(Bloomberg) — Voya Financial Inc. struck a deal to transfer life insurance policies with a face value of about $100 billion to Reinsurance Group of America Inc., freeing up funds for the former U.S. arm of ING Groep NV.
The deal for about 170,000 term-life policies will create about $200 million of excess capital, New York-based Voya said today in a statement.
Voya Financial Chief Executive Officer Rod Martin, 62, is working to improve profitability by shifting the mix of business at Voya. He’s retreated from sales of term-lifeinsurance and other products that tie up large amounts of funds to back future payouts, while focusing on retirement products.
“We are targeting product segments of the life insurance market that best match our lower-capital, higher-returns approach,” Martin said today in the statement. “This is an opportunistic transaction for Voya Financial that aligns with our focus on improving the value of the company.”
Voya Financial said it will record an immediate loss of $100 million to $120 million on the deal, which it expects to be completed in the fourth quarter. Barclays Plc was Voya’s financial adviser and Sutherland Asbill & Brennan LLP provided legal advice. ING Groep, the biggest Dutch lender, owns about 43 percent of Voya after reducing its stake through three public offerings.
Voya climbed 0.4 percent to $38.01 at 9:32 a.m. in New York trading, bringing its advance for the year to 8.1 percent. Reinsurance Group gained 0.1 percent to $81.79 and is up 5.7 percent since Dec. 31.
RGA, the reinsurer that was spun off from MetLife Inc., has built a business by taking on obligations from other carriers. The Chesterfield, Missouri-based company will earn premiums on the insuranceand pay claims while a Voya subsidiary will administer and service the policies.
“This transaction leverages RGA’s deep expertise and understanding of the U.S. mortality market,” Reinsurance Group CEO Greig Woodring said in a separate statement.
Commenting on the deal, Sterne Agee Analyst John Nadel estimated that RGA will require $100-$120 million to capitalize the acquired block of business and thus use about 20 percent of $500 million of existing excess capital to support transaction.
“Assuming a pricing hurdle around 12 percent in after-tax return on equity (ROE), we estimate the acquired block should generate roughly $10 million in after-tax operating income for RGA beginning in 2015, or roughly $0.12 – $0.14 per share depending upon buyback assumptions, Nadel writes in a report on the deal. “For the moment, we do not believe the transaction is significant enough in terms of capital outlay to alter our buyback assumptions (which remain $70 million in [the second half of 2015] and $200 million in 2015, particularly keeping in mind that RGA should generate between $200-300 million in annual free cash flow to supplement current excess capital levels.
“The deal should be accretive to RGA’s 2015 earnings by about 1.5 percent, so clearly a positive, but not necessarily a “dial-mover” in terms of capital deployment or deal size,” Nadel adds. “As we understand it, the block of business was shopped actively in an auction-style bidding, so we could be somewhat aggressive on our 12 percent [return on equity] assumption above.
“We also understand that VOYA has been an active client of RGA for years and as such RGA should have good familiarity with VOYA’s products and underwriting history,” Nadel continues. “Coupling this with the fact that mortality risk is clearly RGA’s area of greatest expertise, we wouldn’t expect any significant negative surprises in terms of the block’s performance over time.”
–With assistance from Bloomberg reporter Matthew Monks and LifeHealthPro Senior Editor Warren S. Hersch in New York.