Shareholder Pressure Forces Hartford Break
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For weeks the Hartford Financial Services Group (NYSE: HIG)has been bombarded with demands from shareholder John Paulson of Paulson & Co, owner of 8.4% of Hartford. Paulson has been pressuring the group to separate its life insurance business from its property-casualty insurance division.
The Hartford stated early Wednesday that it has scheduled a halt in individual annuity sales in April; the intended date is April 27. Instead the group will be “pursuing sales and other strategic alternatives” for its individual life, brokerage, and retirement plans.
In answer to Paulson’s push, the Hartford has decided to sell a selection of businesses instead of following the recommendation to simply spin them off. However, Paulson did recommend an immediate desist of U.S. variable annuities which the company chose to abide. The Hartford placed those annuities in a “runoff.” Runoff is an industry term used for stopping new sales while continuing to service existing policies. International variable annuities have been in a runoff state for a while now but those existing policies will be serviced for several years to come.
These recent decisions will definitely affect employees although the extent is not yet known. The Hartford currently employs more than 24,000 people, 40% of which are located in Connecticut. Workers are clearly fearful stating, “We’re not allowed to talk about it,” and “Sorry can’t say anything—don’t want to lose my job.”
The Hartford will now find itself focusing on its property-casualty, mutual fund business, and group benefits. Its Chairman and CEO Liam E. McGee stated, “The Hartford’s sharper focus will lead to an organization that, over time, will be positioned for higher returns on equity, reduced sensitivity to capital markets, a lower cost of capital and increased financial flexibility.”
Paulson essentially made the same argument in both private and public discussions with the company. Paulson believes a “pure-play” property-casualty company will eventually lead to a better stock price based on a higher multiple of per share earnings. The absence of more volatile retirement and life operations will stabilize the overall revenue and share price.
Of course, the move needs to be approved by Connecticut’s Insurance Department before it can proceed but The Hartford is not foreseeing problems.
Moody’s analyst Paul Bauer said, “Shifting focus on the stronger property-casualty operations and the decision to shut down a high risk line of business is positive to the company’s credit. However, given the nature of variable annuity contracts, it will nevertheless take a long time to materially reduce total risk.”
Moody’s changed its outlook of Hartford Life & Annuity Insurance Company from stable to negative; Hartford Life includes the majority of individual annuity policies.
McGee who stepped in as CEO in 2009 was able to stabilize the company after it took a government bailout but has been unable to bring it back to its former profitable growth and consistent stock gains. McGee admitted that there had been consideration towards breaking off the life insurance business but found the obstacles to be significant and delayed the decision. It has been widely known that Paulson has consistently talked to management but it remains unclear how much those talks truly impacted the company’s decision.
The changes are expected to save the group $100 million annually by 2013. On Tuesday the stock closed at $21.71 opening Wednesday at $22.93, an overnight hike of $1.22. The stock eventually settled at $22.02.
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