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American Financial's Unit to Quit Lloyd's Insurance Market

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American Financial Group AFG announced that it will no longer be part of the Lloyds’s of London insurance market in 2020. To this end, the company commenced the process of putting its Lloyd’s subsidiaries including its Lloyd’s Managing Agency Neon Underwriting Ltd into a run-off.

Lloyd’s is an insurance and reinsurance market located in London, UK where insurance companies come together to form a risk pool and spread the same. American Financial Group acquired Lloyd’s specialist insurer Marketform (now known as Neon Underwriting Ltd.) in 2008 for $75 million.

The company reviewed Neon’s anticipated results of 2019 and 2020. Unfortunately, it was discovered that this Lloyd unit hasn’t been able to meet the profitability objectives of its parent company since its acquisition and henceforth will persistently suffer.

Neon generated approximately 7% of American Financial Group’s net written premiums in 2019.

The winding up of Neon’s operations will help American Financial Group concentrate more on its lucrative businesses with potential to earn targeted returns on investments. This will provide the company with leverage to invest in promising projects. The capital shift will allow the business to move toward reaping higher gains with utmost efficiency.

American Financial Group is estimated to incur a non-core after-tax charge ranging between $50 million and $60 million due to the closure of this business.This cost will be borne, primarily on account of Neon reserve strengthening and its related exit costs and the same will be reported in the company’s fourth-quarter 2019 results.

The insurer reaffirmed its previously announced 2019 core net operating earnings per share guidance of $8.70-$8.50.

American Financial Group boasts assets worth more than $65 billion. It deals mostly in property and casualty insurance as well as in the sale of fixed, fixed-indexed and variable-indexed annuities in the financial market. Hopefully, this run-off will aid the company to generate higher investment returns and increase it business scale and diversification of products. The company’s return on equity of 12.8% is way higher than its industry average of 6.97%.

Shares of the company have rallied 22.2%, outperforming its industry’s growth of 16.2% in the past year.

Currently, the stock carries a Zacks Rank of #3 (Hold). Some better-ranked stocks in the same space are Fidelity National Financial Inc. (FNF - Free Report) with a Zacks Rank #1 (Strong Buy), Alleghany Corporation Y with a Zacks Rank #2 (Buy) and Markel Corporation MKL with a Zacks Rank of 2. You can see the complete list of today’s Zacks #1 Rank stocks here.

Earnings of Fidelity National Financial, Alleghany Corporation and Markel Corporation beat the Zacks Consensus Estimate by 0.22%, 25.16% and 84.77% in the third quarter, respectively. 

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