A.M. Best Affirms Hartford Ratings - Analyst Blog

Following Hartford Financial Services Group Inc.’s (HIG) recent decision to repay the entire $3.4 billion of bailout money it received from the government under the Troubled Asset Relief Program (TARP), rating agency A.M. Best Co. has affirmed the issuer credit rating (ICR) of “bbb+” for the company. However, the outlook for the rating remains negative.

Also, the rating agency has affirmed the financial strength ratings (FSRs) of A (Excellent) and ICRs of “a+” for Hartford’s key life/health insurance subsidiaries. The outlook for the FSRs has improved to stable from negative, but the outlook for the ICRs remains negative.

The rating agency has assigned “bbb-” debt ratings to Hartford’s recently issued convertible preferred stock and senior unsecured notes.

Though the rating agency sights Hartford’s TARP repayment plan as positive, the negative outlook reflects slower earnings growth and a sizeable unrealized loss position.

A.M. Best expects that Hartford’s TARP repayment will improve its financial leverage to approximately 23% for 2010 from 32% in 2009. However, the rating agency remains concerned about the future performance of Hartford Life’s commercial mortgage investments.

During fourth quarter of 2009, Hartford returned to profitability for the first time since mid-2008. Hartford’s fourth quarter core earnings came in at $1.51 per share, substantially ahead of the Zacks Consensus Estimate of $1.40. This also compares favorably with the core loss of 72 cents in the year-ago quarter.

The upside was primarily attributable to stability in Hartford’s life and property and casualty businesses. Also, Hartford ended the year with a strong capital position. Despite overall market conditions remaining timid, Hartford delivered strong underwriting results. During the fourth quarter, rising stock markets helped strengthen investment income in the company’s life insurance business.

However, the results suffered from losses in Hartford’s investment portfolio and higher costs related to the variable-annuity business. We remain concerned with Hartford’s exposure to variable annuities and pressure on Life segment as consumers seek relatively safe investment vehicles for their retirement assets.

In Jan 2009, Hartford became a thrift holding company with the approval of the Office of Thrift Supervision. The holding company status made Hartford eligible for TARP fund.

The repayment of TARP money will free the life and property insurer from government involvement in its affairs and pay restrictions, though the Treasury will still hold Hartford’s warrants for about 52 million shares at an exercise price of $9.79 each. However, Hartford does not intend to repurchase the warrants at this point.

Most of the major institutions in the financial market like JPMorgan Chase and Co. (JPM), Bank of America Corp. (BAC), Wells Fargo & Co. (WFC) and Goldman Sachs Group Inc. (GS) have repaid the TARP loan. Also, the Treasury has started auctioning stock warrants it acquired from the banks that received a significant portion of taxpayers’ money and have fully repaid the same.