Rating Agencies React To The Hartford/Allianz Cash Infusion

Rating agencies A.M. Best Co. and Standard & Poor’s have revised their outlook on The Hartford Financial Services Group after the company received a $2.5 billion cash infusion from competitor Allianz AG in exchange for a stake in the firm.

A.M. Best Co. placed The Hartford’s “A-plus” financial strength (FSR) ratings under review with negative implications. Best also placed under review with negative implications the “a” issuer credit ratings (ICR) and all debt ratings of The Hartford, and the “aa-minus” ICR of the company’s key life and health and property-casualty subsidiaries.

Standard & Poor's Ratings Services said it has revised its outlook on The Hartford to negative from stable but has affirmed the company’s “A” counterparty credit rating and the “AA-minus” counterparty credit and financial strength ratings on all of The Hartford’s core insurance operating subsidiaries.

Both rating agencies cited circumstances surrounding The Hartford’s deal with Allianz in which Allianz will receive a stake in The Hartford in exchange for a $2.5 billion cash infusion.

As reported yesterday by NU Online News Service, The Hartford sought a cash infusion in advance of announcing projected losses due to the market turmoil.

Additionally, before the cash infusion announcement, Fitch ratings had revised The Hartford’s rating outlook from stable to negative, citing potential troubled assets in its portfolios.

Best said it is “evaluating the ultimate impact of these events—as well as the risks associated with continued market dislocation and increased financial leverage—on the ratings of The Hartford and its insurance subsidiaries.”

Standard & Poor’s said its adjustment is due to The Hartford’s announcement that it expects to report “material asset impairments estimated at $2.1 billion to $2.2 billion after taxes and will take a significant deferred acquisition cost (DAC) write-down estimated at $915 million.”

The rating agency added, “The negative outlook on [The Hartford] reflects its reduced financial flexibility because of the increase in leverage and the associated material reduction in fixed-charge coverage levels resulting from the high servicing costs on the [Allianz] investment and the expected softening of its operating performance.”

The ratings and the outlook for The Hartford’s core insurance subsidiaries remain unchanged, Standard & Poor’s said, because “the fundamentals” of the company’s life and p-c operations remain strong.

Standard & Poor’s credit analyst Robert A. Hafner said he expects The Hartford’s operating performance to be strong but below recent record earnings because of the continuing soft market and higher credit losses resulting from the economic downturn.

“The company's effective expense management and underwriting discipline will help support continued earnings strength and limit the decline in earnings through the cycle,” Standard & Poor’s said.

“In addition, management's aggressive action to raise $2.5 billion of additional capital ensures that it is among the U.S. insurance companies best positioned to weather the current economic downturn and maintain its competitive advantages and consumer confidence,” the rating service commented.

Moody’s Downgrades AIG

Moody’s Investors Service downgraded the debt rating of American International Group and two of its operating units, saying the company’s plan to sell assets may not raise enough capital to pay back its $85 billion government loan.

The New York-based rating agency said Friday there is a risk because there could be “shortfalls in executing the restructuring plan or because of declines in the business or financial profiles of the operation to be retained.”

Because of the downgrade, two other units were affected: American General Finance Corp. (AGFC) and International Lease Finance Corporation (ILFC).

Moody’s lowered AIG’s senior unsecured debt rating from “A2” to “A3” and said the long-term ratings and the company’s Prime-1 short-term rating remain under review for possible downgrade.

AGFC’s senior debt rating was downgraded from “A3” to “Baa1.” AGFC's long-term ratings remain under review for possible further downgrade.

The short-term ratings for AGFC, as well as the backed-commercial paper rating for Como LoCo Inc., were affirmed at Prime-2: outlook negative.

The Prime-2 short-term rating of AGFC's direct parent, American General Finance Inc., was placed on review for possible downgrade.

Moody’s action reflected not only the AIG downgrade but also AGFC’s “erosion in the company’s stand-alone credit profile and operating outlook.”

