The Hartford Buying Back Securities Sold to Allianz During Financial Crisis
April 3, 2012 by Arthur D. Postal
April 2, 2012 •
The Hartford Insurance Group says it is buying back, at a steep premium, securities it sold to Allianz during the height of the 2008-2009 financial crisis.
Despite the high cost, Stern Agee analyst John Nadel calls the decision positive because it improves the Hartford’s financial flexibility.
The Hartford says it has negotiated an agreement with Allianz to repurchase all outstanding 10 percent fixed-to-floating rate junior subordinated debentures due 2068 for $2.125 billion.
The principal amount of the notes was $1.75 billion. In addition, the company is using $300 million of remaining buyback authorization to repurchase all outstanding warrants issued to Allianz to purchase 69.4 million shares of its common stock at strike price of $25.23.
Nadel explains that, in the long run, the deal is cheap for the Hartford. “We estimate contractually this would have cost theHartfordabout $2.8 billion versus the $2.125 billon that was negotiated with Allianz,” Nadel says.
That is a savings of approximately $700 million, or 24 percent.
Nadel also says that the decision means that the Hartford management “continues to demonstrate a clear willingness to go beyond the status quo to deliver value for shareholders beyond that currently discounted in the share price.”
At the same time, Nadel says in an investor’s note that he expected the Hartford would announce various debt offerings aimed at raising $2.1 billion in new cash.
Nadel estimates the elimination of the 10 percent Allianz debt, partially offset by a higher principal amount of new debt at a substantially lower weighted average coupon, should save the Hartford between $50 and $75 million in annual pre-tax interest expense.
“Clearly, pricing of the new debt will be a key determinant, and we expect theHartfordwill announce multiple tranche and multiple maturities debt offerings this morning for marketing/pricing over the next couple of days,” Nadel says.
The decision to repurchase the Allianz interest at a premium is part of the decision by the Hartford to regroup and exit the life-variable-annuity business.
It did so under pressure from hedge-fund manager John Paulson.
Under the decision, announced March 21, the Hartford will concentrate on its property and casualty, group benefits and mutual funds businesses.
The Hartford originally entered into the costly deal with Allianz during the height of the economic downturn because it was caught with variable annuities that offered guarantees to investors.
Hartford’s innovations, including guarantees, in the VA market forced other market players to follow, resulting in an increase in a VA market that had been in the doldrums since the Bush tax cuts that helped lift total VA sales to $180 billion in 2007.
However, as the stock market plunged and the economy sunk, the product began to take a heavy toll onHartford.
By late 2008, the Hartford was seeking outside investors, as well as funds from the Troubled Asset Relief Program initiated by the Bush administration in the fall of 2008.
Its need to “de-risk” the business has resulted in a plunge in market share and investment in the business. From a top sales spot in the mid-2000s, Hartford finished 2010 in 20th place among leading variable-annuity sellers, and last year it didn’t make the top 20 chart compiled by industry-funded research firm LIMRA.
The runoff of the annuity operation also affects its fixed and fixed-indexed annuities, a much smaller proportion of its book of business.
The company is placing its individual-annuity business into runoff “and is pursuing sales or other strategic alternatives for its individual life, Woodbury Financial Services and Retirement Plans.”
The company is stopping new annuity sales effective April 27 and expects to take a related after-tax charge of $15 million to $20 million in the second quarter of 2012.
This action is also expected to reduce annual run-rate operating expenses by approximately $100 million, pre-tax, beginning in 2013.
