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Rating Action:

Moody's reviews The Hartford's long-term debt (senior at Baa2) for upgrade following announced divestiture of Talcott

04 Dec 2017

Affirms A1 financial strength ratings of Hartford P&C with stable outlook; reviews Talcott subsidiaries Baa3 financial strength ratings for downgrade.

New York, December 04, 2017 -- Moody's Investors Service, ("Moody's") has placed the long-term debt ratings of The Hartford Financial Services Group, Inc. (senior debt Baa2) on review for upgrade following the company's announcement today of a definitive agreement to sell its "Talcott Resolution" (Talcott) runoff life and annuity operations to an investor group for $2.05 billion. In the same action, Moody's has affirmed the A1 insurance financial strength (IFS) ratings of Hartford's P&C's active insurance subsidiaries and the A2 IFS rating of Hartford Life & Accident Insurance Company, both with stable outlooks. Moody's also placed its ratings for the Talcott operations -- comprising Hartford Life Insurance Company and Hartford Life & Annuity Insurance Company, both rated Baa3 for IFS -- under review for downgrade, and downgraded the senior debt rating of Hartford Life, Inc. to Ba3 from Baa2 with a continuing review for downgrade. Please refer to a summary of the rating actions below.

The Hartford will receive a 9.7% ownership interest, valued at $164 million, in the new company. Subject to regulatory approval, The Hartford also expects to receive $300 million in a pre-closing dividend from Talcott Resolution and will reduce its long-term debt by $143 million because debt issued by HLI will be included as part of the sale. In addition, The Hartford will retain Talcott Resolution tax benefits with an estimated GAAP book value of $950 million, which will be available for realization subject to the level and timing of The Hartford's taxable income. The Hartford estimates that the sale will result in a GAAP net loss of approximately $3.2 billion, after tax, which would be recorded in discontinued operations in fourth quarter 2017. The acquiring investor group - led by Cornell Capital LLC, Atlas Merchant Capital LLC, TRB Advisors LP, Global Atlantic Financial Group, Pine Brook and J. Safra Group - which includes participants with considerable experience in the insurance sector, will operate the Talcott Resolution franchise as an independent company. The transaction is expected to close in the first half of 2018.

RATINGS RATIONALE

The Hartford Financial Services Group, Inc.

According to Moody's, the review of The Hartford's long-term debt ratings will focus on the group's prospective profitability and capital structure excluding the Talcott entities. Moody's views the proposed divestiture of Talcott as credit positive in aggregate for The Hartford as it would conclude a long-intended strategic exit for the company from its runoff life and annuity operations and would significantly reduce stress-case tail exposures given the capital intensive nature of the Talcott's run-off businesses. Moody's added that the sale would reduce organizational complexity for the group, enabling management to focus on its continuing insurance and asset management operations. Tempering the transaction's strategic benefits are the anticipated rise in adjusted financial leverage for the consolidated group following a loss on sale and the retention of some tail-risk risk exposure to the divested operations through its 9.7% ownership, and guarantees provided by Hartford Fire in respect of their policyholder contract/claim liabilities. Partly offsetting these concerns are management's stated intention to use approximately $400 million of the Talcott sale proceeds for additional debt repayment, in addition to the $500 million in previously announced planned debt repayments in 2018.

Moody's would expect to upgrade the Hartford's debt ratings by one notch at the closing of the transaction. A termination of the planned transaction, with no material change to The Hartford's current financial profile would most likely result in a confirmation of the current ratings with a stable outlook.

Hartford P&C (Hartford P&C Group, First State P&C Group)

The affirmation of the A1 IFS ratings on members of The Hartford's P&C Insurance Group reflects the group's prominent brand, significant market presence and diversified distribution channels, as well as its efficient technology platform particularly in serving small commercial accounts. The group is well diversified by product and geography and maintains good capital adequacy. The P&C group's credit profile is supported by the excellent track record, by its efficient technology platform and manageable volatility of its small commercial segment, and by its long-term personal lines direct marketing arrangement with AARP, one of the largest affinity groups in the US. These strengths are offset by moderate exposure to catastrophes, pricing and reserving risk associated with its commercial and specialty lines, including a sizable concentration in workers' compensation accounts, and a risk of adverse development on run-off reserves. The P&C group reported $352 million in pre-tax catastrophe losses in the third quarter of 2017, including Hurricanes Harvey and Irma, but still reported after-tax earnings excluding P&C other operations of $644 million year-to-date for the combined personal and commercial insurance operations despite the catastrophes, as compared with $736 million for the same period in 2016. The group has taken a number of pricing and underwriting actions to improve the weak results in its personal and commercial auto businesses.

