Ratings Agencies Respond to The Hartford’s Plan to Exit Life Insurance

In response to Hartford Financial Services Group Inc.’s planned exit from some of its life insurance business, Standard & Poor’s Rating Services said it is downgrading the subsidiaries previously aggregated under Hartford Life, and assigning individual ratings and outlooks to each legal entity.

S&P also said it is downgrading to ‘BBB-‘ the $240 million senior debt issued by Hartford Life Inc.

It affirmed its ratings on the holding company, the holding company debt, and the property/casualty subsidiaries represented by the Hartford Fire group.

In its response, Moody’s Investors Service affirmed the credit ratings of The Hartford Financial Services Group Inc. and its key operating subsidiaries.

Moody’s changed the outlook on Hartford Life & Annuity Insurance Co. (insurance financial strength (IFS) at A3), which contains the majority of the group’s individual annuity business, to negative from stable. The outlook on The Hartford’s other life subsidiaries, P/C subsidiaries and holding company remains stable, according to Moody’s.

S&P lowered its counterparty credit and insurer financial strength ratings on most of the subsidiaries of Hartford Financial Services Group Inc. previously considered aggregated under Hartford Life: Hartford Life and Accident Insurance Co. (HLA), Hartford Life Insurance Co. (HLIC), Hartford Life and Annuity Insurance Co. (HLAI), Hartford International Life Reassurance Corp. (HILRE).

At the same time, S&P affirmed its ‘BBB/A-2’ ratings on HIG itself and those on its holding company debt, and its P/C insurance operating subsidiaries.

The ‘A-‘ rating on American Maturity Life Insurance Co. (AML) was affirmed by SP. The outlook on HLAI is negative, and the outlook on all other Hartford entities is stable.

S&P said its rating actions reflect a change in its view of Hartford Life’s group status, given that its ultimate parent, HIG, intends to withdraw sales of individual annuities while seeking to sell its individual life and retirement plan businesses. The revised ratings are based on each subsidiaries’ stand-alone credit characteristics and the reduced implied support from the parent, S&P said.

S&P said it expects HIG 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 group benefits business (group life and disability insurance) remains a component of the commercial market, for which Hartford has indicated continued focus and commitment.

Hartford will discontinue new sales of domestic individual annuities on April 27, 2012, putting that business into run-off. The company will also initiate sales processes for its individual life and retirement plans businesses, as well as for Woodbury Financial Services, Hartford’s independent broker-dealer. For now, these businesses remain part of the consolidated group and retain their access to the strong consolidated capital resources and liquidity of the consolidated company, according to S&P.

HLA is HIG’s organizational lead life insurance operating company, and predominantly underwrites the group benefits book of business. S&P said the downgrade to ‘A-‘ from ‘A’ “reflects its stand-alone credit characteristics of higher incidence levels relative to peers and depressed earnings recently experienced in group benefits, offset by the business’ strong competitive position.

HLIC, a subsidiary of HLA, is the predominant writer of HIG’s individual retirement plans, fixed annuities, and institutional investment products. The downgrade to ‘A-‘ from ‘A’ reflects the uncertainty of earnings under current market conditions, offset by HLIC’s strong competitive position and good capitalization, according to S&P analysts.

HLAI, a subsidiary of HLIC, contains most of the legacy U.S. variable-annuity block that is to be placed into run-off. HLAI also writes individual life business, which we expect Hartford to divest. S&P said the downgrade to ‘BBB+’ from ‘A’ and negative outlook reflects our opinion that HLAI’s capitalization will fluctuate as a result of the equity markets’ effect on the variable-annuity liabilities, and its reliance on the effectiveness of a large variable-annuity hedging program.

HILRE, a subsidiary of HLIC, reinsures Hartford’s institutional private placement business. The downgrade to ‘A-‘ from ‘A’ reflects management’s reduced focus on the life insurance business.

AML contains the legacy block of life insurance business written to AARP members. We affirmed the ‘A-‘ rating on AML. We acknowledge that Hartford remains committed to AARP members for P/C operations.

The stable outlook on HIG 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.” S&p said it 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 HIG maintains its favorable P/C business profile and manages the overall enterprise’s risk effectively.”

S&P said it could take negative rating action on HIG if the P/C operation’s competitive position weakens, equity markets decline sharply, and ongoing operating results (excluding catastrophe losses) deteriorate, taking HIG’s fixed-charge coverage below 4x.

Also, S&P said it could take further negative rating action on the life subsidiaries if other economic pressures force capitalization below the strong levels expected for the rating. “We see little prospect of positive rating action, given that the businesses in the life subsidiaries are likely to be sold or restructured,” S&P said.

Commenting on his firm’s ratings affirmation, Moody’s analyst Paul Bauer welcomed The Hartford’s move overall.

“Overall we think the shift in focus towards The Hartford’s stronger property and casualty operations and decision to shut down its highest risk line of business is credit positive; however, given the nature of variable annuity contracts, it will nevertheless take a long time to materially reduce total risk,” Bauer said.

Moody’s said its A2 IFS 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.” Moody’s said 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 Moody’s affirmation of the life insurance group ratings, Moody’s analyst Scott Robinson sad it 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.”

The negative outlook on Hartford Life & Annuity Co. (ILA) reflects the runoff status of the variable annuity business and its highly volatile risk profile, Robinson said.

Moody’s noted that there remains strong ties between the life and P/C businesses, and the rating agency said it expects that HIG would provide support to the life group in a stress scenario.

“From a credit perspective, the savings from exiting the individual annuity business are offset by the loss of income and diversification from exiting other business lines,” said Robinson.

According to Moody’s, Hartford’s large legacy variable annuity operations limit the diversification benefits of other life products. By scaling back its non-variable annuity operations, Hartford “becomes more exposed to the legacy block.” As Hartford was not selling a meaningful amount of new variable annuities, the recent announcement of placing the variable annuity into runoff does little to reduce this risk in the short term, the ratings agency said.

The announcement may also have an adverse impact on future sales and persistency in retained life business lines, namely group benefits and mutual funds, Moody’s cautioned.

Moody’s said the holding company’s debt ratings currently are primarily based on support from its P/C operating subsidiaries. Moody’s said it does not consider the organization’s life insurance operating subsidiaries to be a supporter of the parent over the medium term due to a continued potential for capital volatility at the life operation under a stressed investment market scenario.