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Breaking Up is Hard to Do

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If Hartford Financial were to split in two the outcome would have positive credit implications for the property and casualty (P&C) insurance group and negative credit implications for the life insurance group. The main reason for the difference, according to Moodys Weekly Credit Outlook is that the life group depends on the P&C group to bolster its credit support and elevate its ratings.

The proposal to tear Hartford Financial asunder bubbled to the surface after a contentious earnings call earlier this month where John Paulson, whose hedge fund Paulson & Co. is the largest single owner of Hartford Financial expressed his agitation with Hartford management and subsequently issued a letter calling for the split.

If the break were to happen, discrepancies between the two units would be publicly highlighted and the life group’s weaker status would be showcased.

The P&C operation is healthier than the life operation in terms of its business and financial profile and a standalone life group would struggle to steady wobbly legs after the support from the P&C group that it has grown accustomed to is removed.

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An overall debt allocation were the split to happen along the parameters Paulson is advocating, would break down with an overall debt allocation of close to 40% ($2.5 billion) to the P&C group and 60% ($4.3 billion to the life group. Paulson hopes that this will result in higher equity for the sum of the parts then currently exists as a whole along with  a comprehensive reduction in complexity.

Debt supported by a separate life insurance group would most likely be rated lower than the existing debt today according to Moody’s. That could have serious adverse effects on the hypothetical separate life group due to the confidence-sensitive nature of the life insurance business. Having below investment grade debt ratings could potentially have ripple effects that are detrimental to achieving sales and retaining business.

The life group’s credit quality as a standalone is derived from one of its core businesses, variable annuities. The risk involved in its legacy variable annuity business would have negative repercussions for the group without being boosted by the P&C group.

The Hartford’s management team have expressed their concerns when it comes to discussing the possibility of a split. They fear losing competitive credit ratings, obtaining regulatory approval, the expense of bondholder waivers, intercompany guarantees and a write-off of a large chunk of the life group’s deferred taxes as potential burdens that would accompany a split.