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American Financial (AFG) Q3 Earnings, Revenues Beat, View Up

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American Financial Group (AFG - Free Report) reported third-quarter 2020 core net operating earnings per share of $2.45, which beat the Zacks Consensus Estimate by 58.1%. Also, the bottom line increased 8.9% year over year.

Core net operating earnings take into account 61 cents per share from alternative investments.

The improvement was primarily driven by higher underwriting profit in the Specialty Property and Casualty insurance operations and rise in earnings from $2.3 billion of alternative investments.

Behind the Headlines

Total operating revenues of about $2 billion decreased 4.3% 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 by 43.6%.

Net earned premiums at its P&C insurance declined 4.2% to $1.4 billion. Net investment income of $468 million decreased 2.7% year over year.

American Financial’s total cost and expenses were $1.9 billion, down 1% year over year due to annuity and supplemental insurance benefits & expenses, interest charges on borrowed money and other expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.5 billion in net premiums written, down 8% year over year, primarily as a result of the run-off of Neon.

Pretax core operating earnings were $205 million in the third quarter, up 5.7% year over year.

Increase in P&C underwriting profit and higher earnings from alternative investments were partially offset by lower other P&C net investment income.

Underwriting profit of $104 million was up 18.2%, attributable to higher year-over-year underwriting profits in Specialty Casualty and Property and Transportation Groups. This was partially offset by lower underwriting profits in Specialty Financial Group.

The segment’s combined ratio improved 190 basis points (bps) year over year to 92.1%.

Annuity segment’s gross statutory premiums of $871 million declined 19% 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 $121 million, up 21% year over year.

Financial Update

As of Sep 30, 2020, American Financial had cash and investments of $58.1 billion, which grew 5.1% from the level at 2019 end.

As of Sep 30, 2020, long-term debt of $2.1 billion was up 43.1% from 2019-end level.

As of Sep 30, 2020, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $58.29, down 2.4% from the figure at 2019 end.

Annualized return on equity was 12.9%, up 190 bps year over year. The company had about $1 billion of excess capital at Sep 30, 2020.

The company bought back $96 million worth shares in the reported quarter.

2020 Guidance Upped

American Financial estimates net operating earnings in the bracket of $7.00-$7.50 per share compared with the earlier expectation of $6.60-$7.40.

Pretax annuity core operating earnings are expected to increase in the range of $310 million to $325 million, up from $300 million to $320 million guided earlier.

Gross Annuity premiums are expected to be between $3.7 billion and $4 billion, and result in growth in average investments and reserves of 5% to 7% in 2020. This reflects higher persistency so far in 2020.   

Business Update

Annuity subsidiary, Great American Life Insurance Company, entered into a reinsurance agreement with Commonwealth Annuity and Life Insurance Company — a subsidiary of Global Atlantic Financial Group Limited — in October 2020. This transaction is expected to free up between $300 million and $325 million of GALIC’s statutory capital and result in higher core operating earnings and returns in both the Annuity Segment and the company.

On Sep 28, 2020, American Financial reached a definitive agreement to sell GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own its Lloyd’s of London insurer, Neon, to RiverStone Holdings Limited. The company recorded $70 million in non-core losses related to the runoff of this business in the third quarter of 2020. It also recognized a tax benefit of $73 million, resulting in a net favorable $3 million or 3 cents per share non-core, after-tax impact from Neon Exited Lines in the third quarter of 2020.

Zacks Rank

American Financial currently 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

Of the insurance industry players that have reported third-quarter results so far, The Progressive Corporation (PGR - Free Report) , The Travelers Companies (TRV - Free Report) and RLI Corp. (RLI - Free Report) beat the respective Zacks Consensus Estimate for earnings.

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