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American Financial's Robust Pricing Trend is Here to Stay

Zacks Equity Research

American Financial Group, Inc. AFG, a niche player in the property and casualty (P&C) space and annuity markets, has been witnessing price increases in its P&C business, while being focused on maintaining stable rates in renewal pricing for the future. Also, loss projects cost trends are estimated to remain at a modest level going forward. The company is expected to benefit from these positive trends on a long-term basis.

With respect to boosting its inorganic growth profile, the insurer has been strategically investing in start-ups, small-to-medium sized buyouts and product launches. On the back of this progress, we expect the company to expand its operations and drive its product and service suite. This in turn, bodes well for the company’s overall growth acceleration.

When it comes to premiums, a consistent robust operational performance has led to improving premiums over a considerable period of time. We expect this growth trajectory to continue in the near term riding on a sustained operating performance.

Rising interest rates coupled with solid invested cash have driven higher investment income in the last several years. We anticipate this momentum to stay owing to improving interest rates along with a probable increase in returns on certain private equity and limited partnership investments.

Banking on higher premiums as well as investment income, the company expects a stronger top line in the near term. In fact, the Zacks Consensus Estimate for 2019 revenues is pegged at $5.6 billion, reflecting a 5.5% year-over-year rise.

With respect to enhancing shareholder value, the company has been indulging in a few good shareholder-friendly moves like share buybacks, dividend hikes and payment of special dividends. Such measures underline the company’s sturdy liquidity position and in turn, not only retain its current investors’ faith in the stock but also attract new ones.

It is important to note here that American Financial’s return on equity — a profitability measure — is 15.3%, better than the industry average of 7.8%. This vouches for the company’s efficiency in utilizing shareholders’ funds.

Shares of the Zacks Rank #2 (Buy) P&C insurer have lost 14% in a year’s time, wider than the industry’s decline of 7.1%. We believe, the aforementioned upsides will turn the stock around and perk it up in the near term.

For this P&C insurer, the Zacks Consensus Estimate for 2019 earnings stands at $8.62, indicating year-over-year growth of 1.5%.

Pertaining to its earnings history, the company delivered positive surprises in all the trailing four reported quarters, the average being 21.56%.

Additionally, the stock carries a favorable VGM Score of A. Here V stands for Value, G for Growth and M for Momentum with the score being a weighted combination of all three factors. Back-tested results have shown that stocks with a VGM Score of A or B when combined with a top Zacks Rank #1 (Strong Buy) or 2 offer best investment opportunities.

Other Stocks to Consider

Investors interested in some other top-ranked stocks from the same space can also consider Argo Group International Holdings, Ltd. ARGO, Atlas Financial Holdings, Inc. AFH and Berkshire Hathaway Inc. BRK.B, each carrying a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Argo Group underwrites specialty insurance and reinsurance products in the property and casualty markets. The company delivered positive surprises in three of the trailing four reported quarters, the average beat being 13.57%.

Atlas Financial engages in underwriting commercial automobile insurance policies in the United States. The company pulled off earnings surprises in three of the previous four reported quarters, the average beat being 17.56%.

Berkshire Hathaway engages in insurance, freight rail transportation and utility businesses. The company surpassed estimates in three of the preceding four reported quarters, the average beat being 4.31%.

Zacks' Top 10 Stocks for 2019

In addition to the stocks discussed above, would you like to know about our 10 finest buy-and-holds for the year?

Who wouldn't? Our annual Top 10s have beaten the market with amazing regularity. In 2018, while the market dropped -5.2%, the portfolio scored well into double-digits overall with individual stocks rising as high as +61.5%. And from 2012-2017, while the market boomed +126.3, Zacks' Top 10s reached an even more sensational +181.9%.

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