A month has gone by since the last earnings report for American Financial Group (AFG - Free Report) . Shares have lost about 2.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is American Financial due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
American Financial (AFG - Free Report) Q2 Earnings & Revenues Beat, Up Y/Y
American Financial Group reported second-quarter 2018 net operating earnings per share of $2.04, beating the Zacks Consensus Estimate of $1.88 by 8.5%. Moreover, the bottom line surged about 26.7% year over year.
Apart from delivering record second quarter earnings per share as well as an annualized core return on equity (ROE) over 15%, the company benefited from substantial growth across its portfolio of businesses along with solid profitability and investment performance in both Specialty Property and Casualty (P&C) Insurance operations as well as the Annuity Segments.
Including 27 cents per share of after-tax net realized gains on securities, net income came in at $2.31 per share, having increased nearly 43.5% year over year.
Behind the Headlines
Total operating revenues of $1.7 billion rose 10.3% year over year. This top-line growth can be attributed to higher net investment income and P&C insurance net earned premiums. The metric also outpaced the Zacks Consensus Estimate of $1.3 billion by 36.5%.
Net investment income of $530 million improved 15.2% year over year.
American Financial’s total cost and expenses came in at $1.6 billion, up 9.2% year over year due to higher P&C insurance loss & expenses, annuity, life, accident & health benefits plus expenses, expenses of managed investment entities as well as other expenses.
Specialty Property and Casualty Insurance generated $1.7 billion in net premiums written, up 10.8% year over year. Increase in net premiums written in the Specialty Casualty (13.9%), Specialty Financial (6.7%), Property & Transportation (7.4%) and Other (37%) on a year-over-year basis resulted in the upside.
Underwriting profit of the segment remained unchanged at $73 million from the prior-year quarter.
The segment’s combined ratio deteriorated 50 basis points (bps) year over year to 93.7% owing to deterioration of 40 bps in Specialty Casualty and 120 bps in Special Financial divisions. However, improvement of 30 bps in the combined ratio of Property & Transportation division partially offset this downside.
The Annuity segment’s statutory premiums of $1.4 billion grew 7.7% year over year, attributable to higher premiums in the Retail and Broker-Dealer channels. However, lower level of premiums in the Financial Institutions channel partially offset the upside.
Pretax income totaled $99 million, up 16.5% year over year.
As of Jun 30, 2018, American Financial had cash and investments of $46.8 billion, having inched up 1.5% from $46 billion at 2017 end.
As of Jun 30, 2018, long-term debt of $1.3 billion remained flat with 2017-end level.
As of Jun 30, 2018, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $55.24, up 3.2% from the level at 2017 end.
Annualized return on equity of 17.1% as of Jun 30, 2018 improved from 12.3% in the prior-year quarter.
In the second quarter, the company paid cash dividends of $1.85 per share, which included a special dividend of $1.50. The quarterly cash dividend of 35 cents has already been paid on Jul 25, 2018.
2018 Guidance Revised
Based on the results of the first half of 2018, American Financial projects core net operating earnings per share in the range of $8.10-$8.60 (up from the previous range of $7.90-$8.40).
The insurer anticipates net written premium to grow between 4% and 8% (up from the earlier band of 3-7%) in Specialty P&C Group and the overall combined ratio within 92–94%.
Banking on solid year-to-date sales, the company now expects annuity premiums between 10% and 15% (up from the past guided range of 6-12%).
Backed by a better-than-expected earnings performance, the insurer now projects pretax annuity earnings between $395 million and $430 million (up from the former forecast of $385-$425 million).
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -5.57% due to these changes.
At this time, American Financial has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
The company's stock is suitable solely for value based on our style scores.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Interestingly, American Financial has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.