The Hartford Financial Services Group, IncHIG announced that it has entered into a definitive agreement to acquire the U.S. group life and disability business of Aetna Inc. AET for a cash consideration of $1.45 billion. The transaction is expected to culminate in November 2017.
This buyout aims to expand Hartford Financial's Group Benefits distribution capabilities and ramp up its technology strategy.
The purchase consideration of $1.45 billion comprises a ceding commission which will be paid by Hartford Life & Accident Insurance Company, the primary Group Benefits insurance operating subsidiary of Hartford Financial.
The transaction also includes an exclusive, multi-year collaboration deal per which Aetna will be offering Hartford Financial's group life and disability products through its medical sales team.
Aetna's book of group life and disability insurance, which had premiums of approximately $2 billion in 2016 will be reinsured by Hartford Financial on an indemnity basis. Post takeover, most of the Aetna Group Insurance employees across the country will be transferred to Hartford Financial.
Financing the Transaction
Hartford Financial intends to finance the cash consideration by deploying dividends from its insurance affiliates and holding company resources, including $273 million under its 2017 share repurchase plan. The company does not expect any share repurchase authorization in 2018.
Hartford Financial does not expect to issue any debt or equity for financing the buyout.
Rationale of the Transaction
This transaction will help Hartford Financial to emerge as the second-largest group life and disability insurer. Group life and disability, banking on its stable risk profile, lucrative returns and strong long-term growth prospects, is a significant business for Hartford Financial.
Joining forces with Aetna will strengthen Hartford Financial's foothold as a leader in the large employer market and expand its presence among midsize employer clients. Moreover, Hartford Financial will be able to grab new opportunities to distribute complementary products to a customer base of more than 20 million to be insured by the combined business.
This transaction will also be beneficial to both entities' shareholders and customers, and help them focus in a personalized manner to improve member health. The transaction will be accretive to Hartford Financial's 2018 earnings per share.
With this acquisition, the acquirer will be able to leverage the industry-leading digital assets and an integrated absence management platform to improve customer experience.
Aetna, on the other hand, intends to utilize the sale proceeds for various purposes, including but not restricted to internal investments, share repurchases and debt repayment. Though the transaction will not affect its 2017 bottom line, it will be slightly dilutive to the 2018 bottom line.
Hartford Financial continues to utilize data and advanced analytics across workers' compensation and disability to drive better results for clients across group life and disability lines. As the nation's second-largest workers' compensation insurer and group disability insurer, this buyout improves Hartford Financial's competitive position in the market and enhances its capabilities for future product offerings in the line of absence management.
A.M. Best Jumps Into Action
Following the announcement of the acquisition, A.M. Best commented that the credit ratings of Hartford Financial and its affiliates remain unchanged.
The rating agency expects the financial leverage and coverage measures at the holding company to remain within levels that support the current ratings. Further, it expects the risk-adjusted capitalization of the entities to remain at adequate levels.
Insurers Opting the Inorganic Route
Mergers and acquisitions not only add capabilities to a portfolio but also expand geographical footprint of companies, thereby expanding their growth profile. Hence, acquisitions rage the insurance space. Earlier this month, White Mountains Insurance Group, Ltd. WTM announced that it has entered into an agreement to acquire a 50% stake in DavidShield to gain a premier spot in the accident and health insurance market. Arthur J. Gallagher & Co. AJG recently acquired Santa Fe, New Mexico-based Reynolds & Rodar Insurance Group, Inc to expand its presence in New Mexico.
Zacks Rank & Share Price Movement
Hartford Financial carries a Zacks Rank #3 (Hold). Shares of Hartford Financial have outperformed the industry year to date. While Hartford Financial's shares have returned 13.4%, the industry has gained 9.5%. We expect the company's diversified product offerings and strategic acquisitions to further drive its shares in the near term.You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here
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