Posted on 21 Mar 2012
Bowing to pressure from hedge-fund titan John Paulson, Hartford Financial Services Group Inc. said Wednesday it would exit its annuity business and weigh a sale of a large portion of its life-insurance operation.
The move will allow Hartford to focus on its property-casualty unit, where the company got its start more than 200 years ago, as well as its group benefits business and its "high return" mutual fund operation, Chief Executive Liam McGee said in a statement.
The announcement marks a substantial change of strategy for Hartford, which has long resisted calls to separate its life insurer from its property-casualty arm. Mr. Paulson, whose hedge fund is Hartford's largest shareholder, became the latest to push for such a move when he took to the company's fourth-quarter-earnings call in February to criticize management and urge them to "do something drastic" to boost the share price.
Those shares had fallen 15% in the past year. At $21.71 as of the close of trading Monday, the stock trades at less than half Hartford's book value per share, less than most pure life insurers and property-casualty companies.
The move tracks closely with some of the changes proposed in recent weeks by Mr. Paulson, whose Paulson & Co. hedge fund holds 37,540,676 shares, or about 8.5% of the insurer's stock. Hartford said the decision was based on a review that had been conducted by the company's management and board over the past several quarters.
Hartford said it engaged financial advisors to pursue a sale or other "strategic alternatives" for its individual life business, its retirement plans unit and its broker-dealer, Woodbury Financial Services. The company will continue to sell new business in that time.
Hartford will stop new annuity sales on April 27 and expects to take a charge of $15 million to $20 million related to that move in the second quarter.
In the past decade, much of the annuity book had been concentrated in a business Hartford helped pioneer: variable annuities, a product that offers a tax-advantaged way of investing in mutual funds. Hartford's innovations with that product touched off an arms race that helped lift industry-wide variable-annuity sales to $180 billion by 2007, the peak year, as the retirement products became an important way for retirees to try to guard against outliving their savings.
With the operation in run-off, the company said it will "continue to pursue actions to reduce the risks associated with the legacy annuity blocks, and to improve capital efficiency."
Mr. Paulson had argued in regulatory filings that Hartford's property-casualty arm is its "crown jewel," but had been "buried" within the larger company, undervalued by shareholders and ignored by analysts. He proposed earlier this month that Hartford immediately shut down its variable-annuity operations to save money and free up capital, and spend the next year reviewing the strategy and structure of the life-insurance operation.
A representative for the Paulson firm wasn't immediately reached for comment.
Mr. Paulson had also proposed a spin-off of the property-casualty unit, which offers home and auto insurance to consumers and is a major player in selling coverage to U.S. businesses, particularly mid-sized ones. Wednesday's announcement from Hartford made no mention of a spin-off.
On the February conference call, Mr. McGee responded to Mr. Paulson's criticisms by saying the investor's "sense of urgency about realizing greater value for shareholders is shared by me and this team." But he and other executives also said that several obstacles could stand in the way of the company splitting in two, including concerns of debtholders and the difficulty of getting state insurance regulators to approve a separation.
On Wednesday, Mr. McGee said the proposed changes will lead to a "sharper focus" at Hartford. The company "will be positioned for higher returns on equity, reduced sensitivity to capital markets, a lower cost of capital and increased financial flexibility," he said
Shareholder activism, in which large investors pressure companies for strategic or board changes, has seen a number of successes in recent months, including the announcement of some spinoffs. Mr. Paulson doesn't usually take an activist stance. In this situation, he felt there was an opportunity to increase shareholder value but the company was not taking advantage of it, so he decided to go public with his concerns, according to people familiar with the matter.
Mr. Paulson, whose firm manages assets of about $24 billion, rose to fame with his bet against subprime mortgages during the financial crisis, which reaped him billions of dollars. But he endured a brutal 2011, with one of his largest funds losing about half of its value.
The move to put the variable annuity operation into run-off comes as Hartford has struggled to regain its footing in a business it once dominated.
In the early to mid-2000s, Hartford played a trail-blazing role in developing types of annuity guarantees that proved popular with consumers by providing lifetime income even if the underlying funds tanked.
For a time, its innovations boosted its own and the industry's bottom line. But they cost Hartford dearly during the market meltdown of 2008-09. The market free-fall exposed gaps in the company's risk-management tools—such as hedging—that it and others use.
Smaller than some of its rivals, Hartford was one of the hardest-hit by the turmoil, and its stock lost about 95% of its value at one point in 2008. The company was one of just three insurers that took federal bailout money, which it has since repaid.
It retreated from the variable annuity business in 2009 as its then-CEO put a team of top aides to work to "de-risk" its offerings to better protect the company's shareholders, while maintaining enough value in the products that consumers would want to continue buying them.
From a top sales spot in the mid 2000s, Hartford finished 2010 in 20th place among leading variable-annuity sellers, and last year it didn't make the top 20 chart compiled by industry-funded research firm Limra.
The run-off of the annuity operation also affects its fixed and fixed-indexed annuities, a much smaller proportion of its book of business.
Founded in 1810, the Connecticut-based insurer is one of the oldest names in the U.S. insurance industry. It sold property policies to Abraham Lincoln in 1861 and William "Buffalo Bill" Cody in 1890, and paid out claims after the Great Chicago Fire of 1891 and the 1906 San Francisco earthquake. The company entered the life-insurance business by acquiring Columbia National Life Insurance Co. of Boston, Mass., in 1959.