Why did revenues decline in 2007 even though net income increased?

Total revenues fell to $25.9 billion from $26.5 billion mainly because net investment income dropped to $5.4 billion from $6.5 billion, as equity securities held for trading produced far less income ($1.8 billion versus $3.8 billion). That trading income is largely passed to policyholders through benefit expense, so it does not affect profit. Net income still rose because of lower DAC amortization after the Q3 2007 unlock benefit and higher fee income from growing variable annuity and mutual fund assets, partly offset by larger realized capital losses.

What are the main near-term financial risks flagged for 2008?

Management flagged several items: adopting SFAS 157 is expected to reduce Q1 2008 net income by $200 to $300 million after DAC and tax effects, and the GMWB fair value will likely make realized gains and losses more volatile. Realized capital losses of $75 to $115 million are expected in Q1 2008 when CLO total return swaps terminate, and a February 2008 credit index swap closure added about $109 million of pre-tax losses. Additional credit-related impairments could continue if economic fundamentals keep softening.

How exposed is The Hartford to its Japanese variable annuity business?

Japan is a significant growth contributor, with Japan variable annuity account values of $35.8 billion and The Hartford ranked as the largest variable annuity provider there with a 24% market share. However, competition has intensified, sales declined sharply in Q4 2007 after the FIEL regulation took effect in September 2007, and the company notes that a 1% change in separate account returns could materially shift DAC balances. Japan's guaranteed benefits also add exposure to yen movements and equity declines.

Is the dividend and capital return program sustainable?

The company declared $643 million in dividends in 2007 and raised its quarterly dividend to $0.53 per share in February 2008, representing about $2.12 annualized. Holding company liquidity relies on upstream dividends, with property-casualty subsidiaries permitted to pay up to about $1.6 billion and life subsidiaries about $784 million to the parent in 2008 without regulatory approval. Operating cash flow of $6.0 billion in 2007 and statutory surplus levels above minimum RBC requirements support the program, though a sharp equity market decline could pressure statutory capital.

What is the status of the Marsh-related and other major litigation?

The broker compensation multidistrict litigation was dismissed at the district court, with the plaintiffs appealing the dismissal of the Sherman Act, RICO and ERISA claims. Securities class actions tied to the Marsh allegations were also dismissed in July 2006 and are on appeal, and derivative suits are stayed pending that appeal. A new Ohio antitrust action filed in September 2007 is subject to a motion to dismiss. The company says the ultimate liability from ordinary-course and these other matters is not expected to be material, although an adverse outcome could affect results in a given period.

HIG/HIG-PG 10-K FY2007 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 22, 2008. Cited figures are marked; the original filing is the authoritative source.

The Hartford Financial Services Group (HIG) reported 2007 net income of $2.949 billion^a, up 7% from $2.745 billion in 2006, with diluted EPS of $9.24 versus $8.69.

Total revenues declined to $25.9 billion^b from $26.5 billion, largely because equity securities held for trading (which offset in benefits expense) produced much lower investment income, and realized capital losses widened to $994 million pre-tax, driven by credit-related impairments on subprime-backed ABS, GMWB derivative losses, and credit derivative marks as credit spreads widened. Total assets reached $360.4 billion and stockholders' equity $19.2 billion, while book value and capital remained solid, with statutory surplus of $15.9 billion across insurance subsidiaries. The Life segment (Retail, Retirement Plans, Institutional, Individual Life, Group Benefits, International) generated $1.56 billion of net income, supported by a $210 million DAC unlock benefit in Q3 2007, while Property & Casualty net income was $1.51 billion, roughly flat, with Ongoing Operations combined ratio rising to 90.8 from 89.3 on higher auto liability severity and Personal Lines loss costs.

Management's 2008 outlook calls for a higher Ongoing P&C combined ratio before catastrophes (90.0 to 93.0) and a Q1 2008 hit from adopting SFAS 157 on GMWB guarantees estimated at $200 to $300 million^c after tax, plus expected Q1 2008 realized losses of $75 to $115 million on terminated CLO total return swaps. Key risks include continued exposure to asbestos and environmental reserves (net $2.26 billion, with an estimated range of $1.88 to $2.60 billion), a Japanese variable annuity business (Japan is 24% market share and a major growth driver, but sales slowed in Q4 2007 under new FIEL regulation), reliance on the AARP exclusive licensing arrangement through 2020, and an unlocked GMWB exposure that is largely unhedged by reinsurance. The company repurchased $1.2 billion of stock in 2007 and paid $643 million in dividends, with the quarterly dividend raised to $0.53 per share.

