Hartford, Conn. – When The Hartford Financial Services Group Inc. made a statement last week in response to Senate Majority Leader Harry Reid’s remark that a major carrier was about to fail, it clearly had its game plan already in play.
Unwilling to name the carrier, Sen. Reid ignited industry-wide discussion and speculation that the financial crisis was hitting closer to the insurance vertical than previously thought, sending insurance stocks downward on Thursday.
The Hartford’s binding agreement with German giant Allianz SE calls for a $2.5 billion capital investment. The announcement comes as the company releases preliminary third-quarter results, a reduced dividend and the appointment of a new CIO.
“We are taking decisive action to ensure that The Hartford remains well capitalized for long-term success,” says The Hartford’s chairman and CEO Ramani Ayer. “This investment strengthens our ability to weather volatile markets, and continue to invest and vigorously compete in our businesses. We are dedicated to honoring our commitments to customers.”
The Hartford saw its share price halve last week to a 52-week low of $25.47 before a moderate rally on Friday. Investors sited fears over the company's exposure to troubled companies such as AIG and Washington Mutual.
Michael Diekmann, chairman of the Board of Management and CEO of Allianz SE, indicates that his company’s investment was a sound one. “We believe in the fundamental strength of the U.S. economy and its insurance industry, and respect The Hartford as a great insurance brand,” he said. “We anticipate a favorable return on our investment."
The Hartford said in a statement that 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.
Life operations deposits and flows are expected to be within or above previously provided third quarter 2008 guidance ranges, except for U.S. variable annuity deposits, which are slightly below guidance. In property/casualty, the ongoing operations combined ratio, excluding catastrophes and prior year development, is expected to be 91.8 for the third quarter of 2008.
The terms of Allianz’s investment include purchasing, at $31 per share, $750 million of preferred shares convertible to common stock after receipt of applicable approvals, and $1.75 billion of 10% junior subordinated debentures. The debentures are callable by The Hartford at par beginning 10 years after issuance.
Allianz SE also will 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.
“With this investment by Allianz SE, we project that we will finish the year with a capital margin of about $3.5 billion in excess of our modeled rating agency requirements to maintain AA level ratings,” says Ayer.
This estimate assumes year-end market levels are the same as the end-of-the-third-quarter, rating agency models remain unchanged and the company’s operations perform as planned for the remainder of the year, says the company. Goldman, Sachs & Co. served as financial advisor to The Hartford and placement agent with respect to the capital investment by Allianz SE.
In today’s announcement, The Hartford says it parted ways with CIO Dave Znamierowski, replacing the executive with Greg McGreevey, who joined the insurer in August. McGreevey, who according to Ayer, was chosen for his “fresh perspective,” will hold the position of EVP and CIO for The Hartford, and president of Hartford Investment Management Co.
Sources: The Hartford, INN archives
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