Yield of Dreams

The Hartford Breaks Up Businesses to Satisfy John Paulson

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What will be the future of annuities, life insurance and Woodbury's 1,600 advisors? Stay tuned.

Insurance giant The Hartford announced today that it will exit the annuity business and sell off its life insurance, retirement plan and independent broker/dealer (Woodbury Financial Services) units. It’s been widely publicized that hedge fund manager John Paulson, The Hartford’s largest shareholder, had been pressuring the insurance company to separate its life insurance business from its property and casualty unit. Hartford shares had fallen 15 percent in the last year. (Today, however it was up 1.43 percent.)

The firm said it wants to focus on its property and casualty, group benefits and mutual fund businesses, “each of which has a competitive market position, strong capital generating ability and lower sensitivity to capital markets.”

But the company had been touting its annuity business of late, with a robust ad campaign in several trade publications. Perhaps in this low interest rate environment, investors and advisors don’t want to pay the high fees for annuities. Fourth quarter earnings in its annuity business were down 10 percent from the 2010 quarter due to net outflows, the company said. Could other insurers and sellers of annuities suffer as well?

Annuity sales will stop April 27, and the firm expects to take a related after-tax charge of $15 million to $20 million in the second quarter.

The strategic move also leaves Woodbury’s 1,600 advisors in limbo. According to Cerulli Associates, the firm is the 14th largest IBD in the channel, with $23.7 billion in AUM. Many insurance firms have exited the IBD business, the latest being Western & Southern Financial Group selling Capital Analysts.

Many of the insurance companies that bought the broker/dealers six to 10 years ago now want to wash their hands of them because it's more difficult to distribute proprietary product and the profit margins just haven't lived up to what they expected going into the deals, says Chip Roame, managing partner with Tiburon Strategic Advisors.

Jon Henschen, president of Henschen & Associates, said some insurance firms are not getting the cross-selling synergies they originally hoped for. Pacific Life sold its broker-dealers to LPL; ING sold to Lightyear; and recently, Genworth sold off its b/d.

Despite The Hartford’s drastic move, Paulson didn’t seem completely satisfied with it. According to a statement:

"We support today's actions, not as a conclusion of the strategic review, but as a first step in creating a clear delineation between The Hartford's P&C and non-P&C businesses.

We are pleased that The Hartford is taking steps to focus on core operations and to divest or discontinue non-core and capital intensive businesses. 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. Successful execution of these plans will strengthen the Company's ability to separate the P&C and non-P&C businesses in the future, which we continue to believe would create the greatest short-term and long-term shareholder value and strengthen the company.

While we appreciate the extensive work of The Hartford's board and management, we do not believe the positive actions announced today address the main problem with The Hartford's undervaluation: the lack of interest from P&C analysts and P&C investors in The Hartford's best-in-class P&C business due to its affiliation with unrelated, low-return and complex businesses. We do not believe today's actions will materially increase P&C investor interest in The Hartford."

Stay tuned for more developments in The Hartford’s strategic move to break up its businesses.

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