American Financial Group posts 17% ROE in Q1 despite EPS miss

American Financial Group (NYSE: AFG) reported first-quarter core operating earnings of $2.47 per share, a 36 percent year-over-year increase but short of the $2.55 analyst consensus, driven by strong insurance underwriting that produced a 17 percent core operating return on equity.

"We are pleased to report a core net operating ROE of 17% in the first quarter," S. Craig Lindner and Carl H. Lindner III, AFG’s Co-Chief Executive Officers, said in a statement. "Our specialty P&C businesses produced strong underwriting profitability against a backdrop of lower returns in our alternative investments portfolio."

The insurer’s specialty property and casualty operations generated a combined ratio of 90.3 percent, a 3.7-point improvement from the prior-year period. This drove underwriting profit up 66 percent to $156 million. Gross written premiums rose six percent and net written premiums grew three percent, with the company citing a good renewal rate environment and new business opportunities.

AFG returned nearly $260 million to shareholders during the quarter through $60 million in share repurchases and dividends totaling $2.38 per share. The company also reached an agreement to sell its Charleston Harbor Resort & Marina, expecting to recognize a pretax operating gain of approximately $125 million when the deal closes in the second or third quarter.

Underwriting Strength by Segment

All of AFG's specialty P&C groups reported higher year-over-year underwriting profit.

The Property and Transportation Group saw underwriting profit climb to $65 million from $37 million, with a combined ratio improving 4.9 points to 87.6 percent.
The Specialty Casualty Group reported a $34 million underwriting profit, up from $20 million, achieving a 95.8 percent combined ratio.
The Specialty Financial Group’s underwriting profit grew to $57 million from $37 million, posting an exceptional 80.0 percent combined ratio.

The strong underwriting results and favorable prior-year reserve development of $70 million helped offset a weak quarter for the company's alternative investments, which posted an annualized return of negative 0.4 percent. Excluding alternatives, net investment income increased eight percent year-over-year.

The results show the company's core insurance business remains highly profitable, though the earnings miss and weak alternative investment returns may draw investor scrutiny. The significant capital gain expected from the resort sale provides a future boost to capital, and investors will watch for the transaction's closing later this year.

This article is for informational purposes only and does not constitute investment advice.