Shares of American Financial Group Inc. AFG have gained 22.2% year to date, outperforming the Zacks categorized Property, Casualty and Title Insurance industry’s increase of 21.4%. In fact, the shares hit a new 52-week high of $88.09 on Dec 29. About 0.2 million shares exchanged hands in the last trading session and the stock finally closed at $88.05, up 0.4%.
Based on the strong performance in the first three quarters of 2016, the company expects earnings of $5.55–$5.75 per share in 2016. The Zacks Consensus Estimate for 2016 is currently pegged at $5.63, translating to a year-over-year growth of 3.6%.
American Financial is a niche player in the Property and Casualty (P&C) and annuity markets. The company witnessed continuous pricing increase till 2015, though the same remained flat in 2016, largely due to lower prices in workers’ comp businesses. Nonetheless, the insurer intends to maintain satisfactory rates in P&C renewal pricing going forward. Along with price increase, projects loss cost trends to remain stable and appear relatively benign across all P&C lines. These are some positives that should favor the company in the long run.
Notably, the insurer’s combined ratio has been better than the industry average for 26 out of the last 28 years. American Financial now estimates a combined ratio between 92% and 94% in 2016. The property and transportation group is estimated to deliver combined ratio between 93% and 96% (revised from the range of 93% to 97% guided earlier), while specialty casualty group is projected to deliver combined ratio between 93% and 95% (revised from the range of 92% to 94% guided earlier). Combined ratio for the specialty financial group is projected in the range of 83% to 86% (revised from the range of 84% to 88% expected earlier).
The Zacks Rank #3 (Hold) insurer is well poised to benefit from impressive inorganic growth deals. Last month, American Financial closed the merger with National Interstate Corporation. The merger will fortify the insurer’s capabilities as both the companies are engaged in P&C insurance. This apart, a strong balance sheet, low leverage, and disciplined capital management coupled with improving industry fundamentals will drive overall growth.
Valuation remains attractive at present as the stock is currently trading at a forward P/E of 15.6x, a 46% discount to the peer group average of 29.0x. On a price-to-book basis, shares are trading at 1.4x compared with the peer group average of 1.5x. American Financial has a trailing 12-month return on equity (ROE) of 9.7%, substantially higher than the peer group average of 6.7%.
The company has also been witnessing upward estimate revisions for 2017 over the last two months, thereby instilling investor confidence on the company’s fundamental strength. The expected long-term earnings growth is estimated at 8%.
Stocks to Consider
Some better-ranked insurers are Alleghany Corporation Y, Health Insurance Innovations, Inc. HIIQ, and Primerica, Inc. PRI. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.