In a move that mercifully allows me to get AIG out of the headlines and start discussing another member of our life company fraternity here in the structured settlement market, it was announced today that Hartford Financial had struck a deal with the massive German insurance conglomerate Allianz to provide up to $2.5 billion in fresh capital.
According to both internal communications and published reports, this deal provides Allianz with a hell of purchase of a share in a major US insurance operation.Under the terms of the deal, Allianz will buy $750 million of convertible preferred shares at $31 each and $1.75 billion in 10% junior subordinated debentures. Allianz also will get seven-year warrants entitling it to purchase $1.75 billion of common stock at an exercise price of $25.32. Hartford stock closed at just over $30 a share so the warrants are already in the black and Allianz is clearly banking on the fact that once the current turmoil subsides that they will have a valuable equity stake in Hartford as well.
So, what drove this purchase and capital infusion at this time? Primarily the fact that Fitch had cut their ratings outlook on Hartford from stable to negative last week once it became clear that the companies substantial variable annuity business was going to have potential charges of $330 million to $640 million related to reserve and expense charges. Those charges and reserve moves for those of you who don't do a lot of variable annuity business are tied into the widely sold "market lock" annuity contracts where in a client can be fully invested in a stock accounts that fluctuate in value, but if the market goes down dramatically as we are seeing right now, the clients annuity account stays at a previous locked in value, thus maintaining income value for the annuitant but creating a bookkeeping and reserve issue for the company.
I won't pretend to know all the intracies of how or why Hartford and other big variable annuity sellers have to reserve in this fashion, just let it suffice that it has caused a major reporting issue at exactly the wrong time for Hartford. They also had the twin body blow of having to report a significant loss in their investment portfolio due to large positions they held in financial services stocks. In that area Hartford is hardly alone in seeing share values in AIG, Lehman Brothers, Fannie Mae and Freddie Mac evaporate almost over night.
The Allianz investment will allow the company to maintain the necessary year end capital to retain it's coveted AA- bond rating, a feature that is essential to stay competitive in the municipal, qualified funds and structured settlement areas that Hartford is so active in.
Obviously there is more to learn over time but this is very good news for Hartford and very good news for the structured settlement profession. This has been a very trying month as uncertainty has surrounded many of the key life and P&C markets due to actual market events and unfounded rumors by certain US Senators who shall remain nameless. It is a positive to see private equity coming in to keep Hartford healthy and hopefully this takes them off the radar of companies that people might be concerned about. A rare sliver of good news but at this point we will take it.