A.M. Best Co. has assigned an “a+” rating to the $300 million 4.7% senior notes due 2007 issued by Hartford Financial Services Group, Inc. Proceeds from the notes will be used to retire the $300 million of 6.375% senior notes maturing in the fourth-quarter of 2002.
The Hartford’s rating reflects the company’s overall financial stability and operational excellence. Management has a proven ability to execute sound business fundamentals and strategic direction, which is critical in the current low interest rate environment. The Hartford has the financial strength and flexibility, business diversification and earnings capability to absorb the reported second quarter investment losses. The depressed equity market conditions may exert significant negative pressure on the future results of the company’s market-leading variable annuity business. In 2002, management is seeking to return under performing reinsurance operations to a more opportunistic ROE driven line of business. Moreover, it will undertake to contain the terrorism exposure in commercial operations, strengthen underwriting standards and improve profitability in its personal lines business.
Management recently strengthened asbestos and environmental (A&E) reserves by reclassifying $600 million of “all other” reserves, partially including those considered redundant in the A&E reserve classes. The Hartford has substantial exposure to emerging A&E claims. Given the uncertainty regarding A&E claims, these liabilities may not be fully funded. However, the current rating considers the potential A&E reserve shortfall in the evaluation of capitalization.
Hartford’s debt rating recognizes its declining financial leverage over the past few years to a debt plus trust preferred to capital ratio of 29.3% at June 30, 2002. While the total amount of debt increased in 2001, equity has increased at a greater pace from earnings and two common stock issues in 2001. Hartford’s leverage will temporarily elevate during the third quarter of 2002. The notes are being issued in advance of the maturation of the 6.375% $300 million notes to benefit from current favorable interest rates. Although reported financial leverage has improved, cash flow at the holding company to cover fixed charges and shareholder dividends–at approximately 1.4 times–has been and remains thin for the current rating level. Offsetting this concern continues to be Hartford’s proven stable earnings generation and excellent access to capital markets.
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