The Hartford Agrees to Sell Run-Off Life and Annuity Business to Investor Group (December 7, 2017)

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1 The Hartford Agrees to Sell Run-Off Life and Annuity Business to Investor Group (December 7, 2017) On December 4, 2017, The Hartford Financial Services Group, Inc. (HIG) announced an agreement to sell its run-off life and annuity business (dubbed Talcott Resolution ) to six institutional investor groups for a total of $2 billion. The purchase price includes HIG receiving both cash proceeds and a 9.7% stake in the new company, with the new entity assuming $150 million of debt. The $2.0 billion purchase price compares to total surplus, AVR, and IMR of $3.9 billion for Hartford Life Insurance Company (HLIC) and Hartford Life and Annuity Insurance Company (HLAIC) on a consolidated basis, excluding an $800 million shareholder dividend paid by HLIC in the fourth quarter Thus, the purchase price for HLIC and HLAIC represents a significant discount to statutory book value 1, which may reflect HIG s desire to exit this business (to focus on its P&C and employee benefits businesses) as well as overall valuations of annuity properties given tepid sales, increased regulatory footprint at the point of sale, and potential volatility of the assumed liability given the ongoing low interest rate environment and adverse impact of any equity market downturn. The investor group acquiring Talcott Resolution includes: Cornell Capital LLC - a private investment firm focused on partnering with strong management teams to build businesses. The firm was founded in 2013 by senior partner Henry Cornell. Atlas Merchant Capital LLC an investment vehicle targeting compelling market opportunities in the financial services sector. The company is led by co-founders Bob Diamond and David Schamis. Atlas believes that changes in the regulatory landscape lead to unprecedented opportunities within the financial services industry. TRB Advisors LP - a global direct investment business that seeks superior risk-adjusted returns across asset classes through a long-term, patient and flexible investment mandate. Founded in 2010, TRB invests the capital of its Chairman, Timothy R. Barakett. Pine Brook - an investment firm that makes business building and other equity investments, primarily in energy and financial services businesses. Pine Brook invests principally in North America and the U.K., and manages more than $6.0 billion of limited partner commitments through funds and coinvestments. J. Safra Group - a group with total assets under management of $208 billion and aggregate stockholder equity of $17.4 billion, which is controlled by Joseph Safra and his family. The group consists of privately owned banks under the Safra name and investment holdings in asset based business sectors such as real estate and agribusiness. The Group s real estate holdings consist of more than 200 premier commercial, residential, retail and farmland properties worldwide. Global Atlantic Financial Group (GAFG) - a privately-held holding company for insurers based in Bermuda. GAFG is presently active in the U.S. life insurance, annuity, and reinsurance market, through four major life insurance subsidiaries, including Forethought Life Insurance Company, Accordia Life & Annuity Company, and Commonwealth Annuity & Life Company. 1 We note that HIG is also retaining tax benefits (net operating loss carryovers) in the deal, which currently have an estimated GAAP book value of $950 million. However, these are subject to the level and timing of HIG s taxable income, and may be devalued if corporate tax rates are lowered. ALIRT Insurance Research Page 1 December 7, 2017

