Hartford Financial Services Group Inc. agreed to pay $2.43 billion to buy back securities it sold to Allianz SE in the depths of the financial crisis.
The agreement allows Hartford to replace $1.75 billion of debt it owes to Allianz, which was paying 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 1.5% to $21.39 in morning 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 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 it repaid in 2010.
An Allianz spokesman said Allianz's average return on the Hartford investment had been 15% annually. The agreement announced 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 could be used for other things.
The transaction should also ease market speculation that Allianz could be interested in buying Hartford outright. Such rumors regularly resurfaced even though Allianz executives had repeatedly said they considered the Hartford stake to be a financial investment, rather than a strategic one.
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. Hartford announced plans last month 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. After the announcement of the deal on Monday, Hartford issued prospectuses for new senior and junior notes to raise money to buy back Allianz's investment.
The repurchase requires the approval of investors who hold another series of notes issued by Hartford that pay 6.1%.
The 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.
The repurchase of both the warrants and the debt are scheduled for April 17, though Hartford has the option to delay the repurchase of the debt if needed.