Posted on 27 Mar 2012
As Hartford Financial Services Group announced plans to focus on its property/casualty, group benefits and mutual funds businesses, it joins a growing number of multiline insurers moving toward taking the "multi" from their focus.
Last week, Hartford Financial said it's placing its U.S. individual annuity business into run-off and pursuing "a sale or other strategic alternative" for its individual life insurance and retirement plans businesses and Woodbury Financial, its broker-dealer subsidiary.
The insurer said it would focus on its property/casualty insurance, group benefits and mutual funds businesses, "each of which has a competitive market position, strong capital generating ability and lower sensitivity to capital markets".
Barclays views the plan "as acknowledgement that the U.S. multiline insurance business model faces challenges," wrote Jay Gelb, an equity analyst with Barclays in a March 21 research note, noting American International Group (AIG) as the other multiline insurer.
Ernie Csiszar, former insurance director of South Carolina and former president of the National Association of Insurance Commissioners, said multiline does face challenges.
The point of 1999's Gramm-Leach-Bliley, for example, was to facilitate the "financial supermarket concept" in the United States a concept that "never caught on." But in Europe, this model of banking and insurance under one roof, went fairly well. "People shop in places where they get extra value and that comes not by going to the generalist, it goes to the specialist," he said.
Looking at market multiples and earnings, companies doing well are specialty players that focus on one or two lines, Csiszar said. Automobile insurers such as Geico or Progressive "do very well," he said.
Hartford and AIG are similar now because they are both focusing on their property/casualty businesses, Csiszar said. AIG sold its large Asian life operation and its focus has been on Chartis. Two years ago, AIG was "as big a multiline insurer as you could get," Csiszar noted.
With the ongoing businesses, Hartford will concentrate the allocation of capital to businesses that take insurance risk property, casualty, mortality and morbidity and reduce the allocation to businesses that take market risk, said Liam E. McGee, chairman, president and chief executive officer of Hartford Financial, during a March 21 conference call.
"We are excited about the prospects ahead for each of our ongoing businesses," McGee said.
The team is evaluating different opportunities, including sales, securitizations, risk-sharing and other actions "that can accelerate the release of capital supporting these annuity blocks," he said.
Hartford will halt new sales of annuities April 27 and expects to record a related charge of $15 million to $20 million after tax in the second quarter, which it also expects to reduce certain operating expenses by about $100 million pretax, starting in 2013 (Best's News Service, March 21, 2012).
Gelb wrote Hartford's plan does not go as far as splitting the life and P/C units as recommended by its largest shareholder, Paulson & Co. "Our sense is a full break up was unlikely, driven largely by rating agency and regulatory concerns."
While multiline insurers were common 20 years ago, almost all U.S. multilines other than Hartford chose to separate P/C and life in order to increase shareholder value, including Travelers, CNA, Lincoln, Aetna and Cigna, Paulson said.
Paulson in a statement said the actions do not address what it considers the "main problem" with Hartford's undervaluation: "the lack of interest from P/C analysts and P/C investors in Hartford's best-in-class P/C business due to its affiliation with unrelated, low-return and complex businesses."
Since the global financial crisis that erupted in the fall of 2008, Hartford de-emphasized its variable annuity business, said Steven Schwartz, an equity analyst with Raymond James & Associates, who noted the move is "definitely driven" by Paulson.
The company's decision to place the annuity business in run-off "is a tacit acknowledgment that no competitor would be interested in it," Schwartz said. "Return on capital is low, having been negatively affected by the cost of hedging and low equity values which affect the level of fees," he said, noting the decision to put the annuity business in run-off "will have little effect on competitors."
Hartford will "garner serious interest" in its life and retirement plan business if competitors look for economies of scale or are interested in entering the 401(k) market, Schwartz added.
Starting in the second quarter, financial results for its individual annuity segment, which consists of U.S. variable, fixed and indexed annuities, will be reported in life other operations, Hartford said. As part of the run-off, Hartford will continue to pursue ways to reduce the risks associated with its legacy annuity blocks, and to improve capital efficiency.
On March 21, A.M. Best Co. placed under review with developing implications the issuer credit rating of bbb+ and the debt ratings of the Hartford Financial Services Group, Inc. as well as the ICRs of a+ and the financial strength rating of A (Excellent) of the Hartford Insurance Pool. A.M. Best also placed under review with negative implications the FSR of A (Excellent) and ICRs of a+ of the Hartford's key life/health insurance subsidiaries.
A.M. Best said it believes execution risk may be somewhat diminished by the perceived attractiveness of the individual life and retirement services businesses.
In 2008, Hartford stopped selling variable annuities in Japan. From the onset, it had not hedged the risks in Japan associated with the death benefits and guaranteed minimum income benefits on its variable annuities, Hartford Chief Financial Officer Chris Swift previously told Best's News Service.
During the height of the financial crisis, sales of variable annuities in the United States stood at about $15 billion, Swift said