American Financial (AFG) Q3 Earnings Top Estimates, Soar Y/Y

American Financial Group, Inc.AFG reported third-quarter 2018 net operating earnings per share of $2.19, beating the Zacks Consensus Estimate of $1.83 by 19.7%. Moreover, the bottom line improved by a whopping 106.6% year over year.

American Financial Group, Inc. Price, Consensus and EPS Surprise

American Financial Group, Inc. Price, Consensus and EPS Surprise | American Financial Group, Inc. Quote

Apart from delivering a record third-quarter earnings performance as well as an annualized core return on equity (ROE) over 15%, the company benefited from substantial growth across its portfolio of businesses along with solid profitability and better investment performance in both Specialty Property and Casualty (P&C) Insurance and Annuity Segments.

Including 31 cents per share of after-tax net realized gains on securities as well as special A&E charges, net income shot up to $2.26 per share.

Behind the Headlines

Total operating revenues of $1.9 billion rose 6.8% year over year. This top-line improvement can be attributed to higher net investment income, P&C insurance net earned premiums as well as other income. The metric also outpaced the Zacks Consensus Estimate of $1.3 billion by 42.6%.

Net investment income of $527 million improved 11.9% year over year.

American Financial's total cost and expenses came in at $1.8 billion, down 2.3% year over year due to lower P&C insurance loss & expenses, interest charges on borrowed money as well as other expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.5 billion in net premiums written, up 1.6% year over year. Increase in net premiums written in the Specialty Casualty (11.4%), Specialty Financial (2%) and Other (37.1%) on a year-over-year basis resulted in the upside.

Underwriting profit of the segment skyrocketed 511.1% from the prior-year quarter to $55 million.

The segment's combined ratio improved 360 basis points (bps) year over year to 95.7% owing to improvement of 740 bps in Specialty Casualty and 780 bps in Special Financial divisions. However, deterioration of 110 bps in the combined ratio of Property & Transportation division partially offset this upside.

The Annuity segment's statutory premiums of $1.4 billion surged 57.3% year over year, attributable to higher premiums in the Financial Institutions, Retail, Education Market, Pension Risk Transfer and Broker-Dealer channels.

Pretax income totaled $117 million, up 14.7% year over year.

Financial Update

As of Sep 30, 2018, American Financial had cash and investments of $47.8 billion, which grew 3.9% from $46 billion at 2017 end.

As of Sep 30, 2018, long-term debt of $1.3 billion inched up 0.1% from the 2017-end level.

As of Sep 30, 2018, the company's book value per share (excluding unrealized gains/losses on fixed maturities) was $57.22, up 6.9% from the level at 2017 end.

Annualized return on equity of 16.3% as of Sep 30, 2018 improved from 1% in the prior-year quarter.

2018 Guidance Revised

Based on the results of the first nine months of 2018, American Financial projects core net operating earnings per share in the range of $8.35-$8.65 (up from the previous band of $8.10-$8.60). This updated outlook signifies the effect of the company's operational performance through the first nine months of 2018 as well as its expectations for fourth-quarter 2018 catastrophe loss, which will include Hurricane Michael.

The insurer anticipates P&C net written premium to grow between 5% and 7% (slightly down from the earlier band of 4-8%) and the overall combined ratio within 93-94% (a deterioration from the previously predicted range of 92-94%). These projections have been made on the basis of the results achieved during the first nine months of 2018 and fourth-quarter catastrophe loss estimates associated with Hurricane Michael.

Banking on year-to-date sales, the company now anticipates full-year annuity premiums between 17% and 20% (up from the past guided band of 10-15%).

Backed by a better-than-expected earnings performance in the reported quarter, the insurer now projects pre-tax annuity earnings between $440 million and $450 million (up from the former forecast of $430-$450 million).

Business Update

During the quarter under review, the company finished a detailed comprehensive internal review of its asbestos and environmental exposures pertaining to the run-off operations of its P&C Group and its exposures associated with former railroad and manufacturing operations and sites. The internal review led to non-core after-tax special charges of $21 million ($27 million pretax) to increase AFG's A&E reserves.

Zacks Rank

American Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

Performance of Other P&C Insurers

Among other players from the insurance industry having already reported third-quarter earnings, the bottom line of The Progressive Corporation PGR and The Travelers Companies, Inc.'s TRV outpaced the respective Zacks Consensus Estimate while RLI Corp.'s RLI earnings missed the same.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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