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AFG Reports Solid 2Q13 Earnings

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American Financial Group Inc.'s (AFG - Free Report) second quarter adjusted earnings of 96 cents breezed past the Zacks Consensus Estimate of 85 cents by 12.9%. Results were also up 5.5% year over year from 91 cents earned in the year-ago quarter.

Including net realized gains of 28 cents and Executive Life Insurance Company of New York (ELNY) guaranty fund assessments of 4 cents, American Financial reported net income of $1.20 cents per share in the second quarter of 2013, up 18.8% year over year.

Quarterly Operational Update

Total revenues of American Financial increased 1.3% year over year to $1.1 billion in the second quarter. Improvement in revenues resulted mainly from a higher P&C insurance net earned premiums (up 10.8% year over year). Results also surpassed the Zacks Consensus Estimate of $784 million.

Total expenses of American Financial in the quarter increased 2.5% year over year to $1 billion due to higher P&C insurance losses and expenses, and expenses of managed investment entities.

Higher costs led to a decline in operating income by 3.3% year over year to $87 million.

Behind The Headlines

Specialty Property & Casualty Insurance – Underwriting profit was $21 million, down 59.6% year over year. Combined Ratio deteriorated 520 basis points to 97.0% in the reported quarter. Lower profits resulted from higher catastrophe losses and lower underwriting profit in the property and transportation group, mainly in the transportation business.

Net premiums written increased 2% to $749 million driven by higher premiums in the Specialty Casualty and Specialty Financial groups partially offset by lower premiums in the Property & Transportation group.

The Property & Transportation Group reported underwriting loss of $31 million in the second quarter compared to an underwriting profit of $6 million in the year ago period. Lower profitability in the transportation business and higher catastrophe losses that had an adverse impact on the property and inland marine operations of American Financial led to the deterioration. Combined ratio deteriorated 1220 bps year over year to 110.3%. Net premiums written decreased 11% year over year to $328 million owing to delayed acreage reporting from insureds as a result of excess moisture and delayed plating of corn and soybean crops. Increased cost of reinsurance in the property and inland marine, and crop insurance business also led to the decline in net premiums written.
Underwriting profit in the Specialty Casualty Group was $32 million, showing little deterioration from the year-ago period. This was because lower favorable prior year reserve development more than offset the impact of a modest improvement in accident year results. Combined ratio deteriorated 230 bps year over year to 88.4%. Net written premiums increased 16% year over year to $283 million mainly due to growth in workers’ compensation, and excess and surplus lines of business.

The Specialty Financial group generated underwriting profit of $15 million, up 36.4% year over year. Results improved due to increased underwriting profits in the financial institutions businesses that resulted from lender-placed mortgage insurance. Combined ratio improved 190 bps year over year to 86.6% in the reported quarter. Net written premiums increased 15% year over year to $117 million.  

Annuity & Supplemental – The Annuity Group reported pretax core operating income of $82 million in the second quarter, up 39% year over year.

Run-off Long-Term Care and Life – The run-off long-term care and life segment reported a pretax core operating loss of $2 million during the reported quarter, compared to a pretax core operating income of $5 million in the year-ago period.

Medicare Supplement and Critical Illness – The Medicare supplement and critical illness segment reported pretax core operating earnings of $12 million in the second quarter of 2013. These businesses were divested in Aug 2012.

Share Repurchase Update

In the second quarter, American Financial spent $67 million to buy back 1.4 million shares at an average price of $48.37.

Financial Position

As of Jun 30, 2013, American Financial had cash and investments of $29.3 billion, up 0.7% sequentially.

Long term debt of American Financial was $949 million at Jun 30, 2013, down 0.11% sequentially. Return on equity during the quarter was 11.1% compared to 10.2% in the second quarter of 2012.

American Financial’s book value per share stood at $44.78 per share, up 1.9% from $43.94 in the first quarter of 2013.

2013 Guidance

American Financial increased its 2013 net operating earnings projection to be between $3.70 per share and $4.10 per share from its previous guidance that was between $3.60 per share and $4.00 per share, based on American Financial’s performance so far.

American Financial expects growth in net written premiums in the P&C business to be around 8%–12% in 2013.

Our Take

American Financial has successfully maintained the trend of delivering positive earnings surprise. The company has delivered positive earnings surprise in both the quarters of 2013 with an average beat of 11.9%.

The Specialty Casualty and Specialty Financial business came up with improved performance during the quarter, which keeps American Financial well positioned amidst catastrophe losses and the weak interest rate environment. The Annuity segment has also been performing well for the last two quarters with improved revenues in its portfolio.  Additionally, American Financial’s efforts to retain investor confidence through share buybacks and dividend payouts are expected to help American Financial improve its bottom line results further.

Performance of Other Insurers

On Jul 25, 2013, Chubb Corp. (CB - Free Report) reported second-quarter operating earnings of $1.77 per share, significantly ahead of the Zacks Consensus Estimate of $1.38 per share. Earnings also increased 29% year over year.

On Jul 23, 2013, ACE Limited reported second quarter 2013 operating net income of $2.29 per share, beating the Zacks Consensus Estimate of $1.92 by 19.3%. Results improved 5.5% from $2.17 earned in the year-ago quarter. Operating income was $790 million, up 6.3% over the prior-year quarter.

Zacks Rank

American Financial currently carries a Zacks Rank #3 (Hold). Another insurer, ProAssurance Corporation (PRA - Free Report) carrying a favorable Zacks Rank #1 (Strong Buy) is expected to report its second quarter 2013 results shortly.


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