American Financial Lags Industry, Trades at Premium: How to Play the Stock

Shares of American Financial Group, Inc. AFG have gained 6.5% in the past year, underperforming its industry, the Finance sector and the Zacks S&P 500 composite’s return of 16.9% and 21.1% and 11.5%, respectively. 

The 50-day SMA is a key indicator for traders and analysts to identify support and resistance levels. It is considered particularly important as this is the first marker of an uptrend or downtrend.

The insurer has a market capitalization of $10.64 billion. The average volume of shares traded in the last three months was 0.4 million.
AFG has been trading above its 50-day simple moving average (SMA), signaling a short-term bullish trend. Its share price as of Thursday was $127.43, down 15.1% from its 52-week high of $150.19.

AFG’s Expensive Valuation

Based on the forward 12-month price-to-book ratio, American Financial is currently trading at 2.43X, above its industry average of 1.55X. The insurer has a Value Score of A. Shares of The Travelers Companies, Inc. TRV and Cincinnati Financial Corporation CINF are also trading at a multiple higher than the industry average, while NMI Holdings Inc. NMIH shares are trading at a discount.

AFG’s Growth Projection Encourages

The Zacks Consensus Estimate for 2025 revenues is pegged at $8.21 billion, implying a year-over-year improvement of 2.1%. The consensus estimate for 2026 earnings per share and revenues indicates an increase of 9.5% and 9.6%, respectively, from the corresponding 2025 estimates.

Bearish Analyst Sentiment on AFG

Three of the four analysts covering the stock have lowered estimates for 2025, while two analysts have lowered the same for 2026 over the past 60 days. The Zacks Consensus Estimate for both 2025 and 2026 earnings has moved down 1.04% in the past 60 days.

Average Target Price for AFG Suggests Upside

Based on short-term price targets offered by five analysts, the Zacks average price target is $132.20 per share. The average suggests a potential 5.5% upside from the last closing price.

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 18.3%, which compared favorably with the industry average of 7.8%.

Factors Favoring 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.

American Financial witnessed average renewal pricing across the entire P&C Group. It intends to maintain satisfactory rates in P&C renewal pricing going forward. AFG has reported overall renewal rate increases for 35 consecutive quarters, and it is expected to achieve overall renewal rate increases in excess of prospective loss ratio trends to meet or exceed targeted returns. The property and casualty insurer expects to achieve overall renewal rate increases in excess of 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. For 2025, the company expects the combined ratio of 92.5%.

Wealth Distribution

American Financial 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%.

End Notes

American Financial’s prudent capital deployment, increased exposures, good renewal rate environment and improved combined ratio make it an attractive stock. It intends to maintain satisfactory rates in P&C renewal pricing going forward. 

AFG also has a VGM Score of B. Stocks with a favorable VGM Score are those with the most attractive value, best growth and most promising momentum compared with peers. 

Despite its expensive valuation and bearish analysts’ sentiment, 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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

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

Zacks Investment Research