American Financial (AFG) Beats on Q2 Earnings, Revises View

American Financial Group, Inc. AFG reported second-quarter 2019 net operating earnings per share of $2.12, beating the Zacks Consensus Estimate by 5.5%. Also, the bottom line increased 3.9% year over year.

Higher core operating earnings in Annuity Segment were partially offset by lower operating earnings in Specialty Property and Casualty Insurance operations.

Behind the Headlines

Total operating revenues of $1.8 billion rose 5.5% year over year. This top-line improvement can be attributed to higher net investment income and increase in net earned premiums at its P&C insurance.

Net investment income of $580 million increased 9.4% year over year.

American Financial’s total cost and expenses were $1.7 billion, up 8.1% year over year due to higher P&C insurance loss and expenses, annuity, life, accident and health benefits, interest charges on borrowed money and expenses plus expenses of managed investment entities as well as other expenses.

American Financial Group, Inc. Price, Consensus and EPS Surprise

American Financial Group, Inc. Price, Consensus and EPS Surprise

American Financial Group, Inc. price-consensus-eps-surprise-chart | American Financial Group, Inc. Quote

Segment Results

Specialty Property and Casualty Insurance generated $1.3 billion in net premiums written, up 1% year over year, driven by 44% increase in Specialty Casualty, partially offset by 6% lower premiums from Specialty Financial.

Core operating earnings were $785 million in the second quarter, down 2.8% year over year. Higher P&C net investment income was offset by lower underwriting profit.

Underwriting profit of $60 million declined 17.8%, as higher underwriting profits of Specialty Casualty Group were offset by lower underwriting profit in Property and Transportation and Specialty Financial Groups.

The segment’s combined ratio deteriorated 130 basis points (bps) year over year to 95%.

Annuity segment’s premiums of $1.4 billion declined 3.6% year over year, as higher traditional fixed annuity premiums in the financial institutions channel were offset by lower FIA premiums in the retail and broker dealer channels.

Pre-tax income totaled $104 million, down nearly 8% year over year.

Financial Update

As of Jun 30, 2019, American Financial had cash and investments of $52.9 billion, which grew 9.1% from the level at 2018 end.

As of Jun 30, 2019, long-term debt of $1.4 billion was up 9.3% from 2018-end level.

As of Jun 30, 2019, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $58.49, up 6.6% from the figure at 2018 end.

Annualized return on equity was 14.7%, down 40 bps year over year.

Prudent Capital Deployment

The company paid cash dividends of $1.90 per share during the quarter including $1.50 per share special dividend.

2019 Guidance

American Financial estimates net operating earnings in the bracket of $8.40 - $8.80 per share, compared with the earlier expectation of $8.35-$8.85 per share.

Pretax annuity core operating earnings are expected to increase in the range of $375 million to $405 million.

Annuity premiums are expected to decline 5% to 10% from record $5.4 billion of premiums in 2018, given several crediting rate decreases to maintain appropriate returns on its annuity sales in view of continuous drop in market interest rates.

Zacks Rank

American Financial currently carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other P&C Insurers

Second-quarter earnings of The Progressive Corporation PGR and RLI Corp. RLI beat the respective Zacks Consensus Estimate while that of The Travelers Companies, Inc. TRV missed expectations.

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