The Hartford Hit with Ratings Downgrade

The Hartford Financial Services Group received another blow in what could be considered a disappointing couple months. The Hartford Financial Services Inc. reported, at the end of April, a first-quarter net loss of $1.21 billion. And today, Fitch Ratings downgraded Hartford Financial Services’ issuer default rating to BBB from BBB+ and senior debt to BBB- from BBB.

Fitch also downgraded the insurer financial strength (IFS) ratings of Hartford Financial Services Group’s primary life insurance subsidiaries to A- from A. In addition, Fitch has affirmed the A+ IFS ratings of Hartford Financial Services Group’s property/casualty insurance subsidiaries. The rating outlook is negative.

The downgrade reflects Fitch's updated view of Hartford's primary life insurance subsidiaries in light of continued challenges in the first quarter and public statements by management concerning the suspension of its annuity sales in various international operations and the exploration of options concerning its institutional markets division.

The insurer announced on May 1 that its ending sales of variable annuities in Japan and the U.K., and canceling plans to sell annuities in Germany to cut costs, after the company posted its third consecutive quarterly loss. Faced with making up losses in equity-linked variable annuities under income guarantee riders, CEO Ramani Ayer said during a May 1 conference call with equity analysts that the company will change its approach to the variable annuities.

"The risk-reward ratio in the VA market just doesn't make any sense," he said, "VA will be a lower percentage of the total sales outlook at least for the foreseeable future. Ayer added the company is reorganizing to reduce costs, and "is pursuing options for its Institutional Markets Solutions business with the goals of preserving capital and reducing risks."

Fitch’s rating reflects a more modest degree of potential support from Hartford Financial Services Group’s property/casualty operations than was previously incorporated into the ratings, and is a step closer to a stand-alone rating for the life insurance subsidiaries.

Relative to the property/casualty operation, Fitch believes that the life operation holds the majority of risky assets, and has greater earnings volatility due to variable annuity benefit guarantees, while the property/casualty operation has continued to produce favorable underwriting results. Consequently, the primary life insurance subsidiaries now maintain IFS ratings two notches below the property/casualty operating subsidiaries. Additional factors include reduced estimates of GAAP profitability in its life operations going forward and continued declines in capitalization in the first quarter of 2009 that have increased financial leverage.

The Hartford Financial Services Group’s exposure to the currently volatile credit and equity market conditions continue to negatively affect the organization's capital position and earnings outlook, particularly in its variable annuity business, Fitch says. If the company suffers additional significant losses, or experiences further declines in capital, the ratings could be lowered.