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HARTFORD, Conn.—The Hartford Financial Services Group Inc.'s plan to exit the annuities and individual life businesses, among others, should have a long-term positive impact on its property/casualty business, industry observers say.
That's because the divesture would allow the Hartford, Conn.-based insurer to focus more on its property/casualty business, which no longer would have to support less profitable operations.
However, observers caution the impact of the move will depend greatly on how the divesture is handled and how the proceeds are deployed.
Most major rating agencies affirmed their ratings of Hartford's property/casualty operations after last week's announcement, which came amid pressure from John Paulson, president of hedge fund manager Paulson & Co. and Hartford's largest shareholder, to break up the operation. Mr. Paulson has argued that such a move would boost shareholder value.
In a statement, Hartford said its property/casualty, group benefits and mutual fund businesses each have “a competitive market position, strong capital-generating ability and lower sensitivity to capital markets.” According to Hartford, a sharper focus on these businesses will allow it to “deliver superior performance and greater shareholder value.”
Hartford said it will put its annuity business into runoff and is “pursuing sales or other strategic alternatives for individual life, Woodbury Financial Services (Inc.) and retirement plans.” The decision resulted from a “rigorous evaluation of the company's strategy and business portfolio conducted over the past several quarters” by management and the board of directors, Hartford said in the statement.
In a conference call last week, Chairman, President and CEO Liam McGee said Hartford started looking at the issue in mid-2011.
The announcement, however, was not enough to satisfy Paulson & Co., which issued a statement saying that “while we appreciate the extensive work of the Hartford's board and management, we do not believe the positive actions announced today address the main problem with the Hartford's undervaluation: the lack of interest from property/casualty analysts and property/casualty investors in the Hartford's best-in-class P/C business due to its affiliation with unrelated, low-return and complex businesses.”
While the divestiture probably would have little immediate effect on Hartford's property/casualty operations, it could have a long-term positive effect, analysts said.
“Our take would be in the short run, it's neutral for the property/casualty operations since just about all of the changes they're talking about are focused on the life side,” said Paul Bauer, vp and senior credit officer at Moody's Investors Service Inc. in New York.
“In the long run, we would see it as positive for the property/casualty side,” he said, “because today we penalize the property/casualty side of the Hartford somewhat to reflect the risk that it may be called upon to support the life group.” The extent to which Hartford winds down or exits the life and annuity businesses “would reduce the risk that the property/casualty side of the house would be called on to support the life side.”
“I think it's a generally limited impact,” said Brian Schneider, senior director at Fitch Ratings Inc. in Chicago. “I think Hartford is going to continue to support the life company, particularly the annuity operations going into runoff. From an operational standpoint, it would be a positive for the property/casualty business, given that they can focus their resources more on the commercial business going forward,” he said “There's still a bit of execution risk in looking to sell the businesses that they're looking to dispose of.”
John Ward, CEO of Cincinnatus Partners L.L.C. in Loveland, Ohio, said he views the move as “a positive” for Hartford's property/casualty business. “It won't have the drag of life, but this may also help to shore up the capital base for the property/casualty operations.”
Other analysts took more of a wait-and-see approach.
“It's indifferent,” said Shellie Stoddard, a senior director, at Standard & Poor's Corp. in New York. “We affirmed the ratings, and they're stable. The reason it's not a positive is that Hartford hasn't disposed of anything yet.”
“I can't see that much impact on the property/casualty business,” said Meyer Shields, director at Stifel Nicolaus & Co. Inc. in Baltimore. “That life drag is a drag for shareholders, not for customers or employees of the property/casualty businesses.”
Oldwick, N.J.-based A.M. Best Co. Inc. placed under review with developing implications the issuer credit rating and the debt ratings of Hartford as well as the issuer credit ratings and financial rating strength of the Hartford insurance pool that includes more than a dozen Hartford companies.
Best also placed under review with negative implications the financial strength rating of Hartford's key life/health insurance subsidiaries, saying there is “execution risk” associated with the proposal and possible “continued volatility related to the individual annuity business that will be retained.”