TEXT-Fitch ups Hartford's sr. debt to 'BBB'

Tue May 15, 2012 9:50am EDT

Fitch's ratings of HFSG continue to reflect the company's overall profitable results, reasonable financial leverage and sizable levels of holding company cash and financial resources. The ratings also consider HFSG's lower level of recent investment related impairments and exposure to credit and investment risks.

Furthermore, the rating actions take into consideration execution risk associated with HFSG's strategic plan to focus on its property/casualty, group benefits, and mutual funds businesses, with the company placing U.S. individual annuity into run-off, in addition to Japan annuity which has already been placed in run-off, and seeking to divest of its individual life, retirement plans and Woodbury Financial Services businesses.

While the strategic plan has the potential to impact the business position and franchise value of HFSG's ongoing businesses as the company manages its legacy units, Fitch considers these risks to be manageable. Favorably, a successful execution of HFSG's strategy should improve the company's financial flexibility, with sales proceeds increasing holding company cash that could potentially be used to reduce debt.

HFSG's overall profitability thus far in 2012 and in full-year 2011 and 2010 is viewed favorably by Fitch. However, intermediate-term growth in earnings will be challenged by low margins and increased hedging costs in its run-off annuity and non-core life insurance businesses, and continued elevated loss ratios in the group benefits operation. Fitch also views positively HFSG's enhanced level of hedging its closed block of Japan variable annuity (VA) business with income and death benefit guarantees. HFSG's run-rate property/casualty underwriting results, while favorable compared to the industry, are likely to deteriorate in the near term, given the continued competitive market pricing environment across most lines.

HFSG's equity credit adjusted financial leverage ratio (excluding accumulated other comprehensive income on fixed maturities) remains reasonable at 24.2% at March 31, 2012 compared to 23.8% at Dec. 31, 2011 (including an approximately $1.4 billion writedown of deferred acquisition costs following the retrospective adoption on Jan. 1, 2012 of the new FASB standard). Fitch expects that taking into account the recent refinancing of the Allianz SE investment, remaining stock repurchase program, and successful execution of the company's strategic initiatives, HFSG's equity credit-adjusted financial leverage will remain materially unchanged.

HFSG's operating earnings-based interest and preferred dividend coverage has been reduced in recent years, averaging a low 3.4x from 2008 to 2011. This reflects both constrained operating earnings and increased interest expense, and preferred dividends paid on capital over the last several years, including the recently redeemed 10% junior subordinated debentures investment by Allianz SE. Fitch expects that the company's run-rate operating earnings-based interest and preferred dividend coverage will improve to at least 5.0x.

HFSG maintains financial flexibility with approximately $1.5 billion in holding company cash, fixed maturities, and short-term investments at March 31, 2012, which provides flexibility for funding potential capital requirements in adverse markets. In addition, the company has a $1.75 billion revolving credit facility and a $500 million contingent capital facility.

Fitch expects that HFSG will continue to support its insurance subsidiaries and in the intermediate term 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. The ratings for Hartford Life's operations reflect an adequate U.S. consolidated statutory capital position. While capital generation is expected to remain flat through 2012, Fitch expects consolidated U.S. life insurance to remain above the company's 325% RBC targets for its life operations and 125% for its VA captive operations.

Fitch considers the primary life insurance subsidiaries to be non-core as the life businesses are not considered to be a material strategic focus of the company. As such, the life insurance subsidiaries continue to receive an IFS rating of 'A-', reflecting their own combined financial profile. Fitch designates the strategic category of Hartford Life & Accident Insurance Co. (HLA) and Hartford Life Insurance Co. (HLIC) as Important, as these companies write the majority of the ongoing life business (mainly group benefits) as well as businesses that the company is continuing to write, but is pursuing divestiture options. The strategic category for Hartford Life & Annuity Insurance Co. (HLAIC) is Limited Importance as the majority of its business is run-off variable annuity business.

