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American Financial (AFG) Up 56.2% in a Year: What's Driving It?

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Shares of American Financial (AFG - Free Report) have gained 56.2% in a year compared with the industry's increase of 15.6%. The Zacks S&P 500 composite rose 28.6% in the said time frame. With a market capitalization of $11.8 billion, average volume of shares traded in the last three months was 0.27 million.

Zacks Investment ResearchImage Source: Zacks Investment Research

The rally was largely driven by renewal rate increases, new business opportunities, 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 47.7%.

Can It Retain the Momentum?

The Property and Casualty Insurance segment of American Financial (the major contributor of premium to the company) should benefit from new business opportunities, growth in the surplus lines and excess liability businesses, rate increases, and higher retentions in renewal business, which in turn boost premium growth. The segment witnessed net earned premiums growth of 4.7% in the first nine months of 2021 on the back of solid performances across Property and Transportation, Specialty Casualty, and Specialty Financial lines of business.

American Financial has maintained moderate adjusted financial leverage with good cash flow and significant excess capital. AFG’s excess capital was approximately $3 billion at third-quarter end, which includes parent company cash of approximately $2.7 billion.

The robust operating profitability at the P&C segment, the stellar investment performance and effective capital management support shareholders’ return.

The Zacks Rank #3 (Hold) insurer has been paying out special dividends since 2012. It has increased dividends for 16 years at a 10-year CAGR of 12.3%. With the latest approval in December 2021, AFG will be paying out 17 special dividends in 10 years. Its dividend yield of 1.6% surpassed the industry average of 0.4%.

Upped Guidance

Net written premiums in the Specialty Property and Casualty Insurance segment are expected to be 11% to 14% higher than $5 billion reported in 2020. Growth in net written premiums excluding workers' compensation is now expected to be in the range of 13% to 17%, up from the earlier estimated range of 12% to 16%.

The company continues to expect net written premiums to grow 15-19% at Property & Transportation.

Net written premiums at Specialty Casualty are expected to grow 8% to 12% higher than the 2020 results, while at Specialty Financial it is expected to grow 10-14%, based on projected premium growth in the fidelity and crime, and surety businesses.

The P&C insurer expects 2021 combined ratio between 86% and 88% for the Specialty Property and Casualty Group, which improved two points at the midpoint of the previous range. For Property and Transportation Group, it is expected to be 86% to 88%. For Specialty Casualty, the combined ratio is expected between 85% and 87%. The guidance assumes continued strong renewal pricing in E&S, excess liability and several other longer-tail liability businesses. For Specialty Financial, the combined ratio is projected to be 84% to 86%, reflecting strong underwriting results for the first nine months of 2021.

Based on the results through the end of September, AFG projects overall property and casualty renewal pricing in 2021 to be up 9% to 11%, which remained unchanged from the last quarter.

Stocks to Consider

Some better ranked stocks from the property and casualty insurance market are Fidelity National Financial (FNF - Free Report) , Hallmark Financial Services (HALL - Free Report) and CNA Financial Corporation (CNA - Free Report) . While Fidelity National and Hallmark Financial sport a Zacks Rank #1 (Strong Buy), CNA Financial carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National’s earnings surpassed estimates in each of the last four quarters, the average beat being 38.18%. In the past year, FNF has gained 33.1%.

The Zacks Consensus Estimate for FNF’s 2022 earnings has moved 4.6% north, in the past 30 days.

The bottom line of Hallmark Financial surpassed estimates in two of the last four quarters and missed the same in the other two, the average being 53.62%.

In the past year, Hallmark Financial has rallied 22.1%. The Zacks Consensus Estimate for 2022 earnings has moved 60% north, in the past 60 days.

CNA Financial’s earnings surpassed the Zacks Consensus Estimate in each of the last four quarters, the average beat being 19.68%. In the past year, CNA Financial has gained 13.1%.

The Zacks Consensus Estimate for 2022 earnings has moved 3.9% north in the past 60 days. The Zacks Consensus Estimate for CNA’s 2022 earnings implies 11.2% year-over-year growth.