Best Downgrades Hartford’s Life and P/C Ratings; Outlooks Mostly Negative

March 3, 2009

A.M. Best Co. has downgraded the financial strength ratings (FSR) to ‘A’ (Excellent) from ‘A+’ (Superior) and the issuer credit ratings (ICR) to “a+” from “aa-” of the key life/health (Hartford Life) insurance subsidiaries of The Hartford Financial Services
Group, Inc. Best also downgraded the ICR to “bbb+” from “a-” of Hartford Life, Inc., and assigned the ratings a negative outlook.

Best took the same action on The Hartford’s key P/C insurance subsidiaries, downgrading the FSR to ‘A’ (Excellent) from ‘A+’ (Superior) and the ICR to “a+” from “aa-“. However the outlook for the FSR is stable, while the outlook for the ICR is negative.

Best also downgraded the ICR to “bbb+” from “a-” of The Hartford, with a negative outlook.

Best said: “The rating actions for Hartford Life reflect the recent performance of its general account investment portfolio and retail variable annuity businesses in light of the current economic environment.

“The rating actions also reflect the potential for a material decline in the company’s risk-based capital position should the current economic climate—particularly the equity markets—continue to deteriorate.

“While operating and realized capital losses in 2008 were offset by contributions from the holding company, Hartford Life’s investment portfolio remains in a significant unrealized loss position.” Best added that it “believes that the company is exposed to statutory reserve increases associated with its variable annuity lines, particularly in light of the first quarter-to-date equity market deterioration.” Best also said it “remains concerned regarding future deferred acquisition charge (DAC) unlocks in light of current market conditions.”

Best’s analysis of Hartford’s life business didn’t end there, however. The rating agency also said it “remains concerned over the future performance of Hartford Life’s commercial mortgage investments—both whole loans and structured securities—as it expects rising defaults in response to the deepening recession.”

Specifically, Best said its main concerns are for The Hartford’s “retail, hotel and office properties within close proximity to distressed housing markets and/or labor markets where unemployment is high.”

Best said that while it “recognizes that Hartford Life continues to actively monitor its investment exposures utilizing credit protection and stress-testing them across a variety of economic scenarios, the persistently negative economic climate suggests the potential for additional asset impairments.” The company’s earnings remain “heavily correlated to the equity markets—particularly within its retail variable annuity businesses—which is likely to cause further erosion in operating earnings.

“Hartford Life’s ratings reflect its strong risk-based capital position at year-end, as well as an increased level of liquidity at the operating companies. The ratings also recognize Hartford Life’s significant market position in several life insurance and retirement savings businesses (most notably variable annuities), its diversified sources of revenues and earnings and its broad multi-channel distribution platform.

“Additionally, the ratings also incorporate the fact that The Hartford currently maintains nearly $1.5 billion of liquid assets at the holding company to support its debt service needs, as well as the near-term capital needs of its operating companies.”

Best did indicate that “The Hartford’s financial leverage (including accumulated other comprehensive income [AOCI]) and coverage ratios remain within A.M. Best’s guidelines for the current ratings, despite a recent decline in fixed charge coverage driven by lower operating earnings.”

In its analysis of Hartford’s P/C operations Best explained that its “rating actions on Hartford Insurance Pool reflect the strain placed on the overall enterprise from Hartford Life,” as well as the reduced financial flexibility of the holding company.”

In addition Best noted that “The Hartford Insurance Pool’s ratings recognize its continued supportive risk-adjusted capitalization, strong underwriting fundamentals and solid business position within the property/casualty industry.

“These strengths are somewhat offset by the significant realized and unrealized capital losses reported in 2008, $2.15 billion of dividends taken out of the property/casualty companies, including $1.0 billion to support the life/health operations, and continued softening throughout most commercial lines.

“In addition, uncertainties exist regarding the potential for continued investment losses due to volatile capital markets and the further strain that this may place on risk-adjusted capitalization.”

Best is also worried “regarding the potential for additional dividends out of the property/casualty companies should extraordinary additional capital be provided to the life/health operations.”

In explaining the stable outlook on the Hartford Insurance Pool’s FSR, Best said it reflects its “view that it is well positioned to manage challenging property/casualty market dynamics such as reduced pricing and increased competition, due to its significant depth and breadth of operations, generally conservative underwriting practices, effective utilization of multiple distribution channels and supportive risk-adjusted capitalization.”

For a complete listing of The Hartford Financial Services Group,
Inc.’s FSRs, ICRs and debt ratings go to:

Source: A.M. Best –

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