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Here's Why Hold Strategy is Apt for American Financial Stock

American Financial Group, Inc. AFG is well-poised to benefit from robust property and casualty (P&C) insurance operations and effective capital management strategies.

The stock has a VGM Score of A. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

The company has a trailing four-quarter positive earnings surprise of 5.73%, on average. Return on equity of 13% in the trailing 12 months was better than the industry average of 6.5%, reflecting the company’s efficiency in utilizing shareholders’ funds.

Factors Driving Performance

This P&C insurer continues to benefit from improved revenues, which have witnessed a CAGR of 7.5% in the past five years (2014-2019). Robust premiums from the company’s P&C business operations and higher net investment income have been driving the top line. Inclusion of Atlas Financial Holdings, Inc.’s AFH paratransit business in June last year has also boosted the company’s premiums. Management expects Specialty Property and Casualty Group’s net written premiums in 2020 to be in the range that is 7% to 1% lower than results reported in 2019 (excluding the impact of Neon runoff).

Its insurance business has also been benefiting from strong underwriting results, which have maintained the combined ratio at favourable levels (below 95%) for the last seven years. For 2020, the company expects combined ratio for the Specialty Property & Casualty Group in the range of 92% to 94%.

Moreover, American Financial’s diversified business mix of specialty P&C insurance operations and annuity business has been a market leader. Renewal pricing has remained strong, which in turn, boosted the company’s P&C insurance operations. Further, it has been undertaking efforts in the form of buyouts, business bolt-ons and start-ups in a bid to bolster insurance portfolio. Management estimates Property and Casualty renewal pricing in 2020 to be up 5-8%, which indicates an improvement from the prior expectation of 3% to 5%.

The company’s intensified focus on traditional fixed and indexed annuities has also led to its Annuity segment increasing premiums to three folds in the past 10 years. However, the segment’s sales are anticipated to decline in the second quarter and beyond. Lower interest rates on account of the COVID-19 induced financial turmoil are likely to result in the decline.

Shares of this Zacks Rank #3 (Hold) P&C insurer have lost 43.7% in a year compared with the industry’s decline of 16.8%.

 

Nevertheless, American Financial seeks to get rid of non-performing business units and instead deploy capital on tapping insurance units and opportunities, which have the potential to generate targeted returns. These efforts, as a result, will enable the P&C insurer to achieve operational excellence in the days ahead. Also, the company’s enjoys strong rating from renowned credit rating agencies. Notably, the stock has seen the Zacks Consensus Estimate for the second quarter being revised upward by 133.8% over the last 30 days.

Additionally, the company’s improved liquidity position has led to a strong balance sheet. This implies that American Financial has sufficient cash reserves to meet its debt obligations. It has an undrawn credit facility of $500 million as well. Notably, the company has no debt maturing before 2026. A strong liquidity position have generated excess capital of about $610 million as of Mar 31, 2020, through which American Financial has been returning shareholders’ value via dividend payments and share buybacks.

The dividend payments have been hiked in each of the last 14 years, which indicates the company’s efficient capital management strategy. Notably, its dividend yield of 3% lies above the industry’s average of 0.5%, thereby making it an attractive pick for yield-seeking investors.

Stocks to Consider

Some better-ranked stocks in the insurance space include Fidelity National Financial, Inc. FNF and Everest Re Group, Ltd. RE. While Fidelity National sports a Zacks Rank #1 (Strong Buy), Everest Re carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National is a leading provider of title insurance, specialty insurance and claims management services. It beat estimates in each of the trailing four quarters, with the average surprise being 21.13%.

Everest Re writes property and casualty, reinsurance and insurance in the United States, Bermuda and international markets. It beat estimates in each of the trailing four quarters, the average positive surprise being 30.89%.

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Everest Re Group, Ltd. (RE): Free Stock Analysis Report

Fidelity National Financial, Inc. (FNF): Free Stock Analysis Report

American Financial Group, Inc. (AFG): Free Stock Analysis Report

Atlas Financial Holdings, Inc. (AFH): 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.

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