Moody’s has upgraded the insurance financial strength (IFS) ratings of Talcott Resolution Life Insurance Company and Talcott Resolution Life and Annuity Insurance Company (TLA) to Baa2 from Baa3, the outlook of the Talcott entities remains positive.

Moody’s upgrade and continued positive outlook reflect the firm’s view that recent large transactions along with potential future transactions will greatly enhance Talcott’s business profile.

Moody’s writes, “The company is transforming from being solely a runoff operation of products sold internally to an ongoing aggregator of legacy blocks as well as providing capital to direct insurance counterparties through flow reinsurance.

“This is improving Talcott’s market position and brand and is expanding and diversifying the company’s liability base.”

While the recent transactions have resulted in reduced capitalisation level for Talcott and TLA, long-term risk-based capital (RBC) ratios remain consistent with Moody’s previous expectations.

Moody’s notes that the Bermuda Solvency Capital Requirement (BSCR) ratios of the affiliated offshore entities are also strong.

Though leverage has increased as a result of the transactions, Moody’s expects Talcott’s financial flexibility to remain sufficiently strong relative to the current rating level.

The firm also expects that investment risk will marginally increase, especially given the addition of the FIA and ULSG blocks which are spread-based businesses.

However, this is expected to remain lower or in line with peers, with Moody’s noting that these negatives are more than offset by improvements to the business profile as well as the demonstration by Talcott’s owner, Sixth Street, of its commitment to the insurance business and its focus on long-term growth.

Moody’s states that the Ba2 senior unsecured debt rating of Talcott and the Baa2 IFS ratings of its insurance company subsidiaries reflect the company’s shift from a primarily runoff business, dominated by variable, fixed and institutional spread products, to an aggregator business.

It adds, “Talcott has stable cash flows from its mature inforce business as well as prudent risk management. However, it has significant exposure to earnings and capital volatility and must manage capital requirements that are sensitive to policyholder behavior, equity market returns, and interest rates. The recent transactions and associated fast growth also present execution risks.”

Moody’s observes that factors that may lead to a rating upgrade include a successful execution of growth strategy that enhances business and financial profile; further minimising the volatility associated with stress scenarios for the legacy block of variable annuities; and effective management of the inforce business that results in consistent capital generation.

Given the positive outlook, Moody’s suggests that a downgrade over the near term is unlikely, though, an unanticipated regulatory capital volatility and/or sustained RBC ratio levels below 350%; material increase in investment risk or complexity; and/or financial leverage at Talcott above 35%, may drive the firm to move the ratings back to stable.

Talcott was acquired in June 2021 by Sixth Street, a global investment firm with over $60 billion in assets under management.

In December 2021, Allianz announced that it was entering into a reinsurance agreement with affiliates of Sixth Street, including TL, as well as Resolution Re Ltd. for a $35 billion fixed indexed annuity (FIA) portfolio.

In January 2022, Sixth Street announced a transaction between non-US affiliates of Talcott and Principal Financial Group, Inc., reinsuring $16 billion of fixed annuities and $9 billion of universal life with secondary guarantees (ULSG).

In October 2022, Talcott entered into an agreement with Guardian Insurance & Annuity Company, Inc. to reinsure $7.4 billion of variable annuity liabilities, which mainly include guaranteed minimum death benefits and guaranteed minimum living withdrawal benefits.