2 The exact percentage share of ownership of Talcott Resolution among these six companies is not known at this time. The ownership group plans to retain the over 400 employees that are presently employed in operating HLIC and HLAIC. Talcott Resolution includes HIG subsidiaries Hartford Life Insurance Company (HLIC) and Hartford Life and Annuity Insurance Company (HLAIC), as well as Hartford Life, Inc. (HLI), which is the present holding company owner of HLIC and HLAIC. The transaction is expected to close in the first half of 2018, and will require regulatory approval from the Connecticut Department of Insurance (both HLIC and HLAIC are domiciled in Connecticut), as well as HIG s shareholders approval. In addition to the planned sale of HLIC and HLAIC, HIG agreed to reinsure $9 billion of fixed annuity business to GAFG subsidiary Commonwealth Annuity and Life Insurance Company. These reinsurance agreements (one each with HLIC and HLAIC) will also require regulatory approval from the State of Connecticut Insurance Department. ALIRT s Thoughts ALIRT has long centered on evaluating insurance companies primarily at the statutory entity level, given that the policyholder s legal claim is to the insurance company that issues the contract as that entity ultimately bears all the risk. An important corollary to this is that ALIRT strongly believes that a distributor or policyholder should not give significant credit to the implicit support of holding companies (as we argue is done with public ratings/comdex) given that parents can and do sell subsidiaries and affiliates. The HIG announcement is one in a growing line of major ownership changes that have occurred over the last several years, including: Sun Life s exit from most of its U.S. retail business and ultimate sale of Sun Life Assurance Company (U.S.) December 2011/August HIG s sale of its individual life and retirement businesses, as well as the sale of new business capabilities for individual annuities, following pressure from activist investors 2012/2013 ING spin-off of its U.S. insurance units (Voya Financial) in an IPO May Aviva plc s sale of its U.S. business to Athene Holding Ltd. (and Athene s concurrent sale of Aviva s life business to a subsidiary of Global Atlantic) October Allstate Corp s sale of Lincoln Benefit Life to a newly established professional run-off firm, Resolution Life Holdings Inc. April MetLife, Inc. s spin-off of its U.S. retail life and annuity business (Brighthouse Financial, Inc.) August AXA s announced partial spin-off (via IPO) of its U.S. life and annuity business May In addition to these actions, we have also seen the sales of three mid-sized public life companies to Japanese buyers over the past several years (Protective, Standard Insurance Corp., and Symetra Inc.), the sale of smaller publicly-traded insurer Phoenix Companies, Inc. to a non-u.s. buyer, the sale of publicly-traded Fidelity & Guaranty Life to CF Corp. (now FGL Holdings), and the attempted purchase of Genworth Financial, Inc. by Chinese company China Oceanwide Holdings Group Co., Limited. We have also witnessed substantial industry acquisitions by private equity firms since 2010, including sizeable purchases by Apollo Global Management/Athene Group Ltd., the Blackstone Group, Global Atlantic Financial ALIRT Insurance Research Page 2 December 7, 2017

3 Group, and Guggenheim Partners, among others. We have noted recent purchases of smaller life insurance companies by new players, including the Global Bankers Insurance Group and Kuvare Holdings LP. All of these transactions exhibit at least in part a similar theme traditional U.S. life insurers that are reducing exposure to the life insurance and annuity businesses. There are many factors leading to such transactions including: perceived (and actual) correlation with equity markets, depressed profitability of existing businesses, an over 25-year decline in interest rates, increased regulation, and investor desire to deploy capital in other businesses and/or increase share buybacks and/or dividends. ALIRT Results: Hartford s Run-Off Life Insurance Companies (Talcott Resolution) No one can predict potential future transactions, which is why ALIRT continually focuses on the financial and operating profiles of the actual insurance companies that legally underwrite policies on a standalone basis compared to peers and the industry, apples-to-apples, to contrast underlying relative financial strength trends. To that end, below we provide the ALIRT Scores for HIG s run-off life insurance subsidiaries, and include additional financial data showing the size of the companies and investment leverage. ALIRT Scores & Selected Financial Metrics - Talcott Resolution Life Insurers Total ALIRT Scores Year End M 2017 Surplus 9/30/17 - Data in $ Millions GA Inv. Assets SA Assets Surplus / GA Inv. Assets Hartford Life Insurance Company ,607 19,386 89, % Hartford Life and Annuity Ins. Co ,516 6,149 30, % ALIRT Life Composite ,054 3,584,316 2,386, % *We note that HLIC owns HLAIC, so there is considerable overlap in HLIC's surplus and invested assets HLIC and HLAIC paid $800 million and $550 million of shareholder dividends, respectively, to their parent companies in the fourth quarter of 2017, which are not reflected in the surplus figures in the above table. In addition to the planned sale of HLIC and HLAIC, HIG agreed to reinsure (via coinsurance) $9 billion of fixed annuity business to Global Atlantic Financial Group (GAFG) subsidiary Commonwealth Annuity and Life Insurance Company. Management for GAFG states that over $8 billion of this business presently resides in HLIC, with the remainder held by HLAIC. A breakdown of the business is as follows: Individual Fixed Deferred Annuities $4.25 billion. Payout Annuities - $1.3 billion to $1.7 billion. These are HLIC and HLAIC annuities where the contractholder has annuitized the contract, and thus the contractholder is due a fixed schedule of payments over time. Structured Settlements about $3 billion or so, split between period certain and standard business. These transactions, combined with the possible payment of additional shareholder dividends by HLIC and HLAIC prior to the closing of the acquisition and reinsurance, could lead to considerable changes in the financial profiles of HLIC and HLAIC. Most notably, the reinsurance of fixed annuities described above would lead to a significant reduction in HLIC s general account investment assets, liability profile, and likely the investment mix of the company. It may also result in similar changes for HLAIC, but as the amount of business ceded by HLAIC is much smaller in aggregate and as a percent of total invested assets, the changes may be less dramatic. These transactions will also result in a near doubling of general account invested assets for Commonwealth Annuity & Life. ALIRT Insurance Research Page 3 December 7, 2017

