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Hartford Financial exiting annuity business

March 21, 2012
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HARTFORD, Conn.—Hartford Financial Services Group Inc. is exiting the annuity business so it can focus on its property and casualty insurance, group benefits and mutual funds.

The company said Wednesday that it is also looking to sell or pursue other options for its individual life, retirement plans and broker-dealer Woodbury Financial Services. It will continue to seek new business in them in the meantime.

Christopher Swift, executive vice president and chief financial officer, said in a statement that the individual life, Woodbury Financial Services and retirement plans "will be better positioned for success as part of other organizations."

Credit Suisse's Thomas Gallagher said in a client note that Hartford could get between $2 billion to $3 billion by selling the businesses.

Hartford's announcement comes a little over a month after hedge fund manager John Paulson urged the company to spin off its property and casualty insurance business, saying that it could boost Hartford's value to shareholders by 40 percent to 60 percent. He added that breaking up the company would allow management of each new company to focus on what they do best, while making each new company more streamlined.

At that time Hartford said that it would review Paulson's plan, but warned that a breakup wouldn't be easy.

Paulson's hedge fund, Paulson & Co. Inc. owns an 8.5 percent stake in the company, making it the largest shareholder.

"We do not believe today's actions will materially increase (property and casualty) investor interest in The Hartford," Paulson said in a statement.

The firm said in a statement that it supports Wednesday's actions as a first step in separating its property and casualty business from its other businesses. However, Hartford's actions don't address what Paulson sees as the company's biggest problem: a property and casualty business tied to complex, unrelated and lower-return businesses that make it less attractive to investors.

Gallagher says while Hartford's plan doesn't achieve the legal separation of businesses that Paulson was looking for, it "could very well be the initial step down that path." The analyst estimates that Hartford's actions could free up $2.5 billion to $4 billion of capital over the next few years.

Hartford's shares rose 27 cents to $21.98 in afternoon trading. The stock has traded between $14.56 and $29.59 in the past year.

The Hartford, Conn., company said its decision to exit the annuity business came after a board evaluation conducted over the past few quarters that ended this week. Annuities are a popular component of retirement plans, and can be structured to provide fixed payments at specified intervals for the lives of the beneficiaries.

Hartford said that it will stop new annuity sales on April 27 and anticipates taking a $15 million to $20 million charge in the second quarter.

In February, Hartford reported that earnings for its individual annuity business fell to $86 million in the fourth quarter, down from $96 million in the prior-year period. The company's overall net income plummeted to $127 million in the quarter from $619 million a year earlier.

The individual annuity segment had 2011 revenue of $1.84 billion, while total company revenue was $21.86 billion for the year.

"The Hartford's sharper focus will lead to an organization that, over time, will be positioned for higher returns on equity, reduced sensitivity to capital markets, a lower cost of capital and increased financial flexibility," President and CEO Liam McGee said in a statement.

Analyst John Nadel of Sterne, Agee & Leach believes exiting the annuity business is the right move for the company.

"In discontinuing the sale of individual annuities in the U.S combined with the exit of individual life and retirement plans businesses, the company should be in a position to cut significant costs and run the remaining Life Company at a lower level of capital," he wrote in a note to clients.

Moody's Investors Service maintained its ratings for Hartford and its key operating subsidiaries.

"Overall we think the shift in focus toward The Hartford's stronger property and casualty operations and decision to shut down its highest risk line of business is credit positive; however, given the nature of variable annuity contracts, it will nevertheless take a long time to materially reduce total risk," Moody's analyst Paul Bauer said in a statement.

Moody's lowered the outlook of Hartford Life & Annuity Insurance Co., which houses most of the group's individual annuity business, to negative from stable. It kept the outlook for the parent company, its life subsidiaries and property and casualty insurance subsidiaries at stable.

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