American Financial (AFG) Up 2.8% Since Last Earnings Report: Can It Continue?
It has been about a month since the last earnings report for American Financial Group (AFG). Shares have added about 2.8% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is American Financial due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
American Financial Q2 Earnings Miss on Higher Expenses
American Financial Group, Inc. reported second-quarter 2023 net operating earnings per share of $2.38, which missed the Zacks Consensus Estimate by 16.4%. The bottom line declined 16.4% year over year.
American Financial’s results reflected the impact of higher catastrophe losses and lower favorable prior year reserve development on underwriting profit in the Specialty Property and Casualty (P&C) insurance operations, partially offset by significantly improved net investment income.
Behind the Headlines
Total revenues of $1.7 billion increased 8.6% year over year in the quarter. The growth came on the back of higher P&C insurance net earned premiums and net investment income. The top line missed the Zacks Consensus Estimate by 6.7%. Net investment income climbed 17.8% year over year to $198 million in the quarter under review. The figure was higher than our estimate of $170.7 million and beat the Zacks Consensus Estimate of $174 million. Total cost and expenses increased 18.9% year over year to $1.5 billion due to higher P&C insurance losses and expenses, cost of managed investment entities and other expenses. The figure was lower than our estimate of $1.6 billion.
Segmental Update
The Specialty P&C Insurance segment generated $1.7 billion in net written premiums, which rose 10% year over year. The growth was reported within each of the Specialty P&C groups as a result of a combination of new business opportunities, increased exposures and a good renewal rate environment. Average renewal pricing across P&C Group, excluding workers’ compensation, increased approximately 5% for the quarter.
Net written premiums in Property & Transportation Group grew 6% year over year to $668 million in the quarter. The figure was higher than our estimate of $632.4 million. Net written premiums at Specialty Casualty Group increased 7% year over year to $693 million. The figure was higher than our estimate of $654.7 million.
Further, net written premiums at Specialty Financial increased 36% year over year to $240 million. The figure was higher than our estimate of $183.8 million. Net written premiums at Other divisions improved 8% year over year to $66 million. The figure was lower than our estimate of $69.5 million.
Specialty P&C Insurance segment’s underwriting profit decreased 37.5% year over year to $123 million in the quarter. The decrease was due to lower year-over-year underwriting profit following in each of the Specialty P&C Groups. The figure was lower than our estimate of $207.5 million. The combined ratio deteriorated 610 basis points (bps) year over year to 91.9% at the segment.
Financial Update
American Financial exited the second quarter with total cash and investments of $14.5 billion, which declined 0.1% from the 2022-end level. The figure matched our estimate. As of Jun 30, 2023, long-term debt totaled $1.4 billion, which decreased 1.5% from the level at 2022 end.
As of Jun 30, 2023, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $52.90, down 1.5% from the 2022-end level. Annualized return on equity (ROE) came in at 17.9% for the second quarter, expanding 360 bps year over year.
Prudent Capital Deployment
American Financial paid cash dividends of 63 cents per share during the second quarter. In addition, AFG bought back shares worth $43 million in the reported quarter.
2023 Guidance Revised
American Financial decreased core net operating earnings guidance to $10.15-$11.15 per share from the earlier guidance of $11-$12 per share. At the midpoint of the range, revised guidance would produce a core ROE of approximately 20%. This guidance reflects updated expectations for 2023 for underwriting results, partially offset by an increase in expected net investment income and continues to reflect an average crop year.
The insurer expects an overall calendar year combined ratio in the range of 89-91%, which revised upward from previous guidance of 87% to 89%.
AFG has increased guidance for net written premiums and now expects net written premiums to be 5-8% higher than $6.2 billion reported in 2022. This compares with previous guidance of growth in the range of 3% to 6% and will establish a record for net written premiums for the year. American Financial expects a return of approximately 9% on alternative investments.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month.
The consensus estimate has shifted -5.85% due to these changes.
VGM Scores
Currently, American Financial has a poor Growth Score of F, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, American Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
Performance of an Industry Player
American Financial is part of the Zacks Insurance - Property and Casualty industry. Over the past month, Kinsale Capital Group, Inc. (KNSL), a stock from the same industry, has gained 5.8%. The company reported its results for the quarter ended June 2023 more than a month ago.
Kinsale Capital Group, Inc. reported revenues of $295.77 million in the last reported quarter, representing a year-over-year change of +65.3%. EPS of $2.88 for the same period compares with $1.92 a year ago.
Kinsale Capital Group, Inc. is expected to post earnings of $2.86 per share for the current quarter, representing a year-over-year change of +74.4%. Over the last 30 days, the Zacks Consensus Estimate has changed +5.3%.
Kinsale Capital Group, Inc. has a Zacks Rank #2 (Buy) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
American Financial Group, Inc. (AFG) : Free Stock Analysis Report
Kinsale Capital Group, Inc. (KNSL) : Free Stock Analysis Report
