FINANCIAL REGULATION TO PROTECT CONSUMER

Financial Regulation to Protect Consumer

[Name of the Institute]

Financial Regulation to Protect Consumer

Introduction

Hartford's plan, detailed yesterday by management, calls for the company to focus on property/casualty (P/C) commercial and consumer markets, group benefits, and mutual funds businesses. Individual annuity will be placed into run-off, and HFSG will pursue divestiture options for its individual life, Woodbury Financial Services, and retirement plans businesses.

The affirmation reflects our view that HFSG will continue to support its insurance subsidiaries and maintain insurance company capitalization that is consistent with the current ratings, with HFSG not expected to sell any insurance operating companies as part of any divestiture of businesses. While the plan creates execution risk and has the potential to affect HFSG's business position and the franchise value of its ongoing businesses, Fitch considers these risks to be manageable (www.bis.org).

We expect a portion of cash proceeds from any future sale of the noncore businesses to be directed toward debt reduction, thereby contributing to a delevering of the balance sheet and an improvement in the weak interest coverage ratios at the holding company. We believe management's target of a 12%-13% return on equity in continuing lines of business may be difficult to achieve in the short term due to the highly competitive P/C underwriting environment and weak investment yield outlook. However, in the long term, higher returns may be attainable as the company's strategic focus is sharpened, and if market and economic conditions improve.

Over the long term, management's decision to exit more volatile businesses such as variable annuities and individual life should help derisk the company as it becomes less vulnerable to swings in investment performance. Still, market risk will need to be managed carefully to maximize the sales price of businesses that no longer fit with the company's new strategic focus (www.imf.org).

New data shows that originations continue to grow in several categories especially to subprime credit card customers. For bank credit cards, lending to subprime customers increased 41% from 2010 to 2011. Subprime borrowing hit a four-year high in December with 1.1 million new bank credit cards issued, according to a National Consumer Credit Trends Report produced by Equifax. Subprime borrowers made up more than 46% of the market in auto financing last year, and they totalled 31% of 2011 retail credit card originations. Credit in general expanded as lenders more aggressively sought new customers.

New credit in 2011 totalled $782 billion, which was below pre-recession levels but more than 10% higher than 2009 and 2010. Consumers opened 39.9 million bank cards in 2011 a 18% more than the previous year and the highest total since 2008. Total consumer debt was $11 trillion as of last month, an 11% drop from its peak in the fourth quarter of 2008. The decline was driven by an almost 12% dip in home financing balances.

Regions Financial (RF) has finished rolling out a suite of alternative financial services, including check cashing, money transfer and expedited bill pay services, along with a prepaid card (www.riskcentre.com).

The program, called "Now Banking," is ...