Chief Executive Officer Liam McGee plans to issue senior notes and junior subordinated debt as part of a strategy to improve financial flexibility, according to a statement today from Hartford, which is based in the Connecticut city of the same name. The U.S. company turned to Allianz, Germany’s largest insurer, for capital in 2008, agreeing to pay 10 percent on $1.75 billion of debt as capital markets froze.
Financial firms including Goldman Sachs Group Inc. (GS) have paid back U.S. bailout funds and unwound deals from private companies struck during the credit crisis of 2008 and 2009. Corporate borrowers are now able to tap debt markets at a lower cost as the economy rebounds and Federal Reserve Chairman Ben S. Bernanke holds interest rates near zero.
“It’s a positive step,” said Dan Theriault, an analyst at Portales Partners LLC with an “outperform” rating on Hartford shares. The repurchase of warrants “removes a significant dilutive impact” for shareholders, he said.
The purchase of $300 million in warrants will be funded through an existing $500 million share buyback program, Hartford said. Allianz will have about 5 percent of Hartford’s common stock after the deals, which Hartford said it expects to be completed about April 17. Paulson controls the largest stake, about 8.5 percent, and has pushed McGee to sell units.
“These transactions are expected to reduce the Hartford’s anticipated annual interest expense by replacing high-interest coupon debt with lower-coupon debt,” McGee’s firm said today.
Armel Leslie, a spokesman for Paulson, declined to comment. Paulson’s hedge fund, New York-based Paulson & Co., has been pressing Hartford to separate its life insurance operations from the company’s property and casualty unit. McGee, who announced plans last month to exit some of Hartford’s businesses, has said a split isn’t in the best interests of shareholders.
The warrants gave Allianz the option to buy 69.3 million shares for $25.23 each, Hartford said in its annual 10-K filing. The warrants were issued in October 2008 with a term of seven years.
Hartford advanced 4.1 percent to $21.95 at 4:15 p.m. in New York. Hartford repaid its U.S. bailout in 2010.
European insurers such as Munich-based Allianz and France’s Axa SA are facing higher capital requirements as regulators plan to introduce Solvency II, a new legal framework for the industry. Allianz, led by CEO Michael Diekmann, had its credit rating placed on a negative outlook by Standard and Poor’s in January.
“It’s very positive that the risk capital that Allianz had to set aside for these instruments has been reduced by about 1.5 billion euros, which in these times is a very good development,” Richard Manson, a spokesman for Allianz, said of the repurchase agreement.
The negative outlook reflects the ratings firm’s view that “capital adequacy has weakened to a level close to our minimum expectations for the current ratings and the risk that it could weaken further in light of economic pressures in the euro zone coupled with challenging financial market conditions,” S&P said in its Jan. 27 statement.
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