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Hartford's Executives Reassure Investors in the Event of Another Global Crisis

Source: MarketWatch - Erik Holm


Posted on 07 Oct 2011

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The Hartford's executives on Thursday pledged to investors that the insurer had undergone a drastic overhaul since receiving TARP funding from the federal government in 2009--and promised a better performance in the event of another global crisis.

One major promise: a "stress scenario" that includes a 30% stock-market decline, a weaker U.S. dollar and a steep drop in interest rates would leave Hartford with a capital margin of $1.3 billion.

Chief Executive Liam McGee and the raft of executives who spoke at Thursday's event hope such calculations help investors better understand the company's present situation. Hartford has made its way back since its rescue by the U.S. government, which it needed after the 2008 financial crisis caused massive losses in its investment portfolio and boosted its obligations on annuities it sold to consumers.

"Our risks are significantly reduced and manageable," McGee told attendees at the meeting at the company's headquarters in Hartford, Conn.
Chief Financial Officer Christopher Swift, meanwhile, said the company had "learned from the past."

Since repaying the bailout, Hartford has increased its shareholder dividend and in August announced a $500 million program to buy back the company's shares. The calculation of the company's $1.3 billion cash cushion in the stress scenario would be less if Hartford goes ahead with its announced buyback. Executives said Hartford hadn't repurchased shares yet, but still expected to complete the program in early 2012, as they had announced previously.

The cushion available under the stress scenario also excludes additional resources the company could call upon if needed: a $1.9 billion credit facility and $500 million from a contingent capital facility.

Under its base scenario, which assumes the benchmark Standard & Poor's 500 index reaches 1240 by year-end and hits 1330 in 2012, the company estimated its capital margin would be $3.9 billion. A "bull scenario" that imagines the S&P at 1500 by year-end puts the cushion at $4.4 billion. The stress scenario sees the S&P at 800 by year-end but assumes an increase to 858 a year later.

The S&P on Thursday afternoon traded up 13 points at 1157. It fell as low as 666 in March 2009, when markets reached their financial-crisis trough.
All three scenarios also include assumptions for U.S. and Japanese interest rates, the strength of the Japanese yen against the dollar and euro and other factors.

The yen plays an important part in Hartford's financial future because of annuities the company sold in Japan. Promises the company made to its annuity customers there have proven costly, but the company has hedged some of its exposure and said Thursday the cash flow on the book of business would be positive under a "benign market scenario." Under an "adverse" scenario, the book would be underfunded by about $700 million.

The company has used hedges to reduce possible losses from troubles in Europe, improved the credit quality of its municipal-debt holdings and increased investments in what it calls "high-quality" corporate debt by $8.9 billion. Real estate exposure had dropped by $10.4 billion as of Aug. 31, driven by a $6.8 billion decline in the book value of the company's commercial mortgage-backed securities.

Still, for the just-concluded third quarter, the company cautioned that core earnings would be impacted by a $230 million charge related to customer-acquisition costs at its life-insurance operation and $130 million from natural catastrophes at its property-casualty arm. The figures were preliminary estimates.

The company said it had a net unrealized gain of $2.6 billion in its investment portfolio as of Sept. 30.


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