4 Rating Agency Actions As we have mentioned in the past, public rating agency methodology applies substantial weight to the implicit parental support of insurance company subsidiaries. As such, when parental support is no longer factored into the ratings, the underlying subsidiaries are often downgraded, in some cases severely. Unsurprisingly, HIG s run-off life insurance subsidiaries ratings were downgraded one notch by A.M. Best and S&P following the announcement of the sale of Talcott Resolution. Moody s rating was downgraded one notch for similar reasons after HIG agreed to purchase Aetna s U.S. group life and disability business for nearly $1.5 billion in late October, citing that it no longer considered that HLIC and HLAIC were core to HIG. The table below summarizes the current ratings for HLIC and HLAIC. The ratings in red indicate recent one notch rating downgrades. Hartford Life Insurance Company Current Ratings for the Talcott Resolution Life Insurers Hartford Life and Annuity Insurance Company A.M. Best Fitch Ratings Moody s S&P B++ Baa3 BBB (5 th N/R highest) (10 th highest) (9 th highest) B++ Baa3 BBB (5 th N/R highest) (10 th highest) (9 th highest) Below we provide some detail on the rationale given by the rating agencies regarding their actions: A.M. Best The agency cited the lack of rating enhancement for the companies subsequent to HIG s planned sale of the entities. A.M. Best placed these ratings under review with developing implications. Moody s The agency noted that this rating action reflected its removal of uplift associated with implicit support by HIG and is now more in line with the companies standalone credit profiles. In addition to the rating downgrade earlier this autumn, in conjunction with HIG s announcement this week Moody s placed its ratings on HLIC and HLAIC under review for possible downgrade. S&P S&P stated that its downgrade was due to its view of the companies shifting from moderately strategically important to nonstrategically important for HIG. The agency also noted that its experience with investor groups gives it reason to believe these types of owners generally maintain lower capital levels and commitment than other owners. The agency also placed these ratings on creditwatch with negative implications. ALIRT Insurance Research Page 4 December 7, 2017

5 Conclusion The Hartford s recently announced agreement to sell its run-off U.S. life insurance companies (Talcott Resolution), including HLIC and HLAIC, represents the latest chapter in substantial ownership changes within the U.S. life insurance and annuity markets since the global crisis years of The regulatory fall-out from that crisis (specifically the designation of Systemically Important Financial Institutions, or SIFIs), combined with the protracted low interest rate environment and sometimes volatile equity markets has led insurers to rationalize their products, distribution strategies, and geographical footprints in an attempt to maintain adequate profitability. Publicly-traded holding groups have been especially vulnerable as investors seek better returns, pressuring managements to take steps to better maximize capital efficiencies. Ultimately, the impact of organizational changes on the insurance entities underwriting policies will differ on a case-by-case basis, and ALIRT will continue to focus its analytical efforts specifically on these entities. In addition, shifts in ownership can also presage changes in operating, distribution and product strategies as well as in personnel and service quality. As for HIG s sale of HLIC and HLAIC, we will be watching several things going forward, including: Composition of Talcott Resolution s investor group and board The group s future management team and strategic plans Capitalization, both of the holding company and individual subsidiaries Investment function, philosophy, resources Regulatory approvals We will continue to update clients as more information is forthcoming. This review is prepared by ALIRT Insurance Research, an independent insurance industry financial analysis firm. ALIRT provides its ALIRT (AnaLysis of InsuRer performance Trends) Services to institutional clients responsible for monitoring exposures to insurance company financial deterioration. This review is for the specific internal use of our clients, and may not be redistributed without the express written permission of ALIRT Insurance Research. While this review is prepared for your personal use, it is not a substitute for an impartial and thorough investigation of insurance company relative financial strength, and does not satisfy federal and state mandated fiduciary due diligence. Financial information contained in this review is obtained from public sources we consider reliable, but we cannot guarantee as accurate. This review should not be considered complete, includes expressions of our opinion, and must be accepted without responsibility to ALIRT. ALIRT Insurance Research, 200 Day Hill Road, Ste. 220, Windsor, CT Phone: (860) Fax: (860) HTUinfo@alirtresearch.comUTH Website: HTUwww.alirtresearch.comUTH ALIRT Insurance Research Page 5 December 7, 2017