NEW YORK – Hartford Financial Services Group Incsaid Monday that Germany's Allianz SE will invest $2.5 billion in the U.S. life and property insurer, sending Hartford shares up as much as 20 percent, even as it cut its quarterly dividend and forecast losses.

Hartford lost one-half its market value last week amid worries it would have to raise capital to address rating agencies' concerns about the impact of the global financial crisis on its investment portfolio.

“This investment strengthens our ability to weather volatile markets,” Hartford Chairman and Chief Executive Ramani Ayer said in a statement.

Allianz, the giant financial services group that agreed in August to sell Dresdner Bank after billions in losses from the credit crunch, will purchase $750 million in preferred shares that convert into common stock at $31 per share.

Hartford jumped 12.4 percent to $30.80 on the New York Stock Exchange, after rising as high as $32.95. Allianz saw its shares slide 9 percent at 90.14 euros as stock markets sank around the world.

Allianz, Europe's biggest insurer, will also buy $1.75 billion in 10 percent junior subordinated debentures. The debentures are callable at par beginning 10 years after issuance by Hartford.

Allianz will also receive warrants that entitle it to purchase $1.75 billion in common stock. The warrants expire in seven years.

Even though Hartford did not specify what Allianz's final stake would be, the German company will not have a controlling interest or a seat on the board, a Hartford spokesman said.

“It's a big bet, but when the storm passes, Allianz will be firmly positioned to take advantage of one of the world's largest insurance markets,” Catherine Stagg-Macey, senior insurance analyst with Celent, said in a statement.

Chuck Carlson, portfolio manager of Horizon Investment Services, said Allianz's investment was a vote of confidence for Hartford.

LOSSES AND A LOWER DIVIDEND

Swept up in a global financial crisis that has forced bankruptcies or fire sales of banks across the world, Hartford cut its quarterly dividend and estimated huge capital losses.

Hartford forecast a third-quarter loss of $8.50 to $8.80 per share, and core earnings per share in the range of $1.50 to $ 1.60 before one-time items.

The estimates include a net realized capital loss of $2.1 billion to $2.2 billion, or $7.05 to $7.25 per share, due to the declining value of investments in the financial services sector.

The company reduced its quarterly dividend to 32 cents a share from 53 cents.

Last week, Fitch Ratings warned Hartford's exposure to credit markets could trigger downgrades, sending the cost to insure its debt in the credit default swaps market to record highs.

Hartford said Allianz's investment would allow the insurer to finish the year with a capital margin of about $3.5 billion in excess of its modeled rating agency requirements to maintain AA notes.

Maintaining high ratings is key for insurers because lower ratings can mean higher costs and, in some cases, even a loss of business.

In September, American International Group Inc once the world's largest insurer, received a federal bailout after losses in its financial products unit drove it to the brink of collapse.

(Editing by Derek Caney, Steve Orlofsky and Jeffrey Benkoe)