Hartford's Capital Cushion Questioned

Wall Street Journal
April 1, 2009

Hartford Financial Services Group Inc. may need to post more collateral on its book of derivatives if markets continue to deteriorate, according to an analyst and the company.

A Tuesday research report by Credit Suisse analyst Thomas Gallagher said the insurer may need to post collateral on about $400 million of credit-default swaps it has written if it suffers further downgrades to its ratings.

Credit-default swaps are private contracts that investors buy to insure against losses on debt securities or against the default of a counterparty.

The report was a response to a downgrade issued late Monday by Moody's Investors Service, which lowered Hartford's long-term senior debt rating two notches to Baa3, one level above junk, from Baa1. Moody's also cut the insurance financial strength ratings for Hartford's life insurance operating units to A3 from A1.

Mr. Gallagher cut his price target on Hartford to $10 a share from $14, citing the Moody's actions. Shares of Hartford gained 14 cents, or nearly 2%, to $7.85 Tuesday, amid a rally in the broader market. Shares are down 52% this year.

Hartford's capital cushion is threatened by weakened earnings, losses in the company's investment portfolio and its exposure to variable annuity products in the U.S. and Japan, the ratings agency said.

Hartford Chief Executive Ramani Ayer said in a statement late Monday that he disagrees with the Moody's ratings actions. "The Hartford remains well capitalized to meet our policyholder obligations," he added.

In its 2008 annual filing with the Securities and Exchange Commission, Hartford said ratings downgrades could trigger collateral calls on its derivatives, and limit its ability to purchase additional derivatives. As of now, the downgrades aren't severe enough to cause such problems.

But another downgrade is possible, according to Moody's, if the company suffers certain additional losses in its investment portfolio or certain capital declines. If the market stabilizes, Moody's said, its outlook for the company and the sector will improve.

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