* Will shut down annuities, sell individual life
* To focus on property, group benefits, mutual funds
* CEO says sale process to take up to 18 months
* Shares up 1.3 pct
By Ben Berkowitz
March 21 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
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
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
"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 write $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.