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American Financial (AFG) Up 7.5% Since Last Earnings Report: Can It Continue?

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It has been about a month since the last earnings report for American Financial Group (AFG - Free Report) . Shares have added about 7.5% in that time frame, underperforming 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 the most recent earnings report in order to get a better handle on the important drivers.

American Financial Misses on Q2 Earnings, Ups View

American Financial reported second-quarter 2020 core net operating earnings per share of $1.05, which missed the Zacks Consensus Estimate by 36.8%. Also, the bottom line decreased 50.5% year over year.

Core net operating earnings take into account 48 cents per share loss from alternative investments and 75 cents per share of COVID-19 related losses.

Behind the Headlines  

Total operating revenues of $1.7 billion decreased 7.2% year over year. This top-line decline can be attributed to lower net investment income and decrease in net earned premiums at its P&C insurance as well as lower other revenues. The top line however beat the Zacks Consensus Estimate of $1.4 billion.

Net earned premiums at its P&C insurance declined 1.3% to $1.2 billion. Net investment income of $468 million decreased 0.2% year over year.

American Financial’s total cost and expenses were $1.7 billion, up 1.9% year over year due to higher P&C insurance loss and expenses, annuity and supplemental insurance benefits & expenses and interest charges on borrowed money.

Segment Results

Specialty Property and Casualty Insurance generated $1.1 billion in net premiums written, down 11% year over year, primarily as a result of the run-off of Neon.

Core operating earnings were $116 million in the second quarter, down 34% year over year. Lower P&C net investment income was responsible for the decline.

Underwriting profit of $54 million declined 10%, attributable to lower profits at Specialty Casualty and Specialty Financial Groups, partly offset by higher profits at Property and Transportation Group.

The segment’s combined ratio deteriorated 20 basis points (bps) year over year to 95.2%.

Annuity segment’s gross statutory premiums of $687 million declined 49% year over year. Annuity sales were lower in all channels as a result of stay-at-home orders and other factors related to the COVID-19 pandemic

Operating earnings totaled $42 million, down nearly 60% year over year.

Financial Update

As of Jun 30, 2020, American Financial had cash and investments of $56.7 billion, which grew 2.7% from the level at 2019 end.

As of Jun 30, 2020, long-term debt of $1.9 billion was up 29.8% from 2019-end level.

As of Jun 30, 2020, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $56.95, down 4.6% from the figure at 2019 end.

Annualized return on equity was 7.5%, down 720 bps year over year. The company had about $850 million of excess capital at Jun 30, 2020.

The company bought back $76 million worth shares in the reported quarter.

2020 Guidance Upped

American Financial estimates net operating earnings in the bracket of $6.60-$7.40 per share, compared with the earlier expectation of $6.45-$7.25 per share.

Pretax annuity core operating earnings are expected to increase in the range of $300 million to $320 million, up from $280 million to $310 million guided earlier.

Gross annuity premiums are expected to be between $3.4 billion and $3.9 billion, and result in growth in average investments and reserves of 5% to 7% in 2020. This reflects higher persistency so far in 2020.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month. The consensus estimate has shifted 11.51% due to these changes.

VGM Scores

At this time, American Financial has a subpar Growth Score of D, though it is lagging a bit 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 20% for this investment strategy.

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

Outlook

Estimates have been trending upward for the stock, and the magnitude of this revision looks promising. Notably, American Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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