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Allianz Invests $2.5 Billion In The Hartford

By DIANE LEVICK

October 07, 2008

A $2.5 billion helping hand for The Hartford, announced Monday after a battering week in stock market hell, marks a dramatic attempt by the homegrown insurer to restore investor confidence.

But the investment from German financial powerhouse Allianz means that the independent Hartford Financial Services Group Inc. will give up a piece of itself in return — and still face major business challenges.

The Hartford, stressed by deflated investments, also said Monday that it would report a net loss of $2.6 billion in the third quarter and that it has replaced its chief investment officer. The company is also slashing its quarterly stockholder dividend by 40 percent to 32 cents a share.

The Allianz deal, which allows the German insurer to acquire a nearly 24 percent stake in The Hartford, raised speculation in merger-sensitive Hartford about whether the company might be entirely gobbled up in the future.

"That is not my plan," Ramani Ayer, The Hartford's chairman and chief executive, said in an interview. "We're still independent. ... They're a financial investor."

Hartford-area residents might recall how Travelers, needing a capital boost, agreed in 1992 to sell 27 percent of itself to Wall Street mogul Sandy Weill's Primerica. Travelers executives said they had no plans to sell the whole company to Primerica, but a year later they agreed to do just that.

A "stand-still" provision in The Hartford's new agreement bars Allianz from buying more than 25 percent of its stock or proposing a merger for 10 years. And Allianz won't get any seats on The Hartford's board. Stand-stills, though, can be reversed if both companies agree.

The health of The Hartford is crucial to the city and the region. With 7,000 employees in the city, it is the largest corporate employer in Hartford, and its 13,000 Connecticut workers rank it behind only United Technologies Corp. and Stop & Shop. Since spinning off from ITT Corp. in 1995, The Hartford, headquartered in a sprawling complex in the city's Asylum Hill neighborhood, has largely sidestepped the upheaval of other local insurers' mergers and meltdowns.

Ayer said he was determined to raise capital, a financial cushion closely watched by regulators, rating agencies and investors.

"This was really a confidence issue we had to deal with because the stock was getting hammered toward the end of last week, and I just had to tackle this decisively," Ayer said.

Investors and analysts greeted the Allianz deal with some relief, and The Hartford's stock price shot up 12.8 percent Monday to close at $30.90 a share in a falling stock market.

The company's stock lost about $9 billion, or 52 percent of its value, last week after Senate Majority Leader Harry Reid, D-Nev., said that an unnamed insurer was about to go bankrupt and another rating agency lowered its outlook on the company's ratings.

The Hartford said that it expected to end the year with $1 billion more in capital than it needed to retain its favorable financial ratings, even without the infusion from Allianz. Ayer said that he pursued a deal because "in today's world, where so much anxiety exists about markets and so on, an even stronger, more powerful statement would be very helpful, and that's what we did."

Reaction from employees to the early morning announcement was mostly positive, although some voiced concern about a takeover and its effect on jobs.

Ayer said that no jobs would be cut as a result of the deal but that business conditions would require expense control into 2009. He would not discuss layoffs.

"Unless the federal government's actions reinvigorate the economy, it's going to be a tough year," Ayer said. "Definitely, belt-tightening is an imperative for '09."

Analyst Michael Paisan, a managing director at Stifel Nicolaus in New York, called the deal "a pre-emptive measure designed to change the image of a company in desperate need of capital to one that is fortified by validation from a sophisticated investor that knows [The Hartford's] business very well."

Under the deal, Allianz will buy $750 million of preferred stock of The Hartford at $31 a share, and those shares can be converted into common stock. Allianz will buy $1.75 billion of debt securities and get warrants entitling it to buy $1.75 billion of common stock at an exercise price of $25.32 a share.

"It's The Hartford's own mini-bailout," said one worker returning from lunch.

A woman who said she's an IBM consultant to The Hartford said, "There are so many layoffs these days. Does it matter who lays you off anymore? The Hartford, IBM or some German company?"

The Hartford said Monday that its third-quarter net loss will include more than $2 billion of investment losses.