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Here's Why Hold Strategy is Apt for American Financial Now

Zacks Equity Research

American Financial Group AFG is poised for growth given its niche presence in property and casualty as well as annuity markets, better pricing, improved renewal ratio and favorable industry conditions.

The stock carries a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

Shares of American Financial have rallied 15.8% year to date, outperforming the industry’s increase of 5.5%.



Estimates for American Financial have been revised upward over the past 30 days, reflecting analysts’ confidence in the stock. The Zacks Consensus Estimate for 2019 earnings per share has moved 0.6% north while that for 2020 has moved up 0.9% in the said time frame.

American Financial’s return on equity was 13.4% in the trailing 12-months period, higher than the industry average of 6.8%. Return on equity is a profitability measure that identifies the company’s efficiency in utilizing its shareholders’ funds.

The Zacks Rank #3 (Hold) insurer’s compelling product portfolio, prudent acquisitions and investment in strategic opportunities have been driving steady premium growth. The company estimates Specialty Property and Casualty Group’s net written premiums to grow 2% to 5% in 2019.

Also, sustained increase in pricing has been aiding premium growth. Management raised expectation for Property and Casualty renewal pricing between 2% and 4% for 2019 from 1% to 3% estimated earlier.

Higher invested cash should continue to drive investment income. Management projects investment income to grow 2% to 6% in 2019, up from flat to up 4% guided earlier.

Despite being a property and casualty insurer, which banks on prudent underwriting, consistent price increase in Property and Casualty business, the company’s combined ratio has been better than the industry average for more than two decades. For 2019, the company expects Specialty Property and Casualty Group combined ratio between 92% and 94%.

American Financial has been able to maintain moderate adjusted financial leverage around 20%, with good cash flow and interest coverage ratio. Banking on operational excellence, the company has been hiking dividend each year and also paying special dividend. In August 2019, the company raised its quarterly dividend by 12.5% while in May, it paid a special dividend of $1.51 per share. These endeavors make the stock an attractive pick for yield-seeking investors. In fact, its dividend yield of 1.5% betters the industry average of 0.4%.

The Zacks Consensus Estimate for 2019 and 2020 earnings per share is pegged at $8.65 and $9.08, indicating year-over-year increase of nearly 3% and 5% respectively. The expected long-term earnings growth rate is pegged at 6.2%.

Stocks to Consider

Some better-ranked property and casualty insurance stocks include Hallmark Financial Services HALL, Arch Capital Group Ltd. ACGL and Cincinnati Financial CINF.

Hallmark Financial Services operates through three segments and underwrites, markets, distributes and services property and casualty insurance products in the United States. Its insurance products are marketed through general agents and specialty brokers. It sports a Zacks Rank #1 (Strong Buy). The company came up with an average four-quarter positive surprise of 97.5%. You can see the complete list of today’s Zacks #1 Rank stocks here.

Arch Capital  provides property, casualty, and mortgage insurance and reinsurance products globally. It carries a Zacks Rank #2 (Buy). It pulled off an average four-quarter beat of 14.36%.

Cincinnati Financial provides property casualty insurance products in the United States and operates through five segments. The company also offers services like commercial leasing, insurance brokerage. It carries a Zacks Rank #2. The company delivered an average four-quarter positive surprise of 19.75%.

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Cincinnati Financial Corporation (CINF) : Free Stock Analysis Report
 
Hallmark Financial Services, Inc. (HALL) : Free Stock Analysis Report
 
American Financial Group, Inc. (AFG) : Free Stock Analysis Report
 
Arch Capital Group Ltd. (ACGL) : Free Stock Analysis Report
 
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