The Hartford Financial Services Group announced Monday its plans to sell the company’s Japan annuity business to Orix Life Insurance Corp. for an estimated capital benefit of $1.4 billion.
The divestiture has been anticipated for about a year as The Hartford looks to reduce its risk profile.
Selling The Hartford Life Insurance K.K., the Japan annuity subsidiary, is expected to result in after-tax proceeds of about $860 million. Additionally, the parent company’s U.S. life insurance subsidiaries will be able to reduce the required capital needed for the Japan business by about $540 million as The Hartford ends reinsurance agreements associated with the Japan block of business.
The transaction is expected to close in July, subject to approval by insurance regulators with the Japan Financial Services Agency. The divestiture will result in an accounting loss of $675 million, using Generally Accepted Accounting Principles, which will be included in first-quarter earnings announced after the New York Stock Exchange closes today.
“This transaction materially reduces The Hartford’s risk profile by permanently eliminating the company’s Japan variable annuity risk,” The Hartford’s Chairman and CEO, Liam E. McGee, said in a statement. “We are pleased with the economics of the transaction, both in terms of purchase price and expected capital benefit.”
The Hartford will keep a relatively small portion of its Japan business, the fixed-annuity accounts which have less risk than variable annuities.
Barclays analyst Jay Gelb wrote in a note to investors, “The transaction will result in a hit to book value, although it frees up $1.4bn of capital, all of which is available for share buybacks and debt reduction. This is a positive catalyst for HIG in our view because it exits a non-core business and should free up additional deployable capital.”
Annuities are a contract between a customer and a life insurer in which the customer pays the insurer in return for a series of periodic payments at some future date. Life insurers started offering protections in the early 2000s against market declines and also for longevity, when a policyholder outlives scheduled annuity payments. Those guarantees made the products a drain on capital for life insurers during and after the financial crisis and the recession.
The Hartford Life Insurance K.K. wrote annuity contracts from 2000 to 2009, at which time the Japan annuity business was put into runoff — an insurance term meaning new sales are discontinued and the existing accounts are serviced until they expire. The business was placed in runoff as a response to the financial crisis.
As of Dec. 31, the total value of customers’ accounts totaled $23 billion in about 375,000 contracts. At the peak in March 2008, the total value was $38.96 billion in more than 580,000 annuity contracts. The Japan variable annuity business declined by about 26 percent last year.
Deutsche Bank served as financial adviser and Sidley Austin LLP was the legal adviser to The Hartford in the transaction.
“This transaction is another step in The Hartford’s transformation which increases the company’s financial flexibility, and meaningfully decreases our market risk and net income volatility,” The Hartford’s Chief Financial Officer, Christopher J. Swift, said in a statement
It was not clear Monday how The Hartford intends to use capital from the transaction, and what portion of it will be directed to repurchasing shares of the company or paying off debt.
“We will continue to execute our current 2014-2015 capital management plan,” Swift said in a statement. “After closing, we will provide an update on incremental capital management actions that we will take as a result of this transaction.”
The Hartford has a remaining U.S. variable annuity business, which peaked in 2004 with more than 1.5 million contracts. The U.S. annuity business was put into runoff in 2010 as part of the company’s new strategy announced at the time. As of Dec. 31, the U.S. variable annuity account values totaled $61 billion.
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