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On Tuesday, Fitch raised the long-term issuer default rating (IDR) of Hartford Financial Services Group Inc. ( HIG - Analyst Report ) to “BBB+” from “BBB.” The rating agency also raised the debt ratings on all outstanding senior notes of the company to “BBB” from “BBB-” and junior subordinated debentures and series F mandatory convertible preferred stock to “BB+” from “BB.”
Additionally, Fitch reaffirmed the short-term IDR of Hartford at “F2” and insurer financial strength rating (IFS) of the company’s subsidiaries at “A-.” Moreover, the rating agency assigned a stable outlook to all the ratings.
However, on maintaining a financial leverage ratio at around 20%, holding company cash of over $1 billion and interest preferred dividend coverage at 6x, an upgrade in the debt ratings of the company is likely.
On the other hand, a rating downgrade is possible if the company’s financial leverage ratio stays above 25%, the holding company cash balance deteriorates significantly, interest and preferred dividend coverage does not improve or the company suffers substantial investment or operating losses, thereby impacting the shareholders' equity or statutory capital.
Hartford’s strong financial results, satisfactory financial leverage, considerable cash balance and limited credit and investment risks were primarily responsible for the rating upgrade. The ratings also reflect the impact of the recent structural changes in the company.
In March 2012, Hartford announced its decision to divest its Individual Life and Retirement Plans segments along with Woodbury Financial Services. The company also decided to terminate its Individual Annuity business, which has consequently been included in the Runoff Operations division effective second quarter of 2012. The structural changes are intended to increase Hartford’s focus on its property and casualty (P&C), Mutual Funds and Group Benefits segments.
Fitch considers the execution risk associated with the changes to be manageable, while a successful execution is expected to be beneficial for Hartford as it will not only boost the cash balance but also enhance financial flexibility. Increased hedging of the Japanese variable annuity and satisfactory equity credit adjusted financial leverage ratio are other positives for the company.
However, earnings growth in the medium term is expected to be adversely affected by higher hedging costs and compressed margins in the Runoff Annuity and non-core Life Insurance businesses. Loss ratios in the Group benefits business are also expected to continue growing, while income from the P&C business is expected to decline due to price competition.
Fitch considers Hartford’s subsidiaries -- Hartford Life & Accident Insurance Co. and Hartford Life Insurance Co. -- to be strategically “Important” for the company as it contributes a majority of its life insurance business. However, Hartford Life & Annuity Insurance Co. is placed in the “Limited Importance” strategic category as the Variable Annuity business constitutes a majority of this unit.
Hartford, which competes with insurance companies like American International Group ( AIG - Analyst Report ) and MetLife Inc. ( MET - Analyst Report ) , is one of the largest multi-line insurance and investment companies in the U.S. Currently, the shares of the company carry a Zacks #3 Rank (short-term Hold rating). Considering the fundamentals, we maintain a long-term Neutral recommendation on Hartford.
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