American Financial Beats on Earnings, Keeps View - Analyst Blog

American Financial Group Inc. AFG reported first quarter 2014 operating earnings per share of $1.00, a couple of cents ahead of the Zacks Consensus Estimate. On a year-over-year basis, earnings increased 8.7%. The earnings beat came on the back of significantly higher underwriting profitability in its Specialty Property and Casualty insurance operations, partly offset by lower earnings in the Annuity segment. 

 

American Financial reported total revenue of $1.21 billion, up 5.5% year over year, and easily surpassed the Zacks Consensus Estimate of $827 million. The increase was driven by higher premiums and net investment income, partly offset by lower realized gains. 

 

Total cost and cost expense of $1.10 billion increased 7.9% year over year due to higher losses and expenses in both Property and Casualty and Annuity segments. 

 

Segment Results

 

Property and Casualty generated $755 million in net premium written, which increased 11.0% year over year primarily led by a 12% increase in premium written in the Specialty Casualty sub-segment, along with 3% growth each in the Specialty Financial and Property and Transportation sub segments. The segment's combined ratio improved 90 basis points year over year to 92.2%.

 

American Financial's Annuity segment reported $967 million premium which improved 55% year over year, primarily led by an exponential increase of 147% in sale of Single premium in the financial institutions markets.

 

Financial Update

 

Long-term debt at American Financial remained static at $913 million with the Dec 2013 level. 

 

Book value, a measure of net worth, increased 1.9% year over year to $46.79 per share.

 

Core net operating earnings generated annualized returns on equity of 9.1% in the quarter compared with 8.9% in the year-ago quarter.

 

2014 Guidance Reaffirmed 

 

American Financial reaffirmed its operating earnings expectation of $4.50 and $4.90 per share. Management expects core pre-tax Annuity operating earnings as well as premium to remain unchanged from the 2013 level of $328 million and $4 billion respectively. For its Property and Casualty group, the company expects net written premium to grow in the range of 17% to 21%.

 

Our Take

 

Going forward, we expect American Financial  to benefit from the recent developments in its Specialty Property and Casualty business such as the launch of the Aviation Division, closing of the Summit acquisition and the purchase of renewal rights that will expand its Public Sector Division. Improving industry fundamentals such as price strengthening and increase in renewal ratio would also drive overall growth.

 

Zacks Rank & Other Stocks

 

American Financial currently carries a Zacks Rank #3 (Hold). Most of the property and casualty players have already reported their first quarter earnings. Among these, Zacks Ranked #1 (Strong Buy) W.R.Berkley Corp.WRB, State Auto Financial Corp. STFC and Allied World Assurance Company Holdings, AGAWH surpassed the Zacks Consensus Estimate on earnings.