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American Financial Group Inc.'s (AFG - Analyst Report) fourth quarter adjusted earnings of 67 cents breezed past the Zacks Consensus Estimate by 3.1%. However, results were down 36.2% year over year from $1.05 earned in the year-ago quarter.

Including gain on sale of Medicare Supplement and Critical Illness of 15 cents, other realized gains of 37 cents, long-term care reserve charge of $1.1 and tax case & settlement of open tax years worth 43 cents, American Financial reported net income of 54 cents per share in the fourth quarter of 2012, down 50.5% year over year.

Quarterly Operational update

Total revenues decreased 3.7% year over year to $1.2 billion in the fourth quarter. Decline in revenues resulted from a substantial reduction in life, accident and health premiums (down 73.6% year over year) and a $31 million loss on change in fair value of assets/liabilities.

Total expenses in the quarter increased 21.4% year over year to $1.3 billion.

A decline in revenue coupled with an increase in expenses led to an operating loss of $30 million compared to an operating income of $240 million in the year-ago period.

Full Year Highlights

Adjusted earnings of $3.27 per share deteriorated 7.1% year over year. Results, however, surpassed the Zacks Consensus Estimates by a penny.

Including gain on sale of Medicare Supplement & Critical Illness of $1.19, other realized gains of $1.34, long-term care reserve charge of $1.0, special A&E charges of 22 cents, tax case & settlement of open tax years worth 70 cents and other charges worth 16 cents, net income for 2012 was $5.09 per share as against $3.32 per share in 2011.

Total revenue for full year 2012 increased 6.6% year over year to $5.1 billion.

Behind The Headlines

P&C Specialty -Underwriting profit was $15 million, down 83.1% year over year. Combined Ratio deteriorated 1000 basis points (bps) to 98% in the reported quarter. Net premiums written increased 17% driven by higher premiums in the Property & Transportation and specialty Casualty groups.

The Property & Transportation Group reported underwriting loss of $14 million in the fourth quarter compared to an underwriting profit of $75 million in the year ago period driven by the effects of Midwest drought and Superstorm Sandy. Combined ratio deteriorated 2400 bps year over year to 104%. Net premiums written increased 21% year over year.

Underwriting profit in the Specialty Casualty Group was $8 million, rebounding from a loss of $3 million in the prior-year period. Combined ratio improved 400 bps year over year to 97%. Net written premiums increased 16% year over year.

The Specialty Financial group generated underwriting profit of $16 million, up 23.1% year over year. Combined ratio improved 200 bps year over year to 85% in the reported quarter. Net written premiums increased 7% year over year.  

Annuity & Supplemental- The Annuity Group reported pretax operating income of $68 million in the fourth quarter, up 17% year over year.

Excluding a non-core after tax charge of $99 million, the Run-off operations reported an operating loss of $12 million as compared to a $6 million loss in the year-ago period.

Share Repurchase Update

In the fourth quarter, American Financial spent $100 million to buy back 2.6 million shares at an average price of $38.77. In 2012, it bought back shares worth $415 million.

Financial Position

As of Dec 31, 2012, American Financial had cash and investments of $28.4 billion, up 11.2% year over year.

Long term debt of the company was $953 million at 2012 end, up 2% year over year.

2013 Guidance

American Financial projects adjusted income to be between $3.60 per share to $4.00 per share.

Combined ratio is expected to be in the range of 91% to 95%.

Zacks Rank

American Financial currently carries a Zacks Rank #3 (Hold). ProAssurance Corporation (PRA - Analyst Report), First American Financial Corporation (FAF - Snapshot Report) and Fidelity National Financial Inc. (FNF - Snapshot Report) carrying a favorable Zacks Rank #1 (Strong Buy) are expected to report their fourth quarter and full year 2012 results shortly.


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