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Written by admin on April 11th, 2009

Hartford Financial Debt Protection Cost Rise Following Downgrade

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The price of providing, fourth largest U.S. insurer, the Hartford Financial Services Group, reasonable debt protection increased dramatically on March 24 after Moody’s Investors Service slashed the ratings on the insurer’s debt the previous day.

Now, the company’s senior debt rating has fallen to the lowest investment grade level, Baa3. It has left the Hartford in precarious place in the market, with a negative outlook, and the potential for additional downgrades in the coming 12 to 18 months. The most notable consequence of this serious downgrade is that there is a serious increase in the borrowing costs of the affected company.

According to figures released by Markit Intraday, the credit default material used to insure the Hartford’s debt increase to from 16.25% to 19.25% of the total insured as a deposit payment. This equals $1.92 million to insure $10 million for approximately five years, along with $500,000 payments.

In its statement, Moody said that the downgrade “was driven primarily by the credit deterioration of the life insurance subsidiaries, as well as a reduction in financial flexibility.” The investors service went on to say that “The group’s financial leverage and earnings and cash coverage are expected to deteriorate further and be constrained over the medium term due to potential realized losses and reduced earnings capacity at the operating units.”

The Hartford posted a fourth-quarter loss in February and stated that it planned to reduce its dividend by 84% in an effort to preserve as much capital as possible. This move is also tied to the cuts in the company’s ratings. More importantly, it restricted the Hartford’s ability to access the U.S. commercial paper lending market.

Only time will tell whether the Hartford Group will find a way to recover its debt protection rating, and keep costs manageable for continued operations.

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