American Financial (AFG) Down 5.1% Since Last Earnings Report: Can It Rebound?

It has been about a month since the last earnings report for American Financial Group (AFG). Shares have lost about 5.1% 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 the most recent earnings report in order to get a better handle on the important catalysts.

American Financial Beats on Q1 Earnings, Raises EPS View

American Financial Group, Inc. reported first-quarter 2022 net operating earnings per share of $3.56, which surpassed the Zacks Consensus Estimate by 45.3%. The bottom line improved 50% year over year.

American Financial’s results benefited from net investment income, improved underwriting and profit in each of the Specialty P&C Groups, offset by higher expenses.

Behind the Headlines

Total revenues of $1.6 billion increased 5.2% year over year in the quarter. The growth came on the back of higher P&C insurance net earned premiums, net investment income and other income. Net investment income climbed 22.3% year over year to $230 million in the quarter under review.

Total cost and expenses increased 4.5% year over year to $1.2 billion due to higher P&C insurance losses & expenses.

Segmental Update

Specialty P&C Insurance segment generated $1.4 billion in net written premiums, which rose 14% year over year, attributable to strong performance across the Property & Transportation, Specialty Casualty and Other divisions as well as increasing renewal rate in the entire P&C group.

While net written premiums in Property & Transportation Group grew 24% year over year to $501 million in the quarter, the same at Specialty Casualty Group increased 11% year over year at $650 million. Further, net written premiums at Specialty Financial declined 1% year over year and Other divisions improved 9% year over year.

The segment’s underwriting profit increased 55.2% year over year to $208 million in the quarter, primarily driven by improved underwriting profitability in each of the Specialty P&C Groups.

The combined ratio improved 450 basis points (bps) year over year to 84% at the segment, courtesy of an improvement of 960 bps across Specialty Casualty Group and 210 bps in Specialty Financial divisions.

Discontinued Annuity Operations

In May 2021, AFG completed the divestiture of its Annuity business to Mass Mutual for cash proceeds of $3.57 billion. AFG recognized an after-tax non-core gain on the sale of $656 million in the first half of 2021. The sale continues to be subject to tax-related post-closing adjustments, which are expected to be settled in 2022.

Financial Update

American Financial exited the first quarter with cash and investments of $15.7 billion, which declined 0.3% from the 2021-end level. As of Mar 31, 2022, long-term debt totaled $1.9 billion, which decreased 2.4% from the level at 2021 end.

As of Mar 31, 2022, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $58.14, up 1.2% from the 2021-end level.
Annualized return on equity (ROE) came in at 23.5% for the first quarter, contracting 640 basis points year over year.

Prudent Capital Deployment

American Financial declared a special cash dividend of $8 per share, which will be paid out on May 27, 2022 to shareholders of record as of May 20. The aggregate amount of this special dividend will be nearly $680 million. This special dividend is in addition to the company’s regular quarterly cash dividend of 56 cents per share paid out on Apr 25, 2022. The company has declared $10 per share in special dividends in 2022 so far.

American Financial bought back shares worth around $4.6 million in the reported quarter.

2022 Guidance Revised

American Financial increased core net operating earnings guidance to $10.50 - $11.50 per share from the earlier guidance of $9.75 - $10.75 per share. American Financial continues to expect an overall calendar year combined ratio in the range of 85% to 87%. American Financial expects net written premiums to be up 8% to 12% from $5.6 billion reported in 2021.

How Have Estimates Been Moving Since Then?

It turns out, estimates review flatlined during the past month.

VGM Scores

At this time, American Financial has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

American Financial has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

Performance of an Industry Player

American Financial belongs to the Zacks Insurance - Property and Casualty industry. Another stock from the same industry, RenaissanceRe (RNR), has gained 4.2% over the past month. More than a month has passed since the company reported results for the quarter ended March 2022.

RenaissanceRe reported revenues of $1.57 billion in the last reported quarter, representing a year-over-year change of +27.2%. EPS of $3.50 for the same period compares with $0.09 a year ago.

RenaissanceRe is expected to post earnings of $5.59 per share for the current quarter, representing a year-over-year change of -0.9%. Over the last 30 days, the Zacks Consensus Estimate has changed -5.1%.

RenaissanceRe has a Zacks Rank #3 (Hold) based on the overall direction and magnitude of estimate revisions. Additionally, the stock has a VGM Score of B.

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