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April 02, 2012 at 11:05 AM
The Hartford Insurance Group says it is buying back, at a steep premium, securities it sold to Allianz during the height of the 2008-2009 financial crisis.
Despite the high cost, Stern Agee analyst John Nadel calls the decision positive because it improves the Hartford’s financial flexibility.
The Hartford says it has negotiated an agreement with Allianz to repurchase all outstanding 10 percent fixed-to-floating rate junior subordinated debentures due 2068 for $2.125 billion.
The principal amount of the notes was $1.75 billion. In addition, the company is using $300 million of remaining buyback authorization to repurchase all outstanding warrants issued to Allianz to purchase 69.4 million shares of its common stock at strike price of $25.23.
Nadel explains that, in the long run, the deal is cheap for the Hartford. “We estimate contractually this would have cost theHartfordabout $2.8 billion versus the $2.125 billon that was negotiated with Allianz,” Nadel says.
That is a savings of approximately $700 million, or 24 percent.
Nadel also says that the decision means that the Hartford management “continues to demonstrate a clear willingness to go beyond the status quo to deliver value for shareholders beyond that currently discounted in the share price.”
At the same time, Nadel says in an investor’s note that he expected the Hartford would announce various debt offerings aimed at raising $2.1 billion in new cash.
Nadel estimates the elimination of the 10 percent Allianz debt, partially offset by a higher principal amount of new debt at a substantially lower weighted average coupon, should save the Hartford between $50 and $75 million in annual pre-tax interest expense.
“Clearly, pricing of the new debt will be a key determinant, and we expect theHartfordwill announce multiple tranche and multiple maturities debt offerings this morning for marketing/pricing over the next couple of days,” Nadel says.
The decision to repurchase the Allianz interest at a premium is part of the decision by the Hartford to regroup and exit the life-variable-annuity business.
