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American Financial's Acquisitions Impress, Low Yield a Drag

We issued an updated research report on American Financial Group, Inc.AFG on Oct 7, 2015.

American Financial has been actively involved in startups, small to medium-sized acquisitions, and launch of products over the past decade. The company made 11 acquisitions and startups during the same period. These transactions testify to the company's excellent use of excess capital.

Furthermore, aided by its recent acquisitions, American Financial is expected to achieve double-digit returns on capital in specialty and casualty business. The insurer should also witness immediate earnings accretion.

American Financial has been witnessing price strengthening for 15th consecutive quarter. The company estimates Property and Casualty renewal pricing to be either flat or see a 2% rise in 2015. Along with price increases, loss cost trends continue to be stable and appear 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 been reporting better combined ratio than that of industry average for the larger part of the last three decades. This excellent trend has been primarily supported by its specialty niche focus, product line diversification, stringent underwriting discipline and alignment of compensation incentives. We expect this trend to continue, going forward.

American Financial has traditionally maintained moderate adjusted financial leverage around low 20%, with good cash flow and interest coverage ratio. A strong financial position cushions the company to engage in shareholder friendly moves.

However, low interest rates continue to be a headwind for the company as it directly affects the investment income through low yield. Moreover, the company's earnings have traditionally been affected by catastrophes. Even drought, which does not otherwise qualify as a catastrophe, had impacted the company's earnings historically, given its exposure to crop business.

Zacks Rank

American Financial currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Property and Casualty insurance space are Hallmark Financial Services Inc. HALL , ACE Limited ACE and The Travelers Companies, Inc. TRV . All these stocks sport a Zacks Rank #1 (Strong Buy).

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TRAVELERS COS (TRV): Free Stock Analysis Report

ACE LIMITED (ACE): Free Stock Analysis Report

HALLMARK FINL (HALL): Free Stock Analysis Report

AMER FINL GROUP (AFG): Free Stock Analysis Report

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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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