AIG’s ILFC, which is in the aircraft leasing business, had its senior unsecured rating downgraded to “Baa1” from “A3” and affirmed its Prime-2 short-term rating. The company’s long-term and short-term ratings are under review with direction uncertain.

Moody’s made the move based on the lack of financial support AIG will be able to give the unit and the uncertainty over future ownership.

The rating service issued its downgrades late Friday after AIG Chairman and Chief Executive Officer Edward M. Liddy announced that same morning that the insurer plans to maintain its U.S. property-casualty and foreign general insurance units and keep a majority interest in its foreign life insurance unit, but everything else was on the table for sale.

AIG is selling the units to pay back an $85 billion bridge loan from the Federal Reserve Bank as quickly as it can.

AIG secured the loan and gave the government a 79.9 percent interest in the company after it could not find capital in the private sector. AIG hit a liquidity crunch over its subprime mortgage related investments that have suffered in value and required heavy amounts of collateralization which has drained its financial position.

In A Tight Job Market More Lies Are Found On Resumes

A study that should put risk managers on their guard reports that a check of job candidates’ employment applications finds that 10 percent of them lie about their education credentials.

And the firm that made the discovery, employeescreenIQ, predicts that job applicant efforts to puff up backgrounds will only increase as the job market becomes more difficult.

The educational item most frequently falsified by applicants was the completion of high school, according to research conducted by Cleveland-based employeescreenIQ’s quality service division.

“False information about ones’ educational history is the third most common discrepancy we uncover while conducting verifications for our clients,” Kevin Bachman, employeescreenIQ’s vice president of Quality Service, said in a statement.

“As we released in our 2009 background screening trends, due to the tightening of the job market, we are predicting a rise in the number of individuals that ‘fluff’ their resume, including their educational history.”

Mr. Bachman continued that facts show that “if it wasn’t for proper screening, for every 10 people a company hired, one would have obtained employment while lying about their education, a very important aspect in most jobs.”

His firm’s research found that:
• High school diplomas were falsified more often than a college degree.
• Degrees falsified the least were post-graduate and doctoral degrees.
• Applicants’ false diploma or degree claims more often involved an institution they had attended.

Steven Rothberg, president of CollegeRecruiter.com, an information source for college students and recent graduates seeking employment, continuing education and business opportunities, noted, “employeescreenIQ’s findings are in line with insight we receive from our employer clients.”

He said, “When it pertains to education, job candidates are more likely to inflate their academic experience than to outright lie. Few will claim they graduated from a school they didn't attend, or state they have a business degree when they actually graduated with a major in communications.”

He added, however, that given the reluctance of many, and perhaps most schools, to delve into details about the academic qualifications of their alumni, “these exaggerations can be very, very difficult for most employers to identify.”

In addition to education verifications, he said, hiring professionals should make sure their screening company has the ability to conduct professional reference interviews and license verifications—three elements that play key roles in exposing applicants attempting to falsify their education credentials.

Far beyond just inflating academic experiences, another concern is “diploma mills,” which provide individuals with diplomas and degrees without requiring that any standards be met.

Diploma mills operate to make a profit by distributing non-accredited academic degrees to individuals based on a level of payment and life experiences. People obtaining these degrees can then falsely claim them on their resumes.

“You see it in the news, diploma mill operations being closed by federal and state investigations. Diploma mills should be a concern to all employers,” said Jason Morris, employeescreenIQ president and chief operating officer.
He noted that ramifications associated with hiring an individual with a false degree can be very damaging to an organization and result in a loss of trust, “and depending on the job, harm to individuals.”

Recently, the Federal Trade Commission published a helpful online tool—Avoid Fake-Degree Burns By Researching Academic Credentials —for employers to consult in order to recognize fake degrees when conducting education verifications. The U.S. Department of Education and the Council for Higher Education Accreditation also publish lists of legitimate institutions.

