By Leslie Scism, Erik Holm and Gina Chon
After news Wednesday that Hartford Financial will no longer sell variable annuities, hedge-fund manager John Paulson still wants the company to spin off its property-casualty arm.
But some former insurance regulators have this message: hold your horses. Former top New Jersey insurance regulator Tom Considine says Hartford can?t make that decision in a vacuum, without regulatory input.
?Sometimes, masters of the universe don?t realize that regulators really do have the ability to say no,? said Considine, who stepped down as commissioner of the New Jersey Department of Banking and Insurance in February.
Spinning off the property-casualty business, and leaving a ?less vibrant part behind would be closely scrutinized,? he said, adding: ?Approval would be unlikely in this environment.? Paulson & Co., the insurer?s largest shareholder, believes the idea that regulators would stand in the way of a spinoff is a premature assumption to make, people familiar with the matter said.
A spinoff would likely take at least a year to close, and would be judged by regulators on numbers at that time ? not on today?s numbers, they say.
In a regulatory filing, the hedge-fund firm lays out possible sources of funds that could help make a spinoff palatable to regulators. ?Hartford has access to numerous sources of cash over the next 18 months to ensure that both P&C and Life policyholders will be protected and all regulatory conditions will be met,? the filing says.
Former regulators say the issue isn?t Hartford?s financial health this year or next. Rather, it?s long term.
The insurer said Wednesday it was going to halt sales of variable annuities in April, but the annuities it sold over the past several years come with decades of obligations to customers.
Those obligations include lifetime-payment guarantees based on models that have yet to be fully tested over time at Hartford, or at any of the other insurers that issued the guarantees. Many of the people who bought those guarantees amid a boom for variable annuities in the mid-2000s are just now starting to retire, and their withdrawals will take place over the rest of their lifetimes.
Lots of things could go wrong in coming years that would require beefing up of the reserves, one-time regulators say. As Hartford is currently structured, any funding shortfall in the annuity book could be addressed through cash infusions originating from its other insurance units, such as its property-casualty business.
That?s why regulators could be reluctant to let a sister insurance business legally separate itself from the parent and the runoff annuity unit, said Considine, now chief operating officer of MagnaCare, a health-plan-management company.
Thomas Sullivan, who formerly headed Connecticut?s insurance department and now is a partner with PricewaterhouseCoopers LLC, says a spinoff would be viewed ?with a jaundiced eye.? Thomas B. Leonardi, head of Connecticut?s insurance department, which regulates Hartford, has said: ?Certainly, in any such regulatory approval process that involves a Connecticut-based carrier, policyholder protection is paramount.?
On news of Hartford?s plans Wednesday for the variable annuities business, along with a potential sale of part of its life insurance operation, shares jumped up before declining to close 1.4% higher at $22.02. Thursday afternoon they were trading down 3.6% to $21.23.
Source: http://blogs.wsj.com/deals/2012/03/22/ex-insurance-cops-skeptical-on-paulsons-plans-for-hartford/
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