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American Financial Exits Long-Term Care Insurance Business

Zacks Equity Research
Updated

American Financial Group, Inc. AFG divested United Teacher Associates Insurance Company and Continental General Insurance Company, to HC2 Holdings, Inc. HCHC for about $15 million. These legal entities had all of the company’s long-term care insurance business. The insurer entered into an agreement to sell its run-off long-term care business in mid April this year.

With the legal entities releasing statutory reserves, HC2 Holdings might pay the insurer about $13 million additionally. Also, the insurer will be reimbursed the capital support worth $35 million that it provided to the divested units for maintaining certain surplus levels. In return, American Financial received warrants to buy two million common shares of HC2 Holdings.

The recent divestiture helped American Financial to exit its supplemental medical insurance lines of business, following the 2012 sale of its Medicare supplement and critical illness businesses. However, a small block of 1,700 polices worth $33 million of reserves is still remaining with the company. The exit allows the company to intensify its focus on the annuity market, where it is a leading provider of fixed and fixed-indexed annuities in financial institutions and retail markets.

For HC2 Holdings, the purchase will result in a diversified portfolio and a stronger insurance platform.

American Financial is expected to record an after-tax non-core loss of up to $10 million due to this divestment. In the first quarter, the insurer recorded an after-tax non-core loss of $105 million. Nonetheless, American Financial anticipates receiving between $110 million and $115 million from the transaction on the back of a considerable tax benefit from the divestment. This, coupled with $700 million of excess capital, cushions American Financial with enough capital deployment capability to ramp up earnings and enhance shareholder value.

American Financial presently carries a Zacks Rank #3 (Hold). Some better-ranked property and casualty insurers are Cincinnati Financial Corp. CINF and Partner Re Ltd. PRE. Both these stocks sport a Zacks Rank #1 (Strong Buy).

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PARTNERRE LTD (PRE): Free Stock Analysis Report
 
CINCINNATI FINL (CINF): Free Stock Analysis Report
 
AMER FINL GROUP (AFG): Free Stock Analysis Report
 
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Zacks Investment Research