The key rating triggers that could result in an upgrade to HFSG's debt ratings include a financial leverage ratio maintained near 20%, maintenance of at least $1 billion of holding company cash and interest and preferred dividend coverage of at least 6x. Fitch considers a rating upgrade to be unlikely in the near term for HFSG's life and property/casualty insurance subsidiaries. Over the long term, Fitch could consider an upgrade to the extent that the operating subsidiaries demonstrate favorable profitability and capitalization metrics following a successful execution of the company's strategic plan.

The key rating triggers that could result in a downgrade include significant investment or operating losses that materially impact GAAP shareholders' equity or statutory capital within the insurance subsidiaries, particularly as they relate to any major negative surprises in the run-off VA business; financial leverage ratio maintained above 25%; a sizable drop in holding company cash; failure to improve interest and preferred dividend coverage; and an inability to execute on the company's strategic plan.

Fitch upgrades the following ratings with a Stable Outlook:

Hartford Financial Services Group, Inc.

--Long-term IDR to 'BBB+' from 'BBB';

--$320 million 4.625% notes due 2013 to 'BBB' from 'BBB-';

--$200 million 4.75% notes due 2014 to 'BBB' from 'BBB-';

--$300 million 4.0% senior notes due 2015 to 'BBB' from 'BBB-';

--$200 million 7.3% notes due 2015 to 'BBB' from 'BBB-';

--$300 million 5.5% notes due 2016 to 'BBB' from 'BBB-';

--$499 million 5.375% notes due 2017 to 'BBB' from 'BBB-';

--$325 million 4.0% senior notes due 2017 to 'BBB' from 'BBB-';

--$500 million 6.3% notes due 2018 to 'BBB' from 'BBB-';

--$500 million 6% notes due 2019 to 'BBB' from 'BBB-';

--$499 million 5.5% senior notes due 2020 to 'BBB' from 'BBB-';

--$800 million 5.125% senior notes due 2022 to 'BBB' from 'BBB-';

--$298 million 5.95% notes due 2036 to 'BBB' from 'BBB-';

--$299 million 6.625% senior notes due 2040 to 'BBB' from 'BBB-';

--$325 million 6.1% notes due 2041 to 'BBB' from 'BBB-';

--$425 million 6.625% senior notes due 2042 to 'BBB' from 'BBB-';

--$600 million 7.875% junior subordinated debentures due 2042 to 'BB+' from 'BB';

--$500 million 8.125% junior subordinated debentures due 2068 to 'BB+' from 'BB';

--$556 million 7.25% mandatory convertible preferred stock, series F to 'BB+' from 'BB'.

Fitch affirms the following ratings with a Stable Outlook:

Hartford Financial Services Group, Inc.

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

Hartford Life, Inc.

--Long-term IDR at 'BBB';

--$149 million 7.65% notes due 2027 at 'BBB-';

--$92 million 7.375% notes due 2031 at 'BBB-'.

Hartford Life Global Funding

--Secured notes program at 'A-'.

Hartford Life Institutional Funding

--Secured notes program at 'A-'.

Hartford Life and Accident Insurance Company

--IFS at 'A-'.

Hartford Life Insurance Company

--IFS at 'A-';

--Medium-term note program at 'BBB+'.

Hartford Life and Annuity Insurance Company

--IFS at 'A-'.

Members of the Hartford Fire Insurance Intercompany Pool:

Hartford Fire Insurance Company

Nutmeg Insurance Company

Hartford Accident & Indemnity Company

Hartford Casualty Insurance Company

Twin City Fire Insurance Company

Pacific Insurance Company, Limited

Property and Casualty Insurance Company of Hartford

Sentinel Insurance Company, Ltd.

Hartford Insurance Company of Illinois

Hartford Insurance Company of the Midwest

Hartford Underwriters Insurance Company

Hartford Insurance Company of the Southeast

Hartford Lloyd's Insurance Company

Trumbull Insurance Company

--IFS at 'A+'.

Fitch has withdrawn the following rating as it is no longer considered analytically meaningful as the commercial paper program was terminated in January 2007:

Hartford Life, Inc.

--Short-term IDR at 'F2'.