How Does Prudential’s Acquisition Of Hartford’s Life Insurance Business Affect Both Companies?

The Hartford Financial Services Group (NYSE:HIG) has reached an agreement with Prudential Financial (NYSE:PRU) to sell its individual life insurance business. ^[1] Prudential will pay Hartford $615 million in cash as part of the reinsurance deal, which is expected to complete in the first quarter of 2013.

The transaction is part of Hartford’s strategy to divest non-core businesses and increase focus on property and casualty insurance. The insurer had earlier agreed to sell its retirement plans business to Massachusetts Mutual Life Insurance Company (MassMutual), its broker-dealer business, Woodbury Financial Services, to AIG (NYSE:AIG) ^[2] and its individual annuities new business capabilities to Forethought Financial Group, a Houston-based financial services company. ^[3] Paulson & Co, a big shareholder in Hartford, had earlier pressured the insurer to undertake the divestiture. (Refer to our article Hartford Trims Non-Core Businesses While Focusing On Property And Casualty for more details).

Our $18 valuation for Hartford Financial’s stock is in-line with the current market price. We will update our model shortly to account for the divestiture.

See our full analysis of Hartford Financial here

So What Does this Mean For Hartford?

After including the cash received from Prudential, Hartford will see an increase of around $1.5 billion in net statutory capital as the deal would free up the surplus that it maintained to support the life insurance business. Total benefit from all the transactions carried out so far is around $2.2 billion, including a $1.4 billion increase in statutory surplus and an $800 million reduction in required risk-based capital. The company is likely to use this capital to support its property and casualty business.

Revenues earned through premiums and policy fees by the property and casualty division increased 3% in the first half of 2012. A 9% increase in revenues through workers’ compensation policies was the main driver for this growth. With increased attention, this trend is likely to continue in the future.

Our forecast currently accounts for steady growth in Hartford’s share of the U.S. property and casualty market, which we expect to reach 2.3% by the end of our forecast period. There is a potential upside of 10% to our price estimate should the growth rate exceed our expectations, allowing Hartford to gain 2.8% market share.

And What About Prudential?

Prudential appears to have made a smart buy here. The company will assume coverage for more than 700,000 life policies and acquire investment assets, reserved for future claims on these policies, with a statutory book value of around $7 billion. This will allow it to expand its life insurance business in the U.S.  The individual life insurance division accounted for 16% of the company’s revenue in the first half of 2012. Revenues earned through premiums and policy fees during the period were $898 million, in-line with the figure reported for the first six months of last year.

The acquisition of Hartford’s individual life insurance business will provide a solid platform for organic growth in the future. Prudential’s last significant deals were the acquisitions of Star Life Insurance Co., Ltd. and Edison Life Insurance Company from AIG (NYSE:AIG). These deals proved to be quite successful in allowing Prudential to capture share in the Japanese insurance market, which increased from 7.3% to 10.4% within one year of the deal. A similar return from the Hartford deal would greatly benefit the company.

Prudential’s current share of the U.S. individual life insurance market 2.74%, whereas Hartford’s share is around 1.24%. There is a potential upside of 5% to our price estimate for Prudential, should its market share increase to 5.6% by the end of our forecast period. You can modify the interactive chart below to gauge the effect an increase or decrease in market share could have on our price estimate.

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1. The Hartford To Sell Individual Life Insurance Business To Prudential For $615 Million; Transaction To Provide A Net Statutory Capital Benefit Of $1.5 Billion, Press Release, 27^th September, 2012 [↩]
2. AIG Buying Hartford Financial Brokerage Unit , Wall Street Journal, 31^st July, 2012 [↩]
3. The Hartford Signs Agreement To Sell Individual Annuity New Business Capabilities, Press Release, April 26^th, 2012 [↩]