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The Hartford's new capital plan a credit positive

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Moody’s Investor Service (Moody’s) views The Hartford’s (Hartford) new capital plan and restructuring as a credit positive.

After strong shareholder pressure in February of 2012 — with the loudest voice being that of hedge fund titan and majority shareholder, John Paulson — the company was urged to split in two in order to focus on the more profitable property and casualty business.

By March, Paulson’s will was realized when the company announced that it was to divest its three life businesses and place its U.S. annuity business into runoff.

The plan, which was executed through January of this year, found Hartford selling its broker-dealer business to American International Group, Inc.; its individual life business to Prudential Financial, Inc.; its retirement plan business to Massachusetts Mutual Insurance Company and its variable annuity marketing business to Forethought.

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Paulson hoped the break-up of the company would strengthen the stock price by allowing the property and casualty business to continue growing while leaving the life and annuity business to support existing debt. The move, paved the way for Hartford to announce on Monday that is was retiring $1 billion of debt and was repurchasing $500 million in equity. Moody’s views this as a credit positive.

With the divestiture of its life operations and its U.S. annuity business in runoff, Hartford generated a $2.2 billion “capital benefit.” Moody’s is unsure how the company plans to utilize the new found capital although it cautions that Hartford has made significant progress regarding the amelioration of competing priorities of debtholders and shareholders that will support its overall credit profile.

Moody’s also said that it expected Hartford’s financial leverage to decline as a result of the debt redemptions and the equity buyback thereby improving its interest coverage, an important development as interest coverage has been a deficiency in recent years caused partly by weak consolidated earnings on its variable annuity business.