American Financial Stable on Strong Fundamentals - Analyst Blog

On Mar 14, we issued an updated research report on property and casualty insurer American Financial Group Inc. AFG. Of late, the company has benefited significantly from the improving fundamentals in the industry.

For the recently reported fourth quarter, American Financial reported operating earnings per share of $1.28, beating the Zacks Consensus Estimate by 4.07% and surging 91% year over year. The earnings beat came on the back of record earnings from the company's Annuity segment and significantly higher underwriting profitability in its Specialty Property and Casualty insurance operations.

American Financial is trending comfortably on its inorganic growth profile. The company is reasonably active about new startups, small to medium-sized acquisitions, and the initiation of new products. Over the past decade, the company has successfully made 10 acquisitions and startups. The recent announcement of American Financial's decision to acquire Summit Holdings serves as another strategic fit for the company, which will add yet another specialty niche insurance business with a leading market position in the workers' compensation business.

The company is also witnessing increasing pricing in its property and casualty business. Along with price increase, loss cost trends also continue to be stable and appear to be relatively benign across all the property and casualty businesses. These are strong positive trends that offer the company a favorable long-term growth environment.

American Financial has also managed to keep its combined ratio better than the industry average. In 2013, the company's combined ratio was 93.5% which improved 190 basis points (bps) year over year. Given a specialty niche focus, product line diversification, stringent underwriting discipline and alignment of compensation incentives we expect the trend to continue.

Furthermore, American Financial boasts of a strong capital position which allows it to call for dividend increases as well as special dividends.

However, low interest rates will remain as near-term headwinds. Also, exposure to catastrophes imparts volatility to the company's earnings.

American Financial retains a Zacks Rank #1 (Strong Buy). Other stocks like Alleghany Corp. Y, AmTrust Financial Services, Inc. AFSI and Atlas Financial Holdings, Inc. AFH, all with the same Zacks Rank as American Financial, are worth considering.