As it did with MAPFRE USA, A.M. Best has revised its outlook for The Hartford Fire Insurance Company and its pooling subsidiaries and affiliates, known as the Hartford Insurance Pool. The rating agency adjusted its outlook for The Hartford from stable to positive. It also affirmed the Connecticut-based insurer’s financial strength rating of A (Excellent) as well as its “a+” issuer credit ratings.
In a simultaneous move, the ratings company affirmed the ICR of “bbb+” and all debt ratings of the The Hartford Fire Insurance Company’s parent company The Hartford Financial Services Group, Inc. According to A.M. Best the modified outlook reflects the company’s “solid risk-adjusted capitalization, improving underwriting and operating profitability and excellent market position within the property/casualty industry.” Best noted that the pool’s results have been better than average in recent years as compared to many of the company’s peers. albeit having deteriorated in comparison with the company’s own historical levels. Here’s more behind the rating agency’s decision:
The Hartford Insurance Pool benefits from its geographic and product line diversity, experienced management team, generally conservative operating fundamentals and diversified underwriting initiatives, which provide balanced growth opportunities. Management remains focused primarily on small to middle commercial markets and personal lines that are viewed as less volatile. While results in recent years have been impacted by catastrophes and non-catastrophe weather losses, the pool’s core results remain within A.M. Best’s expectations.
These positive factors are somewhat offset by variable operating performance, given the impact of weather-related losses that weakened operating results in recent years relative to their historical levels. In addition, the pool maintains above-average exposure to affiliated investments and commercial real estate assets compared to the overall property/casualty peer group. In addition, the pool’s ratings reflect the potential strain on capital and resources from the run-off of variable annuity (VA) business written by the pool’s life affiliates.
The change in outlook for both The Hartford and the Hartford Insurance Pool reflects a substantial reduction in the risk associated with the VA business. Two key components of that risk reduction are the significantly increased surrender activity that has lowered the enterprise’s overall exposure to the VA business, and an expansion of The Hartford’s hedging program to include its Japanese VA business. The Hartford has historically employed a hedging program on U.S. VA risks to address equity, interest rate and market volatility risks. The expanded hedging program addresses those risks for the Japan VA block, as well as associated foreign exchange risk.
The change in the outlook for the ratings reflects A.M. Best’s expectation that given the depth and scope of operations, generally conservative underwriting practices and effective utilization of multiple distribution channels, The Hartford will generate solid earnings over the near term while maintaining the group’s strong risk-adjusted capital position and continuing to pay dividends to support its parent’s obligations. Given the strength of the hedging programs, The Hartford maintains the ability to withstand severe equity, interest rate and FX shocks under stress scenarios
Positive rating actions could be taken on the ratings of the Hartford Insurance Pool if the risk associated with the VA block of business is significantly reduced from current levels or eliminated entirely. Additionally, positive rating actions could occur if The Hartford’s underwriting and operating results improve to levels that outperform other similarly rated peers while maintaining a strong level of risk-adjusted capitalization. Key factors that could trigger negative rating actions on the group’s ratings include a weakening in operating performance, particularly if the resulting performance is below A.M. Best expectations, which results in a deterioration of risk-adjusted capitalization.
The Hartford’s debt-to-total capital ratio (excluding accumulated other comprehensive income) and interest coverage ratios are within A.M. Best’s guidelines for its current ratings. A.M. Best anticipates The Hartford will maintain solid liquidity at the holding company to support potential capital needs of its operating subsidiaries should the need arise.