Risk Management

Insurance Woes Touch Hartford, Conseco

Hartford receives some A.M. Best downgrades, while Conseco expects a going-concern qualification from its auditor.
Stephen TaubMarch 2, 2009

It has been a day of blows for big insurers. A.M. Best downgraded a number of Hartford Financial Services Group Inc. ratings. And Conseco Inc. said its accounting firm informed it that the latest year’s audit opinion will include a question about the company’s ability to continue as a going concern.

A.M. Best said it lowered Hartford’s financial strength ratings (FSR) to A (Excellent) from A+ (Superior), and cut the issuer credit ratings (ICR) to “a+” from “aa-” for the key Hartford Life insurance subsidiaries. A.M. Best also downgraded the ICR to “bbb+” from “a-” of Hartford Life Inc. It listed the outlook for these ratings as negative.

The rating firm also downgraded the FSR to stable for the key property/casualty (Hartford Insurance Pool) insurance subsidiaries of Hartford, while cutting its ICR to negative. The rating organization also downgraded the ICR of The Hartford. The outlook for these ratings is negative.

A.M. Best explained that the rating actions for Hartford Life reflect the recent performance of its general account investment portfolio and retail variable annuity businesses in light of the current economic environment. The rating actions also reflect the potential for a material decline in the company’s risk-based capital position should the current economic climate – particularly the equity markets – continue to deteriorate.

“While operating and realized capital losses in 2008 were offset by contributions from the holding company, Hartford Life’s investment portfolio remains in a significant unrealized loss position,” it said. “A.M. Best believes that the company is exposed to statutory reserve increases associated with its variable annuity lines, particularly in light of the first quarter-to-date equity market deterioration. It also said it remains concerned regarding future deferred acquisition charge (DAC) unlocks in light of current market conditions.

A.M. Best said it remains concerned over the future performance of Hartford Life’s commercial mortgage investments – both whole loans and structured securities – as it expects rising defaults in response to the deepening recession. In general, A.M. Best added, it is most cautious on retail, hotel, and office properties within close proximity to distressed housing markets and labor markets where unemployment is high.

The rater also noted that the company’s earnings remain heavily correlated to the equity markets, particularly within its retail variable annuity businesses, which is likely to cause further erosion in operating earnings. It said its actions on Hartford Insurance Pool reflect the strain placed on the overall enterprise from Hartford Life as well as the reduced financial flexibility of the holding company. “The Hartford Insurance Pool’s ratings recognize its continued supportive risk-adjusted capitalization, strong underwriting fundamentals and solid business position within the property/casualty industry,” it elaborated.

But the pool’s strengths are somewhat offset by the significant realized and unrealized capital losses reported in 2008, $2.15 billion of dividends taken out of the property/casualty companies, including $1 billion to support life/health operations, and continued softening throughout most commercial lines.

Despite these concerns, A.M. Best said that its stable outlook on the Hartford Insurance Pool’s FSR reflects its being well positioned to manage challenging property/casualty market dynamics, such as reduced pricing and increased competition, because of its significant depth and breadth of operations, generally conservative underwriting practices, effective utilization of multiple distribution channels, and supportive risk-adjusted capitalization.

Embattled Conseco said that to avoid this it must provide additional information and analysis about its liquidity and debt covenant margins, primarily those that could be impacted by a significant amount of additional realized losses in the company’s investment portfolio. Conseco said it needs additional time to finalize the analysis and disclosure related to its investment portfolio in light of unprecedented market conditions.

Conseco said that it expects its final audited financial statements to show compliance on Dec. 31 with all other covenants in its credit agreement, including those relating to insurance subsidiary capital, the combined risk-based capital ratio of its insurance subsidiaries, the company’s debt to capital ratio, and its interest coverage ratio