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American Financial (AFG) to Offload Neon, Exit Lloyd's

Zacks Equity Research
·3 mins read

American Financial Group AFG has agreed to divest Lloyd’s-based insurer, Neon. The insurer inked a definitive agreement with RiverStone Holdings Limited to divest GAI Holding Bermuda and its subsidiaries, comprising the legal entities that own Neon. This marks American Financial’s move to exit from the Lloyd’s of London insurance market.

American Financial had placed this business into run-off effective in the fourth quarter of 2019. The transaction, pending closing conditions, is expected to close in the fourth quarter of 2020.

Rationale Behind the Divestiture

The company decided to exit the Lloyd’s platform to intensify focus on other Specialty property and casualty (P&C) businesses, redeploy capital in business and growth opportunities that have potential to earn targeted returns on investment, improve earnings, and enhance long-term value for shareholders. Neon has not been able to achieve American Financial’s profitability target.

Once the divestiture closes, this Zacks Rank #3 (Hold) niche player in the P&C and annuity markets expects release of all its funds at Lloyd’s. This also includes release of the letters of credit and collateral pledge facility that the company guarantees in support of Neon’s funds at Lloyd’s.

American Financial expects to record the sale in the third quarter. However, the transaction is not estimated to have material impact on the results.  

American Financial continues to benefit from its robust and casualty operations that in turn have been fueling premium growth over the last several years. Prudent investments in businesses along with organic growth should help the company generate steady top-line growth.

American Financial estimates property and casualty pretax core operating earnings, excluding the impact of alternative investments, between $615 million and $675 million in 2020. It also expects 2020 core net operating earnings per share, excluding marked to market investments, to be in the range of $6.60-$7.40 per share, up from the earlier expectation of $6.45-$7.25 per share.

Shares of American Financial have lost 39.2% compared with its industry’s decrease of 10.9%. Nonetheless, diversified business mix of specialty P&C insurance operations and annuity business and effective capital management strategies should help the stock bounce back.


Stocks to Consider

Some better-ranked companies in the insurance industry are Donegal Group DGICA, Markel Corporation MKL and Fidelity National Financial FNF, each carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank  stocks here.

Donegal Group delivered an earnings surprise of 134.62% in the last-reported quarter.

Markel came up with an earnings surprise of 57.01% in the last-reported quarter.

Fidelity National delivered an earnings surprise of 53.52% in the last-reported quarter.

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