The stable outlook for Hartford P&C's entities reflects Moody's expectations that management will maintain a healthy level of capital adequacy and good profitability with rate adequacy maintained in step with claims inflation. The following factors could lead to an upgrade in Hartford's P&C ratings: long term reduction in gross underwriting leverage (e.g. less than 3.5x, excluding affiliated investments from capital); financial leverage in the mid to low 20% range with sustained cash flow coverage of interest of 6x or higher; consistent returns on capital with a reduced concentration in workers' compensation. The following factors could lead to a downgrade in Hartford's P&C ratings: sustained gross underwriting leverage above 4.5x (excluding affiliated investments from capital); decline in shareholders' equity greater than 10% over a one-year period; financial leverage sustained above 30% with cash flow coverage of interest of 4x or lower.

Hartford Group Benefits (Hartford Life & Accident Insurance Company)

Moody's said the affirmation of Hartford Life & Accident (HLA) Insurance Company's A2 IFS rating, with a stable outlook, reflects HLA's market position, distribution capabilities, and profitability, and go-forward benefits arising from the acquisition of Aetna's group benefits business in October 2017. These strengths are tempered by stiff competition in the group and voluntary benefits business, pressure from sustained low interest rates, and a lower RBC ratio as a result of the Aetna acquisition. HLA's IFS rating continues receiving one notch of uplift from the standalone credit profile due to implicit support from The Hartford.

The following factors could lead to an upgrade in HLA's rating: an upgrade of The Hartford (other than related to the disposition of Talcott) and/or its P&C affiliates; improving profitability at the group life and disability income operations (e.g., a loss ratio consistently below 70%); successful integration of Aetna's block of group life and disability; sustained RBC levels (company action level) above 400%. The following factors could lead to a downgrade in HLA's rating: a downgrade of The Hartford and/or its P&C affiliates; sustained RBC ratio levels (company action level) below 350%; a decline in earnings of more than 20%.

Talcott (Hartford Life & Annuity Insurance Company, Hartford Life Insurance Company, Hartford Life, Inc.)

According to Moody's, the review for downgrade of the Baa3 IFS ratings of Hartford Life Insurance Company (HLIC) and Hartford Life & Annuity (ILA) primarily reflect concerns regarding the run-off life and annuity operation's future capitalization and financial flexibility as a result of their new private equity ownership. As part of the transaction, certain fixed annuities and structured settlements will be reinsured to Commonwealth Annuity and Life Insurance Company (IFS A3 stable), a subsidiary of Global Atlantic Financial Life Limited (issuer rating Baa3 stable), which should mitigate some of the interest rate risk on the spread business. Talcott has strong asset quality, prudent risk management, and good recent earnings. However, it has significant exposure to earnings and capital volatility and must manage capital requirements that are sensitive to policyholder behavior, equity market returns, and interest rates.

The downgrade of Hartford Life, Inc.'s (HLI's) senior debt rating to Ba3 (on review for downgrade) from Baa2 reflects the elimination of structural support from HLA and Hartford Funds following the sale. Until now, HLI has benefited from earnings and cash flows from HLA and Hartford Funds, in addition to those of the Talcott operations. Given the proposed transaction, HLI will rely on dividends from the Talcott entities. HLI's Ba3 senior debt rating (on review for downgrade) is three notches below the Baa3 IFS ratings (on review for downgrade) of HLIC and ILA and reflects Moody's standard notching practice.

Given the ratings are under review for downgrade, an upgrade is unlikely. Factors that could lead to a downgrade include: material increase in volatility of total statutory capital, or unanticipated decline in total statutory capital by 20% over a short period of time; unanticipated regulatory capital volatility and/or RBC ratio levels (company action level) fall below 350%; financial leverage above 25%. A termination of the planned transaction, with no material change to HLI and Talcott's current financial profile, would most likely result in a confirmation of the current ratings with a stable outlook.

