Digital Transformation And Demographic Shifts Will Expand Insurance Markets

Key Takeaways

• Growing demand for insurance and annuity products, aided by demographic shifts and wealth accumulation, is expanding AFG's market opportunities and revenue potential.
  
• Digital transformation and disciplined underwriting, combined with specialty focus and strong capital management, are supporting profitability and long-term earnings growth.
  
• Elevated catastrophe losses, challenging investment returns, litigation, and business concentration risk could undermine long-term profitability, revenue stability, and earnings growth.

Catalysts

An insurance holding company, provides specialty property and casualty insurance products in the United States.

• The ongoing accumulation of wealth among U.S. households is expected to drive greater demand for insurance and annuity products, positioning AFG for continued premium growth and positive impacts on revenue.
  
• Advancements in digital transformation and enhanced use of data analytics are supporting more disciplined underwriting and risk management at AFG, which should help improve net margins and operational profitability over the long term.
  
• Demographic trends, notably an aging population, are increasing the need for retirement and supplemental insurance, expanding AFG's addressable market and supporting higher revenue growth potential.
  
• Sustained focus on specialty property & casualty lines and opportunities arising from higher renewal rates, new business, and industry dislocation (e.g., competitors exiting certain markets) are driving premium increases and bolstering earnings growth.
  
• The combination of higher interest rates, which are boosting net investment income on the $16B portfolio, and continued strong capital management with regular dividends and share buybacks is expected to enhance bottom-line earnings and support per-share earnings growth.

American Financial Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming American Financial Group's revenue will decrease by 1.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.5% today to 14.5% in 3 years time.
• Analysts expect earnings to reach $1.1 billion (and earnings per share of $12.19) by about August 2028, up from $764.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, down from 14.6x today. This future PE is lower than the current PE for the US Insurance industry at 14.4x.
• Analysts expect the number of shares outstanding to decline by 0.61% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.78%, as per the Simply Wall St company report.

American Financial Group Future Earnings Per Share Growth

Risks

• The company's year-over-year decrease in underwriting profit and lower returns on alternative investments signal risk-especially as alternative investments are exposed to volatility in asset prices and multifamily real estate, potentially pressuring long-term net margins and earnings if the investment environment remains challenging.
  
• The Specialty P&C combined ratio rose to 93.1% from 90.5% YoY, with the increase driven in part by persistent catastrophe losses and lower favorable reserve development; if catastrophe activity remains elevated or reserve releases diminish, future profitability and net margins could be at risk.
  
• Social inflation, litigation trends, and adverse severity in social services and excess liability businesses prompted notable nonrenewals, reduced capacity, and increased reserves, showing the impact of escalating loss costs and the challenge of maintaining profitable underwriting, which could constrain long-term earnings and pressure net margins.
  
• Heavy reliance on the success of niche businesses (e.g., lender-placed, crop, and M&A insurance) and the performance of a small set of business lines introduces concentration risk, where downturns or regulation in any of these segments could affect overall revenue stability and long-term earnings growth.
  
• The company's favorable investment income is currently supported by higher interest rates, but a shift to a lower or more volatile interest rate environment-and ongoing pressure on premium growth from competitive and regulatory forces-could reduce investment income and top-line growth, pressuring both revenue and earnings over the long term.

Valuation

• The analysts have a consensus price target of $130.6 for American Financial Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $145.0, and the most bearish reporting a price target of just $124.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.6 billion, earnings will come to $1.1 billion, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 6.8%.
• Given the current share price of $133.8, the analyst price target of $130.6 is 2.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.