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American Financial Gains From Solid P&C Unit, Capital Position

Zacks Equity Research

American Financial Group, Inc. AFG is well-positioned to gain from strong premiums earned from its property & casualty (P&C) business as well as effective capital deployment strategies.

The company has a decent surprise history, having surpassed earnings estimates in three of the trailing four quarters, the average beat being 5%. The Zacks Consensus Estimate for American Financial was revised 5.3% upward over the last 60 days.

Let’s analyze the factors that bode well for the company.

Factors Driving American Financial

The P&C insurer continues to benefit from high premium growth earned from its P&C insurance business, which is an integral part of the company’s business. Net earned premiums from the business moved up 6.6% in 2019. Based on such strong premiums, the company’s top line has witnessed a CAGR of 7.5% in the past five years (2014-2019).

Solid investment income continues to drive its revenues as well. Net investment income improved nearly 10% in 2019, primarily driven by strong performance of limited partnerships and constant investments. However, the current low interest rate environment is likely to keep investment yields under pressure, which would consequently weigh on its overall investment income.

Furthermore, American Financial flaunts a solid financial position on strength at its P&C segment and sound capital deployment strategies. The company’s dividend payments have witnessed a CAGR of 15.4% in the past 5 years (2014-2019). Its dividend yield of 3.7% lies way above the industry’s average of 0.6%. American Financial also engages in paying special dividends to its shareholders.

Additionally, the company’s trailing 12-month return on equity (ROE) of 12.9% compares favorably with 6.4% for the industry. This highlights American Financial’s growth prospects along with the efficient utilization of its shareholders’ funds.

This Zacks Rank #3 (Hold) company has declined 48.8% in a year compared with the industry’s fall of 22.2%. Nevertheless, we believe that the company’s solid P&C insurance business is likely to drive shares going forward.

 

 

Stocks to Consider

Some better-ranked stocks in the insurance space are RLI Corp. RLI, First American Financial Corporation FAF, and ProAssurance Corporation PRA. While RLI and First American Financial sport a Zacks Rank #1 (Strong Buy), ProAssurance carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

RLI, First American Financial and ProAssurance surpassed estimates in the last reported quarters by 28.57%, 33.33% and 23.03%, respectively.

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RLI Corp. (RLI) : Free Stock Analysis Report
 
ProAssurance Corporation (PRA) : Free Stock Analysis Report
 
First American Financial Corporation (FAF) : Free Stock Analysis Report
 
American Financial Group, Inc. (AFG) : Free Stock Analysis Report
 
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Zacks Investment Research