Massachusetts-based Allmerica Financial Corporation announced Monday that it has entered into a definitive agreement to sell its run-off variable life insurance and variable annuity business to The Goldman Sachs Group Inc.
In conjunction with this sale, AFC is seeking approval from the Massachusetts Division of Insurance for a dividend of $40 million from its remaining life business. Total cash proceeds from the sale and the dividend are projected to be approximately $385 million, approximately $70 million of which is expected to be deferred and paid over a three year period.
The actual purchase price will be determined at closing, and is subject to changes in equity market levels, implied equity market volatility, interest rates and surrender activity. Additionally, the actual purchase price will be adjusted based on the actual surplus level of Allmerica Financial Life Insurance and Annuity Company (AFLIAC), the life insurance affiliate being sold, at closing. Allmerica expects to implement a hedge program that is intended to substantially protect the purchase price from movements in interest rates, equity market levels and implied equity market volatility through closing.
Up to $200 million of the proceeds are expected to be used to fund a share repurchase program commencing after the closing of the transaction. The remaining proceeds will be retained to meet certain corporate obligations and provide additional financial flexibility at the holding company.
“This transaction delivers on our strategy to monetize the value of our life business that has been in run-off since 2002, and enables us to apply even greater focus on the continued growth of our property and casualty business,” said Frederick Eppinger, president and chief executive officer of Allmerica Financial Corporation. “The sale will accelerate the release of capital from the Life Companies, and provide us with the financial flexibility to implement a share repurchase program. It will deliver immediate value to our shareholders, and will position us to continue to do so going forward.”
The transaction will include the sale of Allmerica’s primary life insurance company, AFLIAC, to Goldman Sachs. AFLIAC holds 94% of Allmerica’s variable insurance and annuity business. In a related transaction, AFLIAC will reinsure the remaining 6% of Allmerica’s variable business, held by an affiliate company, First Allmerica Financial Life Insurance Company (FAFLIC), in effect transferring the residual variable business to Goldman Sachs.
In connection with these transactions, Allmerica Investment Trust (AIT) has entered into a reorganization agreement pursuant to which it will transfer the assets and liabilities of each of its funds to certain Goldman Sachs managed funds. Lastly, Goldman Sachs will purchase from Allmerica the AIT funds’ current investment advisory company.
The transaction is expected to result in a net after tax loss on the sale that is projected to be approximately $400 million, primarily as the result of the write-down of non-cash deferred acquisition cost assets.
The sale of the variable insurance business to Goldman Sachs will not change the terms and conditions of policyholder contracts. AFLIAC will continue to be well capitalized and will benefit from a strong parent company in Goldman Sachs. The operations of AFLIAC will be outsourced to Security Benefit Life Insurance Company, a state-of-the-art insurance and financial services provider.
After the sale, Allmerica will no longer have exposure to variable annuity business with guaranteed minimum death benefit risk. It will continue to own FAFLIC, which holds various blocks of traditional life insurance businesses that are in run-off. FAFLIC will provide transition services to Goldman Sachs until the operations of AFLIAC can be transferred to Security Benefit.
At the end of the transition period, which is expected to be in the fourth quarter of 2006, FAFLIC is projected to have statutory total adjusted capital of $175 million and certain tax benefits which are expected to be utilized over time to generate dividendable surplus to the holding company.
Allmerica expects the transactions to close on or after Nov. 30, 2005. Closings of the transactions are subject to satisfaction of various conditions, including regulatory approvals from the Massachusetts Division of Insurance and the New York Department of Insurance, expiration of the Hart- Scott-Rodino waiting period, filings with the Securities and Exchange Commission with respect to the reorganization of the AIT funds, the accuracy of various representations and warranties and compliance with covenants and agreements, and to other provisions customary for transactions of this kind.
In addition, Allmerica will indemnify Goldman Sachs for litigation, regulatory matters and other liabilities relating to the pre-closing activities of the business being transferred. The AIT fund reorganization requires fund shareholder approval.
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