NU Online News Service, Feb. 21, 2:09 p.m.EST

If Hartford Financial were to split in two the outcome wouldhave positive credit implications for the property and casualty(P&C) insurance group and negative credit implications for thelife insurance group. The main reason for the difference, accordingto Moody's Weekly Credit Outlook is thatthe life group depends on the P&C group to bolster its creditsupport and elevate its ratings.

The proposal to tear Hartford Financial asunder bubbled to thesurface 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 andsubsequently issued a letter calling for the split.

If the break were to happen, discrepancies between the two unitswould be publicly highlighted and the life group's weaker statuswould be showcased.

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

An overall debt allocation were the split to happen along theparameters Paulson is advocating, would break down with an overalldebt allocation of close to 40% ($2.5 billion) to the P&C groupand 60% ($4.3 billion to the life group. Paulson hopes that thiswill result in higher equity for the sum of the parts thencurrently exists as a whole along with a comprehensivereduction in complexity.

Debt supported by a separate life insurance group would mostlikely be rated lower than the existing debt today according toMoody's. That could have serious adverse effects on thehypothetical separate life group due to the confidence-sensitivenature of the life insurance business. Having below investmentgrade debt ratings could potentially have ripple effects that aredetrimental to achieving sales and retaining business.

The life group's credit quality as a standalone is derived fromone of its core businesses, variable annuities. The risk involvedin its legacy variable annuity business would have negativerepercussions for the group without being boosted by the P&Cgroup.

The Hartford's management team have expressed their concernswhen it comes to discussing the possibility of a split. They fearlosing competitive credit ratings, obtaining regulatory approval,the expense of bondholder waivers, intercompany guarantees and awrite-off of a large chunk of the life group's deferred taxes aspotential burdens that would accompany a split.