As The Hartford Financial Services Group reportedly shops around its life insurance business, it will have a difficult time selling its ailing variable annuity segment, which has been a drag on the company’s stock price and profits.
The Hartford, which is currently coping with financial losses and ratings downgrades, is negotiating a possible sale of its life insurance operations to Canada-based Sun Life Financial Inc., and has had separate discussions with MetLife Inc., Bloomberg reported.
But mounting losses in its annuity business could prevent that segment from being part of a deal, forcing the company to cede more healthy assets from its life insurance company to prop it up.
Besides annuities, Hartford Life sells life insurance, mutual funds and retirement plans.
“I think it’s pretty hard to sell the variable annuity business considering its struggles,” said Michael Paisan, an analyst at Stifel Nicolaus in New York.
“We do not expect Sun Life to be a buyer of [The Hartford’s] variable annuity block,” analysts at Credit Suisse wrote in a March 4 note to investors.
If The Hartford keeps its variable annuity segment, its stock price and profits will continue to come under pressure because that business is heavily dependent on the equities market, Credit Suisse analysts wrote.
The Hartford’s stock price has traded as low as $3.33 in recent weeks, down nearly 95 percent from its 52-week high of $79.88.
The annuity business is a hard sell because it’s difficult to determine its value, said Bob MacDonald, former CEO of Allianz Life of North America and ITT Life, a Minnesota-based insurance company once owned by The Hartford.
“Anyone looking at that block of business would have no way of knowing what it’s worth,” MacDonald said. “You don’t know what the future liability is or how much it will eventually owe in guarantees.”
Those annuity contracts have many variations, but typically, an investor puts money into a mutual-fund-like portfolio with the expectation of receiving annual payments for life.
In recent years, life insurers added aggressively priced minimum-return guarantees on those products, which promise a minimum repayment to the investor no matter how the stock market performs.
In the market’s recent nosedive, many equity portfolios held by annuity customers underperformed the guarantees, draining capital from life insurance companies.
Hartford Life reported a net loss of $2.4 billion in 2008, declining from net incomes of $1.6 billion and $1.4 billion in 2007 and 2006, respectively.
MacDonald said management at The Hartford took on too much risk with the guarantees.
“They were developed because companies were trying to enhance sales, boost their share price and increase bonuses,” MacDonald said. “They took on risks they didn’t understand and they weren’t able to manage it properly.”
Paisan said selling its life business, minus the variable annuity block, could potentially raise enough capital for The Hartford to pay off the guarantees.
