Posted on 17 Feb 2012
Fitch feels recent public discussions surrounding a possible split of the Hartford Financial Services Group, Inc. into separate life and property/casualty companies has raised questions regarding the potential rating implications of such a breakup. While Fitch doesn't want speculate on the likelihood of a split occurring, it would review any announced transaction for its impact on the credit quality and financial strength of the resulting company structure.
Fitch currently maintains separate insurer financial strength (IFS) ratings on HFSG's life and p/c companies that reflect each businesses respective stand-alone financial profiles. HFSG's life insurance subsidaries maintain 'A-' IFS ratings, which are two notches below the p/c IFS ratings of 'A+'. (This approach was implemented in February 2009 during the financial crisis to reflect the divergence in operating performance and balance sheet strength between the life and p/c operations.)
Market perception to a split is largely unknown, though some investors have voiced strong opinions regarding profitability and are pushing for a split. Still, market reaction to a split would be significant. Each stakeholder has a particular interest in the company that has to be considered and balanced relative to the interests of the others, and our analysis of these more qualitative credit factors remains an important part of any rating review.
Fitch analysis would particularly focus on any new entities' debt service capabilities and financial flexibility, as cash to service debt is dependent on dividends from the operating company subsidiaries. In recent years, dividend capacity has only been provided by the p/c operations, as the life companies' earnings have been challenged by lower margins and increased hedging costs in its competitive annuity and life insurance businesses.
Any analysis of a proposed split would consider the allocation of holding company debt between the life and p/c companies and the capitalization and leverage metrics of the individual stand-alone entities. Additional rating considerations would include the willingness and ability of the parent to provide support to the separate insurance operating companies and the potential impact to HFSG's business position, franchise value, and management team as a result of a separation.
In addition, the p/c companies served as a source of capital to the life operations during the financial crisis. While we do not expect the p/c insurance operations will be needed to fund potential future capital needs of the life companies, the p/c companies continue to have the ability to provide such support. This could serve as a particularly valuable source of financial flexibility should the life operations require an additional capital boost