A.M. Best Ratings Fail to Lift Hartford Financial - Analyst Blog

Although A.M. Best Co. recently rated The Hartford Financial Services Group, Inc. HIG and its subsidiaries positively, it failed to pull up the shares of the company. In fact, shares fell almost 2% to $35.37 on Apr 4, 2014, due to broader market conditions.

Last week, the credit rating agency affirmed the financial strength rating FSR and issuer credit ratings (ICR) of Hartford Insurance Pool (comprising Hartford Fire Insurance Company and its pooling subsidiaries and affiliates) at “A” and “a+”, respectively. Moreover, the ICR of the holding company was affirmed at “bbb+” along with the debt ratings. The outlook for all the ratings were raised to positive from stable.

The FSR and ICR affirmation on the Hartford Insurance Pool came on the back of strong risk-adjusted capitalization, underwriting and operating strength and solid market position in the property and casualty business. A.M. Best stated that the geographic presence and product line diversity, a strong team of veterans in the space and broad underwriting initiatives position the company to generate balanced growth going forward. Although natural disasters over the past few years have impacted the pool's results, they remain in line with A.M. Best's expectations. Nevertheless, the rating agency identified that weather-related losses over the past few years have adversely impacted operating performance at higher than historical levels.

The upward revision in the ratings outlook came on the back of Hartford's risk reduction in its variable annuity (VA) block of business. A.M. Best remained optimistic about the near-term prospects of Hartford as the company is expected to generate impressive earnings, de-risk its portfolio and consistently pay dividends. Moreover, the company is cushioned from equity, interest rate and foreign exchange fluctuations owing to its hedging program. Hartford's debt-to-capital ratio also remains within A.M Best's ratings guidelines and the agency expects the company to maintain strong liquidity going forward.

A.M. best also stated that the ratings on Hartford Insurance Pool is liable to an upgrade if the company succeeds in reducing risks related to its VA block of business. Alongside, if the company moves to a level of underwriting and operating performance that is considerably better than its peers, the agency might confer more positive ratings. On the other hand, a ratings downgrade is possible in case of poor operating performance, resulting in deterioration in risk-adjusted capitalization.

Rating affirmations or upgrades play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that Hartford's present score with the credit rating agency will help it write more business going forward.

Hartford currently carries a Zacks Rank #3 (Hold). However, some better-ranked stocks in the insurance sector include Alleghany Corporation Y, AmTrust Financial Services Inc. AFSI and EMC Insurance Group Inc. EMCI. All three stocks carry a Zacks Rank #1 (Strong Buy).