American Financial (AFG) Down 3.7% Since Last Earnings Report: Can It Rebound?

A month has gone by since the last earnings report for American Financial Group (AFG). Shares have lost about 3.7% in that time frame, outperforming 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 Q1 Earnings Lag Estimates, Fall Y/Y

American Financial reported first-quarter 2019 net operating earnings per share of $2.02, missing the Zacks Consensus Estimate by 1.5%. Also, the bottom line declined 16.5% year over year.

Results of the company suffered due to lower earnings in its Annuity Segment on account of the impact of fair value accounting on fixed indexed annuities.

The company recorded first-quarter net realized gains on securities of $1.61 per share after tax and acquisition costs (DAC) that consist of $1.40 in after tax post DAC against the prior-year quarterly net realized losses of 82 cents.

Behind the Headlines

Total operating revenues of $1.7 billion rose 6.9% year over year. This top-line improvement can be attributed to higher net investment income and P&C insurance net earned premiums plus net realized gains. The metric also outpaced the Zacks Consensus Estimate of $1.4 billion by 33.7%.

Net investment income of $542 million increased 9.5% year over year.

American Financial’s total cost and expenses were $1.6 billion, up 11.5% year over year due to higher P&C insurance loss and expenses, annuity, life, accident and health benefits and expenses plus expenses of managed investment entities.

Segment Results

Specialty Property and Casualty Insurance generated $1.1 billion in net premiums written, up 4% year over year. Increase in net premiums written in the Property & Transportation (6%), Specialty Casualty (5%) and Other (11%) on a year-over-year basis led to the upside. Core operating earnings from the segment were $185 million in the first quarter, down 1.6% year over year.

Underwriting profit of $88 million declined 4%, attributable to lower underwriting profitability in Specialty Casualty and Specialty Financial Groups.

The segment’s combined ratio expanded 80 basis points (bps) year over year to 92.5%.

Annuity segment’s premiums of $1.4 billion rose 22% year over year, riding on higher sales of traditional fixed annuities.

Pre-tax income totaled $90 million, down 28% year over year.

Financial Update

As of Mar 31, 2019, American Financial had cash and investments of $51 billion, which grew 5.2% from the level at 2018 end.

As of Mar31, 2019, long-term debt of $1.4 billion was up 9.3% from the 2018-end level.

As of Mar 31, 2019, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $58.02, up 5.8% from the figure at 2018 end.

Annualized return on equity was 25.9%, up 1360 bps year over year.

Prudent Capital Deployment

The company’s board of directors announced a special cash dividend of $1.50 per share, payable May 28, 2019 to shareholders of record on May 15, 2019. This is an addition to its regular quarterly cash dividend of 40 cents per share.

2019 Guidance

American Financial now expects its 2019 annuity sales to be flat to down marginally from its $5.4 billion premiums of 2018.

However, it projects its pretax annuity earnings to be intact as the prior guidance of 365-$425 million in 2019 due to the negative impact of market interest rates in 2019.

The company now assumes pretax annuity earnings before fair value accounting in the range of $445-million. It estimates net operating earnings in the bracket of $8.35-$8.85 per share for 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

Currently, American Financial has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% 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

Estimates have been trending upward for the stock, and the magnitude of these revisions has been net zero. It comes with little surprise 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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