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American Financial (AFG) Up 5.5% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for American Financial Group (AFG - Free Report) . Shares have added about 5.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is American Financial due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

American Financial Q2 Earnings Beat, EPS View Raised

American Financial reported second-quarter 2021 core net operating earnings per share of $2.39, which beat the Zacks Consensus Estimate by 45.7%. Also, the bottom line increased more than twofold year over year.

The company’s results benefited from growing revenues, improved underwriting profit across the Specialty Property and Casualty (P&C) insurance operations, higher P&C net investment income as well as reduced costs.

Behind the Headlines  

Total operating revenues of $1.4 billion increased 11.1% year over year. This top-line increase can be attributed to higher net investment income and increase in net earned premiums at its P&C insurance as well as higher other revenues.

Net earned premiums at its P&C insurance increased 5.6% to $1.2 billion. Net investment income of $164 million increased 86.4% year over year.

American Financial’s total cost and expenses were $1.2 billion, down 4.7% year over year due to lower P&C insurance loss and expenses and expenses of managed investment entities.

Its Specialty Property and Casualty Insurance generated $1.4 billion in net premiums written, up 21.9% year over year, primarily as a result of improving economy, new business opportunities and strong renewal rate environment.

Core operating earnings were $288 million in the second quarter, increased more than two-fold year over year. The improvement was the result of significantly higher P&C underwriting profit and substantially higher P&C net investment income, primarily due to higher earnings from alternative investments.

Underwriting profit of $153 million increased nearly threefold year over year, attributable to higher underwriting profitability in Specialty Casualty Group.

The segment’s combined ratio improved 730 basis points (bps) year over year to 87.9%, courtesy of improvement of 510 bps in Property & Transportation Group, 700 bps in Specialty Casualty Group and 1400 bps in Specialty Financial divisions.

While net written premiums in Property & Transportation Group grew 32.4% year over year to $564 million in the quarter, the same at Specialty Casualty Group increased 15.8% year over year to $592 million. Further, net written premiums at Specialty Financial and Other divisions improved 14% and 15%, respectively, year over year.

Divestiture of Annuity Business

The company sold its Annuity business, which consisted of Great American Life Insurance Company (GALIC) and its two insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company, as well as a broker-dealer affiliate, Great American Advisors, Inc., and insurance distributor, AAG Insurance Agency, Inc. to MassMutual on May 28, 2021.

Initial cash proceeds from the sale were $3.5 billion. The company recognized an after-tax non-core gain on the sale of $697 million upon closing.

Financial Update

As of Jun 30, 2021, American Financial had cash and investments of $16.1 billion, which grew 19.5% from the level at 2020 end. As of Jun 30, 2021, long-term debt of $1.9 billion remained unchanged from 2020-end level. As of Jun 30, 2021, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $63.70, up 0.1% from the figure at 2020 end. Annualized core operating return on equity was 14.7%, up 990 bps year over year. The company had about $3.2 billion of excess capital at Jun 30, 2021.
The company bought back $114 million worth shares in the reported quarter.

2021 Guidance Upped

American Financial increased its 2021 guidance for core net operating earnings. The metric is anticipated in the band of $8.40-$9.20 per share this year, higher than the prior guidance of $7 to $8 per share.

This guidance range excludes earnings from discontinued annuity operations. It continues to assume zero earnings on parent company cash as it continues to evaluate options for the deployment of excess capital.

Core earnings per share guidance excludes non-core items such as results of discontinued operations, realized gains and losses

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended upward during the past month. The consensus estimate has shifted 35.52% due to these changes.

VGM Scores

At this time, American Financial has a poor Growth Score of F, however its Momentum Score is doing a lot better with an A. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise American Financial has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.


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