01—Abstract
Summary
Summary of the 10-K filed February 12, 2009. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported a severe 2008 downturn in its 10-K filed February 12, 2009.
The company posted a net loss of $2.7 billiona (EPS of -$8.99) versus net income of $2.9 billion in 2007, driven by a $10.3 billion mark-to-market loss on equity securities held for trading that back the Japanese variable annuity business (largely offset in benefits credited to policyholders), $5.9 billion of net realized capital losses (including $4.0 billion of other-than-temporary impairments and $650 million of SFAS 157 transition effects), a $932 million after-tax DAC unlock charge in Q3 2008, and $745 million of goodwill impairments in the Individual Annuity and International units. Total assets were $287.6 billion and stockholders' equity fell to $9.3 billion from $19.2 billion, reflecting $7.1 billion of unrealized losses on securities and $1.0 billion of share repurchases, partly offset by a $2.5 billion investment from Allianz SE. Capital and ratings pressure is the central investor concern.
Statutory surplus fell to an estimated $13.8 billionb from $15.9 billion, and in February 2009 Moody's, S&P and Fitch all downgraded the company's ratings (senior debt now Baa1, BBB and A-, respectively). Management said it expects continued pressure on capital in 2009, plans to reprice and restrict variable annuity guarantees, and has applied for up to $1.1 to $3.4 billion of Treasury Capital Purchase Program funds. The holding company depends on dividends from insurance subsidiaries, with extraordinary-dividend limits in effect through at least October 2009.
The Property & Casualty franchise remained comparatively stable. Ongoing Operations posted a 90.7 combined ratio (88.9 before catastrophes and prior-year development), with underwriting results of $1.1 billionc, and favorable prior-year reserve development of $355 million.
Net income was dragged down by realized investment losses, Other Operations (asbestos and environmental exposures) and a $1.4 billiond decline in P&C net income. The company also disclosed a Q1 2009 dividend cut to $0.05 per share and a sizable litigation docket, including broker-compensation class actions, an ERISA suit over company stock held in the savings plan, and an Ohio antitrust action.
02—Key points
Key Highlights
- Net loss of $2.7 billion ($8.99 per share) for 2008, compared with net income of $2.9 billion ($9.24 diluted) in 2007.
- Equity securities held for trading produced a $10.3 billion net investment loss, offset by a corresponding credit to policyholders, and net realized capital losses reached $5.9 billion, including $4.0 billion of other-than-temporary impairments.
- Stockholders' equity fell to $9.3 billion from $19.2 billion, reflecting $7.1 billion of unrealized securities losses, a $2.7 billion net loss, $1.0 billion of buybacks and $598 million of declared dividends, partly offset by the $2.5 billion Allianz SE investment.
- Estimated statutory capital and surplus declined to $13.8 billion from $15.9 billion, with Property & Casualty surplus down roughly 29% to $6.0 billion.
- Ratings were downgraded in February 2009: Moody's to Baa1 (senior debt) and A1 (insurance financial strength), Fitch to BBB, and S&P to A- (counterparty), with negative outlooks or watch status.
- Property & Casualty Ongoing Operations had a 90.7 combined ratio and $1.1 billion of underwriting results, while Other Operations, including asbestos and environmental reserves of $2.2 billion, posted a net loss of $97 million.
- The company sought up to $3.4 billion in Treasury Capital Purchase Program funding, pending approval, and it cut its quarterly dividend to $0.05 per share for Q1 2009.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2008filed February 12, 2009Financial Statements
FY2008 against FY2007
| Line item | FY2008FY2007 | Change |
|---|---|---|
| Revenue | $9.22B$25.92B | −64.4% |
| Operating Income | -$4.59B$4.00B | −214.6% |
| Interest Expense | $343.00M$263.00M | +30.4% |
| Net Income | -$2.75B$2.95B | −193.2% |
| EPS (Basic) | $-8.99$9.32 | −196.5% |
| EPS (Diluted) | $-8.99$9.24 | −197.3% |
| Shares Outstanding (Basic) | 306.70M316.30M | −3.0% |
| Shares Outstanding (Diluted) | 306.70M319.10M | −3.9% |
05—Questions
Frequently Asked Questions
Why did Hartford report such a large net loss in 2008?
The loss was driven mainly by investment-related charges and the variable annuity business. A $10.3 billion mark-to-market loss on equity securities that support the Japanese variable annuity product was largely offset in policyholder benefits, but realized capital losses of $5.9 billion, a $932 million after-tax DAC unlock charge, and $745 million of goodwill impairments in the Individual Annuity and International units all reduced earnings.
How much capital does The Hartford have and is it under pressure?
Stockholders' equity was $9.3 billion at year-end 2008, down from $19.2 billion, and estimated aggregate statutory capital and surplus was $13.8 billion. Management expects continued pressure on capital in 2009 because of variable annuity guarantee liabilities, credit-spread-driven unrealized losses and the ratings downgrades, and it may need to raise additional capital.
What do the February 2009 rating downgrades mean for investors?
Downgrades can raise the company's cost of capital, make its products less attractive to customers, and make it harder to refinance debt. A downgrade of about three notches could also trigger collateral calls on derivatives and counterparty termination rights, which could limit the company's ability to hedge.
Is the dividend safe, and what limits the holding company's cash flow?
The quarterly dividend was reduced to $0.05 per share for Q1 2009, from $0.53 in earlier 2008 quarters. As a holding company, Hartford relies on dividends from its insurance subsidiaries, and Connecticut law restricts extraordinary dividends through at least October 2009, so any further dividend reductions or suspensions remain possible.
What is the outlook for the Property & Casualty business?
The P&C business was the company's relative bright spot, with a 90.7 combined ratio and favorable prior-year reserve releases. Management expects softer written premium in 2009, higher loss-cost severity and a combined ratio before catastrophes that is higher than 2008's 88.9, and it has assumed catastrophe losses of roughly 3% to 3.5% of earned premium. Asbestos and environmental reserves remain a significant source of uncertainty.
06—Continue