02—Key points

Key Highlights

Net income rose 7% to $2.95 billion in 2007; diluted EPS of $9.24 versus $8.69 in 2006 benefited from a $210 million Life DAC unlock and buybacks.
Total revenues fell 2% to $25.9 billion, reflecting lower trading-related investment income (offset in benefit expense) and a swing to $994 million of net realized capital losses.
Realized capital losses were driven by subprime RMBS and ABS impairments, $277 million of U.S. GMWB derivative losses, and credit derivative marks from widening spreads.
Life net income reached $1.56 billion (up from $1.44 billion), with variable annuity account values of $119.1 billion and Japan's variable annuity assets at $35.8 billion.
Property & Casualty net income was $1.51 billion, roughly flat, as Ongoing Operations' combined ratio rose to 90.8 from 89.3; 2008 guidance implies a higher combined ratio before catastrophes.
Asbestos and environmental net reserves of $2.26 billion remain a key uncertainty, with management estimating a range of $1.88 billion to $2.60 billion.
Capital position remains strong: stockholders' equity of $19.2 billion, statutory surplus of $15.9 billion, and $1.2 billion of share repurchases in 2007.

03—One dollar

04—Financials

Financial Highlights

10-KFY2007filed February 22, 2008

Revenue$25.92B Net Income$2.95B11.4% Net Margin EPS (Diluted)$9.24 Cash & Equivalents$2.01B Free Cash Flow$5.99B

Financial Statements

Revenue	$25.92B
Operating Income	$4.00B
Interest Expense	$263.00M
Net Income	$2.95B
EPS (Basic)	$9.32
EPS (Diluted)	$9.24
Shares Outstanding (Basic)	316.30M
Shares Outstanding (Diluted)	319.10M

05—Questions

Frequently Asked Questions

Why did revenues decline in 2007 even though net income increased?
Total revenues fell to $25.9 billion from $26.5 billion mainly because net investment income dropped to $5.4 billion from $6.5 billion, as equity securities held for trading produced far less income ($1.8 billion versus $3.8 billion). That trading income is largely passed to policyholders through benefit expense, so it does not affect profit. Net income still rose because of lower DAC amortization after the Q3 2007 unlock benefit and higher fee income from growing variable annuity and mutual fund assets, partly offset by larger realized capital losses.
What are the main near-term financial risks flagged for 2008?
Management flagged several items: adopting SFAS 157 is expected to reduce Q1 2008 net income by $200 to $300 million after DAC and tax effects, and the GMWB fair value will likely make realized gains and losses more volatile. Realized capital losses of $75 to $115 million are expected in Q1 2008 when CLO total return swaps terminate, and a February 2008 credit index swap closure added about $109 million of pre-tax losses. Additional credit-related impairments could continue if economic fundamentals keep softening.
How exposed is The Hartford to its Japanese variable annuity business?
Japan is a significant growth contributor, with Japan variable annuity account values of $35.8 billion and The Hartford ranked as the largest variable annuity provider there with a 24% market share. However, competition has intensified, sales declined sharply in Q4 2007 after the FIEL regulation took effect in September 2007, and the company notes that a 1% change in separate account returns could materially shift DAC balances. Japan's guaranteed benefits also add exposure to yen movements and equity declines.
Is the dividend and capital return program sustainable?
The company declared $643 million in dividends in 2007 and raised its quarterly dividend to $0.53 per share in February 2008, representing about $2.12 annualized. Holding company liquidity relies on upstream dividends, with property-casualty subsidiaries permitted to pay up to about $1.6 billion and life subsidiaries about $784 million to the parent in 2008 without regulatory approval. Operating cash flow of $6.0 billion in 2007 and statutory surplus levels above minimum RBC requirements support the program, though a sharp equity market decline could pressure statutory capital.
What is the status of the Marsh-related and other major litigation?
The broker compensation multidistrict litigation was dismissed at the district court, with the plaintiffs appealing the dismissal of the Sherman Act, RICO and ERISA claims. Securities class actions tied to the Marsh allegations were also dismissed in July 2006 and are on appeal, and derivative suits are stayed pending that appeal. A new Ohio antitrust action filed in September 2007 is subject to a motion to dismiss. The company says the ultimate liability from ordinary-course and these other matters is not expected to be material, although an adverse outcome could affect results in a given period.

06—Continue

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