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.
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 Services and 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 in February 2009 during 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 billion at Dec. 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 billion at Dec. 31, 2011, up 13% from $20.3 billion at Dec. 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% at Dec. 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 billion 10% junior subordinated debentures investment by Allianz SE in Oct. 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 million 4.625% notes due 2013 at ‘BBB-’;
- $200 million 4.75% notes due 2014 at ‘BBB-’;
- $300 million 4.0% senior notes due 2015 at ‘BBB-’;
- $200 million 7.3% notes due 2015 at ‘BBB-’;
- $300 million 5.5% notes due 2016 at ‘BBB-’;
- $499 million 5.375% notes due 2017 at ‘BBB-’;
- $500 million 6.3% notes due 2018 at ‘BBB-’;
- $500 million 6% notes due 2019 at ‘BBB-’;
- $499 million 5.5% senior notes due 2020 at ‘BBB-’;
- $298 million 5.95% notes due 2036 at ‘BBB-’;
- $299 million 6.625% senior notes due 2040 at ‘BBB-’;
- $325 million 6.1% notes due 2041 at ‘BBB-’;
- $500 million 8.125% junior subordinated debentures due 2068 at ‘BB’;
- $1.75 billion 10% junior subordinated debentures due 2068 at ‘BB’;
- $556 million 7.25% mandatory convertible preferred stock, series F at ‘BB’;
- Short-term IDR at ‘F2′;
- Commercial paper at ‘F2′.