American Financial Eyes Growth Despite Cat Loss Exposure

On Jun 16, 2016, we issued an updated research report on American Financial Group Inc. (NYSE:AFG) .

The property and casualty (P&C) insurer’s first-quarter 2016 earnings outperformed the Zacks Consensus Estimate and were in line with the year-ago figure. The company benefited from higher underwriting profit and net investment income in Specialty Property and Casualty (P&C) insurance operations in the quarter. Revenues improved on increased premiums and net investment income.

Growth Prospects

American Financial is poised to gain from its impressive inorganic growth story and restructuring initiatives.

The company’s combined ratio has been better than the industry average for 26 out of the last 28 years. In fact, the company witnessed an improvement of 230 basis points in the same in the reported quarter. American Financial has been performing better than the industry owing to its specialty niche focus, product line diversification, stringent underwriting discipline and alignment of compensation incentives. We expect the positive trend to continue in the future. The company now estimates a combined ratio between 92% and 94% in 2016.

The P&C insurer anticipates an increase in excess capital through 2016 on the back of the divestiture of its Run-off Long-Term Care Insurance business to HC2 Holdings, Inc. This sale is expected to generate $110 million in excess capital. As of Mar 31, 2016, the company recorded excess capital of around $900 million.

Further, American Financial has traditionally maintained moderate adjusted financial leverage of around 20%, with good cash flow and interest coverage ratio. In the first quarter, the company returned $100 million through dividends and share repurchases. Also, the company bought back another $74 million worth shares and has about 4.2 million shares remaining under its authorization.

Headwinds

American Financial’s exposure to cat losses has been weighing on its earnings performance. In the first quarter, the insurer witnessed cat loss in the Property and Transportation Group of $6 million, up 50% year over year.

Investment results are expected to remain pressurized owing to the low interest rate environment.

In addition, the company experienced a rise in its expenses during the first quarter.

Zacks Rank and Stocks to Consider

Currently, American Financial carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space are Markel Corp. (NYSE:MKL) , NMI Holdings, Inc. (NASDAQ:NMIH) and National General Holdings Corp. (NASDAQ:NGHC) . Each of these stocks sports a Zacks Rank #1 (Strong Buy).

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