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American Financial (AFG) Banks on Premiums Amid Cost Woes

·3 min read

American Financial Group, Inc. AFG has been benefiting from rate increases, and higher retentions. A solid financial position and prudent capital deployment measures are other notable tailwinds.

The Property and Casualty Insurance segment of American Financial (the major contributor of premium to the company) should benefit from new business opportunities, growth in the surplus lines and excess liability businesses, rate increases, and higher retentions in renewal business, which in turn boost premium growth.

Net written premiums in the Specialty Property and Casualty Insurance are expected to be 5% to 9% higher than $5 billion reported in 2020. Renewal rates in 2021 are expected to be up 6% to 8% excluding workers' compensation. Renewal rate increases are expected in the range of 8% to 10%.

The P&C insurer continues to expect 2021 combined ratio between 89% and 91% for the Specialty Property and Casualty Group. For Property and Transportation Group, it is expected in the range of 88% to 92%, and between 87% and 91% for Specialty Casualty. For Specialty Financial, combined ratio is projected in the range of 88% to 92%.

Its excess capital was approximately $1.2 billion at 2020 end, which includes parent company cash of approximately $215 million. The insurer expects to have significant excess capital and liquidity throughout 2021. In December 2020, American Financial replaced its existing credit facility with a new five-year, $500 million revolving credit facility, which expires in December 2025.

Based on solid cash generation abilities, it has committed to enhancing shareholder value through dividend. It returned $649 million to shareholders last year. In August 2020, the company raised dividend by 11%, marking an excellent record of 15 straight annual dividend hikes. In addition to $313 million in share repurchases, the insurer paid $336 million in dividends during the year, representing a $163 million in regular common stock dividends and $173 million special dividend.

However, the company’s expenses escalated over the last several years due to higher P&C insurance losses & expenses, annuity, life, accident & health benefits & expenses and expenses of managed investment entities. A persistent elevation of expenses might weigh on its margins.

Other Players

Other key players in the property and casualty industry include Alleghany Y, Cincinnati Financial Corporation CINF and First American Financial Corporation FAF.

Alleghany’s bottom line surpassed estimates in two of the last four quarters and missed in the other two, the average beat being 34.08%.

Cincinnati Financial surpassed earnings estimates in two of the last four quarters, with the average surprise being 4.10%.

First American Financial’s bottom line surpassed estimates in three of the last four quarters and missed in one, the average beat being 15.86%.

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Cincinnati Financial Corporation (CINF) : Free Stock Analysis Report
First American Financial Corporation (FAF) : Free Stock Analysis Report
American Financial Group, Inc. (AFG) : Free Stock Analysis Report
Alleghany Corporation (Y) : Free Stock Analysis Report
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