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Why Is American Financial (AFG) Up 19.4% Since Last Earnings Report?

Zacks Equity Research

It has been about a month since the last earnings report for American Financial Group (AFG). Shares have added about 19.4% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is American Financial due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

American Financial Q1 Earnings Beat Estimates, Fall Y/Y

American Financial Group, Inc. reported first-quarter 2020 net operating earnings per share of $1.88, which beat the Zacks Consensus Estimate by 1.6%. However, the bottom line declined 6.9% year over year.

The company witnessed improved net investment income and higher premiums in Specialty Property and Casualty Insurance segment, which were offset by soft performance in Annuity segment and higher expenses.

Behind the Headlines

Total operating revenues of $1.8 billion rose 2.2% year over year. This top-line improvement can be attributed to higher net investment income and P&C insurance net earned premiums plus other income.

Net investment income of $544 million increased 0.4% year over year.
The company recorded first-quarter net realized losses on securities of $4.81 per share after tax and after deferred acquisition costs (DAC) that consist of $4.69 in after tax post DAC against the prior-year quarterly net realized gains of $1.61 per share.

American Financial’s total cost and expenses were $1.7 billion, up 3.2% year over year due to higher P&C insurance loss and expenses, annuity, life, accident and health benefits and expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.2 billion in net premiums written, up 2% year over year. Increase in net premiums written in the Property & Transportation (12%), Specialty Financial Group (3%) and Other (38%) on a year-over-year basis led to the upside. Core operating earnings from the segment were $181 million in the first quarter, down 2% year over year.

Underwriting profit of $89 million increased 1%, attributable to higher underwriting profitability in Specialty Casualty and Specialty Financial Groups. It was partially offset by lower underwriting profit in Property and Transportation Group.

The segment’s combined ratio improved 30 basis points (bps) year over year to 92.2%.

Annuity segment’s premiums of $1.2 billion decreased 13% year over year.
Pre-tax income totaled $67 million, down 26% year over year.

Financial Update

As of Mar 31, 2020, American Financial had cash and investments of $53.2 billion, which decreased 3.7% from the level at 2019 end.

As of Mar 31, 2020, long-term debt of $1.5 billion remained flat from the 2019-end level.

As of Mar 31, 2020, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $55.52, down 7% from the figure at 2019 end.

Annualized return on equity was (23.1%) against 25.9% in the year-ago quarter.

2020 Guidance

American Financial expects its pretax Annuity core operating earnings, excluding the impact of MTM investments in the range of $280 million to $310 million.

It continues to expect its 2020 core net operating earnings per share excluding MTM investments to be in the range of $6.45 to $7.25.

Based on current expectations of the impact of COVID-19, the company now projects P&C pretax core operating earnings, excluding the impact of MTM investments, in the range of $630 million to $690 million.

American Financial estimates 2020 combined ratio in the range of 92% to 94%.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -47.29% due to these changes.

VGM Scores

Currently, American Financial has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise American Financial has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.



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