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American Financial (AFG) Q3 Earnings Beat, Revenues Rise Y/Y

American Financial Group AFG reported third-quarter 2021 core net operating earnings per share of $2.71, which beat the Zacks Consensus Estimate by 37.6%. Also, the bottom line increased 10.6% year over year.

The company’s results benefited from growing revenues, improved underwriting profit in Specialty Casualty insurance operations, higher P&C net investment income as well as reduced costs.

Behind the Headlines

Total operating revenues of about $1.7 billion increased 13.3% year over year. This top-line increase can be attributed to higher net investment income and an increase in net earned premiums at its P&C insurance as well as higher other income.

Net earned premiums at its P&C insurance increased 10.7% to $1.5 billion. Net investment income of $169 million increased 38.5% year over year.

American Financial’s total cost and expenses were $1.5 billion, down 1.9% year over year due to lower other expenses.

Segment Results

Specialty Property and Casualty Insurance generated $1.7 billion in net premiums written, up 16% year over year, due to an improvement in the economy, new business opportunities and a strong renewal rate environment.

Pretax core operating earnings were a record $329 million in the third quarter, up 60% year over year. The upside was due to higher P&C underwriting profit and substantially higher P&C net investment income, primarily due to higher earnings from alternative investments.

Underwriting profit of $169 million was up 62.5%, attributable to a higher year-over-year underwriting profit in Specialty Casualty Group and to a lesser extent, Specialty Financial Group.

The segment’s combined ratio improved 310 basis points (bps) year over year to 89%, courtesy of an improvement of 870 bps in Specialty Casualty Group and 740 bps in Specialty Financial divisions.

While net written premiums in Property & Transportation Group grew 22% year over year to $773 million in the quarter, the same at Specialty Casualty Group increased 14% year over year to $732 million. Further, net written premiums at Specialty Financial and Other divisions improved 8% and 2%, respectively, year over year.

Financial Update

As of Sep 30, 2021, American Financial had cash and investments of $16.4 billion, which grew 21.4% from the level at 2020 end.

As of Sep 30, 2021, long-term debt of $1.9 billion was up 0.05% from the 2020-end level.

As of Sep 30, 2021, the company’s book value per share (excluding unrealized gains/losses on fixed maturities) was $59.70, down 6.1% from the figure at 2020 end.

Annualized return on equity was 16.6%, up 370 bps year over year. The company had about $3 billion of excess capital as of Sep 30, 2021.

Prudent Capital Deployment

The company declared a special cash dividend of $4 per share, which will be paid on Nov 22, 2021 to shareholders of record as of Nov 15. The aggregate amount of this special dividend will be nearly $340 million. This special dividend is in addition to the company’s regular quarterly cash dividend of 56 cents per share paid out on Oct 25, 2021. The company has declared $24 per share in special dividends in 2021 so far.

The company bought back $12 million worth shares in the reported quarter.

2021 Guidance Upped

American Financial estimates core net operating earnings in the bracket of $10.10-$10.70 per share, an increase from the earlier expectation of $8.40-$9.20.

American Financial estimates combined ratio in the range of 86% to 88%, an improvement from the earlier expectation of 88% to 90%.

American Financial expects net written premiums to increase 11% to 14% from the $5.0 billion reported in 2020, which marks an increase from the previous expectation of 10% to 13% estimated previously.

Discontinued Annuity Operations

On May 28, 2021, American Financial completed the sale of its Annuity business to Mass Mutual. Initial cash proceeds from the sale were $3.5 billion. The company recognized an after-tax non-core gain on the sale of $656 million in the first half of 2021.

Zacks Rank

American Financial currently 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

Of the insurance industry players that have reported third-quarter results so far, Selective Insurance Group, Inc. SIGI, Arch Capital Group Ltd. ACGL and Cincinnati Financial Corporation CINF beat the respective Zacks Consensus Estimate for earnings.

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