Hartford Moving Closer to Its P/C Roots But Not Severing All Life Ties

By Ben Berkowitz | March 22, 2012

The Hartford Financial Services Group Inc., under pressure to boost its stock price from hedge fund manager John Paulson, said it would get rid of most of its life insurance-related operations and focus on being a property insurance and group benefits company.

But Paulson had only faint praise for the company’s plan, calling it a “first step” that did not address what he perceives as the company’s underlying problems.

The Hartford, one of the oldest companies in the United States and one of three insurers to receive a government bailout during the financial crisis, said it would shut down its annuity business and pursue a sale or other options for its individual life insurance, retirement plan and broker-dealer businesses.

The decision, announced on Wednesday, caps a tumultuous six weeks for the Hartford, whose shares shed most of their early gains and were up 1.3 percent in late trading.

The Hartford’s recent problems started on Feb. 8, when Paulson screamed at management on a quarterly earnings call that the Hartford had to do something “drastic” to improve its industry-low valuations.

Paulson, the company’s largest shareholder, subsequently pushed for a split of the life and property insurance businesses. Most analysts agreed with the idea, but said it would be difficult to implement because the life unit would have problems servicing debt and might not receive a strong enough credit rating to continue writing new policies.

Nonetheless, Paulson is still calling for a split of the property insurance business from all other operations, on the grounds that investors and analysts are not enthusiastic about the property insurer being combined with other assets.

“We do not believe today’s actions will materially increase (property and casualty) investor interest in The Hartford,” he said.


Hartford Chief Executive Liam McGee said in an interview that the plan was not a direct reaction to Paulson and that management and the board had been looking at alternatives since the middle of last year. Goldman Sachs and Greenhill & Co are running the process for the Hartford.

“We take suggestions from all of our shareholders, not just Paulson but all of our shareholders, quite seriously,” McGee said. “Clearly, we evaluated a split but we were in the course of evaluating many options.”

McGee also said the course the Hartford chose was a “far superior plan” than a traditional split.

The news took analysts by surprise, both in its timing and scope.

“While these actions are a bit more than I was expecting, they are less than John Paulson was proposing,” said Robert Glasspiegel, an analyst at Janney Capital Markets unit Langen McAlenney, in a note to clients.

Stifel Nicolaus analyst Meyer Shields estimated the company could end up with proceeds of about $1.5 billion from the asset sales, mostly from the life and broker-dealer businesses, while Barclays analyst Jay Gelb said the assets were likely to draw interest from the likes of American International Group Inc. and Principal Financial Group.

The restructuring will bring the Hartford closer to its roots. Founded by an act of Connecticut’s General Assembly in May 1810, the company got its start with fire insurance, underwriting Yale University in 1825 and writing liability coverage for the first United Nations meeting in 1945.

It did not get into life insurance until a 1959 acquisition. The life business subsequently went public in 1997 but was reacquired in 2000.


The Hartford said it would now focus on its property and casualty, group benefits and mutual fund businesses. It will keep writing business in the for-sale units while it pursues a deal or deals.

Hartford said it would stop new annuity sales from April 27 and take a related after-tax charge of $15 million to $20 million in the second quarter. The company was once one of the largest annuity producers in the country, but it grew more conservative after the crisis and was not even in the top 20 in the most recent industry rankings.

Annuities are investment contracts that turn upfront premiums into monthly income over time.

The individual life business wrote $149 million in direct premiums last year, up 6 percent on 2010, but core earnings fell by nearly half as expenses rose sharply.

Total fee income in the retirement plans business also rose 6 percent last year, but core earnings fell 73 percent as benefits and expenses rose. Assets under management were $52.3 billion at Dec. 31.

McGee said the sale process should take 12 to 18 months. He also said Hartford was targeting a return on equity of 12 to 13 percent in 2012 for the remaining units, which account for virtually all of the company’s earnings. Analysts have said the company’s prior 2012 earnings forecast implied a return on equity of about 8 percent.

Standard & Poor’s quickly downgraded each of Hartford’s life units on Wednesday and cut the main unit’s senior debt to one notch above “junk” status, while A.M. Best put the life businesses under review with a negative view. On the other hand, both Moody’s and Fitch maintained their ratings.

Shares of the Hartford were up 1.3 percent at $22 as of late afternoon. At Tuesday’s close, the stock had risen 13.5 percent since Feb. 8, far outperforming a 2.7 percent gain for the broader industry index. Paulson had suggested his breakup plan could boost the stock by as much as 60 percent.

Still, the Hartford has a sharply lower valuation than peers. It trades at just 0.43 times its book value, against a sector average of 1.07 times book for property insurers. It is also trading at 6.5 times estimated future earnings, against an average of 12 times for life insurers.

S&P Capital IQ analyst Cathy Seifert raised her price target, assuming the company will trade at 7.8 times earnings. “This represents a discount to certain peers, that we view as warranted amid the execution risk we foresee,” she said.

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