Is It Far too Late to Get American Money Team (AFG) Stock?

“American Economic Team is evidence that I’m considerably less concerned with whether a inventory is a “value” or “growth” stock, but a lot more worried with the top quality of the company and the toughness of its earnings ability. AFG was the top performer in the course of the quarter as it properly realized value for its everyday living insurance policy segment via an declared sale of this business to Mass Mutual. Traders typically disliked AFG’s lifetime insurance policies enterprise due to its curiosity level sensitivity and financial commitment portfolio leverage. As a result, the industry was ascribing a lot less than a e book price a number of for AFG’s existence insurance small business despite many publicly announced transactions of competitors that valued very similar books of small business at 1.2x ebook price (which is in the long run the several that Mass Mutual paid). Trader worries with the lifestyle insurance policies section presented an option for us to obtain AFG at a price cut to good worth with an opportunity to compound money at a 10-15% annualized fee for quite a few decades to arrive. When I did not count on an outright sale of the lifestyle insurance plan business, I applaud management for monetizing this asset and recognizing price for shareholders. AFG’s stock outperformed the moment the sale was announced as the price of this business enterprise was bigger than the market place appreciated. See underneath for a extra specific discussion of AFG.

American Fiscal Team (“AFG”): Loved ones Legacy of Fantastic Funds Stewardship

Summary Thesis

1) Main specialty P&C underwriting franchise with a reliable history of excellent underwriting effects.

2) Disciplined management group with a monitor report of seem capital allocation conclusions.

3) Family company with higher insider ownership (18% of organization)

Organization Overview

AFG is a diversified insurance policies business that generates 60% of its earnings from its specialty Assets & Casualty (“P&C”) segment and 40% of its earnings from its Everyday living Coverage phase. AFG was started in 1959 by Carl Lindner Jr and is now led by his two sons who serve as co-CEO’s. In addition to their co-CEO roles, each and every brother is actively included in the ongoing functions of the company: Carl Lindner III is President of the P&C phase and Craig Lindner is President of the Life Insurance policy phase. The Lindner relatives collectively owns 18% of AFG ($1.7B price) and an more 6% of the company is owned by executives and the firm retirement strategy.

Top-quality Underwriting Tradition

Most P&C businesses tout their remarkable underwriting capabilities as a competitive advantage, but in actuality, there is minor differentiation between each and every of these providers. As a consequence, most P&C firms are subject matter to pricing cycles in their unique traces of business enterprise that ultimately figure out underwriting effects. For traders, this is a black box that helps make predicting outcomes virtually extremely hard. AFG is one of the uncommon insurance coverage businesses in which there is distinct proof that the business can continuously generate market foremost underwriting effects. AFG’s underwriting superiority is driven by a selection of attributes that let the company to consistently improve guide worth at charges more rapidly than the business, no matter of fundamental pricing cycles:

1) Aligned incentives: underwriters are compensated based mostly on underwriting benefits about multiple many years and underwriting targets are primarily based on return on fairness (“ROE”) thresholds. Bonuses are subject to clawbacks if underwriting benefits build unfavorably.

2) Variety of Insurance plan Traces: 35 separate P&C insurance plan strains makes it possible for management to distribute cash to the highest return options. When mixed with the incentive payment outlined earlier mentioned, cash only flows to segments exactly where ROE targets can be fulfilled. This variety of insurance coverage traces serves to mitigate the danger from pricing cycles.

3) Ownership mentality: Considerable insider possession along with long-term fairness incentive payment drives underwriters, professionals and executives to allocate funds to the greatest return possibility.

As a consequence of the over aspects, AFG’s P&C underwriting outcomes have constantly outpaced the total marketplace. Notice that the combined ratio is a measure of the underwriting profitability for the company’s P&C phase (a 90% merged ratio can be believed of as a 10% underwriting revenue margin).

Not only do these underwriting benefits review favorably to the total industry, they also stack up much better than their maximum quality friends.

Disciplined Capital Allocators

Management’s capital allocation conclusions increase beyond natural and organic advancement options and serve as a further resource to preserve a continually higher ROE. Although underwriting success have been powerful in AFG’s P&C phase because of to thoughtful allocation to each of these underwriting lines, the results are also bolstered by management’s willingness to distribute extra capital to shareholders if organic expansion possibilities do not meet the company’s ROE thresholds. Administration has generally been thoughtful about balancing these myriad money deployment alternatives. The chart underneath displays how administration has utilized a blend of normal dividends, special dividends and share repurchases as funds deployment applications.

AFG typically operates with considerable excessive money, which has served the organization well as it makes it possible for the corporation to be opportunistic with accretive M&A (Summit in 2014, Nationwide Interstate in 2016) or share repurchases (2020). AFG had $1.1B of excess funds at YE ’20 ($4.3B once the Lifestyle Insurance policies sale is entire), resulting in a drag on ROE of approximately 4% for 2020 (has ranged from 2%-4% in excess of the past 5 a long time).

Management’s funds allocation discipline was on total screen in Q1 when AFG monetized the everyday living insurance policy portfolio as a result of the sale to Mass Mutual. I was surprised AFG sold the overall organization specified that 1) Craig Lindner’s duties ended up largely confined to this section and 2) the total of proceeds from an outright sale will likely be complicated to deploy swiftly. There is some hazard as to how AFG will use these sale proceeds, but as described over, I trust this management workforce to act in the finest pursuits of shareholders. Immediately after all, the Lindner’s are the greatest homeowners of this company.”