01—Abstract
Summary
Summary of the 10-K filed February 23, 2010. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported a net loss of $887 milliona for 2009 (net loss to common shareholders of $1,014 million, or $(2.93) per diluted share), compared with a net loss of $2,749 million in 2008.
The swing from 2008 reflects a sharp reduction in net realized capital losses (from $5.9 billion to $2.0 billionb, including $1.5 billion of other-than-temporary impairments versus $4.0 billion in 2008) and a $3.2 billion positive variable annuity hedge result, partly offset by a $1.0 billion after-tax DAC Unlock charge, a $300 million Allianz-related realized loss, and continued weakness in Life results. Property & Casualty returned to profitability with net income of $983 million, though Ongoing Operations' combined ratio deteriorated to 90.4 with prior-year reserve releases helping offset higher current-year loss costs in Personal Lines. Balance sheet capital improved materially: total stockholders' equity rose to $17.9 billion from $9.3 billion, driven by $3.4 billion of Series E preferred stock and warrants issued to the U.S. Treasury under the Capital Purchase Program, $887 million of common equity raised through a discretionary equity issuance program, and a $912 million cumulative-effect increase to retained earnings from the adoption of new other-than-temporary impairment guidance.
Unrealized losses in the AFS portfolio narrowed as credit spreads tightened. Statutory surplus rose to an estimated $14.7 billionc from $12.1 billion. The company was downgraded by multiple rating agencies in 2009, which the filing identifies as a key risk to competitiveness, cost of capital and collateral requirements on derivatives.
Key risks for investors remain significant: exposure to variable annuity guarantees (U.S. GMWB net liability of $2.0 billiond, GMDB and GMIB combined net liability of $989 million), commercial real estate-related securities, sub-prime RMBS, and asbestos and environmental reserves of $2.2 billion net. Management expects continued pressure on variable annuity sales, lower Retail and Institutional earnings, and further Life restructuring including the exit of several Institutional businesses and the suspension of new sales in Japan and Europe. The company also notes that the CPP preferred stock carries a 5% dividend (rising to 9% after five years) and that repayment will likely require additional capital raising.
02—Key points
Key Highlights
- Net loss of $887 million for 2009 versus $2.7 billion net loss in 2008; loss per diluted share of $(2.93) compared with $(8.99), largely reflecting lower realized capital losses ($2.0 billion vs. $5.9 billion) and a $3.2 billion swing from the International variable annuity mark-to-market.
- Total stockholders' equity more than doubled to $17.9 billion, supported by $3.4 billion in Treasury preferred stock and warrants (CPP), $887 million of common equity from a discretionary issuance program, and a $912 million cumulative-effect benefit from new OTTI accounting.
- Property & Casualty net income of $983 million versus $92 million in 2008; Ongoing Operations combined ratio of 90.4 (vs. 90.7), supported by $186 million of net favorable prior-year reserve development.
- Life segment net loss of $1.3 billion, with Retail ($410 million loss) and Institutional ($515 million loss) the largest drags; the company recorded a $1.0 billion after-tax DAC Unlock charge in 2009.
- Other-than-temporary impairments of $1.5 billion recognized in earnings, concentrated in CRE CDOs, below-prime RMBS and CMBS, with an additional $683 million of non-credit impairments recorded in OCI.
- Multiple credit rating downgrades in 2009 across the group's financial strength and debt ratings; management cites ratings as a critical factor for future sales, cost of capital and derivative collateral calls (roughly $50–70 million additional collateral for one- or two-notch downgrades).
- Statutory surplus estimated at $14.7 billion at year-end 2009, up from $12.1 billion, while Life and P&C continue to face equity-market sensitivity through variable annuity guarantees and the RBC ratio.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2009filed February 23, 2010Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $24.43B$9.22B | +165.0% |
| Operating Expenses | $4.37B— | — |
| Operating Income | -$1.73B-$4.59B | +62.4% |
| Interest Expense | $476.00M$343.00M | +38.8% |
| Net Income | -$887.00M-$2.75B | +67.7% |
| EPS (Basic) | $-2.93$-8.99 | +67.4% |
| EPS (Diluted) | $-2.93$-8.99 | +67.4% |
| Shares Outstanding (Basic) | 346.30M306.70M | +12.9% |
| Shares Outstanding (Diluted) | 346.30M306.70M | +12.9% |
05—Questions
Frequently Asked Questions
Why did Hartford swing from a $2.7 billion net loss in 2008 to an $887 million net loss in 2009?
The main driver was lower net realized capital losses, which fell to $2.0 billion from $5.9 billion, including OTTI losses of $1.5 billion versus $4.0 billion in 2008. Gains of $631 million on the variable annuity hedge program in 2009 compared with losses of $639 million in 2008. Goodwill impairments were also much smaller ($32 million versus $745 million). These benefits were partly offset by a $1.0 billion after-tax DAC Unlock charge and a roughly $300 million realized loss tied to the Allianz contingent obligation.
How well capitalized is the company after the 2009 capital actions?
Total stockholders' equity increased to $17.9 billion from $9.3 billion, and the company had $13.8 billion of liquidity available at the holding company and insurance subsidiary levels at year-end. Estimated aggregate statutory capital and surplus rose to $14.7 billion. Management says repayment of the $3.4 billion of CPP preferred stock will likely require raising additional capital, and it notes the risk of dilution to shareholders.
What are the biggest risks to investors in the variable annuity business?
The U.S. GMWB net liability was about $2.0 billion at year-end, and the net GMIB/GMDB liability was about $989 million. Declines in equity markets increase these liabilities, and the statutory reserve requirements can rise at a greater-than-linear rate in extreme scenarios. The company has reduced its variable annuity risk by repricing and launching a new product with lower guarantees, but it reports that hedging costs remain high and that the hedging program produces greater GAAP earnings volatility.
Is the company's dividend secure, and what do shareholders receive?
The board declared a quarterly common dividend of $0.05 per share, payable April 1, 2010, down from $0.53 per quarter in early 2008. Common dividends for 2009 totaled $0.20 per share. The CPP agreement restricts quarterly common dividends to $0.05 without Treasury consent until June 2012 or until the preferred stock is redeemed. Preferred dividends of roughly $170 million are expected over the next twelve months, and the holding company's approximately $80 million common dividend budget is at the board's discretion.
What is the outlook for the Property & Casualty business?
Management expects Personal Lines written premiums to be roughly flat in 2010, with AARP growth offset by Agency declines. Small Commercial is expected to see single-digit written premium growth, while Middle Market and Specialty Commercial face continued pricing pressure. Combined ratios are expected to rise in several segments as current accident-year loss costs increase and expense ratios rise. Asbestos and environmental reserves remain a source of uncertainty, with a recorded net reserve of $2.2 billion within an estimated range of $1.75 billion to $2.52 billion.
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