December 15, 2008 | last updated May 26, 2012 6:25 am

The Hartford Overhauls Life, Annuity Segments

Lizabeth Zlatkus, EVP and CFO, The Hartford

The Hartford Financial Services Group said it has started restructuring its life insurance operations, an initiative that will involve major adjustments to its ailing variable annuities business and layoffs of 150 people in life operations.

Company executives told shareholders at a Dec. 5 meeting in New York that they will redesign and increase prices on their variable annuity products by the second quarter of 2009.

Analysts have questioned the company's capital adequacy in light of deepening problems with its variable annuity portfolio.

At the Dec. 5 meeting, CEO Ramani Ayer boosted the company's earnings outlook and painted a positive picture of the company's capital position.

That sent investor confidence soaring — The Hartford's stock price more than doubled the day of the meeting, rising to $14.59 from $7.21. But its left some analysts scratching their heads.

"While the market naturally responded with relief to the notion of better life capital, the sudden and dramatic change in management's capital estimate also deepens our discomfort that variable annuity risks are too complex, too mysterious, too opaque and too fluid for investors to embrace," Keefe, Bruyette & Woods analyst Jeffrey Schuman wrote to investors in a Dec. 8 research note.

Schuman also questioned whether consumers will embrace price increases and product changes to the company's variable annuity business.

"We've long been concerned that industry demand has been maintained on the backs of aggressive product feature wars," Schuman wrote.

Keefe, Bruyette & Woods reduced its 2008 estimate for The Hartford from $4.73 to $3.69 to reflect further weakness in the company's equity-sensitive businesses and the lower returns of alternative investments.

Expensive Guarantees

John C. Walters, president and chief operating officer of Hartford Life Inc., acknowledged that the entire annuity industry has had a challenging 2008.

"Clearly over time [variable annuities] has been one of our biggest businesses," Walters said. "But the way people are going to buy these and the way we are going to be able to present them will be different."

In an annuity contract, an investor puts money into a mutual-fund-like portfolio with the expectation of receiving payments for life. In recent years, life insurers have added aggressively priced guarantees to those contracts. They 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, exposing life insurers to millions of dollars in losses.

The Hartford's guaranteed minimum living benefit in particular has created capital strain for the company, executives at The Hartford acknowledged to investors.

In October and November the liability for those guarantees increased by nearly $5 billion "clearly more than we ever have seen since we began our hedging program and selling our guaranteed living benefit," said Lizabeth Zlatkus, executive vice president and chief financial officer.

The company uses reinsurance and a hedging program to manage the risk associated with the guaranteed minimum liability. Recent market volatility has significantly increased the cost of hedging, which could add $300 million to $400 million in expenses, Zlatkus said.

If the Standard & Poor's 500 Index drops into the low 800 range, it could also trigger a deferred acquisition charge of $600 million to $1.2 billion in the company's variable annuity portfolio, Zlatkus said.

In the third quarter, The Hartford Life Insurance Co.'s variable annuity business suffered a pre-tax operating loss of $552 million, compared with a $365 million gain a year earlier.

"In this environment our earnings are going to be depressed somewhat as we go into 2009," Walters said.

Despite the looming losses however, company officials said the life insurance segment still has sufficient capital.

"The capital outlook for our life operations through year-end indicates more than sufficient capital in current market conditions, and even assuming significant additional market deterioration," said CEO Ramani Ayer in a written statement.

Even if the S&P 500 ends the year at 700, the company would still leave untapped $2.85 billion of existing capital resources, Ayer said.

The Hartford may also receive as much as $3.4 billion from the federal government's Capital Purchase Program, which the company became eligible for after it agreed to buy a small Florida-based savings and loan institution in November.

Ayer's assessment of the company's capital position was a dramatically more positive view than the one he gave to analysts on a Nov. 3 conference call.

Despite recent and future challenges presented by the variable annuity business, Walters said the company still sees a profitable future for it once financial markets recover from current volatility.

"It is still very important for us going into the future," he said. "The need for retirement income has never been higher."


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