Hartford to Exit Annuity Business, Fitch Affirms Rating
March 24, 2012 by Brian Schneider
March 21, 2012
| Business Wire, Inc. |
CHICAGO–(BUSINESS WIRE)– Fitch Ratings has affirmed all Issuer Default Ratings (IDRs), debt and Insurer Financial Strength (IFS) ratings for the Hartford Financial Services Group, Inc. (HFSG) and its primary life and property/casualty insurance subsidiaries. The Rating Outlook is Stable. A full list of ratings appears at the end of this release.
Fitch’s rating action follows HFSG’s announcement today that going forward the company will focus on property/casualty commercial and consumer markets, group benefits, and mutual funds businesses. As such, individual annuity will be placed into run off and HFSG will pursue divestiture options for individual life,Woodbury Financial Servicesand retirement plans.
Fitch already maintains separate IFS ratings on HFSG’s life and property/casualty companies that reflect each businesses respective stand-alone financial profiles. HFSG’s life insurance subsidiaries maintain ‘A-‘ IFS ratings, which are two notches below the property/casualty IFS ratings of ‘A+’. This approach was implemented inFebruary 2009during the financial crisis to reflect the divergence in operating performance and balance sheet strength between the life and p/c operations.
HFSG’s strategic announcement today does not significantly change Fitch’s assessment of the life and property/casualty operating companies’ financial strength. Fitch expects 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 impact HFSG’s business position and franchise value of its ongoing businesses, Fitch considers these risks to be manageable.
Favorably, a successful execution of HFSG’s strategy could improve the company’s financial flexibility, particularly to the extent that sales proceeds increase holding company cash, fixed maturities, and short-term investments (approximately$1.6 billionatDec. 31, 2011) that could potentially be used to reduce debt. As such, Fitch would most likely consider a positive rating action on HFSG’s IDR and debt ratings before the company’s IFS ratings, reflecting an improvement in notching between insurance company ratings and holding company ratings.
Fitch’s rationale for the affirmation of HFSG’s ratings reflects the company’s overall profitable results, reasonable financial leverage and sizable levels of holding company cash and financial resources. The ratings also reflect HFSG’s lower level of recent investment related impairments and exposure to credit and investment risks, particularly in its life asset portfolio where its above-average exposure to commercial real estate-related investments is declining.
HFSG’s capital position improved in 2011, with GAAP shareholders’ equity of$22.9 billionatDec. 31, 2011, up 13% from$20.3 billionatDec. 31, 2010. HFSG’s equity credit-adjusted debt-to-total capital ratio (including accumulated other comprehensive income) remains reasonable at 21.3% at
Dec. 31, 2011, down from 24.5% atDec. 31, 2010.
HFSG’s operating earnings-based interest and preferred dividend coverage has been reduced in recent years, averaging a low 3.4x from 2008 to 2011. This reflects both constrained operating earnings and increased interest expense and preferred dividends paid on capital over the last several years, including the outstanding$1.75 billion10% junior subordinated debentures investment by Allianz SE inOct. 2008. Fitch expects the company to maintain run-rate operating earnings-based interest and preferred dividend coverage of at least 5.0x.
The ratings for Hartford Life’s operations reflect an adequate U.S. consolidated statutory capital position. While capital generation is expected to remain flat through 2012, Fitch expects consolidated U.S. life insurance to remain above the company’s 325% RBC targets for its life operations and 125% for its captive operations.
The key rating triggers that could result in an upgrade include strong and stable operating earnings in line with higher rated peers and industry averages; Fitch’s determination that investment and VA risk will not cause a material level of volatility relative to current capital; overall flat-to-favorable loss reserve development; continued improvement in the quality and liquidity of the investment portfolio; equity credit-adjusted debt to total capital maintained below 25%; and reduced volatility of insurance subsidiary capitalization.
The key rating triggers that could result in a downgrade include significant investment or operating losses, including those from the VA business line, that affect GAAP shareholders’ equity by 20% or more, or materially affect capital within the insurance subsidiaries; sizable adverse prior year loss reserve development; and equity credit-adjusted debt-to-total capital maintained above 30%. The ratings of the property/casualty subsidiaries could also be negatively affected to the extent they are needed to fund potential capital needs of the life operations.
Fitch affirms the following ratings with a Stable Outlook:
Hartford Financial Services Group, Inc.
–Long-term IDR at ‘BBB’;
–$320 million4.625% notes due 2013 at ‘BBB-‘;
–$200 million4.75% notes due 2014 at ‘BBB-‘;
–$300 million4.0% senior notes due 2015 at ‘BBB-‘;
–$200 million7.3% notes due 2015 at ‘BBB-‘;
–$300 million5.5% notes due 2016 at ‘BBB-‘;
–$499 million5.375% notes due 2017 at ‘BBB-‘;
–$500 million6.3% notes due 2018 at ‘BBB-‘;
–$500 million6% notes due 2019 at ‘BBB-‘;
–$499 million5.5% senior notes due 2020 at ‘BBB-‘;
–$298 million5.95% notes due 2036 at ‘BBB-‘;
–$299 million6.625% senior notes due 2040 at ‘BBB-‘;
–$325 million6.1% notes due 2041 at ‘BBB-‘;
–$500 million8.125% junior subordinated debentures due 2068 at ‘BB’;
–$1.75 billion10% junior subordinated debentures due 2068 at ‘BB’;
–$556 million7.25% mandatory convertible preferred stock, series F at ‘BB’;
–Short-term IDR at ‘F2’;
–Commercial paper at ‘F2’.
Hartford Life, Inc.
–Long-term IDR at ‘BBB’;
–$149 million7.65% notes due 2027 at ‘BBB-‘;
–$92 million7.375% notes due 2031 at ‘BBB-‘;
–Short-term IDR at ‘F2’.
Hartford Life Global Funding
–Secured notes program at ‘A-‘.
Hartford Life Institutional Funding
–Secured notes program at ‘A-‘.
Hartford Life and Accident Insurance Company
–IFS at ‘A-‘.
Hartford Life Insurance Company
–IFS at ‘A-‘;
–Medium-term note program at ‘BBB+’.
Hartford Life and Annuity Insurance Company
–IFS at ‘A-‘.
Members of theHartford Fire Insurance Intercompany Pool:
Hartford Fire Insurance Company
Nutmeg Insurance Company
Hartford Accident & Indemnity Company
Hartford Casualty Insurance Company
Twin City Fire Insurance Company
Pacific Insurance Company, Limited
Property and Casualty Insurance CompanyofHartford
Sentinel Insurance Company, Ltd.
Hartford Insurance Company ofIllinois
Hartford Insurance Companyof the Midwest
Hartford Underwriters Insurance Company
Hartford Insurance Companyof the Southeast
Hartford Lloyd’sInsurance Company
Trumbull Insurance Company
–IFS at ‘A+’.
Additional information is available at ‘www.fitchratings.com‘. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
–Insurance Rating Methodology (Sept. 22, 2011).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY’S PUBLIC WEBSITE ‘WWW.FITCHRATINGS.COM‘. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE ‘CODE OF CONDUCT’ SECTION OF THIS SITE.
Fitch Ratings
Primary Analyst
Brian C. Schneider, CPA, CPCU, ARe
Senior Director
+1-312-606-2321
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
R. Andrew Davidson, CFA
Senior Director
+1-312-368-3144
or
Committee Chairperson
Julie A. Burke, CPA, CFA
Managing Director
+1-312-368-3158
or
Media Relations:
Brian Bertsch, +1-212-908-0549 (New York)
brian.bertsch@fitchratings.com
Source: Fitch Ratings
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