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American Financial (AFG) Down 16.7% Since Last Earnings Report: Can It Rebound?

Zacks Equity Research
·4 mins read

It has been about a month since the last earnings report for American Financial Group (AFG). Shares have lost about 16.7% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is American Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

American Financial Q4 Earnings Top Estimates, Rise Y/Y

American Financial Group fourth-quarter 2019 net operating earnings per share of $2.22 beat the Zacks Consensus Estimate by 0.45%. Also, the bottom line increased 26.9% year over year.

Higher net premiums written in Specialty Property & Casualty insurance operations were partially offset by lower premiums in Annuity Segment.

Behind the Headlines

Total operating revenues of $2.1 billion rose more than 26% year over year. This top-line improvement can be attributed to higher net investment income and increase in net earned premiums at its Property & Casualty insurance.
Net investment income of $593 million increased 9.4% year over year.

American Financial’s total cost and expenses were $1.9 billion, up 8.2% year over year. This was due to higher P&C insurance loss and expenses, interest charges on borrowed money and other expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.3 billion in net premiums written, up 9% year over year, driven by increase of 15% and 10%, respectively, in the Specialty Casualty and Specialty Financial. Core operating earnings were $199 million in the fourth quarter, down 7% year over year, due to lower underwriting profits at Specialty P&C insurance operations.
Underwriting profit of $89 million declined 12.7% due to lower year-over-year profits in crop operations at the Property and Transportation Group.

The segment’s combined ratio deteriorated 150 basis points (bps) year over year to 93.5%.

Annuity segment’s premiums of $1.1 billion declined 23% year over year, as higher traditional fixed annuity premiums in the financial institutions channel were offset by lower FIA premiums in the retail and broker dealer channels, Pension Risk Transfer, Education Market and Variable Annuities. Pre-tax income of $100 million remained unchanged year over year.

Financial Update

As of Dec 31, 2019, American Financial had cash and investments of $55.3 billion, which grew 13.9% from year-end 2018 level. As of Dec 31, 2019, long-term debt of $1.5 billion was up 13.1% from 2018 end level. As of Dec 31, 2019, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $59.70, up 8.8% from the figure at 2018 end.
Core operating return on equity was 14.9%, down 70 bps year over year.
2020 Guidance

American Financial expects full-year 2020 pretax Annuity core operating earnings to be in the range of $395 million to $425 million. It reported $398 million in 2019.

American Financial expects core net operating earnings for 2020 to be in the range of $8.75 to $9.25 per share. Specialty Property & Casualty net written premiums are expected to grow in the range of 3% to 7% (excluding the impact of Neon runoff).  Combined ratio for 2020 is expected in the range of 92% to 94%.

 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision flatlined during the past month. The consensus estimate has shifted 5.19% due to these changes.

VGM Scores

At this time, American Financial has a nice Growth Score of B, a grade with the same score on the momentum front. Following the exact same course, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

American Financial has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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