The following ratings have been placed under review for upgrade:

The Hartford Financial Services Group, Inc.:

- senior unsecured debt at Baa2;

- junior subordinated debt at Baa3 (hyb);

- senior unsecured shelf at (P)Baa2;

- subordinated shelf at (P)Baa3;

- junior subordinated shelf at (P)Baa3;

- preferred shelf at (P)Ba1.

The following ratings have been placed under review for downgrade:

Hartford Life Insurance Company - insurance financial strength at Baa3; short-term insurance financial strength at P-3; senior unsecured debt Ba1;

Hartford Life & Annuity Insurance Company - insurance financial strength at Baa3.

The following ratings have been downgraded and are under review for further downgrade:

Hartford Life, Inc. - senior unsecured debt to Ba3 from Baa2;

Hartford Life Institutional Funding - senior secured debt to Baa3 from Baa2.

-Outlooks for all of the above issuers changed to RUR from stable.

The following rating has been affirmed:

The Hartford Financial Services Group, Inc.:

- short-term debt at P-2.

The following ratings have been affirmed, with stable outlooks:

Hartford P&C Group:

- Hartford Fire Insurance Company -- insurance financial strength at A1;

- Hartford Accident & Indemnity Company - insurance financial strength at A1;

- Hartford Casualty Insurance Company - insurance financial strength at A1;

- Hartford Insurance Company of Illinois - insurance financial strength at A1;

- Hartford Insurance Company of the Midwest - insurance financial strength at A1;

- Hartford Insurance Company of the Southeast - insurance financial strength at A1;

- Hartford Lloyd's Insurance Company - insurance financial strength at A1;

- Hartford Underwriters Insurance Company - insurance financial strength at A1;

- Nutmeg Insurance Company - insurance financial strength at A1;

- Pacific Insurance Company, Limited - insurance financial strength at A1;

- Property & Casualty Insurance Company of Hartford - insurance financial strength at A1;

- Sentinel Insurance Company - insurance financial strength at A1;

- Trumbull Insurance Company - insurance financial strength at A1;

- Twin City Fire Insurance Company - insurance financial strength at A1.

First State P&C Group:

- First State Insurance Company -- insurance financial strength at Baa2;

- New England Insurance Company -- insurance financial strength at Baa2;

- New England Reinsurance Corp. - insurance financial strength at Baa2.

Hartford Group Benefits:

- Hartford Life & Accident Insurance Company -- insurance financial strength at A2.

The principal methodologies used in rating The Hartford Financial Services Group, Inc. were Global Property & Casualty Insurers published in May 2017 and Global Life Insurers published in April 2016. The principal methodology used in rating Hartford Life & Accident Insurance Company, Hartford Life Insurance Company, Hartford Life & Annuity Insurance Company, Hartford Life, Inc., and Hartford Life Institutional Funding was Global Life Insurers published in April 2016. The principal methodology used in rating First State Insurance Co., New England Insurance Co., New England Reinsurance Corp, Hartford Accident & Indemnity Co., Hartford Casualty Insurance Co., Hartford Fire Insurance Company, Hartford Insurance Company of Illinois, Hartford Insurance Company of the Midwest, Hartford Insurance Company of the Southeast, Hartford Lloyd's Insurance Company, Hartford Underwriters Insurance Company, Nutmeg Insurance Company, Pacific Insurance Company, Limited, Property & Casualty Ins. Company of Hartford, Sentinel Insurance Company, Trumbull Insurance Company, and Twin City Fire Insurance Company was Global Property & Casualty Insurers published in May 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

The Hartford Financial Services Group, Inc. is a Connecticut-based holding company whose subsidiaries write a broad range of insurance products. For the first nine months of 2017, The Hartford reported total revenues of $14.1 billion and net income of $572 million. Shareholders' equity was $17.2 billion at September 30, 2017.

For more information, visit our website at www.moodys.com/insurance.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alan Murray
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Marc R. Pinto, CFA
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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