If the Hartford decides to split its P&C and Life operations, as proposed by a hedge-fund manager who owns an 8.4 percent stake in the company, the P&C operations would have a more favorable credit outlook than would the Life operations alone, according to Moody's Investors Service.
In its Weekly Credit Outlook, Moody's notes that the Life group depends on the P&C group to bolster its credit support and boost its ratings.
Moody's says that if the break were to happen, discrepancies between the two units would be publicly reported—and the Life group's weaker status would be highlighted.
The P&C operation is healthier than the Life operation in terms of its business and financial profile, the ratings agency argues, which suggests a stand-alone Life group would struggle to steady wobbly legs after the support it has grown accustomed to from the P&C group is removed.
In a separate analysis, Fitch Ratings also highlights the support the P&C companies have given to the Life operations, although Fitch does not go as far as Moody's in assigning positive or negative credit implications to either group in the event of a split.
"While we do not expect the P&C insurance operations will be needed to fund potential future capital needs of the Life companies, the P&C companies continue to have the ability to provide such support," Fitch says. "This could serve as a particularly valuable source of financial flexibility should the Life operations require an additional capital boost."
Fitch adds, "Any analysis of a proposed split would consider the allocation of holding-company debt between the Life and P&C companies and the capitalization and leverage metrics of the individual stand-alone entities."
If the split occurred along the parameters advocated by hedge-fund manager John Paulson, the overall debt allocation would be close to 40 percent ($2.5 billion) to the P&C group and 60 percent ($4.3 billion) to the Life group, Moody's says.
The ratings agency says debt supported by a separate Life group would most likely be rated lower than the existing debt today. That could have serious adverse effects on the hypothetical separate Life group due to the confidence-sensitive nature of the Life business, Moody's contends.
The agency notes that having below-investment-grade debt ratings could potentially have ripple effects that are detrimental to achieving sales and retaining business.
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