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American Financial Issues Notes, Sees Rating Action

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American Financial Group, Inc. (AFG - Free Report) recently announced to offer $365 million senior notes in two tranches — 3.50% $125 million senior notes with maturity scheduled in August 2026 and 4.50% $240 million senior notes with maturity scheduled in June 2047.

American Financial intends to deploy the proceeds along with cash to redeem 9-7/8% $350 million senior notes due in June 2019. The company will redeem these notes on Dec 11, 2017.

American Financial’s debt-to-equity ratio at third-quarter end was 23.9, improved merely 210 basis points from 2016-end level. With the new issuance and redemption of some notes, the ratio is expected to decrease 20 basis points.

These transactions will surely lower the company’s interest expense as notes with higher coupon rates are redeemed and those that are issued, bear lower coupon rates.

It seems a prudent approach by American Financial to capitalize on the low interest rate environment to procure funds. Also, this will lower the interest burden on borrowings, facilitating margin expansion. Though the Federal Reserve has increased the interest rate thrice since December 2016, the rate environment still remains low. American Financial estimates after-tax interest savings of about $13 million or 14 cents per share in 2018 from these two transactions.

However, the company expects to incur about $27 million or 30 cents per share after-tax non-core expenses in the fourth quarter of 2017 due to early redemption of the 9-7/8% senior notes.

Rating Agencies Jump Into Action

Both 3.50% and 4.50% senior notes carry Long-Term Issue Credit Ratings of “a-” with stable ratings from A.M. Best. Concurrently, Moody's Investors Service, a wing of Moody's Corporation, assigned Baa1 ratings with stable outlook to these notes.

Price Perfromance

Shares of American Financial have rallied 20.3% quarter to date, outperforming the industry’s gain of 11.6%. We believe that the company’s strategic initiatives to boost margin expansion, inorganic growth profile, better pricing and improvement of industry fundamentals will continue to drive the shares higher.

American Financial carries a Zacks Rank #3 (Hold).
    
Stocks to Consider


Some better-ranked stocks from the insurance industry are Radian Group Inc.(RDN - Free Report) , First American Financial Corp. (FAF - Free Report) and Prudential Financial, Inc. (PRU - Free Report) , each holding a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Radian Group offers mortgage and real estate products and services in the United States. The company delivered positive surprises in three of the last four quarters with an average beat of 4.52%.

First American Financial offers financial services. The company delivered positive surprises in all of the last four quarters with an average beat of 12.74%.

Prudential Financial provides insurance, investment management, and other financial products and services in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 0.16%.

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