Hartford Financial Services Group Inc. (HIG:US) is creating “a tremendous amount of financial flexibility” as the insurer divests units and weighs share repurchases, Chief Executive Officer Liam McGee said.
McGee, 58, is focusing on property-casualty coverage, such as commercial insurance and auto policies, after reaching deals (HIG:US) this year to sell Hartford’s broker-dealer, the retirement-plans business and the individual annuities distribution unit. Prudential Financial Inc. (PRU:US) has emerged as the lead bidder for Hartford’s individual life-insurance arm, people familiar with the matter said last month.
“The businesses that we’re staying in have generated a substantial amount of capital,” McGee said in an interview today. “The businesses that we’re getting out of consume virtually all of that capital. By selling and shutting down the businesses, we’re eliminating that consumption of capital.”
Hartford trades for about 40 percent of book value (HIG:US), a measure of assets minus liabilities. The insurer in the second quarter completed a $500 million share repurchase plan that was authorized in August of 2011.
“Buybacks are certainly among the most accretive things we could do today,” given the firm’s book value, he said in the interview at a company office in New York.
McGee said the Hartford, Connecticut-based insurer needs to balance the “obvious appeal” of buybacks with the need to keep cash free to do other deals, such as transactions that could require payments to manage the risk of annuities. The insurer may also pay down debt, he said.
Credit-default swaps tied to Hartford’s bonds fell 30.8 basis points to 164.2 basis points as of 12:30 p.m. in New York, the biggest drop since March 21, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market.
The contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. The swaps, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, decline as investor confidence improves and rise as it deteriorates.
Hartford climbed 63 cents, or 3.4 percent, to $19.31 at 1:30 p.m. The shares have gained 19 percent this year, outpacing the 10 percent rally of the 24-company KBW Insurance Index. (KIX)
A deal with Prudential could happen as soon as today, the Wall Street Journal said on its website. Hartford declined to comment on the report. McGee said Hartford will provide more details about capital levels and its plans after selling the life unit.
As Hartford divests units and reduces the risk from annuities, it will trade more like property-casualty peers, McGee said. Travelers Cos., the lone insurer in the Dow Jones Industrial Average, sells for 5 percent more than its book value (TRV:US).
“No, we’re not happy with the share price,” McGee said. “Over time, I’d rather have the multiple to book of a property and casualty business.”
Billionaire John Paulson, whose hedge fund is Hartford’s largest investor, has called on the firm to “do something drastic” to boost the stock price, which fell 39 percent last year. He pushed Hartford to split its property-casualty operation from life insurance. McGee answered with plans to sell or shutter parts of the insurer that are most sensitive to stock-market fluctuations and low interest rates.
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