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American Financial (AFG) Up 6.9% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for American Financial Group (AFG - Free Report) . Shares have added about 6.9% 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 its most recent earnings report in order to get a better handle on the important catalysts.

American Financial Q3 Earnings Top Estimates, Rise Y/Y

American Financial Group third-quarter 2019 net operating earnings per share of $2.25 beat the Zacks Consensus Estimate by 15.3%. Also, the bottom line increased 2.7% year over year.

Higher net premiums written in Specialty Property and Casualty insurance operations were partially offset by lower premiums in Annuity Segment.

Behind the Headlines

Total operating revenues of $2.1 billion rose 9.4% year over year. This top-line improvement can be attributed to higher net investment income and increase in net earned premiums at its Property & Casualty insurance.

Net investment income of $588 million increased 11.6% year over year.
American Financial’s total cost and expenses were $1.9 billion, up 10.3% year over year. This was due to higher P&C insurance loss and expenses, annuity, life, accident and health benefits, interest charges on borrowed money and expenses plus expenses of managed investment entities as well as other expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.6 billion in net premiums written, up 11% year over year, driven by increase of 17%, 8% and 6%, respectively, in the  Property & Transportation,  Specialty Casualty  in Specialty Financial.
Core operating earnings were $194 million in the third quarter, up 22.8% year over year, driven by higher P&C underwriting profit and higher P&C net investment income as a result of higher earnings on limited partnerships and similar investments.

Underwriting profit of $88 million increased 60% as higher year-over-year underwriting profits in the Property and Transportation and Specialty Financial Groups were partially offset by lower underwriting profit in the Specialty Casualty Group.

The segment’s combined ratio improved 170 basis points (bps) year over year to 94%.

Annuity segment’s premiums of $1.1 billion declined 22% year over year, as higher traditional fixed annuity premiums in the financial institutions channel were offset by lower FIA premiums in the retail and broker dealer channels, Pension Risk Transfer, Education Market and Variable Annuities.
Pre-tax income of $100 million remained unchanged year over year.

Financial Update

As of Sep 30, 2019, American Financial had cash and investments of $54.2 billion, which grew 11.8% from year-end 2018 level.

As of Sep 30, 2019, long-term debt of $1.4 billion was up 9.3% from 2018 end level.

As of Sep 30, 2019, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $59.65, up 8.7% from the figure at 2018 end.

Annualized return on equity was 15.3%, down 50 bps year over year.

2019 Guidance

American Financial expects full-year 2019 pretax Annuity core operating earnings to be in the range of $380 million to $400 million. This compares favorably with the previous guidance of $375 million to $405 million.

American Financial expects core net operating earnings for 2019 to be in the range of $8.50 to $8.70 per share compared with $8.40-$8.80 announced previously.

Specialty Casualty net written premiums are expected to grow in the range of 4% to 7%, up from previous guidance of 2-5%. It reported $5.0 billion in 2018.
Combined ratio for 2019 is expected in the range of 93% to 94% compared with the previous projection of  92-94%.



 

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month. The consensus estimate has shifted -12.86% due to these changes.

VGM Scores

Currently, American Financial has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second 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.

Outlook

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.


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