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American Financial (AFG) Q3 Earnings Beat, Guidance Lowered

Zacks Equity Research

American Financial Group, Inc.’s AFG third-quarter 2017 net operating earnings per share of $1.06 beat the Zacks Consensus Estimate of 85 cents by 24.71%. However, the bottom line declined about 29.8% year over year.

The quarter suffered from lower underwriting income across all its Specialty P&C groups stemming from catastrophe losses. It dragged the bottom line by 95 cents per share.

American Financial Group, Inc. Price, Consensus and EPS Surprise


American Financial Group, Inc. Price, Consensus and EPS Surprise | American Financial Group, Inc. Quote


Including realized losses of 8 cents, special asbestos and environmental charges of 82 cents and loss on retirement of debt of 3 cents, net income came in at 13 cents per share, plunging 89% year over year.

Behind the Headlines

Total operating revenues of $1.8 billion rose 12.5% year over year. The top-line growth can be attributed to higher net investment income and P&C insurance net earned premiums. The top line outpaced the Zacks Consensus Estimate of $1.3 billion.

Net investment income of $471 million grew 8.8% year over year.

American Financial’s total cost and expenses came in at $1.8 billion, up 20% year over year due to higher P&C insurance losses & expenses, annuity, life, accident & health benefits plus expenses, interest charges on borrowed money, expenses of managed investment entities and other expenses.
Segment Results

Specialty Property and Casualty Insurance generated $95 million in net premiums written, down 38% year over year. Increase in net premiums written in the Property & Transportation (up 8%), Specialty Casualty (24%) and Specialty Financial (1%) on a year-over-year basis, resulted in the improvement.

Underwriting profit of the segment plunged 88% to $9 million. Lower underwriting profit at Property and Transportation Group, and Specialty Casualty Group and underwriting loss at Specialty Financial Group led to this downside.

The segment’s combined ratio deteriorated 610 basis points (bps) year over year to 93.2% owing to rise of 780 bps, 210 bps and 1580 bps in combined ratios of Property & Transportation, Specialty Casualty and Specialty Financial segments, respectively.

The Annuity segment’s statutory premiums of $876 million declined 6.9% year over year, attributable to pricing discipline in a relatively low and decreasing interest rate environment plus aggressive price competition.

Pre-tax income came in at $102 million, down 5% year over year.

Financial Update

As of Sep 30, 2017, American Financial had cash and investments of $42.5 billion, up 2.7% from the level of $41.4 billion at 2016-end.

Long-term debt of $1.3 billion was almost flat from 2016-end level. As of Sep 30, 2017, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $55.98, up 3.7% from the level at 2016-end.

In the quarter under review, the company reported return on equity (ROE) of 1% compared with 9.9% in the prior-year quarter.

2017 Guidance Lowered

American Financial projects core net operating earnings per share in the range of $5.90-$6.20, lowered from the earlier guided range of $6.40-$6.90.

The insurer projects net written premium to grow between 6% and 9% in Specialty Financial Group and the combined ratio between 94% and 95%.

The company estimates Annuity premiums to be tad lower than $4 billion and pre-tax annuity operating earnings between $370 million and $390 million in 2017.

Zacks Rank

American Financial carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other Insurers

Among other players from the insurance industry that have reported third-quarter earnings so far, the bottom line at The Progressive Corporation PGR, The Travelers Companies, Inc. TRV and RLI Corp. RLI beat their respective Zacks Consensus Estimate.

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