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American Financial (AFG) Q4 Earnings Miss, Revenues Beat

Zacks Equity Research

American Financial Group, Inc. AFG reported fourth-quarter 2018 net operating earnings per share of $1.75, missing the Zacks Consensus Estimate of $1.84 by 4.9%. Also, the bottom line declined 20.4% year over year.

Lower earnings in Annuity Segment, primarily due to the significant downturn in financial markets during the fourth quarter, and lower underwriting profits in Property and Casualty Insurance Segment affected results. However, a lower tax incidence partially limited the downside.

Including $2.08 per share of after-tax net realized loss on securities, the company incurred net loss of 33 cents against net income of $1.84 per share in the year-ago quarter. Net income shot up to $2.26 per share.

Behind the Headlines

Total operating revenues of $1.9 billion rose 10.4% year over year. This top-line improvement can be attributed to higher net investment income, P&C insurance net earned premiums, life, accident & health net earned premiums as well as other income. The top line outpaced the Zacks Consensus Estimate of $1.4 billion by 35.1%.

Net investment income of $542 million increased 16.6% year over year.

American Financial’s total cost and expenses were $1.7 billion, up 12.2% year over year due to higher P&C insurance loss & expenses, annuity, life, accident & health benefits & expenses as well as expenses of managed investment entities.

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

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

Full-Year Highlights

Net operating earnings per share were a record $8.40, missing the Zacks Consensus Estimate of $8.49. However, net earnings increased 28.2% from 2017 and were within the company’s guided range.

Operating revenues of $7.2 billion increased 8.2% from 2017 and outpaced the Zacks Consensus Estimate of $5.3 billion.

Segment Results

Specialty Property and Casualty Insurance generated $1.2 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 (42%) on a year-over-year basis resulted in the upside.

Underwriting profit of $102 million plunged 34.6% attributable to lower underwriting profitability in Specialty Casualty Group and Property and Transportation Group.

The segment’s combined ratio deteriorated 470 basis points (bps) year over year to 92% owing to deterioration of 6500 bps in Specialty Casualty and 390 bps in Property & Transportation. However, improvement of 70 bps in the combined ratio of Specialty Financial division partially limited this downside.

Annuity segment’s premiums of $1.5 billion surged 63% year over year, attributable to higher premiums in the Financial Institutions, Retail, Education Market, Pension Risk Transfer and Broker-Dealer channels.

Pre-tax income totaled $20 million, plunging 79% year over year attributable to higher expenses.

Financial Update

As of Dec 31, 2018, American Financial had cash and investments of $48.5 billion, which grew 35.3% from 2017 end.

As of Dec 31, 2018, long-term debt of $1.3 billion inched up 0.1% from the 2017-end level.

As of Dec 31, 2018, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $54.86, up 2.5% from the level at 2017 end.

Return on equity of 10.6% in 2018 improved 60 basis points from 2017.

Prudent Capital Deployment

The company increased quarterly dividend by 14% and paid special dividends of $3.00 per share.

It also bought back shares worth $6 million.

2019 Guidance

American Financial expects to deliver core net operating earnings in the range of $8.35 - $8.85 per share.

For Specialty Property and Casualty Insurance segment, net written premiums are expected to increase 0-3% over 2018 and combined ratio is expected in the range of 92% to 94%.

For Annuity segment, sales are estimated to decline slightly from its record $5.4 billion premiums in 2018. Pre-tax annuity earnings are expected in the range of $365 million to $425 million.

Zacks Rank

American Financial currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other P&C Insurers

Of the insurance industry players that have reported fourth-quarter earnings so far, The Travelers Companies, Inc. TRV and RLI Corp. RLI beat the respective Zacks Consensus Estimate for earnings while The Progressive Corporation PGR missed the same.

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