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.
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.
Paulson 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.