Hartford Financial Services Group Inc. (HIG:US) agreed to sell a life-insurance unit to Prudential Financial Inc. (PRU:US) as Chief Executive Officer Liam McGee divests units to narrow his company’s focus.
Prudential, the second-largest U.S. life insurer, will make a $615 million cash payment as part of the agreement, which is structured as a reinsurance deal, the companies said yesterday in statements. Hartford advanced 1.6 percent to $19.60 in extended trading (HIG:US) at 5:26 p.m. in New York yesterday after saying it would get a net statutory capital benefit of about $1.5 billion from the deal, including the cash payment.
McGee, 58, is focusing on property-casualty coverage, such as commercial insurance and auto policies, after reaching deals (HIG:US) this year to sell Hartford’s broker-dealer, retirement-plans business and individual-annuities distribution unit. Hartford trades for less than in 2010 when it paid back a taxpayer rescue, as lower bond yields and stock-market fluctuations hurt results from life insurance and annuities in the U.S. and Japan.
“Our core competency is not managing interest-rate bets, equity-market bets, or foreign exchange,” McGee said in an interview yesterday before the announcement. “Shareholders aren’t going to pay us for managing those risks.”
Hartford said it will turn over about $7 billion of general account assets to help cover obligations. The transaction is expected to be completed early next year, and will cover about 700,000 policies with a face amount of approximately $135 billion, Prudential said in its statement.
The cumulative capital benefit from the life, retirement and broker-dealer sales is about $2.2 billion, according to Hartford’s statement. McGee said yesterday before the deal was announced that he may use capital for buybacks or to pay down debt. The firm plans to provide an update on capital plans early next year, according to its statement.
“Buybacks are certainly among the most accretive things we could do today,” given the firm’s book value, McGee said in the interview.
Hartford gained 19 percent this year through yesterday’s close and trades for about 40 percent of book value. Newark, New Jersey-based Prudential climbed 9.4 percent since Dec. 31 and trades for two-thirds of book value.
McGee narrowed the company’s focus after billionaire investor John Paulson pressured him to separate the life and property-casualty operations. Paulson’s hedge fund, Paulson & Co., was Hartford’s biggest shareholder (HIG:US) as of June 30, data compiled by Bloomberg show.
Prudential CEO John Strangfeld, 58, is targeting return on equity of at least 13 percent next year as he integrates Japan- based units that he purchased from American International Group Inc. (AIG:US) in 2011. Strangfeld said in August that Prudential had about $4 billion in cash and short-term investments at the parent company and that most of the funds can be used to repay debt, be redeployed or support operations. The insurer’s return on equity was 11 percent to 11.5 percent last year.
The deal “will create an organization with greater scale, enhanced product offerings and expanded distribution expertise,” Strangfeld said in the statement. “Hartford’s individual life insurance business represents a unique opportunity for us.”
Jim Avery, CEO of Prudential’s individual life business, will retire when the transaction is completed. Kent Sluyter, vice president and chief actuary of the unit, will replace Avery, who is 61. Sluyter, 53, began working at Prudential in 1981 and has a bachelor’s degree in mathematics from Lafayette College, according to Prudential’s statement
Hartford said its employees at the individual-life unit will be offered positions with Prudential. After the deal, the benefits and provisions of Hartford’s life insurance contracts will remain in place.
McGee’s life business had net income of $36 million in the second quarter, compared with $46 million a year earlier, according to a regulatory filing from Hartford, which is based in the Connecticut city of the same name. In addition to property-casualty insurance units, McGee will also retain a mutual-funds operation and group-benefits unit, which provides life policies and disability coverage through employers.
Hartford’s bankers were Goldman Sachs Group Inc. (GS:US) and Greenhill & Co. and the company’s legal adviser was Sutherland Asbill & Brennan LLP. Perella Weinberg Partners LP and Morgan Stanley advised Prudential, Sheila Bridgeforth, a spokeswoman for the insurer, said in an e-mail. Debevoise & Plimpton LLP said it provided legal advice to Prudential.
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