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Mark A. Hofmann

Hartford's sale of Japanese annuity unit is latest step in refocused strategy

May 11, 2014 - 6:00am

Hartford Financial Services


The Hartford Financial Services Group Inc.'s nearly $1 billion planned sale of its Japanese annuity business marks another big move in the insurer's ongoing strategy to concentrate on its core businesses.

In late April, Hartford said it reached an agreement to sell its Japanese annuity subsidiary, Hartford Life Insurance K.K., for $895 million to Orix Corp.'s Orix Life Insurance Corp. subsidiary.

The move followed Hartford's March 2012 announcement that it would divest individual life and variable annuities businesses to focus on its property/casualty, group benefits and mutual funds business. In the first quarter of this year, property/casualty operations accounted for $386 million of Hartford's $564 million in core earnings. Group benefits contributed $45 million and mutual funds $21 million.

With the sale of its Japanese annuity business, the only major piece of noncore business remaining is Hartford's U.S. annuity business, which insurance analysts say the insurer does not appear to be in a rush to sell.

“They have accomplished pretty much what they said they were going to do,” said Gloria Vogel, senior vice president at Philadelphia-based Drexel Hamilton L.L.C.'s New York office. “There's really only one remaining piece left, and that's the U.S. variable annuity business, and they've been trying to wind that down.”

Selling the Japanese business “is a significant accomplishment in our efforts to transform The Hartford and create value for shareholders ... that materially reduces the Hartford's risk profile by permanently eliminating the company's Japan variable annuity risk,” Hartford Chairman, President and CEO Liam E. McGee said in a statement.

In a conference call, Mr. McGee said the company's focus on its strategy has been “unrelenting” and he was proud of the progress.

In October 2009, Hartford hired Mr. McGee from Bank of America, where he was president of Charlotte, North Carolina-based Bank of America's consumer and small-business bank operations. His tall task was to turn around Hartford.

Hartford reported a $2.75 billion loss for 2008 and a $1.22 billion loss for the first half of 2009. To improve its capital, Hartford received $3.4 billion in federal Troubled Asset Relief Program funds, a $2.5 billion capital infusion from Munich-based Allianz S.E., and raised $900 million in an August 2009 equity offering.

In early 2012, hedge fund manager John Paulson, Hartford's largest stockholder, began pushing the insurer to split up operations to increase shareholder value. In March of that year, Mr. McGee announced Hartford's strategy to concentrate on the three core property/casualty, group benefits and mutual funds businesses. Hartford put its U.S. variable annuity business into runoff in March 2012.

Hartford Life Insurance K.K. wrote annuity contracts from 2000 through 2009, when Hartford placed its Japan annuity business into runoff. At the end of last year, Japan account values were $23 billion for 375,000 contracts, according to Hartford.

Industry analysts commended Hartford for its progress in refocusing the 200-year-old company.

“I think I would echo their own evaluation ... to be frank,” said John Nadel, managing director at Birmingham, Alabama-based Sterne Agee Group Inc.'s New York office. “Wall Street's response to it (the sale of Hartford's Japanese annuity business) is the price, including the freed-up capital in the U.S., is in line with expectations, but I don't think it focuses enough attention on how significant the sale of that business is to reducing the volatility of Hartford's results.”

Selling the Japanese variable annuity business is “very significant to their strategy,” said Vincent DeAugustino, an analyst at Keefe, Bruyette & Woods Inc. in Baltimore.

“I would expect them to work up to a more complex U.S. variable annuity sale,” he said. “It's just going to take more time to find a buyer.”

Ms. Vogel said Hartford's U.S. variable annuity business is “much less risky than the Japanese piece,” which presented both interest rate and foreign exchange risks.

“Maybe half of the variable annuity risk was in the Japanese book, so now that will be gone,” said Martha Butler, senior director at Fitch Ratings Inc. in Chicago.

“Certainly, if a buyer came along for U.S. variable annuities, they would sell it if they were offered the right price,” Ms. Butler said. “The business is in runoff, and they want to manage it for profit.”

Indeed, annuities and other obligations in Hartford's so-called Talcott resolution runoff contributed $175 million to 2014 first-quarter earnings.

“Hartford has definitely benefited a lot from sheer luck; the markets were working in their favor,” Mr. DeAugustino said.

“The timing has been pretty good,” and Hartford has taken advantage of opportunities, he said. “They're doing everything they said they would do.”

 



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