How profitable was The Hartford in 2006 compared with 2005?

Net income rose 21% to $2.745 billion, or $8.69 per diluted share, from $2.274 billion ($7.44 per diluted share) in 2005. Life contributed $1.44 billion (up from $1.20 billion), and Property & Casualty contributed $1.52 billion (up from $1.24 billion). Total revenues declined about 2% to $26.5 billion, largely because investment income on Japan variable annuity trading securities fell by about $2.0 billion. The effective tax rate was 24%.

What are the main risks to investors identified in the filing?

The most significant risks are (1) asbestos and environmental reserve uncertainty, which could require material reserve increases; (2) pending broker-compensation litigation and regulatory investigations, including securities class actions, a multidistrict MDL, and market-timing inquiries; (3) equity-market exposure from variable annuity guarantees (GMDB, GMWB, GMIB), which can increase benefit costs and affect DAC amortization; (4) catastrophe losses, with a 250-year Florida hurricane modeled pre-reinsurance loss of about 31% of P&C statutory surplus; (5) a possible rating downgrade, which would raise borrowing costs; and (6) the expiration of federal terrorism reinsurance after 2007 (TRIA).

What does the 2007 outlook imply for earnings?

Management expects Ongoing Operations' combined ratio before catastrophes and prior-year development to rise to 87.5–90.5 (versus 88.0 in 2006), citing higher loss costs and expense ratio pressure. It assumes catastrophe losses of 3.0%–3.5% of earned premium, versus 1.9% in 2006. Life faces slower Japan variable annuity deposits, and the SOP 05-1 DAC change is expected to reduce 2007 net income by $15–25 million, with a one-time cumulative charge of $50–65 million to retained earnings on January 1, 2007. Management also believes 2006 represented the peak year of underwriting profitability in the cycle.

How is the company returning capital to shareholders?

The Hartford paid $460 million in dividends in 2006 and declared $531 million, and the quarterly dividend was raised to $0.50 in February 2007 from $0.40 earlier in 2006. The board expanded the share repurchase authorization by $1 billion in February 2007, bringing the total to $2 billion; about $363 million (3.8 million shares) had been repurchased through February 16, 2007. The holding company relies on dividends from insurance subsidiaries, which can pay up to about $1.5 billion (P&C) and $620 million (Life) in 2007 without prior approval.

Are the broker-compensation and regulatory matters likely to be material?

Management states that ordinary-course claims litigation is not expected to be material. For the broker-compensation matters, the company says it cannot predict outcomes. Securities class actions were dismissed in July 2006 and the plaintiffs have appealed. The multidistrict litigation's motions to dismiss are pending, and class certification has not occurred. Regulators have resolved several matters, including a $20 million settlement with New York and Connecticut on group annuities and a $55 million SEC directed-brokerage settlement, which were already reserved. A market-timing reserve of $83 million pre-tax remains. Management acknowledges that adverse outcomes in particular quarters could have a material effect on results.

HIG/HIG-PG 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.

The Hartford Financial Services Group (NYSE: HIG) closed 2006 with record results: net income rose 21% to $2.745 billion^a ($8.69 diluted EPS), total revenues were $26.5 billion, and total assets reached $326.7 billion.

Stockholders' equity grew to $18.9 billion^b, up from $15.3 billion, driven by earnings, equity unit settlements of roughly $1.0 billion, and an AOCI rebound. Life (Hartford Life) produced $1.44 billion of net income, supported by growth in assets under management to $327.5 billion, strong mutual fund sales of $11.1 billion, and the International/Japan variable annuity franchise. Property & Casualty net income rose to $1.52 billion, with Ongoing Operations' combined ratio improving to 89.3 from 93.2, aided by lower catastrophe losses and a favorable reserve release, though Other Operations swung to a $35 million loss after a $243 million reserve charge tied to the Equitas settlement.

The filing also flags material risk areas. Asbestos and environmental reserves of roughly $2.57 billion^c sit within a wide estimated range of $1.99 billion to $3.05 billion, and management warns that ultimate liabilities could exceed recorded reserves. Broker-compensation litigation and regulatory investigations remain open, including securities class actions (dismissed in July 2006, now on appeal), a multidistrict MDL, and market-timing matters.

Management's 2007 outlook calls for a higher Ongoing Operations combined ratio (87.5–90.5 before catastrophes and prior-year development), slower Japan variable annuity deposits, and a DAC-related unlock and SOP 05-1 adoption expected to reduce retained earnings by $50^d–65 million. The Board also authorized an additional $1 billion buyback in February 2007, bringing the total authorization to $2 billion, and raised the quarterly dividend to $0.50.

