On Dec 17, 2015, we issued an updated research report on American Financial Group, Inc. AFG.
American Financial has been actively involved in startups, small to medium-sized acquisitions, and launch of products over the past decade. A solid capital base is helping the company to enhance its product and service portfolio apart from achieving double-digit returns on capital in specialty and casualty business.
The company is also aligning its business to brace up its operations and focus more on the annuity business.
The property and casualty insurer has been witnessing price strengthening. The last reported quarter marked the 16th straight quarter for the same. The company projects Property and Casualty renewal pricing to be either flat or to see a 2% rise in 2015. Also, stable loss cost trends offer the company a favorable long-term growth environment.
However, a prolonged low interest rate environment has affected the investment results of the company. Moreover, the company’s earnings have traditionally been affected by catastrophes. Nonetheless, American Financial has been reporting better combined ratio than the industry average for the larger part of the last three decades. Specialty niche focus, product line diversification, stringent underwriting discipline and alignment of compensation incentives are expected to keep the trend alive.
Moreover, a low leveraged balance sheet, with good cash flow and interest coverage ratio helps the company to engage in shareholder-friendly moves.
American Financial posted lower-than-expected earnings in the third quarter of 2015 owing to lower core operating earnings at the Annuity segment. With respect to the surprise trend, the insurer posted positive surprises in three of last four quarters, with an average beat of 2.3%.
The Zacks Consensus Estimate for 2015 and 2016 is currently pegged at $5.52 and $5.65, respectively. These translate into a year-over-year increase of 14.5% for 2015 and 2.4% for 2016.
American Financial is a niche player in the property and casualty, and annuity markets. Improving industry fundamentals will drive overall growth. The expected long-term earnings growth for the stock is 8%
Zacks Rank
American Financial currently carries a Zacks Rank #3 (Hold). Some better-ranked property and casualty insurers are RLI Corp. RLI, Hallmark Financial Services Inc. HALL and Cincinnati Financial Corp. CINF. Each of these stocks sports a Zacks Rank #1 (Strong Buy).
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