On Aug 26, we issued an updated research report on American Financial Group, Inc. (AFG). The insurer reported second-quarter 2014 operating earnings per share of $1.07, beating the Zacks Consensus Estimate of 95 cents by 12.6%. On a year-over-year basis, earnings increased 11.5% buoyed by higher contribution from the specialty property and casualty group as well as earnings strength in the annuity segment.
The company’s top line also showed an impressive growth of 22.2% year over year, and easily surpassed the Zacks Consensus Estimate.
American Financial is a niche player in the property and casualty insurance market. The company has a very impressive inorganic growth profile with active engagements in new startups, small- to medium-sized acquisitions, and initiation of new products. Over the past decade, the company has successfully made a number of acquisitions and startups. The recent acquisition of Summit Holdings Southeast Inc. is another strategic fit for the company, enhancing its scale in specialty business.
American Financial is also witnessing a consistent price increase in property and casualty business. Almost two-thirds of the company’s property and casualty businesses reported pricing increases during the second quarter of 2014, resulting in about a 3% overall renewal rate increase. This represents the company’s eleventh successive quarter of overall price strengthening.
American Financial has managed to maintain a superior underwriting outperformance. Over the past 10 years, the combined operating ratio of the company’s property and casualty business has bettered the industry by nearly 10 points.
American Financial remains committed to create long-term value for shareholders and has returned $1.6 billion of capital to shareholders over five years through Dec 2013. It uses its capital intelligently. Recently, the company used capital to purchase Summit, launched the aviation division, purchased renewal rights to expand its Public Sector Division and was involved in regular share buyback and dividend payments.
Nonetheless, low interest rates, exposure to catastrophe and pressure on annuity business in the second half of the year are some of the headwinds.
American Financial carries a Zacks Rank #3 (Hold). Better-ranked stocks in the sector include Endurance Specialty Holdings Ltd. (ENH), Global Indemnity plc (GBLI) and Mercury General Corporation (MCY). All these stocks sport a Zacks Rank #1 (Strong Buy).
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