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

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

He said Hartford decided to make the deal because “demonstrating superior capital strength is hugely important” during a period of market turmoil.

He said before the added capital injection Hartford had more than $1 billion in capital above the level needed to maintain its ratings but decided that, “in this kind of environment, it is critical that you take this opportunity to remain one of the strongest.”

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

Some analysts remained unconvinced.

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

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

“Obviously, we view this as allowing us to continue to operate autonomously in the market,” Mr. Marra said, citing standstill provisions in the contract that put limits on Allianz's “ability to take additional steps.”

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

While informing investors it will take a huge charge in the third quarter to account for a diminished investment portfolio, the company took additional steps designed to reassure markets and preserve cash, announcing it will cut its dividend and naming a new chief investment officer–Greg McGreevey, a former ING executive.

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

Another factor was a decision by Fitch Ratings to revise its rating outlook for HIG from “Stable” to “Negative.” Fitch cited potentially troubled assets, such as mortgage-backed securities in its portfolio.

HIG sought to add cash in advance of announcing a projected loss because of the market turmoil. It said it expects a net loss for the 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 are impairments on The Hartford's investment portfolio,” about three-quarters of which are losses in investments in the financial services sector, the company said.

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

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

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

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

The Hartford has huge property-casualty and life insurance assets, both in the United States and overseas. Its p-c business includes personal lines, small commercial, middle market, specialty commercial and other operations.

Mr. McGreevey, the new chief investment officer, who joined the company in August, will become an executive vice president of HIG and president of Hartford Investment Management Company, the firm said. He succeeds Dave Znamierowski, who is leaving the company after 12 years.

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

Mr. Ayer said the decision to change investment managers was made because “given the recent unprecedented turmoil in the financial markets and its effect on the company's investment portfolio, we agreed that it would be best to bring a fresh perspective to our investment operations.”

Mr. Marra confirmed that shoring up capital during a period of market turmoil is important because well-capitalized insurers are taking business away from troubled insurers, although he declined to mention AIG–recently bailed out by an $85 billion government loan–by name.

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

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

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

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

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

Best said it is “evaluating the ultimate impact of these events–as well as the risks associated with continued market dislocation and increased financial leverage–on the ratings of The Hartford and its insurance subsidiaries.”

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

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

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

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

“The company's effective expense management and underwriting discipline will help support continued earnings strength and limit the decline in earnings through the cycle,” S&P said. “In addition, management's aggressive action to raise $2.5 billion of additional capital ensures that it is among the U.S. insurance companies best positioned to weather the current economic downturn and maintain its competitive advantages and consumer confidence.”

(Additional reporting by Phil Gusman.)

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Infusion Not A Prelude To Takeover, Hartford Says

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