02—Key points

Key Highlights

Record 2006 net income of $2.745 billion (diluted EPS $8.69), up 21% from $2.274 billion in 2005; total revenues of $26.5 billion, down 2% due to lower equity-trading investment income.
Total assets of $326.7 billion and stockholders' equity of $18.9 billion at year-end 2006, versus $285.6 billion and $15.3 billion a year earlier.
Life segment net income of $1.44 billion; total assets under management of $327.5 billion (up 18%), with retail mutual fund sales of $11.1 billion and Japan variable annuity assets of $29.7 billion.
Property & Casualty net income of $1.52 billion; Ongoing Operations combined ratio improved to 89.3 (from 93.2), supported by lower catastrophe losses ($199 million vs. $351 million) and favorable prior-year development.
Other Operations net loss of $35 million, driven by a $243 million reserve charge from the Equitas agreement and reinsurance recoverable reassessment on older casualty liabilities.
Asbestos and environmental reserves of about $2.57 billion, within a $1.99–$3.05 billion estimated range; management acknowledges ultimate liabilities could exceed recorded reserves.
Dividend increased to $0.50 per quarter (declared February 2007); share repurchase authorization expanded to $2 billion total, with about $363 million repurchased through February 16, 2007.

03—Questions

Frequently Asked Questions

How profitable was The Hartford in 2006 compared with 2005?
Net income rose 21% to $2.745 billion, or $8.69 per diluted share, from $2.274 billion ($7.44 per diluted share) in 2005. Life contributed $1.44 billion (up from $1.20 billion), and Property & Casualty contributed $1.52 billion (up from $1.24 billion). Total revenues declined about 2% to $26.5 billion, largely because investment income on Japan variable annuity trading securities fell by about $2.0 billion. The effective tax rate was 24%.
What are the main risks to investors identified in the filing?
The most significant risks are (1) asbestos and environmental reserve uncertainty, which could require material reserve increases; (2) pending broker-compensation litigation and regulatory investigations, including securities class actions, a multidistrict MDL, and market-timing inquiries; (3) equity-market exposure from variable annuity guarantees (GMDB, GMWB, GMIB), which can increase benefit costs and affect DAC amortization; (4) catastrophe losses, with a 250-year Florida hurricane modeled pre-reinsurance loss of about 31% of P&C statutory surplus; (5) a possible rating downgrade, which would raise borrowing costs; and (6) the expiration of federal terrorism reinsurance after 2007 (TRIA).
What does the 2007 outlook imply for earnings?
Management expects Ongoing Operations' combined ratio before catastrophes and prior-year development to rise to 87.5–90.5 (versus 88.0 in 2006), citing higher loss costs and expense ratio pressure. It assumes catastrophe losses of 3.0%–3.5% of earned premium, versus 1.9% in 2006. Life faces slower Japan variable annuity deposits, and the SOP 05-1 DAC change is expected to reduce 2007 net income by $15–25 million, with a one-time cumulative charge of $50–65 million to retained earnings on January 1, 2007. Management also believes 2006 represented the peak year of underwriting profitability in the cycle.
How is the company returning capital to shareholders?
The Hartford paid $460 million in dividends in 2006 and declared $531 million, and the quarterly dividend was raised to $0.50 in February 2007 from $0.40 earlier in 2006. The board expanded the share repurchase authorization by $1 billion in February 2007, bringing the total to $2 billion; about $363 million (3.8 million shares) had been repurchased through February 16, 2007. The holding company relies on dividends from insurance subsidiaries, which can pay up to about $1.5 billion (P&C) and $620 million (Life) in 2007 without prior approval.
Are the broker-compensation and regulatory matters likely to be material?
Management states that ordinary-course claims litigation is not expected to be material. For the broker-compensation matters, the company says it cannot predict outcomes. Securities class actions were dismissed in July 2006 and the plaintiffs have appealed. The multidistrict litigation's motions to dismiss are pending, and class certification has not occurred. Regulators have resolved several matters, including a $20 million settlement with New York and Connecticut on group annuities and a $55 million SEC directed-brokerage settlement, which were already reserved. A market-timing reserve of $83 million pre-tax remains. Management acknowledges that adverse outcomes in particular quarters could have a material effect on results.

04—Continue

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