01—Abstract
Summary
Summary of the 10-K filed March 24, 2000. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (NYSE: HIG) reported 1999 net income of $862 milliona, down 15% from $1,015 million in 1998, and basic EPS of $3.83 versus $4.36.
The decline was driven largely by the November 1998 sale of London & Edinburgh, lower net realized capital gains, the run-off of leveraged COLI business, and a $1.0 billionb drop in unrealized gains on securities as rising interest rates pushed the fixed-income portfolio into a net unrealized loss. Total revenues fell 10% to $13.5 billion. Core earnings, which strip out realized gains and other items, rose 3% to $837 million, led by Life segment growth.
Stockholders' equity fell to $5.5 billionc from $6.4 billion, and book value was pressured by the rate-driven swing in unrealized gains and $596 million of share repurchases. The company's operating story is mixed. Life is the growth engine: core earnings rose 21% to $467 million on higher fee income from variable annuities, with the company ranked the number one U.S. individual variable annuity writer for 1999 and $145.4 billion in total assets under management.
Commercial P&C remains unprofitable, with a $171 milliond underwriting loss and a 105.5 combined ratio, while Personal lines underwriting income fell to $34 million from $77 million as the combined ratio rose to 99.6 amid intense auto pricing competition. Reserve development was favorable in 1999 (a $171 million prior-year release on a net basis), but environmental and asbestos exposures remain a source of uncertainty. For investors, the key takeaways are the Life franchise's fee-income momentum, persistent underwriting pressure in commercial and personal lines, and balance-sheet sensitivity to interest rates.
The board raised the quarterly dividend 4% to $0.24 and authorized a new $1.0 billion repurchase program. Management also flagged that the 2000 federal budget proposal could materially affect COLI sales, a risk worth monitoring.
02—Key points
Key Highlights
- Net income fell 15% to $862 million ($3.79 diluted EPS) from $1,015 million, reflecting the 1998 London & Edinburgh sale and lower realized gains; core earnings rose 3% to $837 million.
- Life segment core earnings grew 21% to $467 million, driven by variable annuity fee income; The Hartford ranked #1 in U.S. individual variable annuity sales in 1999 with a 9% share.
- Commercial segment posted a $171 million underwriting loss (105.5 combined ratio), and Personal segment underwriting income dropped to $34 million from $77 million amid intense auto price competition.
- Stockholders' equity declined to $5.5 billion from $6.4 billion, mainly from a $1.0 billion swing in unrealized securities gains to a loss as interest rates rose.
- Total assets reached $167.1 billion, with separate account assets of $111.7 billion, a 22% increase that reflects the Life business's growth.
- Capital return continued: $596 million of treasury stock repurchased in 1999, a new $1.0 billion buyback authorized in October 1999, and the quarterly dividend raised 4% to $0.24.
- Management flagged a potential material adverse impact on COLI sales from proposed tax changes in the President's 2000 budget, and a proposed DAC tax increase that could affect certain products.
03—Questions
Frequently Asked Questions
Why did The Hartford's net income decline in 1999 even though core earnings increased?
Net income includes net realized capital gains, which fell to $25 million after tax from $199 million in 1998. 1998 also benefited from the one-time $33 after-tax gain on the London & Edinburgh sale. Core earnings, which exclude realized gains, rose 3% to $837 million, so the headline decline is mostly a comparison against an unusually strong 1998.
How is the Life segment performing relative to the property and casualty businesses?
Life is the strongest segment. Core earnings rose 21% to $467 million on fee income from variable annuities and mutual funds, with assets under management up 17% to $145.4 billion. By contrast, Commercial posted a $171 million underwriting loss and Personal underwriting income fell to $34 million, so North American Property & Casualty core earnings declined 5% to $434 million.
What risks should investors watch in the balance sheet?
Rising interest rates in 1999 turned the fixed-maturity portfolio into a net unrealized loss, reducing equity by roughly $1.0 billion. Fixed-maturity duration is about 5.0 years for P&C. Environmental and asbestos reserves remain uncertain, with $1.6 billion of net reserves at year-end, and the company holds $1.25 billion of trust preferred and QUIPS obligations. Management states it does not expect environmental and asbestos changes to have a material effect on liquidity or financial condition.
What is the company's capital return policy?
The Hartford completed its $1.0 billion repurchase authorization from 1997 during 1999, buying back 9.2 million shares for $453 million. It then authorized a new $1.0 billion program in October 1999, under which it had repurchased 3.1 million shares for $143 million by year-end. The quarterly dividend increased 4% to $0.24 per share, and 1999 dividends declared totaled $0.92 per share.
Does the company face any regulatory or legislative threats?
Yes. The President's 2000 federal budget proposal included changes to the tax treatment of COLI that management said could have a material adverse effect on COLI sales. The proposal also included a higher DAC tax on certain products and a tax on policyholder surplus accounts. Management said it is too early to determine whether these will be enacted, so the financial impact cannot yet be estimated.
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