Filed Under:Risk, Enterprise Risk Management

Paulson Reacts to Hartford; A.M. Best Places Insurer Under Review

NU Online News Service, March 22, 2:43 p.m. EST

Insurance company rating agency A.M. Best Co. has placed The Hartford Financial Services Group Inc. under review with “developing implications.”

In the meantime, the insurer’s largest shareholder says Hartford’s decision to exit its life business in favor of its property and casualty operations does not addressHartford’s undervaluation due to lack of interest from investors and analysts.

“We do not believe today’s actions will materially increase P&C investor interest in TheHartford,” says John Paulson of Paulson & Co. Inc., in a statement.

A.M. Best’s financial-strength rating of “A” for the Hartford Insurance Pool is under review with developing implications, and the Hartford’s key life and health insurance subsidiaries are under review with negative implications.

McGee says the company will stop new annuity sales effective April 27 and expects to take a related after-tax charge of $15 million to $20 million in the second quarter of 2012. He says the company is “pursuing sales or other strategic alternatives for its individual life, Woodbury Financial Services and Retirement Plans.”

This action is also expected to reduce annual run-rate operating expenses by approximately $100 million, pre-tax, beginning in 2013.

Paulson says the moves planned byHartfordwill bring in cash and free capital, but, more importantly to the investor, it will strengthen the insurer’s ability to split its P&C and non-P&C businesses, which Paulson says would “create the greatest short-term and long-term shareholder value and strengthen the company.”

The news announced by Hartford yesterday is described by Paulson as a mere “first step.”

Paulson has been encouraging a split, and took his case directly to shareholders. During the insurer’s fourth-quarter conference call, the hedge fund manager, who owns 8.5 percent of Hartford shares, was very critical of CEO Liam McGee’s handling of the company’s falling stock price.

During the call, McGee said Hartford found the challenges of splitting the company’s operations were “significant,” including the foreseen difficulty in maintaining competitive ratings while setting apart $6.8 billion in debt. The P&C companies would have to assume two-thirds of the debt.

Hartford’s 2011 fourth-quarter net income plummeted 79 percent to $127 million on above-normal catastrophe and non-cat losses, low interest rates and volatility in the capital markets.

A.M. Best says Hartford’s execution risk in the current economic environment is a concern.

The risk may be lessened “by the perceived attractiveness of the individual life and retirement services businesses,” though Hartford has told of no plans to sell.

“A.M. Best notes that the longer it takes to consummate a transaction, the less likely management will generate its targeted proceeds from the sale.”  

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