The Allstate Corp. (ALL) announced the sale of one of its consumer life insurance units – Lincoln Benefit Life Co. (:LBL) – to Resolution Life Holdings Inc. for $600 million. This follows the company’s attempt to reduce its risk in its life insurance unit at Allstate Financial, which was operated via independent agencies.
Post regulatory approvals, the deal is scheduled to culminate by the end of 2013. Founded in 1938 and acquired in 1984 by Allstate, LBL holds a prominent position in most of the US markets.
Incremental Value and Risk Minimization
Overall, the transaction should earn about $785 million to Allstate after including tax benefits. Moreover, the disposal of LBL is expected to generate statutory earnings of $350–400 million, while reducing reserves in Allstate life and annuity business by $13 billion. Additionally deployable capital is likely to expand by about $1.0 billion.
Nevertheless, management also projects post-tax GAAP loss of $475–525 million, which includes approximately $575–675 million of unrealized capital gains and losses. The deal is also expected to diminish the company’s equity capital, on a GAAP basis.
Following the sale, Allstate will terminate the sale of new life or retirement products via independent life insurance and annuity agencies. Furthermore, management decided to cease the issue of fixed annuities by the end of this year, in order to control the losses from such annuities. A wide array of life, retirement, savings, long-term care and disability products will remain in the product basket of Allstate Financial and its subsidiaries.
This is also consistent with Allstate’s strategy of shifting its focus to underwritten products from spread-based products, which are marred by the low interest rate environment and volatile equity markets. Based on this, contractholder funds were reduced by $512 billion from 2012-end to $34.2 billion at Mar 2013-end.
However, Allstate is not the first insurer that is striving to reduce exposure to market risks by vending of its annuity-related products. In Dec 2012, Sun Life Financial Inc. (SLF) disposed of its variable annuity business to Delaware Life Holdings for $1.35 billion, among others.
On the other hand, the deal complements the long-term growth strategy of Resolution Life, which concentrates on growing its life insurance business inorganically through acquisitions than attempting to make a fresh market presence.
Overall, we believe that the aggressive measures to mitigate market risks will likely generate incremental earnings and free up capital, which should further shore up investor confidence in the stock. Nevertheless, the extent of gain from these efforts can only be assessed in the long run. Allstate carries a Zacks Rank #3 (Hold).
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