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This report is a few days old, and the shares of HIG have spiked significant since the comments of the CEO apparently have eased the concerns of somebody. Therefore, please be aware that the share price quoted in the report is nearly half what the current share price is. That being said, any paying subscribers interested in my take on this company can feel free to download the appropriate reports.

For those who are not paying subscribers, I'll include this tidbit from the professional subscription report (which goes in depth and significant detail in illustrating exactly what the issues are with HIG).

Shrinking shareholder's equity is threatening solvency; the insurer likely to seek further capital infusion

The margin between the tangible general account assets and general account liabilities of the company is rapidly contracting. With the tangible general account assets (general account assets excluding equities held for trading which pertain to Japanese variable interest annuities, goodwill, DAC and deferred taxes) at $109.7 bn and the general account liabilities (general account liabilities excluding policyholder funds and benefits payable on Japanese variable interest annuities) at $111.2 bn, the margin slipped to negative $1.5 bn as of September 2008 against the postive $2.0 bn in June 2008 and $5.7 bn in December 2007. The contraction in this margin accelerated in the first three quarters of 2008 owing to a significant erosion of the fair value of the investments.

The shrinking gap between the tangible assets and tangible liabilities is threatening the solvency of the company


Source: Company filings


The 3Q2008 losses more than wiped out the amount of $2.5 bn the insurer had raised from Allianz in October 2008. With no respite from investment write-down in sight in the near-term, Hartford has no option but to raise additional funds in the current markets, which are wtinessing signifcant widening of spreads. Hartford's CDS spread more than tripled from 115.3 bp as at the end 2Q2008 to 553.9 bp as of October 30, 2008. The resultant (and expected) increase in cost of borrowing combined with lower margins and revenue growth off of a slow down in core business will weigh on the company's near-to-medium term earnings.


Hartford's liquidity also seems in danger

Insurers like Hartford are required to maintain sufficient cash balances to settle the claims of policyholders, which arise irrespective of the company's financial standing, and to meet increased redemption demand which is likely to pace up amid market uncertainty and economic downturn. Over the last four quarters the redemption outpaced new inflow as suggested by the difference between the deposits and the withdrawals from the investment and universal life type contracts. Although the deficit was largely compensated by transfers from separate account policies to general account policies, the same may not be sustainable in future as demand for redemption outpaces the new investment by a significant margin. In 3Q2008, the trailing 12-month difference between the deposits and the withdrawals widened to negative $6.1 bn from negative $1.8 bn and $0.1 bn in 2Q2008 and 1Q2008, respectively, compared to a positive difference (net inflow) of $2.1 in 4Q2007.

 Net inflows on the various investment contracts are shriking as withdrawals outpace deposits and the transfers from separate account products tapers off.


Source: Company filings

In addition, Hartford's general account investment reflects a fairly illiquid portfolio, which could aggravate problem for the insurer in case it sees a repeat of the 3Q2008 losses in the next the quarter. As at the end of September 2008, out of the total general account investments portfolio of $89.8 bn, $77.2 bn were investments in securities and $12.6 bn were investments in policy loans, mortgage loans and other undisclosed investments, all of which are highly illiquid. Out of $77.2 bn investment in securities, 22.5% and 75.2% are in the illiquid level 3 and level 2 assets, respectively. Amid rising redemption pressure off fears of a decline in investment value, the company is likely to face liquidity crunch as the value of investments plunge while losses continue to mount. In addition, the scheduled payment of a debt installment of $530 million in 4Q2008 is likely to add to the insurer's current problems, given the constrained liquidity situation in global capital markets.

This particular professional subscription download, in conjunction with the addendums and the timely actionable notes released over the last few weeks (see pdf  Hartford Insurance Group spreads and counterparty/debt holders - pro (149 kB 2008-11-01 09:39:04

and spreadsheet  Hartford Insurance Actionable Opinion Note (538.89 kB 2008-10-09 09:30:38) ) are worth more than what I charge for the entire subscription.

Subscribers can download the latest HIG forensic reports here: