American Financial Group, Inc. AFG recently announced the pricing of $125 million subordinated debentures. These debentures carry a coupon rate of 5.875% and are scheduled to mature in March 2059.
The company intends to deploy the proceeds for general corporate purposes.
American Financial’s debt-to-equity ratio at 2018 end was 26.2%, having deteriorated 180 basis points from 2017-end. With this new issuance, the ratio is expected to deteriorate 250 basis points. Nonetheless, the leverage ratio will still compare favorably with the industry average of 27.8%.
However, with the new issuance, interest expense will increase. But we believe that the company is in a strong position to clear debts, banking on operational efficiencies, largely driven by organic growth.
Though the interest rate is gradually improving, reflecting the country’s thriving economy, the rate is still low. With one-quarter percentage point hike in December 2018, the interest rate currently stands at 2.50%. At the last FOMC meeting, the Fed took a cautious stance. The central bank may not raise any rates in 2019 against its earlier expectation of two increases. This is likely due to slowing economic growth and sluggish inflation.
It seems a prudent approach on American Financial’s part to capitalize on the persistently low interest rate environment to procure funds. Also, lower interest rate reducing interest burden on borrowings combined with lower tax incidence should facilitate margin expansion.
Shares of American Financial have gained 6.2% year to date against the industry’s decline of 0.3%. Consistent price increase in property and casualty (P&C) business, improving premiums, niche presence in the P&C and annuity markets, compelling product portfolio and solid capital position are tailwinds driving the stock higher.
American Financial currently has a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks from the insurance industry are Arch Capital Group Ltd. ACGL, Berkshire Hathaway Inc. BRK.B and Cincinnati Financial Corporation CINF.
Arch Capital Group provides property, casualty and mortgage insurance and reinsurance products worldwide. The company delivered positive surprise in all the last four reported quarters, with the average being 14.72%. The company has a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Berkshire Hathaway provides property and casualty insurance and reinsurance plus life, accident and health reinsurance besides operating railroad systems in North America. The company came up with positive surprise in three of the preceding four reported quarters, the average beat being 4.31%. The company is a Zacks #1 Ranked player.
Cincinnati Financial provides property casualty insurance products in the United States. The company came up with average four-quarter beat of 18.08%.
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