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American Financial (AFG) Q4 Earnings & Revenues Top Estimates

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American Financial Group, Inc. AFG reported fourth-quarter 2020 net operating earnings per share of $3.09, which beat the Zacks Consensus Estimate of $1.81 by 70.7%. Moreover, the bottom line increased 39.2% year over year.

The improvement was primarily driven by higher underwriting profit in the Specialty Property and Casualty insurance operations, higher annuity premiums and lower expenses, which were partially offset by lower net investment income.

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

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

American Financial Group, Inc. price-consensus-eps-surprise-chart | American Financial Group, Inc. Quote

Behind the Headlines

Total operating revenues of $1.9 billion decreased 4.6% year over year. This downside was due to lower net investment income and P&C insurance net earned premiums. However, the top line outpaced the Zacks Consensus Estimate of $1.3 billion by 42.7%.

Net investment income of $548 million decreased 7.6% year over year.

American Financial’s total cost and expenses were $1.7 billion, down 7% year over year due to lower P&C insurance losses and expenses of managed investment entities & expenses.

Full-Year Highlights

Net operating earnings per share were a record $8.44, which beat the Zacks Consensus Estimate of $7.20 by 17.2%. However, net earnings decreased 2.1% from 2019.

Operating revenues of $7.4 billion decreased 3.6% from 2019. However, it outpaced the Zacks Consensus Estimate of $5.2 billion by 42.1%.

Segment Results

Specialty Property and Casualty Insurance generated $1.2 billion in net premiums written, down 7% year over year primarily as the result of the run-off of Neon. Net premiums written in the Property & Transportation and Specialty Casualty were down 2% and 16%, respectively on a year-over-year basis. Net premiums written in Specialty Financial and Other were up 4% and 23%, respectively on a year-over-year basis.

Underwriting profit of $179 million increased 101.1% attributable to higher underwriting profitability in Property and Transportation and Specialty Casualty Groups. It was partially offset by lower year-over-year underwriting profit in Specialty Financial Group.

The segment’s combined ratio improved 730 basis points (bps) year over year to 86.2% owing to improvement of 570 bps in Specialty Casualty and 1460 bps in Property & Transportation. However, deterioration of 720 bps in the combined ratio of Specialty Financial division partially limited this upside.

Annuity segment’s premiums of $1.32 billion increased 16% year over year. This increase was driven by higher sales of traditional fixed annuities in the Financial Institutions channel, as well as higher pension risk transfer premiums.

Pre-tax annuity core operating income totaled $129 million, up 24% year over year attributable to higher earnings from the Annuity Segment’s alternative investments.

Financial Update

As of Dec 31, 2020, American Financial had cash and investments of $52.5 billion, which decreased 4.9% from 2019 end.

As of Dec 31, 2020, long-term debt of $1.9 billion grew 33.3% from the 2019-end level.

As of Dec 31, 2020, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $63.61, up 6.5% from the level at 2019 end.

Annualized return on equity of 52.1% in 2020 improved 3650 basis points year over year.

Prudent Capital Deployment

The company increased quarterly dividend by 11% and paid out special dividends of $2.00 per share.

The company bought back $80 million worth shares in the reported quarter.

2021 Guidance

American Financial expects to deliver core net operating earnings in the range of $6.25 to $7.25 per share.

For Specialty Property and Casualty Insurance segment, net written premiums are expected to increase in the range of 5% to 9% over 2020 and combined ratio is expected in the range of 89% to 91%.

Business Update

As previously declared in October 2020, American Financial’s Annuity subsidiary, Great American Life Insurance Company entered into a reinsurance agreement with Commonwealth Annuity and Life Insurance Company, a subsidiary of Global Atlantic Financial Group Limited. This transaction created approximately $335 million of excess capital for AFG, including more than $250 million at GALIC. As a result, the Annuity Segment paid dividends totaling $215 million to AFG in the fourth quarter of 2020.

As declared on Sep 28, 2020, American Financial reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own its Lloyd’s of London insurer, Neon, to RiverStone Holdings Limited. The transaction closed in the fourth quarter of 2020. The insurer recorded $3 million ($0.04 per share) in non-core losses related to the sale and runoff of this business in the fourth quarter of 2020.

Zacks Rank

American Financial currently carries a Zacks Rank #5 (Strong Sell).

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

Performance of Other P&C Insurers

Fourth-quarter earnings of Markel Corporation MKL, W.R. Berkley Corporation WRB, and Chubb Limited CB beat the respective Zacks Consensus Estimate.

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