AFG Trading at a Premium to Industry: What Should Investors Do Now?

Shares of American Financial Group, Inc. AFG are trading at a premium to the Zacks Property and Casualty Insurance industry. Its price-to-book value of 2.39X is higher than the industry average of 1.63X. It has a Value Score of B. 

Shares of other insurers like The Travelers Companies, Inc. TRV, Palomar Holdings, Inc. PLMR and W.R. Berkley Corporation WRB are also trading at a multiple higher than the industry average. 

American Financial shares have gained 2.1% in the past year, underperforming its industry, the Finance sector, as well as the Zacks S&P 500 composite’s return.

AFG vs. Industry, Sector, S&P in One Year

With a market capitalization of $10.62 billion, the average volume of shares traded in the last three months was 0.5 million. AFG shares are trading above the 50-day moving average, indicating a bullish trend.

AFG’s Growth Projection Encourages

The Zacks Consensus Estimate for 2025 revenues is pegged at $8.32 million, implying a year-over-year improvement of 3.4%. The estimate for 2026 earnings per share and revenues indicates an increase of 9.4% and 5.9%, respectively, from the corresponding 2025 estimates. 

AFG has an impressive Growth Score of B. This style score helps analyze the growth prospects of a company. 

AFG’s Favorable Return on Capital

American Financial’s return on equity has also been improving over the last few quarters, reflecting its efficiency in utilizing shareholders’ funds. The trailing 12 months ROE was 20.2%, which compared favorably with the industry average of 8.3%.

Factors Acting in Favor of AFG

New business opportunities, increased exposure and a good renewal rate environment, coupled with additional crop premiums from the Crop Risk Services acquisition, position AFG well for growth.

American Financial, a niche player in the P&C market, is likely to benefit from strategic acquisitions and improved pricing. Improved industry fundamentals drive overall growth.

AFG witnessed average renewal pricing across the entire P&C Group. It intends to maintain satisfactory rates in P&C renewal pricing going forward. AFG expects to achieve overall renewal rate increases above prospective loss ratio trends to meet or exceed targeted returns.

Its combined ratio has been better than the industry average for more than two decades. Specialty niche focus, product line diversification and underwriting discipline should help AFG outperform the industry’s underwriting results.

Wealth Distribution 

The property and casualty insurer has increased its dividend for 18 straight years, apart from paying special dividends occasionally. This reflects its financial stability, which stems from robust operating profitability in the P&C segment, stellar investment performance and effective capital management.

Notably, the 10-year compound annual growth rate for the company's regular annual dividends stands at an impressive 12.4%. This track record underscores its prudent financial management and stability. The dividend yield is 2.5%, better than the industry average of 0.2%.

Final Take on AFG

American Financial’s prudent capital deployment, increased exposures, good renewal rate environment and improved combined ratio make it an attractive stock.

Despite its expensive valuation, American Financial should benefit from strategic acquisitions, new business opportunities, stronger underwriting profit and favorable growth estimates. It is, therefore, wise to hold on to this Zacks Rank #3 (Hold) stock. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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