Old Mutual plc ("Old Mutual" or "the Group") announces today that it has agreed terms to sell its US Life operations to affiliates of Harbinger Capital Partners LLC ("Harbinger") for a consideration of $350 million (£220 million at a $1.59:£ exchange rate). Completion is anticipated on or after 31 December 2010 and is subject, inter alia, to relevant regulatory approvals.
The financial impact of the transaction is expected to be an increase in MCEV of £718 million or 13.2p per share and an IFRS net asset write off of £689 million or 12.7p per share based on the Group's unaudited financial statements as at 30 June 2010.
After the expected adjustment based on statutory capital at completion and costs of the sale process, estimated net proceeds are $364 million. Proceeds will be paid in two tranches in accordance with the sale contract, the final payment to be made 6 months after closing. The disposal will also permit the redeployment of capital from the associated captive reinsurance company.
Net proceeds will be applied to reduce Group net debt in accordance with the Group's stated debt reduction target.
The transaction results in a significant reduction in the Group's exposure to US credit markets, and a corresponding reduction in economic capital at risk. Whilst the final impact on Group FGD surplus will depend on the final net receipts from the transaction, the reduction in Group FGD surplus is estimated to be approximately £0.1 billion. The disposal will materially reduce the future volatility in the FGD capital at risk, particularly in extreme stress events.
Julian Roberts, Old Mutual Group Chief Executive said "I am delighted to announce the sale of our US Life business. This deal marks further progress towards our strategic objectives of simplifying the Group, lowering our risk profile and improving our returns on equity".
Philip Falcone, CEO of Harbinger Capital Partners, said: "The purchase of Old Mutual's U.S. business is an attractive proposition. As a result of our extensive review of Old Mutual's U.S. business, we believe the company is well capitalized to meet its obligations to policyholders. We expect to realize substantial returns from continuing business improvements and Harbinger's ability to enhance the value of the asset portfolio. In addition, we are fortunate to have Leland C. Launer, Jr. on board to serve as Chairman and CEO of this business. As a former Executive Vice President and Chief Investment Officer of MetLife, Inc., Lee is one of the industry's most experienced and respected executives to take the company forward."
Background to the Transaction
Old Mutual announced its intention to explore the sale of its US Life operations as part of its strategic review on 11 March 2010. Having delivered a business improvement programme and in anticipation of likely consolidation in the US life industry, Old Mutual determined that a sale of the business was in the best interests of its shareholders and commenced a formal sale process.
Transaction details and impact on Old Mutual
- Sale price of $350 million cash upon completion, subject to a purchase price adjustment for capital movements between 31 December 2009 and closing, and on the finalisation of terms for an associated reinsurance transaction.
- Up to $125 million of the purchase price will be held in escrow for 6 months after closing as part of an asset protection agreement in which Harbinger is protected against any loss incurred on sale of certain credit instruments for less than book value. At 30 June 2010 the book value of these assets was $542 million and the market value was $506 million.
- In addition the transaction will allow the redeployment of approximately $115 million of capital from OM Re, an Irish reinsurance captive which will continue to be owned by Old Mutual.
The impact of the transaction is expected be an increase in MCEV of £718 million or 13.2p per share based on the Group's unaudited financial statements as at 30 June 2010, when MCEV for the US Life operations stood at negative £387 million. The transaction is expected to result in an IFRS net asset value write off of £689 million or 12.7p per share based on the Group's unaudited financial statements as at 30 June 2010, when IFRS net asset value for the US Life operations stood at £933 million. The transaction requires approval of State insurance regulators in Maryland and New York and usual completion mechanics. These are expected to be completed on or after 31 December 2010. The majority of any residual contractual exposure will expire within two years of closing.
Old Mutual currently finances a total of $775 million of redundant US Life reserves with a letter of credit. Old Mutual will continue to provide this financing after closing as follows:
$300 million of redundant reserves on the annuity business (CARVM) will be financed by Old Mutual through letters of credit from its existing financing arrangements. This initial requirement will run down significantly over the next few years and will be refinanced by the purchaser on or before 31 December 2015.
In addition, Old Mutual is working with Harbinger to source market financing for up to $600 million of redundant reserves on the Universal Life and Term Life (XXX/AXXX) business. To facilitate this financing Old Mutual will act as legal guarantor until 31 December 2012 after which point it will be replaced by Harbinger.
J.P. Morgan advised Old Mutual on the transaction. Bank of America Merrill Lynch advised Harbinger.
Old Mutual's US Life operation provides term life and annuities to the US market. In the year to 31 December 2009 it made an audited IFRS loss after tax of £80 million ($126 million at a $1.57:£ exchange rate). Its statutory capital at 31 December 2009 was $819 million.
Harbinger Capital Partners is a leading private investment fund based in New York with $10 billion in assets under management. The firm was founded in 2001 and employs a fundamental approach to deep value and distressed credit investing. Harbinger is led by Philip A. Falcone, its Chief Executive Officer, who has over 20 years of investment experience across an array of market cycles.
For further information on Old Mutual plc, please visit the corporate website at www.oldmutual.com
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Notes to Editors
Old Mutual plc is an international long-term savings, protection and investment Group. Originating in South Africa in 1845, the Group provides life assurance, asset management, banking and general insurance in Europe, the Americas, Africa and Asia. Old Mutual plc is listed on the London Stock Exchange and the JSE, among others.
In the year ended 31 December 2009, the Group reported adjusted operating profit before tax of £1.2 billion (on an IFRS basis) and had £285 billion of funds under management at the year end. The Group has approximately 54,000 employees.