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By MATTHEW STURDEVANT, email@example.com
The Hartford Courant
10:55 PM EDT, March 21, 2012
Connecticut's largest employer in the insurance industry, The Hartford, is breaking apart.
The Asylum Hill company that dates to 1810 enjoyed relative calm from the time it was spun off by ITT Corp. in 1995 to its near collapse in 2008, a period when other multi-line insurers such as Travelers and Aetna were splitting into pieces.
The Hartford Financial Services Group said Wednesday that it will end new sales of annuities to individuals on April 27, and that it is selling its individual life-insurance business, retirement plans and its Woodbury Financial Services brokerage.
The breakup follows weeks of intense pressure from The Hartford's largest shareholder, a New York hedge fund managed by billionaire John Paulson. It is not, however, a spinoff of property-casualty operations from life insurance, as Paulson had wanted.
After the annuities runoff and sale of life and retirement units, The Hartford plans to focus on property-casualty, group benefits and mutual funds — more profitable and less volatile businesses — in hopes of unlocking share value and setting the stage for growth.
"We want to be a superior-performing company, we want to create shareholder value, and the status quo, in our view, was not going to get us there in a reasonable period of time," The Hartford's CEO, Liam E. McGee, told The Courant in an interview.
The effect on jobs in central Connecticut, where The Hartford has 10,300 of its 24,400 total employees, remains unclear. Some employees said the mood in the Simsbury office, where hundreds of people work in annuities, and at the company's main campus in Hartford, was jittery.
In New York, the proposal was met with a lukewarm response by Paulson, whose firm, Paulson & Co., owns 8.5 percent of the company.
"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," Paulson & Co. said in a statement, adding, "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."
Shares opened up sharply and later settled, closing at $22.02, up 31 cents, or 1.4 percent, on the New York Stock Exchange.
The breakup plan is the latest and most dramatic recovery step in The Hartford's 4-year odyssey, since investment losses — including mortgage-backed securities — eroded the company's strength at the start of the recession. The company has had massive executive changes, including the early retirement of Ramani Ayer, a CEO who had guided it through years of growth; a huge cash infusion by a German insurer; a $3.4 billion federal bailout; and thousands of job losses amid restructuring.
As Wall Street studied the plan, the question coursing through the city and state was about jobs at the Stag, the company's mascot and nickname. Decades after other insurers spread their workforces far and wide, The Hartford maintains an astounding 40 percent of its payroll at home, and any radical step is viewed as a threat to that situation.
McGee said he believes that the new strategy could lead to job growth.
"I think as we strengthen the company with this plan, both Connecticut and the city of Hartford remain incredibly important to our company," McGee said. "I would hope as we implement this plan, it gives us a platform to invest and create new jobs in a prosperous, growing Hartford — the company."
"We'll continue, as we have been, to be a very involved citizen, whether it be in our Asylum Hill project, whether it be in helping the demolition of the Capitol West building, and all the other things our teammates do in Connecticut and the city of Hartford," McGee said. "If anything, I view this as an opportunity to continue to invest and grow in Connecticut and in the city of Hartford."
'The Mood Is Somber'
The Hartford did not say how many employees work in the affected businesses, or how the company might disentangle parts of the insurer that will remain from those that will be sold or put into runoff.
For employees at divisions being sold, their fate depends on the strategic needs of the buyers. But the jobs in annuities — a significant segment, with $80 billion in assets in the U.S. and $30 billion in Japan — will eventually disappear. It was not clear Wednesday when and whether layoffs would occur.
"These are multiyear commitments to customers," McGee told The Courant. "We will be servicing significant blocks of annuities for many years, and our teammates who are servicing them will continue to service them. We will honor our commitments to our customers."
Despite reassurances, workers were worried about their jobs.
"The mood is somber," said a worker in The Hartford's annuity division as he walked across the Simsbury campus. Other workers at the security-patrolled campus were terse and tight-lipped.
An employee at the Hartford campus said that the breakup was ironic, considering that McGee had taken steps to unify company operations after taking over as CEO in late 2009. "There was this big focus on life and property-casualty becoming one company, and now it's going by the wayside."
"People are really upset about it," he added as he waited at a bus stop Wednesday after work.
The company's Connecticut workforce was reduced by 460 last year. More job cuts were anticipated even before Wednesday's announcement as the company planned to slash $160 million from its overall budget this year and $150 million in 2013.
Ending annuity sales will mean a charge against earnings of $15 million to $20 million this spring, and will lead to $100 million in annual savings starting in 2013.
The history of company breakups by sale is mixed when it comes to jobs. When MassMutual bought Connecticut Mutual in the mid-1990s, it closed Hartford operations, leading to thousands of job losses and displacements.
But when MetLife bought the former Travelers Life & Annuity, and when ING bought the old Aetna Financial Services, those businesses kept the bulk of employees in place, where they remain in Bloomfield and Windsor, respectively.
"For over 200 years, The Hartford and its employees have been a source of financial and volunteer strength for our region," said Oz Griebel, president and CEO of the MetroHartford Alliance. "By focusing on its most competitive businesses, the company will be better positioned to continue its invaluable leadership for decades to come."
The segments that The Hartford is keeping have the strongest competitive market position, McGee said.
"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," he said.
That, in essence, is the argument that Paulson made in both public and private discussions with the company, and in documents filed with securities regulators last month. Paulson said a "pure-play" property-casualty company, without the more volatile life and retirement operations, would lead to a stock price based on a higher multiple of per-share earnings, as realized by other property-casualty companies, such as Travelers.
Businesses that will remain are expected to have a return on equity of 12 percent to 13 percent, according to the company's outlook.
Even after the selloff, however, Paulson said Wednesday that the company would still suffer from a lack of interest from property-casualty analysts and investors in The Hartford's "best-in-class" property-casualty business due to its affiliation with "unrelated, low-return and complex businesses."
The move will be scrutinized by Connecticut's Insurance Department before it can proceed.
"As the department does with any proposed transaction of this type, we will review it with great diligence to ensure that the commitments to all policyholders are protected," said Insurance Commissioner Thomas B. Leonardi. "To comment on any specifics would be premature and inappropriate at this time."
Shifting focus to the stronger property-casualty operations and the decision to shut down a high-risk line of business is positive to the company's credit, saidMoody'sanalyst Paul Bauer.
"However, given the nature of variable annuity contracts, it will nevertheless take a long time to materially reduce total risk," Bauer said.
Moody's changed the outlook on Hartford Life & Annuity Insurance Company, which includes the majority of the individual annuity business, from stable to negative.
Barclays Capital analysts Jay Gelb and Sarah DeWitt wrote in a research note that The Hartford is on the right strategic path, but that the company's earnings-per-share and return-on-equity "will likely remain compressed for several more years in our view because this plan does not quickly free up trapped capital and earnings will be lost from businesses that are sold."
In a conference call on Feb. 7, after a challenge from Paulson, McGee said the company had considered breaking off its life business, but found the barriers to be significant. Paulson is known to have been negotiating with management, but it was unclear early Wednesday what role those talks played in the company's decision.
McGee said that management was already looking to make big changes when Paulson brought his suggestions.
"This is management and the board's decision," he said.
Courant staff writer Janice Podsada contributed to this story.
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