Best Affirms Hartford’s ICR – Outlook Negative; Other Ratings Affirmed

A.M. Best Co. affirmed the issuer credit rating (ICR) of “bbb+” of The Hartford Financial Services Group, Inc. with a negative outlook. The rating agency also affirmed the FSRs of ‘A’ (Excellent) and ICRs of “a+” of the key life/health insurance subsidiaries of The Hartford (collectively known as Hartford Life). The outlook for the FSRs has been revised to stable from negative, while the outlook for the ICRs is negative.

Best also affirmed the financial strength rating (FSR) of ‘A’ (Excellent) and ICRs of “a+” of the key property/casualty insurance subsidiaries of The Hartford (collectively known as the Hartford Insurance Pool). The outlook for the FSR is stable, while the outlook for the ICRs has been revised to stable from negative.

At the same time Best assigned a debt rating of “bbb-” to the recently issued $575 million 7.25 percent mandatory convertible preferred stock, converting into common stock on April 1, 2013, as well as debt ratings of “bbb+” to the recently issued $300 million 4.0 percent senior unsecured notes due 2015, $500 million 5.5 percent senior unsecured notes due 2020 and $300 million 6.625 percent senior unsecured notes due 2040. The assigned outlook is negative.

“The Hartford’s rating takes into account its recently announced plan to fully repurchase $3.4 billion of preferred shares issued under the Capital Purchase Program (CPP) through a public offering of common equity, mandatory convertible preferred stock and debt securities, as well as a modest amount of current holding company cash,” Best explained. It also said that, although it views the repayment plan as “favorable (given that CPP funds were viewed as a source of temporary capital and the strong capital market support for The Hartford has been demonstrated), the negative outlook reflects continued concerns over Hartford Life, particularly its exposure to capital market volatility, slower than expected rebounding of net earnings and continued sizeable unrealized loss position in comparison to peers. Furthermore, should losses continue at Hartford Life, capital contributions from The Hartford will likely be required to support current capital levels.”
.
Best added that, following the completion of the plan, it expects The Hartford’s financial leverage (including accumulated other comprehensive income) to improve to approximately 23 percent by year-end 2010 from 32 percent at year-end 2009,” which remains in line with Best’s expectations at current rating levels. Financial leverage calculations provide for some level of equity credit for its hybrid securities. In addition, coverage ratios should improve somewhat from a lower cost of new capital in comparison to the cost of the funds received under the CPP. However, as part of the plan, The Hartford also is issuing debt to prefund debt maturities coming up through 2012, which will result in a higher interest expense prior to the debt maturities.

Best indicated that, while “coverage ratios remained negative at year-end 2009 due to continued realized capital losses, The Hartford maintains a fair amount of liquidity with approximately $2.2 billion of cash and short-term investments at year-end 2009, access to a $500 million contingent capital facility and $1.9 billion revolving credit facility.

“The rating actions for Hartford Life recognize the ongoing exposure of its general account investment portfolio to higher credit-risk assets (such as mortgage-backed and other asset-backed securities) as well as the slow growth in operating earnings across its major segments. The actions also acknowledge the potential for a decline in Hartford Life’s risk-based capital position should the economic climate—both equity and credit markets—deteriorate. Hartford Life’s large block of in-force variable annuity liabilities remains exposed to volatile equity markets both in reduced fees and increased risk through embedded guarantees. Furthermore, while losses in 2009 were offset by significant contributions from The Hartford, Hartford Life’s investment portfolio remains in a sizeable unrealized loss position (approximately. $3 billion after tax at year-end 2009), which is outsized relative to its peers.”

Best also said it “remains concerned over the future performance of Hartford Life’s commercial mortgage investments—both whole loans and structured securities. A.M. Best recognizes that Hartford Life continues to actively monitor its investment exposures utilizing credit protection and stress-testing across a variety of economic scenarios; however, the ongoing uncertainty of the economic climate suggests the potential for additional asset impairments.”

Best noted that Hartford Life’s earnings remain heavily correlated to the equity markets—particularly within its retail annuity business—and will likely take some time to return to early 2008 levels. In addition, Best said it “is monitoring the benefit to be derived from Hartford Life’s newly launched de-risked variable annuity product.

“Hartford Life’s ratings reflect its risk-based capital position at year-end 2009, which remains in line with guidelines for the current rating level, as well as increased operating company liquidity due to improving market conditions and portfolio actions taken to reduce risk. The ratings also recognize Hartford Life’s significant market position in several life insurance and retirement savings businesses. A.M. Best also notes Hartford Life’s recent drop in rankings in the variable annuity market. However, Hartford Life continues to have diversified sources of earnings and a broad multi-channel distribution platform.”

Turning to Hartford’s P/C operations, Best indicated that the “ratings of the Hartford Insurance Pool reflect its solid risk-adjusted capitalization, strong underwriting fundamentals, continued core operating profitability and excellent business position within the property/casualty industry.

“These strengths are somewhat offset by the strain placed on the Hartford Insurance Pool from Hartford Life, as evidenced by the need for prior capital contributions, as well as significant realized and unrealized investment losses reported in 2008 and 2009, above-average exposure to asset classes related to commercial real estate in comparison to the overall property/casualty industry and continued soft market conditions throughout most commercial lines. Furthermore, additional dividends out of the property/casualty companies may be needed to support the life operations should capital markets experience another decline and investment losses worsen.”

Nevertheless, best said that the stable outlook on the Hartford Insurance Pool’s ratings acknowledges its view that it is “well positioned to manage challenging property/casualty market dynamics such as pricing pressures and increased competition, due to its significant depth and breadth of operations, generally conservative underwriting practices, effective utilization of multiple distribution channels and strengthened risk-adjusted capitalization.”

For a complete listing of The Hartford Financial Services Group, Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, go to: www.ambest.com/press/032403hartford.pdf.

Source: A.M. Best – www.ambest.com