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American Financial (AFG) Up 43% in 6 Months: Here's Why

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American Financial Group (AFG - Free Report) shares have gained 42.7% in six months compared with the industry's increase of 23.3% and the Finance sector’s increase of 22.7%. The Zacks S&P 500 composite has risen 22.6% in the said time frame. With market capitalization of $7.6 billion, average volume of shares traded in the last three months was 0.5 million.

Growth in the surplus lines and excess liability businesses, niche presence in the P&C and annuity markets and solid capital position continue to drive American Financial. The company beat estimates in two of the three reported quarters of 2020.

Its ROE of 11.8% in the trailing twelve months was better than the industry average of 5.6%, reflecting the company’s efficiency in utilizing shareholders’ fund.  

Will the Bull Run Continue?

The Zacks Consensus Estimate for 2021 earnings has moved up about 5% in the past 60 days, reflecting analysts’ optimism. The consensus estimate indicates year-over-year increase of 18.1%.

New business opportunities, growth in the surplus lines and excess liability businesses, rate increases, and higher retentions should continue to drive premiums, the main component of an insurer’s top line.

This Zacks Rank #2 (Buy) property and casualty insurer has been benefiting from consistent price increase in property and casualty business and intends to maintain satisfactory rates in renewal pricing going forward.

Despite its exposure to catastrophe loss, the company has been able to deliver combined ratio better than the industry average for more than two decades. Given prudent underwriting, improved pricing, we expect the company to retain the momentum.

American Financial has a solid track record of enhancing shareholder value. In each of the last 14 years, the company has successfully increased its dividends and paid out 12 special dividends in nine years. It intends to hold back about $200–$300 million of the excess capital to maintain flexibility for any opportunity that may arise in the future.

The company’s Annuity subsidiary, Great American Life Insurance Company entered into a reinsurance agreement with Commonwealth Annuity and Life Insurance Company 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.

American Financial carries an impressive VGM Score of B. Here V stands for Value, G for Growth and M for Momentum, with the score being a weighted combination of all three factors. Back-tested results have shown that stocks with a VGM Score of A or B combined with a Zacks Rank #1 (Strong Buy) or #2 are the best investment options.

Other Stocks to Consider

Some other top-ranked companies from the same space are Alleghany , The Hanover Insurance Group (THG - Free Report) and The Allstate Corporation (ALL - Free Report) .    

Alleghany delivered an earnings surprise of 195.85% in the last reported quarter. It sports a Zacks Rank #1 at present. You can see the complete list of today’s Zacks #1 Rank.

The Hanover Insurance Group delivered an earnings surprise of 9.85% in the last reported quarter. It currently carries a Zacks Rank #2.

Allstate delivered an earnings surprise of 66.10% in the last reported quarter. It currently carries a Zacks Rank #2.

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