Moody's Investors Service has affirmed the credit ratings of The Hartford Financial Services Group, Inc. (NYSE: HIG; senior debt rated Baa3) and its key operating subsidiaries following the company's announcement that it intends to shift its focus to its property and casualty (P&C) insurance, group benefits, and mutual fund businesses.
As part of this, the company will place its US annuity business into run off, and will pursue a sale of its individual life, retirement plans and Woodbury Financial Services businesses. Moody's changed the outlook on Hartford Life & Annuity Insurance Company (insurance financial strength (IFS) at A3), which contains the majority of the group's individual annuity business, to negative from stable. The outlook on The Hartford's other life subsidiaries, P&C subsidiaries and holding company remains stable.
RATINGS RATIONALE Commenting on the ratings affirmation, Moody's analyst Paul Bauer said, "Overall we think the shift in focus towards The Hartford's stronger property and casualty operations and decision to shut down its highest risk line of business is credit positive; however, given the nature of variable annuity contracts, it will nevertheless take a long time to materially reduce total risk."
P&C Insurance Group The A2 IFS ratings of the members of The Hartford's P&C Insurance Group are based on the group's significant market presence, strong brand name recognition, excellent product and geographic diversification, historically conservative underwriting standards, and reasonably positioned investment portfolio. These strengths are offset by exposure to catastrophes, pressure on earnings from a continued highly competitive P&C insurance market, risk of adverse development on run-off reserves which include significant asbestos and environmental liabilities, and the continued implied support of the group's affiliated life operations even as these operations are de-emphasized.
Factors that could result in an upgrade of the P&C subsidiaries ratings include: a reduction in the long term risk associated with the group's affiliated life operation; long term reduction in gross underwriting leverage (e.g. less than 3.5x, excluding affiliated investments from capital); or a resolution of the company's asbestos liabilities. Factors that could result in a downgrade include: further deterioration in the stand-alone credit profile of the life companies; excessive dividends from the P&C operations to support the life companies; investment losses in excess of $750 million (in a 12 month period); earnings volatility from runoff operations including A&E liabilities; gross underwriting leverage above 4x; or annual catastrophe losses resulting in shareholders' equity declining 10% or more.
Life Insurance Group According to Moody's analyst Scott Robinson, "The ratings' affirmation reflects the life group's strong market position in group insurance, the company's recognizable brand name, and the implicit support of the ultimate parent company." The negative outlook on Hartford Life & Annuity Company (ILA) reflects the runoff status of the variable annuity business and its highly volatile risk profile. Commenting on the life business, Moody's noted that there remains strong ties between the life and property and casualty businesses, and the rating agency expects that HIG would provide support to the life group in a stress scenario.
"From a credit perspective, the savings from exiting the individual annuity business are offset by the loss of income and diversification from exiting other business lines," said Mr. Robinson. According to Moody's, Hartford's large legacy variable annuity operations limit the diversification benefits of other life products. By scaling back its non-variable annuity operations, Hartford becomes more exposed to the legacy block. As Hartford was not selling a meaningful amount of new variable annuities, the recent announcement of placing the variable annuity into runoff does little to reduce this risk in the short term. The announcement may also have an adverse impact on future sales and persistency in retained life business lines, namely Group Benefits and Mutual Funds.
According to the rating agency, since the outlook on ILA is negative, and given its runoff status, upward rating movement over the near to medium term is unlikely. That said, the following factors could place upward pressure on the ratings of the life group: minimizing the volatility associated with stress scenarios for the legacy block of variable annuities; and statutory earnings more in line with GAAP earnings (adjusting for movement in hedges). To the contrary, the following factors could lead to a downgrade of the life group's ratings: unanticipated regulatory capital volatility and/or NAIC RBC ratio levels below 275%; and annual credit impairments in excess of $1.0 billion pre-tax and pre-DAC in the life companies.
Holding Company The company's debt ratings currently are primarily based on support from its P&C operating subsidiaries. Moody's does not consider the organization's life insurance operating subsidiaries to be a supporter of the parent over the medium term due to a continued potential for capital volatility at the life operation under a stressed investment market scenario.
Factors that could result in an upgrade of The Hartford's debt ratings include an upgrade of the financial strength ratings of the company's lead operating P&C or life companies, or sustained consolidated earnings coverage of interest above 6x. Conversely, factors that could result in a downgrade of the company's debt ratings include a downgrade of the financial strength ratings of the company's lead operating P&C or life companies, financial leverage greater than 40%, or earnings coverage of interest below 4x
The Hartford is an insurance and financial services organization that offers a wide variety of property and casualty as well as life and annuity insurance products. The company reported total revenue of $21.9 billion and net income of $662 million for 2011. Shareholders' equity was $22.9 billion at December 31, 2011.
The principal methodologies used in this rating were Moody's Global Rating Methodology for Property and Casualty Insurers published in May 2010, and Moody's Global Rating Methodology for Life Insurers published in May 2010.