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American Financial's Premium Growth Solid, Cat Loss a Woe

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American Financial Group, Inc. (AFG - Free Report) has reputation in the market as an industry-leading property and casualty (P&C) insurer, specializing in commercial products for businesses. Its stellar record confirms its successful client servicing, catering to diverse needs. Over the years, the customers have gained a lot from the company’s broad portfolio of varied insurance products and services and by retaining this favorable buzz among its brokers, this Zacks Rank #3 (Hold) P&C insurer consistently emerges stronger over time and is positioned to maintain its winning streak in the near future.

Growth Drivers

American Financial’s net written premium growth trajectory has been impressive over the past few years, which in turn has been boosting the company’s results and we expect this trend to continue in the near term as well. Given a steadfast operational performance, the company estimates net written premiums to improve across its units consisting of specialty P&C, property and transportation group, specialty casualty group as well as specialty financial group.

Investment income, a major contributor to the insurers’ top line, has been improving over a considerable period of time, backed by higher rising interest rates as well as invested cash. The P&C insurer anticipates witnessing better investment results in the near term owing to a slow but steady improving pace of interest rates. In fact, Property and Casualty investment income is expected to increase 4-6% over the 2017 tally.

On the back of improving investment income and premium growth, the company has been witnessing an upward trend pertaining to its top line. We expect the company to continue displaying this momentum in the near term, which in turn is likely to accelerate its overall growth.

Price increases in the P&C business have been favoring the company’s results over the past few years with the company continuing to focus on maintaining satisfactory renewal rates in P&C renewal pricing as the year progresses. The metric is projected to inch up 1-2% (down from the previously guided range of 1-3%) in 2018.

Further, the company has been exhibiting a favorable combined ratio despite incurring catastrophe loss and we expect this positive trend to continue in the near term. In 2018, combined ratio is projected between 92% and 94%. An improved combined ratio also reflects underwriting profitability and therefore we anticipate better-than-expected underwriting results in the future.

A strong capital position aids the company to return value to its shareholders via dividend hikes and buybacks. In fact, the company boasts a five-year (2012-2017) total annualized shareholder return, representing growth in share price plus dividends of about 27%.

An Outperformer: Shares of American Financial have gained 12.5% in a year’s time, outperforming the industry’s 11.8% rally. We believe, the company’s aforementioned strengths will drive the stock higher in the near term.



 

Growth Projections: The Zacks Consensus Estimate for current-year earnings per share is pegged at $8.43, representing a year-over-year rise of 28.7%. For 2019, the consensus estimate for earnings stands at $8.63, reflecting a year-over-year increase of 2.4%.

Northbound Estimate Revisions: The company has witnessed an upward estimate revision for both 2018 and 2019 with the estimates moving north by nearly 2.8% and 0.1%, respectively, over the last 60 days.

Positive Earnings Surprise History: American Financial flaunts an encouraging earnings surprise history, having outshined the Zacks Consensus Estimate in each of the trailing four quarters with an average beat of 26.66%.

Near-Term Headwinds

Being a P&C insurer, the company has been suffering catastrophe loss for a considerable period of time, rendering volatility to its earnings. Hence, exposure to such weather-related loss will remain a concern.

Also, mounting expenses, mainly due to higher P&C insurance loss & expenses and annuity, life, accident & health benefits persist to restrict the operating margin expansion.

Stocks to Consider

Some better-ranked stocks from the insurance industry are Alleghany Corporation (Y - Free Report) , NMI Holdings, Inc. (NMIH - Free Report) and RLI Corp. (RLI - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Alleghany provides property and casualty reinsurance and insurance products in the United States and internationally. The company delivered positive surprises in three of the last four quarters with an average beat of 17.61%.

NMI Holdings provides private mortgage guaranty insurance services in the United States. The company came up with positive earnings surprises in three of the last four quarters with an average beat of 24.55%.  

RLI Corp. underwrites property and casualty insurance in the United States and internationally. The company pulled off positive surprises in each of the last four quarters with an average beat of 33.65%.

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