Hartford Ups Reserve, Exits Re

The company actually would have recorded an improvement compared to one year ago if not for the reserve charge. First-quarter 2003 net income, minus the $1.7 billion charge, is $306 million, 5 percent above last year.

To help cover this additional expense and to shore up its balance sheet, The Hartford is planning to raise $1.85 billion in the capital markets. In detailing its capital-raising effort, the company said it plans to issue some $1 billion of common stock and $600 million of securities that are convertible into common stock, as well as $250 million of debt. Hartford expects to complete the offerings by the end of the month.

After the announcements, Oldwick, N.J.-based A.M. Best Co. affirmed the "A-plus" financial strength ratings of The Hartford Insurance Pool, but downgraded to "a-minus" from "a-plus" the senior debt ratings of Hartford Financial Services Group Inc.

Standard and Poor's placed its ratings on CreditWatch with negative implications. And Moody's Investors Service in New York downgraded debt ratings of The Hartford Financial Services Group Inc. to "A3″ from "A2″ with a "Negative" outlook. Moodys noted that the new capital will hike the amount of ongoing funding needed to meet increased fixed charges and common stock dividends.

Peter Patrino, a senior director at Fitch Ratings in New York, noted that The Hartford's asbestos study was "one of the more thorough studies that have been undertaken in the industry. The result of the study was rather conservative." His ratings firm currently has a "double-A" financial strength rating and an "A" senior debt rating for the insurer.

"The important item for us is that they are raising capital, mostly in equities, to replace lost capital. We expected that there would be a move to raise capital to replace the capital lost and that expectation has been met," Mr. Patrino told National Underwriter. "So the asbestos reserve charge would be a neutral event from a ratings perspective."

Ramani Ayer, chairman and chief executive officer at The Hartford, said during the company's conference call that an internationally recognized actuarial consulting firm had reviewed its asbestos-reserve study methodology. He observed that the study was conducted against the backdrop of a "rapidly deteriorating asbestos legal environment."

In the past year, there was a surge in bankruptcies, especially aggressive pre-packaged bankruptcies, which heightened exposure to bankrupt insureds and put "extraordinary pressure" on solvent asbestos defendants, he said.

"In particular, exposures extend to higher layers of excess insurance than we would have anticipated even a few months ago," he said.

The Hartford's study, Mr. Ayer noted, looked into all 990 of the company's open direct U.S. accounts. The study reviewed both open and closed accounts, including settlement agreements, for potential non-products exposure.

The company also used its knowledge of its direct book to analyze its assumed reinsurance, which allowed the company to reserve its asbestos exposure more accurately, without relying on reinsureds' notification of claims, Mr. Ayer said.

On the company's plan to exit its assumed p-c reinsurance business offered through HartRe, Mr. Ayer commented that The Hartford is a "small player" in this business and that its small scale does not justify the capital investment required to compete effectively.

The reinsurance market, he noted, has been hit badly in the past couple of years by a range of liability issues, including asbestos as well as 9/11 terrorism-related claims.

Mr. Ayer said that the company is in talks with "an interested party" to possibly sell off most of this business. But The Harford will exit and focus on its core businesses whether the deal goes through or not, he said.

Mr. Patrino at Fitch added that exiting the reinsurance business was a strategic move for the company and that the announcement wasn't all that surprising. "The management has likely been watching its reinsurance business and they have never been thrilled with its volatile results," he said.

Mr. Ayer, commenting on hundreds of Hartford employees who stand to lose their jobs, said that these reductions are painful, but necessary. "We recognize the impact of these steps on many who have contributed to our company. We will make every effort to help them with their career transition," he said.

Reproduced from National Underwriter Edition, May 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.