American Financial Group, Inc. (AFG - Free Report) is well poised, given growth in the surplus lines and excess liability businesses, rate increases, lower catastrophe events and solid capital position.
The stock has seen its estimates for 2021 move up nearly 2.4% in the past 30 days, reflecting investor optimism.
The Zacks Consensus Estimate for 2021 earnings per share is pegged at $8.64, indicating year-over-year increase of nearly 25.1%. American Financial estimates 2020 core net operating earnings in the range of $6.60-$7.40 per share, an increase from the previous guidance of $6.45-$7.25 per share.
Factors Driving American Financial
American Financial continues to benefit from higher net written premiums at its Property and Casualty Insurance segment on the back of strong performance at property and transportation, specialty casualty, specialty financial, and other specialty lines of business. New business opportunities in the transportation, property and inland marine and ocean marine businesses, growth in the surplus lines and excess liability businesses, rate increases, higher retentions in renewal business and increase in premiums retained from businesses in the Specialty casualty sub-segment are expected to drive premiums going forward.
Such premium growth from the company’s P&C business operations have been driving the top line of the company, which witnessed four-year CAGR (2015-2019) of 7.6%. The Zacks Consensus Estimate for the company’s 2021 revenues is pegged at $5.43 billion, indicating year-over-year increase of nearly 7.2%.
The property and casualty insurer has been witnessing substantial improvement in the combined ratio of its P&C business over the past few years due to lower catastrophe events. It continues to expect 2020 combined ratio between 92% and 94% for the Specialty Property and Casualty Group. For Property and Transportation Group, it is expected in the range of 90% to 94%, between 91% and 95% for Specialty Casualty. For Specialty Financial, combined ratio is projected in the range of 91% to 95%.
Further, the company’s improved liquidity position has led to a strong balance sheet. Its excess capital stood at approximately $850 million at second-quarter end, which includes borrowing capacity of $282 million without exceeding its 22% debt leverage target. It expects to have significant excess capital and liquidity for the remainder of 2020 and beyond. It also maintains an undrawn credit facility of $500 million.
Moreover, investors should be impressed by its stellar record of 15 straight years of dividend increases. Its dividend has witnessed a six-year CAGR (2014-2020) of 12.7% Its current dividend yield of 2.7% is higher than the industry average of 0.4%, which makes the stock an attractive pick for yield-seeking investors. It has 2.8 million shares remaining in repurchase authorization.
Return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing over the past several years. Its trailing twelve months ROE of 11.3% betters the industry average of 6.2%.
However, shares of this Zacks Rank #3 (Hold) property and casualty (P&C) insurer have lost 36.8% in a year compared with the industry’s decline of 3.3%. Also, the company has been witnessing rising expenses due to higher P&C insurance losses & expenses, annuity, life, accident & health benefits & expenses, interest charges on borrowed money. Such costs tend to weigh on the company’s margins. Notably, in the second quarter, net margin contracted 450 basis points (bps) year over year.
Stocks to Consider
Some-better ranked property and casualty insurers include Donegal Group Incorporation (DGICA - Free Report) , Fidelity National Financial Inc., (FNF - Free Report) and The Allstate Corporation (ALL - Free Report) . While Donegal Group and Fidelity National carry a Zacks Rank #1 (Strong Buy), Allstate carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Donegal surpassed estimates in each of the last four quarters, with the average being 86.44%.
Fidelity National surpassed estimates in each of the last four quarters, with the average being 32.13%.
Allstate surpassed estimates in each of the last four quarters, with the average being 25.24%.
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