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Hartford shares fall slightly as reports emerge of US variable annuities biz sale

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Hartford shares fall slightly as reports emerge of US variable annuities biz sale

The HartfordFinancial Services Group Inc.'s stock declined more than otherinsurers and the broader markets during the week ended Sept. 29, when newsemerged that the P&C insurer is planning to sell its variable annuityrunoff business, Talcott Resolution.

Shares of The Hartford fell 0.98% to finish the week at$42.35.

The SNL Insurance Index dropped 0.84% to 763.75, and theS&P 500 fell 0.63% to close at 2,151.13.

The Hartford is in talks with JP Morgan to get a valuation for the sale,which is an attempt to focus on its core businesses, especially auto insurance,analysts said.

Unloading Talcott was inevitable, given that the insurersuffered significant earnings hits in the second quarter from the segment, andthe environment is right for the sale, Aite Group analyst Jay Sarzen said. Hesaid that Talcott was a substantial book of business and shedding it couldprobably fetch the company a good price.

"If you don't have the expertise on how to price theannuity properly or to underwrite that risk, it could really jump up and biteyou on the backside," Sarzen said.  

The company still owed payouts from valid annuity contractsand is waiting for them to expire before it can get Talcott completely off itsbooks, analysts noted. Until then, The Hartford is not in a position to take onany new annuity contracts.

Reports of the sale followed chatter during the conferenceseason in which The Hartford executives acknowledged that they were open to "looking atother ways to move the risk to someone else."

CFO Beth Bombara said the company wanted to find a solutionto be able to transfer its liabilities and legal entities. Talcott had excesscapital, she said, which was in runoff since 2012 and was declining to theextent that it impacted the company's overall return on equity. Talcott's 2017dividends were expected to be about $500 million, down from $750 million in2016, Bombara said.

Even so, the company may not necessarily be under pressureto immediately sell Talcott at a reasonable valuation, according to Barclaysanalyst Jay Gelb.

The variable annuity business includes the runoff of institutionaland private-placement life insurance businesses, and has been giving a seesawperformance since2013, when it posted a net loss of more than $600 million. It generated $120million in net income for the first half of 2016.

Although Bombara had said that the low interest rateenvironment was impacting Talcott, the environment may not make the segmentunsellable, Credit Suisse analyst Ryan Tunis wrote in a Sept. 21 report.

Meanwhile, the sale could bring in between $3 billion and $4billion, a sum that would provide plenty of scope for the company to examineacquisition opportunities, especially in industry segments and geographies theyhave not yet reached.

"It's my gut feeling that they are going to use it toacquire or they are going to use it to bolster capital reserves," Sarzensaid.

Two of The Hartford's biggest , Ace Ltd. and , closed their in January,heightening speculation that The Hartford could also up its game in the M&Aspace. In fact, The Hartford entered an agreement to buy Northern HomelandsCo., a subsidiary of Maxum Specialty Insurance Group, a specialty P&Ccarrier, earlier in 2016.

The Hartford could deploy the proceeds from the sale intoshare buybacks, Gelb noted. On the M&A front, the company's plans are notdefinite. "It is unclear in our view if a sale of Talcott would increasethe potential for [The Hartford] to become a consolidation candidate," hesaid.

Shares of other P&C companies rose slightly. shares edged up0.22% to $68.64, and ProgressiveCorp. shares rose 0.32% to finish at $31.25.

Life insurance stocks declined during the week. Shares ofPrudential FinancialInc. dropped 0.46% to close at $79.97, and shares fell 1.93% to$43.66.