Why Is American Financial (AFG) Down 8.3% Since Last Earnings Report?

A month has gone by since the last earnings report for American Financial Group (AFG). Shares have lost about 8.3% 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 Q3 Earnings Beat, Revenues Rise Y/Y

American Financial Group reported third-quarter 2021 core net operating earnings per share of $2.71, which beat the Zacks Consensus Estimate by 37.6%. Also, the bottom line increased 10.6% year over year.

The company’s results benefited from growing revenues, improved underwriting profit in Specialty Casualty insurance operations, higher P&C net investment income as well as reduced costs.

Behind the Headlines

Total operating revenues of about $1.7 billion increased 13.3% year over year. This top-line increase can be attributed to higher net investment income and an increase in net earned premiums at its P&C insurance as well as higher other income.

Net earned premiums at its P&C insurance increased 10.7% to $1.5 billion. Net investment income of $169 million increased 38.5% year over year.

American Financial’s total cost and expenses were $1.5 billion, down 1.9% year over year due to lower other expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.7 billion in net premiums written, up 16% year over year, due to an improvement in the economy, new business opportunities and a strong renewal rate environment.

Pretax core operating earnings were a record $329 million in the third quarter, up 60% year over year. The upside was due to higher P&C underwriting profit and substantially higher P&C net investment income, primarily due to higher earnings from alternative investments.

Underwriting profit of $169 million was up 62.5%, attributable to a higher year-over-year underwriting profit in Specialty Casualty Group and to a lesser extent, Specialty Financial Group.

The segment’s combined ratio improved 310 basis points (bps) year over year to 89%, courtesy of an improvement of 870 bps in Specialty Casualty Group and 740 bps in Specialty Financial divisions.

While net written premiums in Property & Transportation Group grew 22% year over year to $773 million in the quarter, the same at Specialty Casualty Group increased 14% year over year to $732 million. Further, net written premiums at Specialty Financial and Other divisions improved 8% and 2%, respectively, year over year.

Financial Update

As of Sep 30, 2021, American Financial had cash and investments of $16.4 billion, which grew 21.4% from the level at 2020 end.

As of Sep 30, 2021, long-term debt of $1.9 billion was up 0.05% from the 2020-end level.

As of Sep 30, 2021, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $59.70, down 6.1% from the figure at 2020 end.

Annualized return on equity was 16.6%, up 370 bps year over year. The company had about $3 billion of excess capital as of Sep 30, 2021.

Prudent Capital Deployment

The company declared a special cash dividend of $4 per share, which will be paid on Nov 22, 2021 to shareholders of record as of Nov 15. The aggregate amount of this special dividend will be nearly $340 million. This special dividend is in addition to the company’s regular quarterly cash dividend of 56 cents per share paid out on Oct 25, 2021. The company has declared $24 per share in special dividends in 2021 so far.

The company bought back $12 million worth shares in the reported quarter.

2021 Guidance Upped

American Financial estimates core net operating earnings in the bracket of $10.10-$10.70 per share, an increase from the earlier expectation of $8.40-$9.20.

American Financial estimates combined ratio in the range of 86% to 88%, an improvement from the earlier expectation of 88% to 90%.

American Financial expects net written premiums to increase 11% to 14% from the $5.0 billion reported in 2020, which marks an increase from the previous expectation of 10% to 13% estimated previously.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in estimates revision. The consensus estimate has shifted 21.93% due to these changes.

VGM Scores

Currently, American Financial has a subpar Growth Score of D, however its Momentum Score is doing a lot better with an A. Following the exact same course, 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 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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