The industry is abuzz with reactions after yesterday’s news of The Hartford’s decision to place its individual annuity business into run off and pursue divestiture options for individual life, Woodbury Financial Services and retirement plans.
Paulson & Co. Inc., an investment management firm run by hedge fund manager John Paulson—who publicly demanded in February that the Hartford Financial Services Group Inc. (HFSG) break itself into two companies—released a statement that made it clear that the company's immediate actions do not address what Paulson called the carrier’s "undervaluation" issues:
"We support today's actions, not as a conclusion of the strategic review, but as a first step in creating a clear delineation between The Hartford's P&C and non-P&C businesses.
We are pleased that The Hartford is taking steps to focus on core operations and to divest or discontinue non-core and capital-intensive businesses. We believe that putting the variable annuity business in runoff and selling the non-core individual life, retirement plans and broker dealer businesses will raise cash, free up capital, permit de-leveraging and increase its financial flexibility. Successful execution of these plans will strengthen the Company's ability to separate the P&C and non-P&C businesses in the future, which we continue to believe would create the greatest short-term and long-term shareholder value and strengthen the company.
While we appreciate the extensive work of The Hartford's board and management, we do not believe the positive actions announced today address the main problem with The Hartford's undervaluation: the lack of interest from P&C analysts and P&C investors in The Hartford's best-in-class P&C business due to its affiliation with unrelated, low-return and complex businesses. We do not believe today's actions will materially increase P&C investor interest in The Hartford."
Statements from all four rating agencies set a slightly more positive tone for the insurer. Fitch Ratings affirmed all ratings for HFSG and its primary life and P&C subsidiaries. Their rating outlook is stable. Moody’s affirmed the company’s P&C subsidiaries’ and majority of life insurance subsidiaries’ stable ratings. Standard & Poor’s affirmed ratings on HFSG itself and those on its holding company debt, and its P&C subsidiaries.
However, HFSG’s life operation received different responses from the agencies. A.M. Best placed under review with negative implications the financial strength rating of A (Excellent) and issuer credit ratings of “a+” of the Hartford’s key life/health subsidiaries. Moody's changed the outlook on Hartford Life & Annuity Insurance Company’s insurance financial strength rating at A3 to negative from stable.
It’s evident that all four rating agencies are keeping their eyes closely affixed to The Hartford’s P&C and non-P&C operations:
A.M. Best placed under review with developing implications the issuer credit rating of “bbb+” and the debt ratings of HFSG as well as the ICRs of “a+” and the financial strength rating of A (excellent) of the Hartford Insurance Pool (the Pool).
At the same time, A.M. Best placed under review with negative implications the financial strength rating of A and issuer credit ratings of “a+” of the Hartford’s key life/health insurance subsidiaries (collectively known as Hartford Life).
Additionally, notes A.M. Best, the Hartford’s revised strategy will cause Hartford Life’s business profile to contract over time and be limited to the ongoing Group Benefits and Mutual Funds businesses, as well as declining in-force blocks of fixed and variable annuities. This will result in reduced life/health revenues and earnings available to the enterprise.
The “under review with negative implications” status recognizes the potential for changes in Hartford Life’s ratings and outlook based on the final outcome of management’s intended restructuring.
A.M. Best noted that the rating actions for the Hartford and the Pool acknowledge the potential for successful implementation of the restructuring plan in line with management’s expectations to result in favorable movement on the ratings. The increase in financial flexibility at the holding company, the expected reductions in financial leverage and the benefits of a more focused management strategy centered around the company’s property/casualty business are viewed positively by A.M. Best, and—if the plan is achieved as expected—would likely result in favorable rating action on these entities.
Fitch affirmed all issuer default ratings debt and insurer financial strength ratings for the Hartford Financial Services Group Inc. (HFSG) and its primary life and P&C subsidiaries. The rating outlook is stable.
Fitch maintains separate IFS ratings on HFSG's life and P&C companies that reflect each businesses respective stand-alone financial profiles. HFSG's life insurance subsidiaries maintain 'A-' insurer financial strength ratings, which are two notches below the P&C insurer financial strength ratings of 'A+'.
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.
The ratings for Hartford Life's operations reflect an adequate U.S. consolidated statutory capital position, notes Fitch. While capital generation is expected to remain flat through 2012, Fitch expects consolidated U.S. life insurance to remain above the company's 325-percent RBC targets for its life operations and 125 percent 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; the triggers that could result in a downgrade include significant investment or operating losses, concluded Fitch.
Moody’s affirmed the credit ratings of HFSG and its key operating subsidiaries and changed the outlook on Hartford Life & Annuity Insurance Company—containing the majority of the group's individual annuity business—insurance financial strength at A3, to negative from stable. The outlook on The Hartford's other life subsidiaries, P&C subsidiaries and holding company remains stable.
Moody’s A2 insurance financial strength 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.
As for the life group, 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, Moody’s says. 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.
S&P lowered its counterparty credit and insurer financial strength ratings on most of the subsidiaries of HFSG previously considered aggregated under Hartford Life--Hartford Life and Accident Insurance Co., Hartford Life Insurance Co., Hartford Life and Annuity Insurance Co. (HLAI), Hartford International Life Reassurance Corp.
S&P affirmed the 'BBB/A-2' ratings on HFSG itself and those on its holding company debt, and its P&C insurance operating subsidiaries. We also affirmed the 'A-' rating on American Maturity Life Insurance Co. The outlook on HLAI is negative, and the outlook on all other Hartford entities is stable.
S&P expects HFSG to remain highly committed to its consumer and commercial segments, where it enjoys leading market shares in the small commercial market segment and a long-term affinity relationship with AARP.
The stable outlook on HFSG and the Hartford P&C business reflects S&P’s opinion that the group will sustain its strong competitive position and business profile in the consumer and commercial segments. The rating agency could raise the ratings on the holding company and the P&C operations if the group successfully executes its new strategic plan, thus reducing its leverage and market risk throughout the organization, and if HFSG maintains its favorable P&C business profile and manages the overall enterprise's risk effectively. However, S&P could take negative rating action on HFSG if the P&C operation's competitive position weakens, equity markets decline sharply, and ongoing operating results (excluding catastrophe losses) deteriorate, taking HFSG’s fixed-charge coverage below 4x.
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