HIG Possible Sale of Japan VA Business: Devil In The Details

HIG Possible Sale of Japan VA Business: Devil In The Details

Sterne Agee analyst John Nadel looks at the ramifications of a possible Hartford Financial Services Group Inc (NYSE:HIG) sale of its VA business to a Japanese company.

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HIG’s Possible Sale of Japan VA Business

Press reports out of Japan indicate Hartford Financial Services Group Inc (NYSE:HIG) may be on the cusp of selling its run-off VA business to a leasing firm known as Orix which has an insurance operation. The sale price is said to be about ¥90b, or $875m U.S. We cannot confirm whether this is indeed the case, but offer some thoughts herein.

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What We Do Know

In its most recent disclosures, Hartford Financial Services Group Inc (NYSE:HIG) has indicated its run-off VA business in Japan has the following metrics, all as of December 31, 2013:

• $1.2b of Statutory capital, which excludes about $600m within U.S. insurance subsidiaries supporting Japanese liabilities.

• Statutory reserves of $800m including $600m of “contingency” reserves.

• Japan VA business generated roughly $330m of operating income in 2013 and we estimate $233m in 2014 and $184m in 2015, or roughly 13.5% and 10% of 2014/15 operating income, respectively.

• If we assume 100% of the 2015 earnings contribution from Japan VA block is eliminated but we deploy an additional $1.475b in buybacks (proceeds plus U.S. capital released), our 2015E EPS would fall by less than 1% (timing and price of share repurchases, tax impacts and other factors could affect this estimate).

Devil Will Be in the Details

We believe on the surface some investors may view the reported selling price as perhaps a bit disappointing given it equates to 73% of Statutory capital in the Japanese subsidiary supporting the business. However, as is always the case, the ultimate details of the sale (assuming it takes place) will be critical. For example:

• We would expect the sale to completely free up the $600m of capital within the U.S. subsidiaries supporting the business. This capital would presumably be dividended to the Hold Co reasonably quickly post closing of the sale (pending regulatory approval);

• The press report does not indicate whether Hartford Financial Services Group Inc (NYSE:HIG) might be able to take a dividend out of the Japanese subsidiary prior to sale. Management had indicated it would take a roughly $150m dividend from the Japan subsidiary in 2014.

We do know management has consistently indicated it is interested in reducing the size of the run-off business as quickly as possible. Moreover, management has consistently indicated it would sell the block only if it was able to generate something close to the true economic value of the business. We have a high level of confidence in management to do exactly that.

Our Estimate of Value of Japan VA Block

In our sum of the parts $42 price target for Hartford Financial Services Group Inc (NYSE:HIG), we ascribed $1.3 – $1.5b of value to the Japan run-off block. Assuming a $875m purchase price plus release of the $600m of capital in the U.S. supporting the business, this would be near the upper end of our range.

Link to Press Report. http://asia.nikkei.com/Business/Deals/US-insurer-Hartford-to-sell-Japan-unit-to-Orix

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