A month has gone by since the last earnings report for American Financial Group (AFG - Free Report) . Shares have added about 4% 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 the most recent earnings report in order to get a better handle on the important catalysts.
American Financial Q3 Earnings Top Estimates, Soar Y/Y
American Financial Group, Inc. reported third-quarter 2018 net operating earnings per share of $2.19, beating the Zacks Consensus Estimate of $1.83 by 19.7%. Moreover, the bottom line improved by a whopping 106.6% year over year.
Apart from delivering a record third-quarter earnings performance 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 better investment performance in both Specialty Property and Casualty (P&C) Insurance and Annuity Segments.
Including 31 cents per share of after-tax net realized gains on securities as well as special A&E charges, net income shot up to $2.26.
Behind the Headlines
Total operating revenues of $1.9 billion rose 6.8% year over year. This top-line improvement can be attributed to higher net investment income, P&C insurance net earned premiums as well as other income. The metric also outpaced the Zacks Consensus Estimate of $1.3 billion by 42.6%.
Net investment income of $527 million improved 11.9% year over year.
American Financial’s total cost and expenses came in at $1.8 billion, down 2.3% year over year due to lower P&C insurance loss & expenses, interest charges on borrowed money as well as other expenses.
Specialty Property and Casualty Insurance generated $1.5 billion in net premiums written, up 1.6% year over year. Increase in net premiums written in the Specialty Casualty (11.4%), Specialty Financial (2%) and Other (37.1%) on a year-over-year basis resulted in the upside.
Underwriting profit of the segment skyrocketed 511.1% from the prior-year quarter to $55 million.
The segment’s combined ratio improved 360 basis points (bps) year over year to 95.7% owing to improvement of 740 bps in Specialty Casualty and 780 bps in Special Financial divisions. However, deterioration of 110 bps in the combined ratio of Property & Transportation division partially offset this upside.
The Annuity segment’s statutory premiums of $1.4 billion surged 57.3% year over year, attributable to higher premiums in the Financial Institutions, Retail, Education Market, Pension Risk Transfer and Broker-Dealer channels.
Pretax income totaled $117 million, up 14.7% year over year.
As of Sep 30, 2018, American Financial had cash and investments of $47.8 billion, which grew 3.9% from $46 billion at 2017 end.
As of Sep 30, 2018, long-term debt of $1.3 billion inched up 0.1% from the 2017-end level.
As of Sep 30, 2018, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $57.22, up 6.9% from the level at 2017 end.
Annualized return on equity of 16.3% as of Sep 30, 2018 improved from 1% in the prior-year quarter.
2018 Guidance Revised
Based on the results of the first nine months of 2018, American Financial projects core net operating earnings per share in the range of $8.35-$8.65 (up from the previous band of $8.10-$8.60). This updated outlook signifies the effect of the company’s operational performance through the first nine months of 2018 as well as its expectations for fourth-quarter 2018 catastrophe loss, which will include Hurricane Michael.
The insurer anticipates P&C net written premium to grow between 5% and 7% (slightly down from the earlier band of 4-8%) and the overall combined ratio within 93-94% (a deterioration from the previously predicted range of 92-94%). These projections have been made on the basis of the results achieved during the first nine months of 2018 and fourth-quarter catastrophe loss estimates associated with Hurricane Michael.
Banking on year-to-date sales, the company now anticipates full-year annuity premiums between 17% and 20% (up from the past guided band of 10-15%).
Backed by a better-than-expected earnings performance in the reported quarter, the insurer now projects pre-tax annuity earnings between $440 million and $450 million (up from the former forecast of $430-$450 million).
During the quarter under review, the company finished a detailed comprehensive internal review of its asbestos and environmental exposures pertaining to the run-off operations of its P&C Group and its exposures associated with former railroad and manufacturing operations and sites. The internal review led to non-core after-tax special charges of $21 million ($27 million pretax) to increase AFG’s A&E reserves.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -11.36% due to these changes.
At this time, American Financial has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, American Financial has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.