American Financial (AFG) Down 3.2% Since Last Earnings Report: Can It Rebound?
A month has gone by since the last earnings report for American Financial Group (AFG). Shares have lost about 3.2% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is American Financial due for a breakout? 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 Q1 Earnings Beat, Revenues Rise Y/Y
American Financial Group, Inc. reported first-quarter 2023 net operating earnings per share of $2.89, which surpassed the Zacks Consensus Estimate by 0.3% as well as our estimate of $2.72 per share. The bottom line decreased 18.8% year over year.
American Financial’s results benefited from higher Property and Casualty (P&C) insurance net earned premiums and other income, offset by improved expenses and lower net investment income.
Behind the Headlines
Total revenues of $1.7 billion increased 11.3% year over year in the quarter. The growth came on the back of higher P&C insurance net earned premiums and other income. The top line beat the Zacks Consensus Estimate by 4.5% and matched our estimate of $1.7 billion. P&C insurance net earned premiums of $1.4 billion climbed 10.4% year over year.
Net investment income decreased 5.6% year over year to $217 million in the quarter under review. The figure was higher than our estimate of $169.3 million.
Total cost and expenses increased 20.3% year over year to $1.4 billion due to higher P&C insurance losses and expenses, cost of managed investment entities and other expenses. The figure matched our estimate of $1.4 billion.
Segmental Update
The Specialty P&C Insurance segment generated $1.5 billion in net written premiums, which rose 11% year over year, attributable to strong performance across the Property & Transportation, Specialty Casualty, Specialty Financial and Other divisions. A combination of new business opportunities, increased exposures and a good renewal rate environment in the entire P&C group added to the growth.
While net written premiums in Property & Transportation Group grew 10% year over year to $522 million in the quarter, the same at Specialty Casualty Group increased 11% year over year at $722 million. Further, net written premiums at Specialty Financial increased 16% year over year and Other divisions improved 5% year over year.
Pre-tax core operating earnings of P&C Insurance segment of $350 million in the first quarter decreased 17.1% year over year.
The segment’s underwriting profit decreased 25.4% year over year to $155 million in the quarter. The decrease was due to each of the Specialty P&C Groups producing lower year-over-year underwriting profit following the record first-quarter results reported in the 2022 period.
The combined ratio deteriorated 520 basis points (bps) year over year to 89.2% at the segment due to a deterioration of 520 bps in Property & Transportation Group and 690 bps in Specialty Casualty and 450 bps in Specialty Financial. Catastrophe losses were $31 million, wider than the year-ago loss of $9 million.
Financial Update
American Financial exited the first quarter with cash and investments of $14.4 billion, which declined 0.4% from the 2022-end level. As of Mar 31, 2023, long-term debt totaled $1.4 billion, which decreased 1.2% from the level at 2022 end.
As of Mar 31, 2023, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $51.37, down 4.4% from the 2022-end level. Annualized return on equity came in at 18.9% for the first quarter, contracting 460 basis points year over year.
Prudent Capital Deployment
AFG declared cash dividends of $4.63 per share in the first quarter which include a $4 per share special dividend paid in February. In addition, American Financial bought back shares worth $24 million in the reported quarter.
2023 Guidance Revised
American Financial’s core net operating earnings guidance has remained unchanged at $11-$12 per share.
American Financial expects an overall calendar year combined ratio in the range of 87% to 89%, indicating an increase of one point at the midpoint of previous combined ratio guidance. American Financial expects net written premiums growth in the range of 3% to 6%, suggesting an increase at the top end of the previous range of 3% to 5%, when compared to $6.2 billion reported in 2022.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed an upward trend in estimates review.
VGM Scores
At this time, 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 A on the value side, putting it in the top 20% 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 trending upward for the stock, and the magnitude of these revisions looks promising. 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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American Financial Group, Inc. (AFG) : Free Stock Analysis Report
