The Hartford Seals Pension Risk Deal To Reduce Liability
Zacks Investment Research | Jun 27, 2017 10:48PM ET
The Hartford Financial Services Group, Inc. (NYSE:HIG) has entered into a pension risk transfer deal with Prudential Financial Inc. (NYSE:PRU) . Per the agreement, Prudential (LON:PRU) will shoulder $1.6 billion, or 29% of The Hartford’s $5.6 billion in the U.S. qualified pension plan liabilities.
The company has chosen Prudential to transfer its longevity risk because of its solid expertise in offering compelling long-dated longevity protection solutions. In fact, longevity risk is faced by pension or annuity providers. It is associated with the risk of making annuity type payments to a retiree for a longer period than priced for, if the person lives longer than expected.
Notably, Prudential is a leader in the pension risk transfer business which started back in 2012. Since then this business has grown manifold and the company manages pension liabilities of Verizon Communications Inc. (NYSE:VZ) , General Motors Co. (NYSE:GM) and United Technologies Corp (NYSE:UTX)., among others.
The deal will result in a charge of nearly $485 million after tax, to be incurred by the company in the second quarter of 2017. It will also lead to a reduction to stockholder’s equity of approximately $140 million, or 37 cents per diluted share based on Mar 31, 2017 shares outstanding. The Hartford, however, intends to make a contribution of $300 million by the year-end 2017, to keep the pension plans’ funding status intact as it was prior to this deal.
The company’s shares have rallied 9.6% year to date, significantly outpacing the Zacks categorized Insurance- Multi line industry’s gain of 3.4%.
Though this transaction will cause The Hartford to incur charge in the near term, it will relieve the company of its long-term pension obligations.
Meanwhile, longevity worries continue to bother employers who provide pension plans, given that the advancement in medical field and healthier lifestyles have led to an increase in the average lifespan. In fact, this change has made insurance risk transfer crucial as longevity de-risking would release the capital locked up in such businesses, thus restoring capital flexibility in businesses.
Furthermore, a rising interest rate environment has made these deals more attractive by making it less costly for the employers. We therefore expect to hear more deals of the same kind, going forward.
Currently, The Hartford holds a Zacks Rank #2 (Buy). You can see .
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