Why The Hartford Took a Hit on Wall Street

October 6, 2008

The Hartford Financial Services Group Inc. lost nearly $9 billion of market value last week as investors fled the financial sector during the worst crisis in decades.

"We've got contagion right now'' affecting "perfectly fine, sound institutions,'' said Walter Dolde, a finance professor at the University of Connecticut School of Business in Stamford. "Investors are very wary of anything that's a financial institution, and they're damning them all.''

Last week's developments prompted The Hartford to negotiate a $2.5 billion capital investment from Allianz SE.

Sen. Harry Reid of Nevada, the Senate majority leader, also hurt insurers when he said last Thursday that an unidentified insurer is on the brink of bankruptcy. He later retracted his comments.

The Hartford, which said it does not typically comment on fluctuations in its share price, nevertheless issued a statement earlier this week saying that officials are disappointed with the recent stock performance, and cited what it calls unprecedented market conditions.

"The Hartford's core operating businesses are performing well and our liquidity remains strong,'' it said.

The Hartford's share value dropped 52 percent, from $56.64 Sept. 26 to $27.40 on Friday. Since Oct. 26, 2007, the share value has dropped more than 72 percent.

Fitch Ratings said last Monday it lowered its outlook for the issuer-default ratings, senior debt and insurer financial strength ratings for the Hartford to "Negative'' from "Stable.''

The move reflects concerns related to the financial profile of the Hartford Financial in an "extraordinarily challenging credit market environment,'' Fitch said.

"Hartford's life insurance operations have experienced a drop in capital levels caused by a deterioration in asset values and a decline in earnings, both of which are driven by weakened capital market conditions,'' Fitch said in a statement.

Andrew Kligerman, an analyst at UBS, said in a note to investors Friday that the sell-off of life insurer stocks such as The Hartford "seems way overdone,'' and solvency concerns are "overblown,''

He noted that the companies didn't have units such as AIG did writing "credit default swaps'' that protect against bond defaults or speculate on a company's creditworthiness. AIG lost billions on the business.

"AIG wrote enormous amounts of that, and for a time it was very profitable, but now it's coming back to haunt them,'' Dolde said.