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American Financial (AFG) Divests Annuity Business to MassMutual

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American Financial Group, Inc. (AFG - Free Report) recently divested its Annuity businesses to Massachusetts Mutual Life Insurance Company (MassMutual). The company had inked this divestiture deal in the first quarter of 2021. This move will aid American Financial to streamline its business by intensifying focus on Specialty P&C businesses.

The Annuity businesses comprised Great American Life Insurance Company (GALIC) and two of its insurance subsidiaries, Annuity Investors Life Insurance Company and Manhattan National Life Insurance Company. Also, it consisted of a broker-dealer affiliate, Great American Advisors, Inc., as well as an insurance distributor, AAG Insurance Agency, Inc. Total after-tax cash proceeds from the divestiture are around $3.5 billion.

Founded in 1851, MassMutual is a leading mutual life insurance company, which offers a variety of protection, accumulation, wealth management and retirement products and services. It is focused on delivering long-term value.

The property and casualty insurer has been witnessing poor performance at the Annuity segment over the past quarters. In 2020, total revenues decreased 4% year over year. Also, gross statutory premiums declined 18% in 2020 due to the lower market interest rate environment. The company implemented several rates decreases to maintain proper returns on annuity sales that started to affect new sales. Annuity sales were lower in all channels due to stay-at-home orders and other factors related to the COVID-19 pandemic. Thus, exiting Annuity businesses was a strategic move by the insurer.

The results of American Financial’s Annuity operations are reported as discontinued operations from the first quarter of 2021.

On exit from the underperforming Annuity business, American Financial will be able to intensify its focus on its Specialty P&C segment, which aims to achieve solid underwriting profitability and provide excellent service to its policyholders and agents. New business opportunities, growth in the surplus lines and excess liability businesses, rate increases, higher underwriting profitability in Property and Transportation Group and higher retentions in renewal business boost premium growth of this segment.

Moreover, the sale of Annuity business to MassMutual is expected to significantly enhance American Financial’s cash and excess capital.

In connection with the sale of its Annuity business, a special, one-time cash dividend of $14.00 per share has been declared, which marked the 13th straight year of special dividend paid by the property and casualty insurer. Shareholders of record as of Jun 8 will receive the special dividend on Jun 15. This property and casualty insurer estimates spending $1.2 billion for the special dividend, which is well-supported by its strong financial position. Prior to this, the company had paid out special cash dividend of $2.00 per share last year in December.

Recently, three other insurers, Radian Group Inc. (RDN - Free Report) , RLI Corp. (RLI - Free Report) and Chubb Limited (CB - Free Report) undertook dividend hikes. While Radian Group approved a 12% hike in its quarterly dividend, RLI Corp. approved a 4.1% raise. The board of directors of Chubb approved a 2.6% hike in its quarterly dividend.

In each of the last 14 years, the company successfully increased its dividends apart from paying out special dividends and buying back shares. Its dividend yield of 1.5% betters the industry average of 0.4%. Returning capital to shareholders in the form of regular and special cash dividends and through opportunistic share repurchases is an important and effective component of its capital management strategy.

Furthermore, on May 19, 2021, the company authorized a share buyback program to return more value to investors. The latest authorization will allow the company to repurchase up to an additional 5 million shares of the its outstanding common stock through Dec 31, 2025. In the first quarter of 2021, the company bought back shares for $192 million.

Shares of this Zacks Rank #3 (Hold) property and casualty (P&C) insurer have gained 120.6% in a year, outperforming the industry’s increase of 43.3%. Moreover, acquisitions, better pricing and improving industry fundamentals will enable the P&C insurer to achieve operational excellence in the days ahead. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
 

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