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American Financial (AFG) Down 2.2% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for American Financial Group (AFG). Shares have lost about 2.2% 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 its most recent earnings report in order to get a better handle on the important catalysts.

American Financial Q3 Earnings Beat, Guidance Updated

American Financial Group, Inc. reported third-quarter 2022 net operating earnings per share of $2.24, which surpassed the Zacks Consensus Estimate by 1.8% as well as our estimate of $1.18 per share. The bottom line declined 17.3% year over year. American Financial’s results reflect higher P&C insurance net earned premiums, offset by higher expenses and lower net investment income.

Behind the Headlines

Total revenues of $1.9 billion increased 13% year over year in the quarter. The growth came on the back of higher P&C insurance net earned premiums and other income. The top line beat the Zacks Consensus Estimate by 17.1%.

Net investment income declined 10.6% year over year to $151 million in the quarter under review. The figure was lower than our estimate of $211.3 million. Total cost and expenses increased 19.3% year over year to $1.8 billion due to higher P&C insurance losses & expenses, expenses of managed investment entities and other expenses. The figure was higher than our estimate of $1.6 billion.

Segmental Update

The Specialty P&C Insurance segment generated $1.9 billion in net written premiums, which rose 15% year over year, primarily due to growth in crop insurance business. 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, was up approximately 6% for the quarter.

Net written premiums in Property & Transportation Group grew 24% year over year to $959 million in the quarter. The figure was higher than our estimate of $868.4 million. Net written premiums at Specialty Casualty Group increased 6% year over year to $777 million. The figure was lower than our estimate of $815.1 million.

Further, net written premiums at Specialty Financial increased 7% year over year to $176 million. The figure was lower than our estimate of $181.8 million. Net written premiums at the Other division improved 22% year over year to $72 million. The figure was higher than our estimate of $67.2 million.

The Specialty P&C Insurance segment’s underwriting profit decreased 6.5% year over year to $158 million in the quarter. The decrease was primarily due to higher year-over-year underwriting profit in Specialty Casualty Group, which was more than offset by lower underwriting profit in Property and Transportation and Specialty Financial Groups. The combined ratio deteriorated 210 basis points (bps) year over year to 91.1% at the segment.

Financial Update

American Financial exited the third quarter with total cash and investments of $14.3 billion, which declined 9% from the 2021-end level. The figure was lower than our estimate of $16.1 billion. As of Sep 30, 2022, long-term debt totaled $1.5 billion, which decreased 21.9% from the level at 2021 end.

As of Sep 30, 2022, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $53.03, down 7.6% from the 2021-end level.
Annualized return on equity  came in at 14.7% for the third quarter, contracting 190 bps year over year.

Prudent Capital Deployment

American Financial has declared a special cash dividend of $2 per share. The aggregate amount of this special dividend will be around $170 million. This special dividend is in addition to the regular quarterly cash dividend of 63 cents per share paid on Oct 25, 2022. With this special dividend, AFG has declared $12 per share in special dividends in 2022. American Financial repurchased shares for $5 million in the quarter.

2022 Guidance Revised

American Financial revised the core net operating earnings guidance to $11 - $11.75 per share from the earlier guidance of $10.75 - $11.75 per share. Based on results through the first nine months, American Financial expects the overall calendar year combined ratio in the range of 86% to 87%, narrowed from the earlier range of 85% to 87%. American Financial expects net written premiums in the range of 10% to 12%, higher than $5.6 billion reported in 2021, refined from earlier guidance range of 9% to 13%.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

Currently, American Financial has a subpar Growth Score of D, however its Momentum Score is doing a lot better with a B. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 #3 (Hold). We expect an in-line return from the stock in the next few months.

Performance of an Industry Player

American Financial belongs to the Zacks Insurance - Property and Casualty industry. Another stock from the same industry, RLI Corp. (RLI), has gained 1.4% over the past month. More than a month has passed since the company reported results for the quarter ended September 2022.

RLI Corp. reported revenues of $312.74 million in the last reported quarter, representing a year-over-year change of +15.3%. EPS of $0.50 for the same period compares with $0.65 a year ago.

For the current quarter, RLI Corp. is expected to post earnings of $1.08 per share, indicating a change of -14.3% from the year-ago quarter. The Zacks Consensus Estimate remained unchanged over the last 30 days.

The overall direction and magnitude of estimate revisions translate into a Zacks Rank #3 (Hold) for RLI Corp. Also, the stock has a VGM Score of C.

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