The Hartford’s actions arguably represent an
impressive display of the power of shareholder activism.
These actions include The Hartford’s decision
to place its individual annuity business into runoff, as well as
pursuing sales or other strategic alternatives for its individual
life, Woodbury Financial Services and Retirement Plans
businesses.
Go deeper with GlobalData
The actions came less than a month after John
Paulson, president of The Hartford’s largest shareholder, hedge
fund management firm Paulson & Co, demanded that it take action
to unlock shareholder value.
According to Paulson & Co, it has an 8.4%
stake in The Hartford worth about $865m.
In a letter to McGee filed with the Securities
and Exchange Commission, Paulson called on the insurer to separate
its life and general insurance operations.
Logical strategy
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By GlobalDataPaulson argued this is the logical strategy
required to rectify a situation that at the time of his letter saw
The Hartford trading at 44% of its book value.
This is the lowest of any major US insurance
company and compares to the general insurance sector where the
average company trades at 110% of book value, and the life
insurance sector, where the average is 80% of book value.
Paulson’s letter followed shortly after the
release by The Hartford of its 2011 results which reflected a 61%
fall in net income from $1.68bn in 2010 to $662m.
Commenting on the sweeping changes, Liam E.
McGee, chairman, president and CEO of The Hartford, said: “The
announcement is the result of management and the board of
directors’ rigorous evaluation of the company’s strategy and
business portfolio conducted over the past several quarters and
concluded this week.”
Individual Life, Woodbury Financial Services
and Retirement Plans are strong businesses with distinct market
positions and talented employees,” said McGee. “But they do not
align with our go-forward focus. They will be better positioned for
success as part of other organisations.”
McGee continued: “The actions will allow us to
build on our strong financial foundation by concentrating our
resources on a smaller number of businesses to position The
Hartford for long-term success.”
In the run-up to the units’ sales, The
Hartford will continue to sell life insurance, but will stop
writing new individual annuity business on 27 April, an action it
expects will reduce annual run-rate operating expenses by about
$100m before tax, beginning in 2013.
Paulson expressed his tentative approval of
The Hartford’s move. “We are pleased that The Hartford is taking
steps to focus on core operations and to divest or discontinue
noncore and capital intensive businesses,” Paulson said in a
statement.
He added: “We believe that putting the
variable annuity business in runoff and selling the non-core
individual life, retirement plans and broker dealer businesses will
raise cash, free up capital, permit deleveraging and increase its
financial flexibility.”
With its exit from the individual life
insurance and annuity markets The Hartford will to a fairly large
degree be going back to its roots as a general insurer.
The insurer was founded in 1810 as the
Hartford Fire Insurance Company and first entered the US life
market 149 years later through the acquisition of the Columbian
National Life Insurance Company.
The scale of the units that are to be placed
under the selling hammer are significant.
In individual life, The Hartford generated
$1.4bn in revenue in 2011 and ranked sixth in terms of total
premium income. Individual life reserves and separate account
liabilities total $12.4bn.
In the individual retirement plans segment,
The Hartford has assets under management of $52.3bn and generated
revenue of $766m in 2011. Also significant is Woodbury Financial
Services, which ranks as the US’ 12th largest independent broker
dealer and in 2011 produced total revenue of $1.4bn.
In the general insurance and group benefits
segments The Hartford generates premium income of about $6bn and
$4bn, respectively.
In 2010, The Hartford ranked eighth in the
commercial lines sector based on premium income and ninth in the
commercial vehicle sector.
In the mutual fund market The Hartford
reported total assets under management of $85.5bn at the end of
2011, down from $100.5bn at the end of 2010.
Thumbs up from moody’s
The Hartford’s bold restructuring strategy has
received a generally favourable response from Moody’s Investor
Services. “Overall we think the shift in focus towards The
Hartford’s stronger property and casualty operations and decision
to shut down its highest risk line of business is credit positive,”
says Paul Bauer, a Moody’s analyst.
