Following last week's announcement of
The Hartford Financial Services Group Inc.
) definitive agreement to divest its Individual Life Insurance
Prudential Financial Inc.
), 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
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
Currently, Hartford carries a short-term Zacks #3 Rank (Hold).
Also, we maintain our long-term 'Neutral' recommendation on the
HARTFORD FIN SV (HIG): Free Stock Analysis
PRUDENTIAL FINL (PRU): Free Stock Analysis
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