Billionaire Warren Buffett’s Berkshire Hathaway Inc. (A:US) agreed to take on Hartford Financial Services Group Inc. (HIG:US)’s U.K. variable-annuity business, adding $1.75 billion in assets under management.
Berkshire will pay $285 million in cash for Hartford Life International Ltd., which sold the annuities from 2005 to 2009, according to a statement today from Hartford, which is based in the Connecticut city of the same name. The deal will cut second-quarter earnings by about $110 million, Hartford said.
Buffett, 82, has assumed obligation from insurers seeking to cut risk or narrow their focus. In February, Cigna Corp. agreed to give the Omaha, Nebraska-based company $2.2 billion to take on liabilities tied to retirement products. The deals add risks from market fluctuation and give Buffett funds to invest.
“We are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run,” Buffett said in a 2008 letter, referring to the company’s strategies in catastrophe insurance businesses and derivatives.
Hartford Chief Executive Officer Liam McGee, 58, has sold a life insurer to Prudential Financial Inc. and divested a broker-dealer as he focuses (HIG:US) on property-casualty coverage. He’s used hedges to guard against currency fluctuations and stock-market declines on annuities issued in prior years after the company retreated from the market. The insurer said yesterday it would boost its plan for buybacks and lift its dividend (HIG:US) by 50 percent.
McGee’s company climbed 4.1 percent to $31.23 at 4:03 p.m., the biggest gain since April. Hartford has rallied 39 percent this year. Berkshire was little changed and is up about 26 percent since Dec. 31.
Hartford has made “significant progress” reducing the size of its variable-annuity business unit, which is “now self-sufficient from a capital perspective,” Chief Financial Officer Christopher Swift said in the statement. “Selling the U.K. business is another meaningful step forward.”
The $285 million price is about the same as the unit’s statutory surplus, a measure of assets minus liabilities, as calculated under Irish accounting standards, Hartford said. The Hartford Life Ltd. unit is based in Dublin.
Variable annuities can guarantee minimum returns for clients, and results from the products have been pressured by stock-market volatility and low interest rates. Leon Black’s Apollo Global Management LLC and Guggenheim Partners LLC are among firms betting they can make a windfall on annuities as insurers scale back after being burned on the contracts.
Offloading liabilities to Berkshire, where Ajit Jain helps Buffett weigh insurance deals, can be expensive, MetLife Inc. (MET:US) has said. MetLife, the largest U.S. life insurer, is researching options to cut risks tied to retirement contracts sold before the financial crisis, even as it continues to sell annuities.
“To our knowledge, there’s only one major player who has a balance sheet large enough to offer variable-annuity reinsurance, but it’s very pricey,” John Hele, MetLife’s chief financial officer, said at a May 21 presentation to investors. “Warren and Ajit do very high returns on their side, so it really doesn’t make economical sense, from what we’ve seen.”
Deutsche Bank AG (DBK) was Hartford’s financial adviser, and Sidley Austin LLP provided legal advice.
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