A white paper list containing hundreds of known fraudulent diploma mills that employeescreenIQ has identified through its education verifications searches can be downloaded at www.employeescreen.com.

October Expected To Be Busy Hurricane Month

With Subtropical Storm Laura fading away over the cold waters of the North Atlantic, hurricane forecasters expect October to be a very active hurricane month with possibly one major hurricane predicted over the next couple of weeks.

Researchers from Colorado State University said today they believe this month will produce “well above average hurricane activity,” in line with predictions for a very active hurricane season.

Phil Klotzbach and William Gray, who head up the research team at the university, said they expect to see a total of three named storms in October. Two are expected to become hurricanes, with one becoming a major hurricane of Category 3 or higher on the Saffir-Simpson scale, meaning sustained winds will reach or exceed 111 mph.

“We expect the month of October to be quite active,” said Mr. Klotzbach, lead author of the hurricane forecast, in a statement. “We continue to observe low sea level pressures and warm sea surface temperatures across the tropical Atlantic. A combination of these two factors typically leads to an active October.”

“We predict that October will be quite active based on climate signals through September,” said Mr. Gray. “There has been a strong clustering of hurricane activity around mid-July and late August-early September. We think we are now entering a new period of heightened activity that is likely to go for another two to three weeks.”

The researcher’s full-season forecast, revised in August, calls for a total of 17 named storms in the Atlantic, nine of which will become hurricanes, with five of those becoming intense hurricanes. To date, there have been six hurricanes with three becoming intense.

On Monday, the National Weather Service announced the formation of Subtropical Storm Laura with sustained winds that topped off at 60 mph. The storm never threatened the United States and dissipated today over the cold waters of the North Atlantic. Laura was the twelfth named storm of the Atlantic hurricane season that extends through Nov. 30.

For U.S. insurers, the most damaging storms this season have been Hurricanes Gustav and Ike, which hit in August and September, respectively. Risk modelers’ estimates for insured losses for Gustav ranged from $2 billion to $10 billion, while insured losses from Ike ranged from $6 billion to $12 billion.

Hurricane Ike hit the Texas coast on Sept. 13, doing tremendous damage to the Galveston area. The affects from Ike have been extensive. The U.S. Geological Survey reported yesterday that runoff caused by the storm has contaminated the waters of Lake Michigan affecting the shoreline of northwestern Indiana and Chicago.

Commercial Carrier Size Doesn’t Affect Performance

The size of a commercial insurance company does not appear to affect premium growth or underwriting profitability for three different lines in that sector, according to a new financial analysis.

That finding came in a report released by the investment firm Stifel Nicolaus, reviewing second-quarter 2008 statutory direct premium and loss data for commercial auto liability, commercial multiple peril and workers’ compensation.

Based on figures from Highline Data, a unit of Summit Business Media Co., the parent of National Underwriter, Stifel Nicolaus’ analysis found size does not appear to determine superior premium growth or dramatically affect underwriting profitability.

The analysis also found “almost no relationship (yet!) between premium growth and loss ratio deterioration.” The results were surprising because the expectation is that companies whose premium base is growing faster would be expected to see a higher deterioration in rates.

Part of the reason, noted Meyer Shields, an analyst for Stifel Nicolaus, is that unlike personal lines insurers who rely upon technology to perform the underwriting, commercial lines are still underwritten individually, “reducing the potential for economies of scale that bigger insurers might use to drive either faster or more profitable premium growth.”

He also pointed out that the differences between accounts translate into more attention to underwriting.

Noting the situation with American International Group, Mr. Shields wrote that “people are overestimating the likely outflow of business from AIG, whose property-casualty subsidiaries are more than solvent. We’re pointing investors toward smaller commercial competitors, as we see no fundamental underwriting disadvantage inherent in being small, and as even a modest move of share from AIG could represent significant growth opportunity.”