--Hartford to buy back warrants and $1.75 billion of debt from Allianz
--Analyst estimates annual savings of $50 million to $75 million
--Allianz had 15% annual return on its Hartford investment
(Adds details on warrants, covenants in 2008 agreement, other information, in the third, fifth, eighth and 11th paragraphs.)
By Erik Holm and Ulrike Dauer
Hartford Financial Services Group Inc. (>> Hartford Financial Services) agreed to pay $2.43 billion to buy back securities it sold to Allianz SE (ALV.XE, ALIZF, AZSEY) in the depths of the financial crisis.
The agreement allows Hartford to replace $1.75 billion of debt it owes to Allianz--which was yielding the German insurer 10% a year--with new debt at a lower cost. John Nadel, an analyst at Sterne Agee, estimated Monday that Hartford could save between $50 million and $75 million in interest expenses annually.
Hartford will also pay Allianz $300 million to buy back warrants that entitled the German insurer to purchase 69.4 million shares of Hartford's stock for $25.32 each. Hartford's stock rose 2.5% to $21.61 in recent trading.
The agreement leaves Allianz with about 5% of Hartford's outstanding shares, but otherwise closes the book on an October 2008 investment that helped to shore up Hartford's balance sheet when capital markets were frozen and investors were beginning to question the company's ability to survive the financial crisis. Hartford later needed a $3.4 billion bailout from the U.S. government, which the company repaid in 2010.
An Allianz spokesman said Allianz's average return on the Hartford investment had been 15% annually.
The agreement disclosed Monday frees up about EUR1.5 billion ($2 billion) in capital that Allianz, Europe's largest insurer by premium income and market capitalization, had to set aside for the investment, which can now be used for other things.
The transaction should also ease market speculation that Allianz was interested in buying Hartford outright. Such rumors regularly surfaced in Europe even though Allianz executives had repeatedly said they considered the Hartford stake to be a financial investment, rather than a strategic one. Allianz also owns Pacific Investment Management Co., or Pimco, and Fireman's Fund, an insurance and risk-management company.
The deal with Allianz comes as Hartford Chief Executive Liam McGee embarks on an effort to shed low-return businesses and boost the company's share price. Last month, Hartford disclosed plans to exit the variable-annuity business and put its life-insurance arm up for sale to focus on its property-and-casualty insurance business.
Hartford agreed to pay about $2.1 billion plus interest to retire the junior subordinated debt held by Allianz ahead of schedule. Under terms of their 2008 agreement, Hartford had the option to redeem the notes beginning in 2018.
The gains from the deal on top of the 10% coupon from the debt have "vindicated Allianz's original investment," Credit Suisse analyst Thomas Gallagher said in a note to clients.
After disclosure of the deal on Monday, Hartford issued prospectuses for new senior and junior notes to raise money to buy back Allianz's investment.
The debt repurchase requires the approval of investors who hold another series of notes issued by Hartford that pays 6.1%.
The warrants that Hartford is repurchasing would have raised Allianz's equity stake to nearly 20%, had the German insurer exercised them within a seven-year window that would have expired in 2015.
Repurchase of the warrants will be counted as part of Hartford's existing $500 million equity-repurchase program. The deal leaves Hartford with a remaining buyback authorization of about $106 million, which the company "intends to complete on a timely basis," according to a statement Monday.
Repurchase of both the warrants and the debt is scheduled for April 17, though Hartford has the option to delay the repurchase of the debt if needed.
-By Erik Holm, Dow Jones Newswires; 212-416-2892; [email protected]
--Kristin Jones contributed to this article.