for the full year is less than $100 million of premium. So I wouldn't say that that's a run rate. I think the California workers' comp adjustment probably elevates the loss ratio a little bit. I think if you look at the full year loss ratio for casualty, that's probably a better indication of like a run rate type of number.

Andrew Andersen, Analyst

Okay. And then maybe one more. Just looking at the expense ratio, I think as we came into '25, there was maybe some business mix shift headwind and some commission changes. Have those kind of found their level now and perhaps we could see some improvement into '26?

Brian Hertzman, CFO

Yes, there will always be a mix of business impacts. As Carl mentioned, our embedded insurance could contribute to some growth. When we evaluate our businesses, we consider the overall return on equity and the combined ratios to drive those returns. If we expand in a sector with a higher expense ratio, it could negatively affect us. However, we are also investing in future initiatives focused on customer experience and data analytics, including AI and machine learning, as well as IT security. Although these investments may have a short-term negative impact, they will position us for strong returns over the long term. We might observe some fluctuations, but overall, we should be in a good place. It's important to remember that in some of our businesses, we receive ceding commissions that vary with profitability. For example, in the fourth quarter, the expense ratio for our property transportation looks low due to a strong crop year, which resulted in higher ceding commissions that reduced underwriting expenses. Conversely, in our financial segment, where we have very profitable underwriting, some commissions paid to brokers and agents are linked to long-term profitability. As we achieve consistent strong performance in that area, these profit-based commissions increase, which can lead to improved loss ratios, but the increase in broker commissions may cause the expense ratio to rise slightly.

Operator, Operator

Our next question comes from Michael Zaremski from BMO.

Michael Zaremski, Analyst

Just one more for me on capital management. I see the special dividend announcement. But just curious why there are no buybacks or material amount this quarter. You've done buybacks at valuation levels in previous quarters. Just wondering, should we think about share repurchases to resume in 2026? Or how should we be thinking about that?

Craig Lindner, Co-CEO

Yes, Mike, this is Craig. I wouldn't put too much emphasis on the lack of share repurchases in the fourth quarter. We have previously indicated that we take an opportunistic approach to repurchase programs. When our shares are significantly undervalued, we prefer to maintain sufficient cash reserves to enable us to purchase a substantial number of shares. I should also mention that we decided to reduce the special dividend we're issuing in the first quarter by $0.50 compared to last year in order to conserve some cash for other options, including the possibility of share repurchases.

Operator, Operator

Thank you. At this time, I would now like to turn the conference back over to Diane Weidner for closing remarks.

Diane P. Weidner, Vice President, Investor Relations

Thank you all for joining us this morning and for the great opportunity to answer your questions and share a little bit more about AFG's story. So we look forward to chatting with you all again next quarter when we share our first quarter results. Hope you all have a great day.

Operator, Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.