01—Abstract
Summary
Summary of the 10-K filed February 24, 2006. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (NYSE: HIG) closed 2005 with total assets of $285.6 billiona and stockholders' equity of $15.3 billion, up from $14.2 billion a year earlier.
Net income rose to $2.27 billionb ($7.44 diluted EPS) from $2.12 billion ($7.12) in 2004, and revenues grew 19% to $27.1 billion, driven largely by a $3.8 billion mark-to-market gain on equity securities held for trading that back the Japanese variable annuity business (offset by an equal increase in interest credited to policyholders). Life (Hartford Life) generated $1.2 billion of net income, down from $1.4 billion because 2004 included a $190 million IRS-related tax benefit, while Property & Casualty net income swung to $1.24 billion from a $745 million loss in 2003 that was caused by the $2.6 billion asbestos reserve strengthening. Ongoing P&C operations improved, with the combined ratio falling to 93.2 from 95.3, though Specialty Commercial deteriorated sharply.
Key risks for investors include continued asbestos and environmental exposure (net asbestos and environmental reserves of about $2.7 billionc, with the Blanket Casualty Treaty reinsurance dispute and potential federal asbestos legislation as open issues), broker compensation investigations and related class actions, the FCRA class action, and market-timing and single-premium group annuity regulatory matters, for which a reserve has been established. Life's variable annuity business faces rising competition, lower sales ($11.5 billion in 2005 vs. $15.7 billion in 2004) and net outflows, and the company is exposed to equity-market and interest-rate sensitivities through guaranteed minimum withdrawal benefits.
The company also declared a higher quarterly dividend of $0.40d per share for 2006 (up from $0.30), and its 2006 outlook anticipates moderate increases in loss costs and pricing pressure in auto and business insurance. Two equity unit purchase contracts settle in August and November 2006, providing roughly $1.02 billion of new equity capital and adding up to about 17.8 million to 22.2 million shares to the share count.
02—Key points
Key Highlights
- Total revenues increased 19% to $27.1 billion in 2005, led by an $8.2 billion net investment income line that includes a $3.8 billion mark-to-market gain on Japanese variable annuity trading securities (largely offset in benefits expense).
- Net income rose to $2.27 billion ($7.44 diluted EPS) from $2.12 billion ($7.12) in 2004, though 2004 benefited from a $216 million IRS settlement tax benefit that did not recur.
- Property & Casualty net income of $1.24 billion versus a $745 million loss in 2003; Ongoing Operations combined ratio improved to 93.2 from 95.3, helped by lower catastrophe losses ($351 million, including Hurricanes Katrina, Rita and Wilma, versus $523 million in 2004).
- Life annuity sales fell 27% to $11.5 billion, with U.S. variable annuity net outflows of $881 million, reflecting intensified competition in guaranteed-living-benefit products; Japan remained strong with $11.9 billion in annuity sales and $26.1 billion of assets under management.
- Net asbestos and environmental reserves of about $2.7 billion remain highly uncertain; the Company's ultimate liability could exceed recorded reserves, and the BCT reinsurance litigation (a $586 million gross recovery) poses additional collection risk.
- Significant regulatory and litigation exposure includes the broker compensation investigations, securities and derivative class actions, a Ninth Circuit FCRA ruling remanded for trial on willfulness, and SEC/NYAG market-timing and group annuity investigations with a $102 million after-tax reserve established in 2005.
- Quarterly dividend declared at $0.40 per share for 2006 (up from $0.30), and total 2005 dividends declared rose to $1.17 per share from $1.13.
03—Questions
Frequently Asked Questions
How profitable was The Hartford in 2005 compared with 2004?
Net income was $2.274 billion in 2005, up from $2.115 billion in 2004, and diluted EPS rose to $7.44 from $7.12. The comparison is flattered by reserve improvements and investment gains, but was held back by the absence of a $216 million 2004 IRS settlement benefit, a $102 million after-tax regulatory reserve in Life, and higher hurricane-related assessments.
What is the biggest risk to the company's earnings and balance sheet?
The most significant risk highlighted is asbestos and environmental (A&E) claims. Management states the ultimate liabilities may exceed currently recorded reserves, and that additional liability cannot be reasonably estimated. The 2003 $2.6 billion net asbestos reserve addition shows how material these exposures can be. Other significant risks include reinsurer credit and collectibility (particularly the BCT litigation), catastrophe losses, equity-market declines affecting variable annuity guarantees, and the potential effects of broker-compensation and mutual fund regulatory actions.
Why did reported revenues jump so much in 2005?
Total revenues rose about $4.4 billion, but most of the gain came from a $3.3 billion increase in net investment income. Net investment income includes a $3.8 billion mark-to-market gain on equity securities held for trading that support the Japanese variable annuity product. Policyholders receive corresponding credits within benefits expense, so the gain has limited effect on net income.
Is the dividend growing, and how secure is it?
The dividend is growing. Dividends declared rose to $1.17 per share in 2005 from $1.13 in 2004, and the Board declared a $0.40 quarterly dividend in February 2006 versus $0.30 in the prior quarter. Dividends are constrained by insurance regulators' limits on subsidiary dividends (about $1.9 billion available to the holding company in 2006, of which $667 million from HLA requires prior approval through August 2006) and by the holding company's reliance on subsidiary cash flows.
What should investors expect for 2006?
Management expects continued growth in Business Insurance and Personal Lines premiums, a decline in Specialty Commercial written premium, and rising loss costs as claim severity outpaces frequency gains. Pricing pressure is expected in auto and middle market business, while hurricane-driven reinsurance costs increased at January 2006 renewals. In Life, management anticipates lower variable annuity sales and forecasts net outflows above 2005 levels. Two equity unit purchase contracts settle in August and November 2006, which will add new shares and about $1.0 billion of capital.
04—Continue