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We have initiated coverage on American Financial Group Inc. (AFG - Analyst Report) with a Neutral recommendation.

American Financial is a niche player in the U.S. property and casualty market. The company boasts of solid financial fundamentals, including consistent profitability and a good market position in a diverse group of specialty niche businesses.

The company is very adept at conducting new startups, undertaking small-to-medium sized acquisitions and rolling out new products. Over the past decade, the company has successfully made 10 acquisitions and startup ventures. The recently announced acquisition of Summit Holdings is another strategic fit for the company, which will enhance its presence in the worker compensation market.

American Financial is also experiencing favorable pricing trends in its property and casualty business which has seen price increases in the past eight consecutive quarters. Along with price increase, favorable loss cost trends offers growth momentum at the company.

American Financial has also exhibited superior underwriting profitability by maintaining its combined ratio at an average of 91.9% for the period 2010–2012 as compared to 104.6% clocked by the property and casualty industry over the same period.

However, headwinds such as low interest rates, exposure to catastrophes and growing total costs are likely to pressurize earnings over the near term.

Nevertheless, American Financial’s strong balance sheet, consistent dividend increases and a disciplined capital management are some other positives that make us optimistic about the company’s performance going forward.

American Financial presently carries a Zacks Rank #2 (Buy). The company is expected to release its fourth-quarter earnings on Jan 30, 2014. The Zacks Consensus Estimate for fourth-quarter earnings stands at $1.23 per share which translates into year-over-year growth of 83.5%. For full year 2013, earnings of $4.17 per share is expected which reflects year-over-year growth of 27.5%.    

Some other stocks worth considering in the property and casualty industry include Ace Limited (ACE - Analyst Report), Aspen Insurance Holdings Ltd. (AHL - Snapshot Report) and The Chubb Corp. (CB - Analyst Report). All these stocks sport a Zacks Rank #1 (Strong Buy).  

 

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