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American Financial (AFG) Up 100% in a Year: What's Driving It?

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Shares of American Financial Group, Inc. (AFG - Free Report) have gained 100% in a year compared with the industry's increase of 26.4%. The Zacks S&P 500 composite rallied 33.7% in the said time frame. With a market capitalization of $11.5 billion, average volume of shares traded in the last three months was 0.49 million.

Zacks Investment Research
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The rally was largely driven by strong renewal pricing in E&S, sufficient liquidity and prudent capital deployment.

It has a decent earnings surprise history. Its bottom line beat estimates in each of the last four quarters, the average being 52.82%.

Can It Retain the Momentum?

Estimates for 2021 and 2022 have moved up nearly 9.1% and 8.4%, respectively, in the past seven days that reflects investors’ optimism.

Banking on higher underwriting profit in Specialty Property and Casualty insurance operations as well as higher Property and Casualty net investment income, core net operating earnings doubled year over year in the first half of 2021.

American Financial expects core net operating earnings in 2021 in the bracket of $8.40 to $9.20, which implies an increase from the earlier guidance of $7.00 to $8.00 per share. Also, it marks an increase of $1.30 from the midpoint of the previous guidance.

The company’s core business, Property and Casualty Insurance witnessed significant growth in the second quarter owing to economic recovery, new business opportunities and healthy renewal pricing, and improved underwriting margins across portfolio of businesses, which in turn boost premium growth. It continues to witness strong renewal rate momentum, and this quarter marked the 20th consecutive quarter of overall Specialty Property and Casualty rate increases, which continue to be in excess of prospective estimated loss ratio trends.

Following solid second-quarter results, this Zacks Rank #1 (Strong Buy) company raised its guidance for the current year with respect to certain metrics.

Net written premiums in the Specialty Property and Casualty Insurance are expected to be 10% to 13% higher than $5 billion reported in 2020.

Of this, net written premiums at Property & Transportation are estimated to grow 15-19%. Net written premiums at Specialty Casualty are expected to grow 5-9% higher than 2020 results, up from the previous estimate of 2% to 5%, while at Specialty Financial it is expected to grow 10-14%, an increase of 5% from the midpoint of the previous guidance.

The P&C insurer continues to expect 2021 combined ratio between 88% and 90% for the Specialty Property and Casualty Group. For Property and Transportation Group, it is expected in the range of 87% to 90%. For Specialty Casualty, combined ratio is expected between 87% to 90%, the guidance assumes continued strong renewal pricing in E&S, excess liability and several of other longer-tail liability businesses. For Specialty Financial, combined ratio is projected in the range of 84% to 87%.

Based on the results through the end of June, it projects overall property and casualty renewal pricing in 2021 to be up 9% to 11%, which improved from the previous estimated range of 8% to 10%.

American Financial had nearly $3.2 billion of excess capital at the end of June 2021 that provides it with financial flexibility to make repurchases, pay additional special dividends, and grow Specialty P&C niche businesses organically and through acquisitions. It expects to continue to have significant excess capital and liquidity throughout 2021 and beyond.

American Financial has achieved its 15th straight year of dividend increase and currently yields 1.5%, which is higher than the industry average of 0.4%. It makes the stock an attractive pick for yield-seeking investors.

The insurer estimates spending $170 million for the special dividend on the back of its strong financial position. With the latest approval in July 2021, the company paid out 14 special dividends in 10 years. This latest approval marks two special dividends approved by the board so far in 2021.

Moreover, its annualized core operating return on equity in the first half of 2021 was 14.8%, which improved 770 basis points year over year.

Other Stocks to Consider

Some other top-ranked stocks from the same space include Cincinnati Financial Corporation (CINF - Free Report) , Everest Re Group, Ltd. (RE - Free Report) and Fidelity National Financial, Inc. (FNF - Free Report) , each sporting a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Cincinnati Financial surpassed estimates in three of the last four quarters and missed in the other one, the average earnings surprise being 36.01%.

The bottom line of Everest Re surpassed estimates in two of the last four quarters and missed in the other two, the average being 20.33%.

Fidelity National’s earnings surpassed estimates in each of the last four quarters, the average being 37.32%.