Reith explores Neon management buyout

Neon CEO Martin Reith and the rest of his executive team have been given permission by majority owner American Financial Group (AFG) to pursue a management buyout (MBO) of the company, The Insurance Insider can reveal.

Sources told this publication that AFG and Neon are being advised by Macquarie.

It is understood that a restricted process is currently underway, with a number of financial bidders taken through to the second round, and a change of ownership envisaged comfortably before year end.

Sources said that AFG and Neon set the work in train a number of months ago and that it represented a plan to spin the businesses off that had long been contemplated.

If it had always been AFG’s intention to give Reith the opportunity to spearhead an MBO at Neon, it would go some way to clearing up the mystery of the Ascot founder’s decision to take on the leadership of the sub-scale and serially underperforming Lloyd’s business back in 2015.

Neon has Funds at Lloyd’s of around £250mn ($322.9mn) and although it will also have some assets at managing agency level, this is a reasonable proxy for book value. In 2017 the business wrote £226mn of gross premiums, but it is believed to have grown meaningfully this year.

Sources said that AFG is targeting a premium valuation that one private equity source placed at a 1.5x book value.

Participants in the sale process are not known. However, private equity houses believed to have shown an interest in the Lloyd’s sector in recent months include Blackstone, Aquiline, Cinven and Warburg Pincus.

Reith established relationships with several major financial sponsors in the early years of this decade, when he explored the creation of a collateralised reinsurer and then a succession of acquisitions.

Backers from that period included Blackstone, Warburg Pincus and Capital Z, although high valuations meant the capital was never deployed.

Reith has overseen a complete overhaul of AFG’s Lloyd’s platform since he was parachuted in as CEO of Marketform in 2015.

As well as overhauling the management team, he has overseen a major shift from long-tail to short-tail lines and disposed of all of the legacy liabilities from prior to his tenure – transforming the business into a quasi-start-up.

Sources have suggested for some time that Neon may not be a good long-term fit for AFG.

The Cincinnati-based company is famously cautious on catastrophe risk and has tended to deliver a much lower level of earnings volatility than its peers, with a 2017 P&C combined ratio of 94.7 percent. This reflects a high concentration in specialty and casualty lines.

Reith, meanwhile, has a background at Ascot of running substantial catastrophe risk, and building a major presence in cat-exposed lines is clearly a part of Syndicate 2468’s strategy.

Macquarie has recent experience of running Lloyd’s sale processes targeting financial bidders. It advised on AIG’s sale of Ascot to Canada Pension Plan Investment Board in 2016 and was also involved in the Canopius MBO, in which Sompo sold out to Centerbridge.

Neon declined to comment. AFG did not immediately respond to a request for comment outside of normal office hours.

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