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American Financial (AFG) Q3 Earnings Top Estimates, Soar Y/Y

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American Financial Group, Inc. (AFG - Free Report) reported third-quarter 2018 net operating earnings per share of $2.19, beating the Zacks Consensus Estimate of $1.83 by 19.7%. Moreover, the bottom line improved by a whopping 106.6% year over year.

American Financial Group, Inc. Price, Consensus and EPS Surprise

 

American Financial Group, Inc. Price, Consensus and EPS Surprise | American Financial Group, Inc. Quote

Apart from delivering a record third-quarter earnings performance as well as an annualized core return on equity (ROE) over 15%, the company benefited from substantial growth across its portfolio of businesses along with solid profitability and better investment performance in both Specialty Property and Casualty (P&C) Insurance and Annuity Segments.

Including 31 cents per share of after-tax net realized gains on securities as well as special A&E charges, net income shot up to $2.26 per share.

Behind the Headlines

Total operating revenues of $1.9 billion rose 6.8% year over year. This top-line improvement can be attributed to higher net investment income, P&C insurance net earned premiums as well as other income. The metric also outpaced the Zacks Consensus Estimate of $1.3 billion by 42.6%.

Net investment income of $527 million improved 11.9% year over year.

American Financial’s total cost and expenses came in at $1.8 billion, down 2.3% year over year due to lower P&C insurance loss & expenses, interest charges on borrowed money as well as other expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.5 billion in net premiums written, up 1.6% year over year. Increase in net premiums written in the Specialty Casualty (11.4%), Specialty Financial (2%) and Other (37.1%) on a year-over-year basis resulted in the upside.

Underwriting profit of the segment skyrocketed 511.1% from the prior-year quarter to $55 million.

The segment’s combined ratio improved 360 basis points (bps) year over year to 95.7% owing to improvement of 740 bps in Specialty Casualty and 780 bps in Special Financial divisions. However, deterioration of 110 bps in the combined ratio of Property & Transportation division partially offset this upside.

The Annuity segment’s statutory premiums of $1.4 billion surged 57.3% year over year, attributable to higher premiums in the Financial Institutions, Retail, Education Market, Pension Risk Transfer and Broker-Dealer channels.

Pretax income totaled $117 million, up 14.7% year over year.

Financial Update

As of Sep 30, 2018, American Financial had cash and investments of $47.8 billion, which grew 3.9% from $46 billion at 2017 end.

As of Sep 30, 2018, long-term debt of $1.3 billion inched up 0.1% from the 2017-end level.

As of Sep 30, 2018, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $57.22, up 6.9% from the level at 2017 end.

Annualized return on equity of 16.3% as of Sep 30, 2018 improved from 1% in the prior-year quarter.

2018 Guidance Revised

Based on the results of the first nine months of 2018, American Financial projects core net operating earnings per share in the range of $8.35-$8.65 (up from the previous band of $8.10-$8.60). This updated outlook signifies the effect of the company’s operational performance through the first nine months of 2018 as well as its expectations for fourth-quarter 2018 catastrophe loss, which will include Hurricane Michael.

The insurer anticipates P&C net written premium to grow between 5% and 7% (slightly down from the earlier band of 4-8%) and the overall combined ratio within 93-94% (a deterioration from the previously predicted range of 92-94%). These projections have been made on the basis of the results achieved during the first nine months of 2018 and fourth-quarter catastrophe loss estimates associated with Hurricane Michael.

Banking on year-to-date sales, the company now anticipates full-year annuity premiums between 17% and 20% (up from the past guided band of 10-15%).

Backed by a better-than-expected earnings performance in the reported quarter, the insurer now projects pre-tax annuity earnings between $440 million and $450 million (up from the former forecast of $430-$450 million).

Business Update

During the quarter under review, the company finished a detailed comprehensive internal review of its asbestos and environmental exposures pertaining to the run-off operations of its P&C Group and its exposures associated with former railroad and manufacturing operations and sites. The internal review led to non-core after-tax special charges of $21 million ($27 million pretax) to increase AFG’s A&E reserves.

Zacks Rank

American Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other P&C Insurers

Among other players from the insurance industry having already reported third-quarter earnings, the bottom line of The Progressive Corporation (PGR - Free Report) and The Travelers Companies, Inc.’s (TRV - Free Report) outpaced the respective Zacks Consensus Estimate while RLI Corp.’s (RLI - Free Report) earnings missed the same.

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