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Following last week’s announcement of The Hartford Financial Services Group Inc.’s (HIG - Analyst Report) definitive agreement to divest its Individual Life Insurance business to Prudential Financial Inc. (PRU - Analyst Report), credit rating agency A.M. Best Co. has placed the ratings of the former and its subsidiaries under review with developing implications. The rating agency is going to keep an eye on the company’s activities, including any progress in its restructuring plans and utilization of cash generated from divestitures, among other potential capital plans. Any revision in the ratings will depend on these activities.

Meanwhile, Reuters revealed that Standard & Poor’s (S&P) Rating Services affirmed its BBB/Stable/A-2 ratings on Hartford. This rating agency believes that the recent business divestitures will be beneficial for the holding company and the proceeds generated from these could be used by the company to cut down debt and strengthen capital base.

Another rating agency, Fitch Ratings also affirmed its long-term issuer default rating (IDR) of Hartford at “BBB+”, short-term IDR at “F2” and debt ratings on all outstanding senior notes of the company at “BBB” and junior subordinated debentures and series F mandatory convertible preferred stock at “BB+”. The rating agency also affirmed the insurer financial strength rating (IFS) of the company’s subsidiaries at “A-” as well as their long-term IDR and debt ratings. All these ratings carry a stable outlook.

Fitch appreciates Hartford’s swift action following its initial announcement about its decision to divest its Individual Life and Retirement Plans segments as well as the Woodbury Financial Services unit in March 2012. The company not only avoided a delay in signing agreements, but also managed to get a satisfactory price for the divestitures. The rating agency feared that a delay would have damaged the market position of the to-be-divested businesses, leading to distressed sale at low prices.

Moreover, Fitch believes that the divestiture of the variable annuities and individual life businesses will reduce volatility risk. It expects the financial leverage ratio of Hartford to remain at or lower than 25% after the culmination of the announced divestitures. Additionally, run-rate operating earnings-based interest and preferred dividend coverage is projected to rise to a minimum of 5.0x. Meanwhile, risk-based capital (RBC) is anticipated to stay above the target of 325% for life operations and 125% for variable annuities captive operations.

The stable outlook assigned by Fitch indicates low possibility of a revision in the near term. However, the maintenance of a financial leverage ratio at around 20%, holding company cash of over $1 billion and interest and preferred dividend coverage at a minimum of 6x, could lead to an upgrade in the debt ratings of Hartford. Meanwhile, Fitch does not anticipate an upward revision in the ratings of the company’s life and property/casualty insurance subsidiaries.

On the other hand, a rating downgrade by Fitch is possible if Hartford fails to implement the strategic plans, its 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 subsidiaries’ shareholders' equity or statutory capital.

Hartford had announced the divestiture to Prudential Financial last week. The company will receive $615 million for the divestiture, which will be formulated as a reinsurance transaction. The transaction is expected to culminate in the initial months of next year. However, it is subject to regulatory approval and other customary closing conditions. Hartford expects the transaction to boost its net statutory capital by $1.5 billion due to the impact of enhanced statutory surplus and a reduction in the risk-based capital requirement.

Currently, Hartford carries a short-term Zacks #3 Rank (Hold). Also, we maintain our long-term ‘Neutral’ recommendation on the stock.

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