The Hartford Insurance Group squashed speculation that lastweek's $2.5 billion cash infusion by Allianz AG–owner of Fireman'sFund–in return for a stake in the firm is a prelude to atakeover.

“Allianz's capital injection is an investment,” Tom Marra,Hartford's president and chief operating officer, told NU in aphone interview. “They will have no board seats, no managementoversight. They are an investor.”

He said Hartford decided to make the deal because “demonstratingsuperior capital strength is hugely important” during a period ofmarket turmoil.

He said before the added capital injection Hartford had morethan $1 billion in capital above the level needed to maintain itsratings but decided that, “in this kind of environment, it iscritical that you take this opportunity to remain one of thestrongest.”

“This will help us weather the volatility of the market, even ifit gets worse,” he said.

Some analysts remained unconvinced.

“Given the size of Hartford's in-force book, combined with theslowdown in its recent business production, we have viewed it asripe for acquisition, and this transaction increases the likelihoodthat Allianz may ultimately buy [the company],” Citi Global Marketsanalyst Joshua Shanker said in a note to investors.

But Mr. Marra said Allianz made its cash infusion “because theyare great investors, they know our business, and they haveconfidence in our company and our execution ability.”

“Obviously, we view this as allowing us to continue to operateautonomously in the market,” Mr. Marra said, citing standstillprovisions in the contract that put limits on Allianz's “ability totake additional steps.”

Bank of America analysts said the total capital infusion couldbe $4.25 billion if Allianz decides to exercise warrants in thedeal that would give it a 30 percent stake.

While informing investors it will take a huge charge in thethird quarter to account for a diminished investment portfolio, thecompany took additional steps designed to reassure markets andpreserve cash, announcing it will cut its dividend and naming a newchief investment officer–Greg McGreevey, a former INGexecutive.

The infusion was precipitated in part by the sharp decline ofHIG's stock over the past few months, as the financial turmoilmainly affecting investment banks moved into the insurance sector.The stock has been as high as $99.52 over the past 52 weeks, butdropped below $26 last week.

Another factor was a decision by Fitch Ratings to revise itsrating outlook for HIG from “Stable” to “Negative.” Fitch citedpotentially troubled assets, such as mortgage-backed securities inits portfolio.

HIG sought to add cash in advance of announcing a projected lossbecause of the market turmoil. It said it expects a net loss forthe third quarter in the range of $8.50 to $8.80 per share,including net realized capital losses in the range of $7.05 to$7.25 per share, or approximately $2.1 billion to $2.2 billion.

“The vast majority of the realized capital losses areimpairments on The Hartford's investment portfolio,” aboutthree-quarters of which are losses in investments in the financialservices sector, the company said.

The new dividend will be 32 cents a share, down from 53 cents ashare.

Specifically, HIG officials said Allianz will purchase, at $31per share, $750 million of preferred shares convertible to commonstock after receipt of applicable approvals, and $1.75 billion of10 percent junior subordinated debentures. The debentures arecallable by The Hartford at par beginning 10 years afterissuance.

Allianz SE will also receive warrants which entitle it topurchase $1.75 billion of common stock at an exercise price of$25.32 per share, subject to shareholder approvals. The warrantsexpire in seven years.

Allianz is based in Munich. Its U.S. operations includeFireman's Fund, a multiline property-casualty insurer based inNovato, Calif.

The Hartford has huge property-casualty and life insuranceassets, both in the United States and overseas. Its p-c businessincludes personal lines, small commercial, middle market, specialtycommercial and other operations.

Mr. McGreevey, the new chief investment officer, who joined thecompany in August, will become an executive vice president of HIGand president of Hartford Investment Management Company, the firmsaid. He succeeds Dave Znamierowski, who is leaving the companyafter 12 years.

Hartford CEO Ramani Ayer said Mr. McGreevey and his team are“immersed in our portfolio, evaluating our investments and settinga course to navigate in this very volatile marketplace.”

Mr. Ayer said the decision to change investment managers wasmade because “given the recent unprecedented turmoil in thefinancial markets and its effect on the company's investmentportfolio, we agreed that it would be best to bring a freshperspective to our investment operations.”

Mr. Marra confirmed that shoring up capital during a period ofmarket turmoil is important because well-capitalized insurers aretaking business away from troubled insurers, although he declinedto mention AIG–recently bailed out by an $85 billion governmentloan–by name.

“I think there is definitely an interest, particularly in largercommercial lines, for capital strength and trustworthiness,stability in the brand, in the insurer they are doing businesswith,” he said. “Those are all the kinds of things that customersare going to be looking for.”

He acknowledged that having the added capital provided by theAllianz investment “represents a great opportunity to drive in themarketplace.”

Rating agencies Moody's, A.M. Best Company and Standard &Poor's revised their outlook on The Hartford Financial ServicesGroup after the cash infusion.

Moody's Investors Service placed its debt rating of “SeniorUnsecured At A2″ on review for a possible downgrade.

A.M. Best placed The Hartford's “A-plus” financial strengthratings under review with negative implications.

Best said it is “evaluating the ultimate impact of theseevents–as well as the risks associated with continued marketdislocation and increased financial leverage–on the ratings of TheHartford and its insurance subsidiaries.”

S&P said it has revised its outlook on The Hartford tonegative from stable, but has affirmed the company's “A”counterparty credit rating and the “AA-minus” counterparty creditand financial strength ratings on all of The Hartford's coreinsurance operating subsidiaries.

S&P attributed its “negative outlook” to The Hartford's“reduced financial flexibility because of the increase in leverageand the associated material reduction in fixed-charge coveragelevels resulting from the high servicing costs on the [Allianz]investment and the expected softening of its operatingperformance.”

The ratings and the outlook for The Hartford's core insurancesubsidiaries remain unchanged, S&P said, because “thefundamentals” of the company's life and p-c operations remainstrong.

S&P credit analyst Robert A. Hafner said he expects TheHartford's operating performance to be strong but below recentrecord earnings because of the continuing soft p-c market andhigher credit losses resulting from the economic downturn.

“The company's effective expense management and underwritingdiscipline will help support continued earnings strength and limitthe decline in earnings through the cycle,” S&P said. “Inaddition, management's aggressive action to raise $2.5 billion ofadditional capital ensures that it is among the U.S. insurancecompanies best positioned to weather the current economic downturnand maintain its competitive advantages and consumerconfidence.”

(Additional reporting by Phil Gusman.)