Moody's: Hartford Plan May Take Years to Reduce Total Risk

NU Online News Service, March 26, 1:53 p.m. EDT

While Hartford’s decision to exit its life operations to focus on its property and casualty business is credit positive, the plan may take a long time to materially reduce the company’s total risk, according to Moody’s Investors Services.

In its Weekly Credit Outlook, Moody’s contends that, given the long-term nature of variable-annuity contracts, “it will take many years for the portfolio to roll off, though the run-off status of the line may lead to elevated policy redemptions by customers and somewhat speed the process of winding down the business.

Additionally, Moody’s says the current mergers and acquisitions market may complicate Hartford’s plan to sell off its individual life, retirement plans and broker/dealer businesses. Moody’s says that “M&A activity among insurance companies has been light over the past few years as companies have sought to preserve capital and reduce risk, and because low-equity valuations have made it difficult to raise funding.”

Moody’s says in the current environment, it may be difficult to execute the sales at attractive prices within the desired 12-month timeframe.

Still, Moody’s recognizes the benefits of Hartford’s overall plan. The ratings agency says, “The businesses that Hartford plans to retain generally have strong franchises and credit characteristics.

“The include a very strong personal-automobile-affinity business targeting members of AARP, a leading position in small and middle market commercial lines P&C insurance, and a leading position in group benefits.”

Moody’s also says Hartford is shutting down certain divisions with the “specific purpose of reducing its sensitivity to capital markets, which, based on our stress testing, is one of the company’s largest risks.”

The ratings agency goes on to say that Hartford’s plan is “more balanced and creditor-friendly than the plan put forward by [hedge fund manager John] Paulson, which was aggressive in terms of the amount of debt that would have been allocated to the life company, and could have resulted in a downgrade of the remaining life organization’s senior debt to below-investment-grade.”

Paulson, who had urged the company to split its life and P&C operations, offered a lukewarm reaction to the Hartford’s plan in a recent statement, saying the company’s decision to exit its life business in favor of its property and casualty operations does not address Hartford’s undervaluation due to lack of interest from investors and analysts.

He said the moves planned by Hartford will bring in cash and free capital, but, more importantly to the investor, it will strengthen the insurer’s ability to split its P&C and non-P&C businesses, which Paulson says would “create the greatest short-term and long-term shareholder value and strengthen the company.”

Paulson described the Hartford’s plan as a mere “first step.”

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