After resisting its largest shareholder, John Paulson's
incessant pressure for almost two months,
Hartford Financial Services Group Inc.
(
HIG
) finally gave in to the demands of segregating its life insurance
and property and casualty (P&C) businesses on Wednesday.
Consequently, the company is on the lookout for suitable
divestiture opportunities for its Individual Life and Retirement
Plans segments along with Woodbury Financial Services. Woodbury is
an indirectly-held, wholly-owned retail broker-dealer subsidiary,
included in the Individual Life segment's distribution network.
Hartford has hired
The
Goldman Sachs Group Inc.
(
GS
) and
Greenhill & Co. Inc.
(
GHL
) as financial advisors for the same but expects the divestitures
to take about two years.
The company has also decided to terminate its Individual Annuity
business, which offers individual variable, fixed market value
adjusted (fixed MVA), fixed index and single premium immediate
annuities in the U.S. Hartford will stop selling annuities from
April 27, 2012. Moreover, the Individual Annuity segment will be
integrated into the Life Other Operations segment, which is
included in the Runoff Operations division, from the second quarter
of 2012.
Subsequent to the developments, the Wealth Management division
of Hartford will be left with only the Mutual Funds segment, while
the Commercial Markets, Consumer Markets and Corporate divisions
will stay unaltered. However, Hartford will carry on its operations
in the segments intended for sale until the divestitures are
made.
The proposed structural changes are intended to increase
Hartford's focus on its P&C, Mutual Funds and Group Benefits
segments, which not only generate strong revenues, but also have
admirable market standing and are not too sensitive to capital
market fluctuations either. The company intends to utilize its
proficiency in underwriting, distribution and claims management to
boost the earnings of the Commercial Markets and Consumer Markets
divisions.
The Mutual Funds business had already been gaining considerable
spotlight as it traditionally generates higher growth and return on
equity for the company. In order to boost its mutual fund business,
Hartford hired Wellington Management as the sole sub-adviser for
its mutual funds business in December 2011. Thus, the modifications
are expected to amplify Hartford's return on equity, enhance its
financial flexibility, reduce the cost of capital and ease the
sensitivity to capital markets.
Effect on Financials
The company expects an after-tax charge of $15-20 million in the
second quarter of 2012 related to the structural changes.
Additionally, Hartford even anticipates a $100 million cut in the
annual run-rate pre-tax operating expenses from 2013. Moreover, the
return on equity for the retained businesses is expected to be
about 12-13% in 2012.
Paulson's Anxiety
Hartford's announcement came amid mounting pressure from hedge
fund manager John Paulson to spin-off its P&C business. Paulson
is the largest shareholder of the company with an 8.51% stake held
through Paulson & Co.
Paulson was anxious about Hartford's valuation, which is
significantly lower than its peers such as
MetLife Inc.
(
MET
),
Prudential Financial Inc.
(
PRU
) and
American International Group Inc.
(
AIG
) who focus on either life insurance or P&C business. The hedge
fund manager opined that the undervaluation was an outcome of
Hartford's complex business model and a split would unlock the
value of the company's shares.
While the management of Hartford had been assessing the
company's business structure and policies since mid-2011, it
initially seemed unenthusiastic about a division of its business.
Management held the opinion that a split would not create
shareholder value in the present environment and also cited various
challenges to a spin-off such as allocation of debt, impact of the
spin-off on ratings and regulatory hurdles, when Paulson initially
suggested a spin-off in February 2012.
Nevertheless, investors' pressure seems to have acted as a
catalyst for streamlining operations. However, Paulson is not
satisfied with the alterations and holds on to his demand for a
spin-off of the P&C segment as he feels that Hartford's P&C
business is a strong contender in the commercial insurance market
but gets overshadowed by the company's large scale and fails to
realize its full potential.
Ratings Action
Hartford's declarations resulted in a flurry of activity by the
rating agencies. Standard and Poor's Rating Services downgraded the
life insurance business of the company to "A-" and annuities
business to "BBB+". The rating agency also dropped Hartford Life's
Senior debt to "BBB-", which is the lowest investment grade rating.
A further downgrade will push the debt into junk category.
Nevertheless, the "BBB" rating of the holding company and its
P&C units were affirmed by S&P. Meanwhile, Fitch affirmed
the Insurer Financial Strength (
ISF
) of Hartford's life insurance subsidiaries at "A-" and P&C
units at "A+".
Further, A.M. Best Co. placed the Issuer Credit Rating (ICR) of
"bbb+" and debt ratings of Hartford, ICR of "a+" and financial
strength rating (
FSR
) of "A" of Hartford Insurance Pool. Moreover, the rating agency
also placed the FSR of "A" and ICR of "a+" of Hartford's life
insurance subsidiaries under review with a negative outlook.
Currently, the shares of the company carry a Zacks #3 Rank
(short-term 'Hold' rating). Also, we maintain a long-term 'Neutral'
recommendation on the shares.
AMER INTL GRP (
AIG
): Free Stock Analysis Report
GREENHILL & CO (
GHL
): Free Stock Analysis Report
GOLDMAN SACHS (
GS
): Free Stock Analysis Report
HARTFORD FIN SV (HIG): Free Stock Analysis
Report
METLIFE INC (MET): Free Stock Analysis Report
PRUDENTIAL FINL (PRU): Free Stock Analysis
Report
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