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American Financial (AFG) Up 5.1% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for American Financial Group (AFG). Shares have added about 5.1% in that time frame, underperforming 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 drivers.

American Financial Q3 Earnings Miss, Revenues Beat

American Financial Group, Inc. reported third-quarter 2023 net operating earnings per share of $2.45, which missed the Zacks Consensus Estimate by 0.8%. The bottom line increased 9.4% year over year. American Financial’s results reflected higher premiums, increased average renewal pricing across the Property and Casualty (P&C) group and improved net investment income, offset by higher expenses and catastrophe losses.

Behind the Headlines

Total revenues of $2 billion increased 6% year over year in the quarter. The growth came on the back of higher P&C insurance net earned premiums, other income and net investment income. The top line beat the Zacks Consensus Estimate by 5.9%. Net investment income climbed 11.2% year over year to $168 million in the quarter under review. The figure was lower than our estimate of $204.6 million and missed the Zacks Consensus Estimate of $189 million.

Total cost and expenses increased 9.6% year over year to $1.9 billion due to higher P&C insurance losses and expenses, cost of managed investment entities and other expenses. The figure was higher than our estimate of $1.7 billion.

Segmental Update

The Specialty P&C Insurance segment generated $2 billion in net written premiums, which rose 4% year over year. The growth reflects a larger percentage of crop insurance premium written in the second quarter of 2023 due to the earlier planting of corn and soybeans, as well as the impact of lower 2023 spring commodity futures pricing and related volatility. Average renewal pricing across P&C Group, excluding workers’ compensation, increased approximately 7% in the quarter.

Net written premiums in Property & Transportation Group decreased 6% year over year to $905 million in the quarter. The figure was lower than our estimate of $922.1 million. Net written premiums at Specialty Casualty Group increased 7% year over year to $829 million. The figure was higher than our estimate of $781.7 million. Further, net written premiums at Specialty Financial increased 48% year over year to $261 million. The figure was higher than our estimate of $224.3 million.

Net written premiums at other divisions decreased 8% year over year to $66 million. The figure was lower than our estimate of $80.6 million. The Specialty P&C Insurance segment’s underwriting profit decreased 9.5% year over year to $143 million in the quarter. A higher frequency of lower severity convective storms throughout the 2023 period resulted in catastrophe losses of $56 million, which included the impact of Hurricane Ian. Higher year-over-year underwriting profit in the Property and Transportation and Specialty Financial Groups was more than offset by lower underwriting profit in the Specialty Casualty Group. The figure was higher than our estimate of $123.9 million. The combined ratio deteriorated 110 basis points (bps) year over year to 92.2% at the segment.

Financial Update

American Financial exited the third quarter with total cash and investments of $14.8 billion, which increased 1.9% from the 2022-end level. The figure is lower than our estimate of $15.4 billion. As of Sep 30, 2023, long-term debt totaled $1.5 billion, which decreased 1.5% from the level at 2022 end.

As of Sep 30, 2023, the company’s adjusted book value per share, which excludes unrealized gains (losses) related to fixed maturities, was $53.90, up 0.3% from the 2022-end level. Annualized return on equity came in at 15.7% for the third quarter, expanding 100 bps year over year.

Prudent Capital Deployment

American Financial declared a special cash dividend of $1.50 per share in the third quarter. The dividend will be paid out on Nov 22 to shareholders of record at the close of business as of Nov 13, 2023. The aggregate amount of this special dividend will be approximately $126 million. During the third quarter of 2023, AFG repurchased shares for $86 million.

2023 Guidance Revised

American Financial continues to expect core net operating earnings in the range of $10.15 to $11.15 per share. The guidance reflects updated expectations of a below average crop year, offset by higher-than-previously expected net investment income. At the midpoint of the range, revised guidance would produce a core return on equity of approximately 20%. The insurer expects an overall 2023 calendar year combined ratio in the range of 90% to 92%.

AFG has increased guidance for net written premiums and expects net written premiums to be 6% to 8% higher than the $6.2 billion reported in 2022. This compares to previous guidance of growth in the range of 5% to 8% and will establish a record for net written premiums for 2023. American Financial continues to expect a return of approximately 9% on alternative investments.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended downward during the past month.

VGM Scores

At this time, American Financial has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 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.

Performance of an Industry Player

American Financial is part of the Zacks Insurance - Property and Casualty industry. Over the past month, First American Financial (FAF), a stock from the same industry, has gained 10.6%. The company reported its results for the quarter ended September 2023 more than a month ago.

First American Financial reported revenues of $1.48 billion in the last reported quarter, representing a year-over-year change of -18.8%. EPS of $1.22 for the same period compares with $1.62 a year ago.

First American Financial is expected to post earnings of $1.19 per share for the current quarter, representing a year-over-year change of -11.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -7.4%.

First American Financial has a Zacks Rank #4 (Sell) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of C.

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