American Financial Looks Steady, Buyouts Continue

On May 23, we issued an updated research report on American Financial Group Inc. (AFG). The company reported first-quarter 2014 operating earnings per share of $1.00, a couple of cents ahead of the Zacks Consensus Estimate.

On a year-over-year basis, earnings increased 8.7%. The earnings beat came on the back of significantly higher underwriting profitability in its Specialty Property and Casualty insurance operations, partly offset by lower earnings in the Annuity segment.

American Financial is a niche player in the U.S. property and casualty market. The company boasts solid financial fundamentals, including consistent profitability. It is also a key player in diverse specialty businesses.

The company proactively ventures into new businesses, undertaking small-to-medium sized acquisitions and rolling out new products. Over the past decade, the company has successfully made more than 10 acquisitions and ventured into several startups. The recently concluded acquisition of Summit Holdings, launch of the aviation division and purchase of renewal rights to expand its Public Sector Division would broaden its footprint in the property and casualty market.

American Financial is also experiencing favorable pricing trends in its property and casualty business which has seen price increases in the past 10 quarters consecutively. Along with price increase, favorable loss cost trends offer consistent growth momentum.

American Financial has also exhibited superior underwriting profitability by maintaining its combined ratio at a considerably lower level compared with the property and casualty industry over several years.

However, headwinds such as low interest rates, exposure to catastrophes and increasing total costs are likely to keep near-term earnings under pressure.

Nevertheless, American Financial’s strong balance sheet, consistent dividend hikes and intelligent use of capital are some other positives that make us optimistic about the company’s future performance.

American Financial carries a Zacks Rank # 3 (Hold). However, better-ranked players include W.R.Berkley Corp. (WRB), Allied World Assurance Company Holdings, AG (AWH) and Aspen Insurance Holdings Ltd. (AHL). All these stocks sport Zacks Rank #1 (Strong Buy).