Hartford to Accept as Much as $3.4 Billion From TARP (Update5)

By Andrew Frye
Bloomberg News
June 12, 2009

June 12 (Bloomberg) -- Hartford Financial Services Group Inc., the insurer that's raised capital from equity sales at least five times this decade, will accept as much as $3.4 billion in U.S. bailout funds and sell $750 million of shares. The stock fell 8 percent.

The common share offering to private investors will be carried out over time in a so-called discretionary equity issuance, Hartford, based in the Connecticut city of the same name, said today in a statement. The funds may be used to repurchase outstanding debt, the firm said.

Outgoing Chief Executive Officer Ramani Ayer, 62, turned to the government in November after asset declines depleted capital and a sagging stock price deterred private investors. The insurer is welcoming an investment from Treasury's Troubled Asset Relief Program and the pay curbs that may come with it, even as banks led by JPMorgan Chase & Co. and Goldman Sachs Group Inc. raise capital to exit the government initiative.

"All this just shows how deep the problems were at Hartford," Robert Haines, an analyst with CreditSights Inc. said in an e-mail. "Others who had been looking for TARP cash were able to raise capital in the markets because of recent upturn. Hartford is raising capital, but as you can see they do not have capacity to raise enough."

Hartford fell $1.13 to $12.95 at 4 p.m. in New York Stock Exchange composite trading. The company has declined about 82 percent in the past 12 months. Hartford's share count may more than double after TARP and the equity issuance, Joshua Shanker, an analyst with Citigroup Inc., said today in a note to investors.

Job Cuts

Ayer, whose firm lost $2.7 billion in 2008, braced for more asset declines by cutting jobs, slashing the dividend and pulling back from non-U.S. markets including Japan. He steered Hartford through the toughest year in its two centuries of history and announced his retirement after winning clearance for the bailout last month.

Hartford was caught off guard by the credit-market seizure in September after the collapse of Lehman Brothers Holdings Inc. Losses on fixed-income holdings widened and were exacerbated by the rising cost of guaranteeing minimum returns to savers with equity-linked variable annuities.

Ayer, faced with a $2.6 billion third-quarter loss, turned to Germany's Allianz SE for a $2.5 billion capital injection in a deal announced on Oct. 6. Hartford has a history of seeking support from investors when losses exceed expectations, said David Havens, an analyst with Hexagon Securities LLC. The insurer made five equity offerings for a total of about $3 billion from 2001 to 2004, according to Bloomberg data.

'Thin Margin'

"They traditionally operated with a thin margin of safety from a capital perspective," Havens said in an interview. "The surprise is that they took significant pain from variable annuities in 2003 and they weren't prepared for this market downturn."

Ayer's departure, expected by yearend, follows the exit of top executives since 2008 including CFO David Johnson, Chief Operating Officer Thomas Marra and Chief Investment Officer David Znamierowski. The board is searching for Ayer's replacement as CEO and chairman outside of the company.

Hartford said in a regulatory filing today it will pay $200 million to Allianz because of the dilution of the German insurer's investment. Allianz was entitled to $300 million, under terms of an agreement in October. Under the revised accord, the terms of warrants issued by Hartford will be extended to 10 years from seven.

Prudential, Principal

"We still have confidence in Hartford; we've always said this is a long-term investment," said Michael Matern, a spokesman for the Munich-based insurer, in a telephone interview today. "Our basic assessment of that investment hasn't changed."

Ayer applied for the bailout in November and was joined by Prudential Financial Inc., the second-biggest U.S. life insurer, Lincoln National Corp., Principal Financial Group Inc. and other rivals. Hartford agreed to buy a Sanford, Florida-based savings and loan to qualify for TARP. Prudential and Des Moines, Iowa- based Principal have declined Treasury funds and raised capital from private investors.

Of the six insurers cleared last month for bailouts, only Hartford has accepted so far. Lincoln said last month that taking TARP funding could be part of a "mix" of capital alternatives available.

Hartford posted about $12.4 billion in writedowns and unrealized losses tied to the collapse of the U.S. subprime mortgage market, second-worst among U.S. insurers to American International Group Inc., which needed four government bailouts.

'Uncertain Economic Environment'

Ayer said he decided to accept U.S. funds and conduct the share sale because of the "uncertain economic environment."

Goldman Sachs will manage the sale of as much as $750 million in shares to private investors, which will be offered "from time to time," according to the statement.

"The discretionary equity issuance will allow us to be opportunistic in raising capital while reducing our financial leverage," Chief Financial Officer Lizabeth Zlatkus said in the statement.

The government investment and equity issuance exceeds the market's estimate of Hartford's capital need and may help ease concern among rating firms, said Michael Paisan, an analyst for Stifel Nicolaus & Co. Hartford has a "negative" outlook at both Standard & Poor's and Fitch Ratings.

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