The Hartford Financial Services Group Inc (NYSE:HIG) entered a definitive agreement to sell Hartford Life Insurance K.K. (HLIKK), its wholly owned Japanese annuity subsidiary, to ORIX Corporation (ADR) (NYSE:IX) for $895 million.
According to Liam E. McGee, chairman, president and CEO of Hartford Financial Services Group Inc (NYSE:HIG), the sale of its Japanese annuity subsidiary is a significant accomplishment in its efforts to transform the company and create value for shareholders.
Transaction reduces Hartford’s risk
“This transaction materially reduces The Hartford’s risk profile by permanently eliminating the company’s Japan variable annuity risk. We are pleased with the economics of the transaction, both in terms of purchase price and expected capital benefit,” said McGee.
In addition, McGee described ORIX Corporation (ADR) (NYSE:IX) as financially strong, well-respected, and a diversified Japanese financial services that will continue to provide high-quality service to its customers in Japan.
Details of the transaction
According to Hartford Financial Services Group Inc (NYSE:HIG), all reinsurance agreements between HLIKK and the company’s U.S. life insurance subsidiaries will be terminated following the closing of the deal excluding an agreement covering approximately $1.1 billion fixed payout annuity reserves.
Hartford Financial Services Group Inc (NYSE:HIG) estimated an approximately $675 million (U.S. GAAP loss) pro forma effect of the transaction. The company also estimated a $275 million statutory surplus loss, and a March 31 pro forma capital benefit of approximately $1.4 billion from the deal.
According to the company, the capital benefit includes about $860 million after tax, and an estimated $540 million capital reduction required in its U.S. life insurance subsidiaries due to termination of certain insurance agreements.
Hartford Financial Services Group Inc (NYSE:HIG) expects to complete the transaction in July of this year, subject to customary closing conditions.
In a note to investors, John M. Nadel, an analyst at Sterne Agee, commented that the total proceeds of the transaction to Hartford Financial Services Group Inc (NYSE:HIG) was in line with their expectations in the range of $1.3 billion to $1.5 billion. According to Nadel, “We don’t view the sale as significantly altering our view of fair value for HIG shares, although the sale should clearly result in reduced volatility of results and improvement in the company’s GAAP net income (hedging cost and fair value changes eliminated for this block).”
Nadel added that Hartford Financial Services Group Inc (NYSE:HIG) will no longer receive approximately $150 million in annual dividends from its Japanese operations given the expected date of the closing of the deal. He also assumed that the company will use 75% of the proceeds for a share buyback and 25% for debt reduction. Based on that assumption, Nadel estimated that the impact of the deal to his 2015E EPS is roughly 4% to 5% dilution. He estimated that the company’s 2015 EPS will be around $3.85, down from his previous estimate of $4.05.
Furthermore, Nadel emphasized that the company’s net income per share should rise while its operating EPS will fall.