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Add American Financial (AFG) for an Impressive Portfolio


Shares of American Financial Group, Inc. AFG have outperformed the Zacks categorized Property and Casualty Insurance industry, quarter to date. Shares gained 4.25% compared with the industry’s 2.56% increase. The company also witnessed estimates moving north over last 60 days.

American Financial is a niche player in P&C and annuity markets and has been experiencing a sustained increase in price. The company expects renewal pricing to increase between flat to a 1% increase. Along with price increase, loss projects cost trends to remain stable and appear relatively benign across all P&C lines.

The Zacks Rank #2 (Buy) insurer has an impressive inorganic profile with strategic buyouts and startups. The company is prudently investing in business it is knowledgeable about. Given a continued solid operational performance, management expects Specialty P&C net premiums written to grow 3–7% (up from 2–6% estimated earlier) in 2017.

Of this, property and transportation group is estimated to generate net written premiums of 2–6% compared with the range of flat to 3% increase projected earlier. Meanwhile, specialty casualty group will generate net written premium growth of 5–9%, unchanged from the previous guidance. Net written premiums in specialty financial group are projected between 2- 6%, up from previous estimate of flat to 4% increase.

Over several years now, the American Financial has been witnessing a favorable combined ratio, which is a measure of an insurer’s underwriting profitability. The company now estimates a combined ratio between 92-94% in 2017.

The property and transportation group is estimated to deliver a combined ratio between 91- 95%, while the specialty casualty group is projected to report a combined ratio varying between 94-96%. The combined ratio for specialty financial group is pegged at a band of 84-88%.

The company’s shareholder-friendly approach makes it an attractive pick for the yield-seeking investors. American Financial had 4.1 million shares remaining under authorization. Last quarter, the company also paid a special dividend besides increasing the payout regularly. The insurer boasts a solid capital position with adjusted financial leverage around 20%, a good cash flow and a strong interest coverage ratio.

Valuation remains impressive on a price to earnings as well as price to book basis. The P/E ratio is 14.9, a discount of 47.5% to the industry average. Though on a price-to-book basis, the multiple is trading slightly higher than the industry average, return on equity of 11.1% is substantially ahead of the industry average of 6.5%.

With respect to earnings revision, the Zacks Consensus Estimate for 2017 improved 4.9% to $6.58, while the same for 2018 increased 3.1% to $6.63. The expected long-term earnings growth is currently tipped at 8%.

Other Stocks to Consider

Investors interested in property and casualty insurers can look at First American Financial Corp. FAF, State National Companies, Inc. SNC and CNA Financial Corp. CNA.

State National Companies provides property and casualty insurance in the U.S. The company delivered positive surprises in two of last four quarters, with average beat of 20.54%. The company carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

First American Financial provides financial services. The company delivered positive surprises in last four quarters with an average beat of 14.12%. The company sports a Zacks Rank #2 (Buy).

CNA Financial offers commercial P&C insurance products, mainly across the United States. The company delivered positive surprises in last four quarters with an average beat of 12.45%. The stock carries a Zacks Rank #2.

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