01—Abstract
Summary
Summary of the 10-K filed February 25, 2011. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) closed 2010 with a sharp turnaround from 2009's net loss.
Net income was $1.68 billiona (versus a $887 million loss in 2009), and net income available to common shareholders was $1.17 billion, or $2.49 diluted EPS. The improvement was driven mainly by a much smaller DAC Unlock charge (a $111 million after-tax benefit in 2010 versus a $1.0 billion charge in 2009) and far lower net realized capital losses ($554 million pre-tax versus $2.0 billion). Excluding those items, earnings declined about $46 million year over year, so the underlying business was roughly flat.
Total revenues were $22.4 billion and total stockholders' equity rose to $20.3 billionb, with book value supported by $2.0 billion of improved unrealized investment gains. Balance sheet and capital actions were significant in 2010. The company repurchased all $3.4 billion of Series E preferred stock issued to the U.S. Treasury under the Capital Purchase Program, funded by a $1.6 billion common stock offering, $1.1 billion of senior notes, and $556 million of 7.25% mandatory convertible preferred stock.
The Treasury then sold its warrants in a secondary offering. Statutory surplus rose to $15.5 billionc, and the holding company is no longer subject to CPP restrictions. Management also flagged continued risks: heavy exposure to variable annuity guarantees (U.S. GMWB account value of $44.8 billion), a 2011 dividend increase to $0.10 per quarter, and ongoing asbestos and environmental reserve uncertainty (net A&E reserves of $2.14 billion).
The company is also reshaping its portfolio. It reorganized into three customer-facing divisions (Commercial Markets, Consumer Markets, and Wealth Management), announced divestitures of Hartford Investments Canada and Specialty Risk Services, and suspended new sales in Japan and Europe in 2009.
Management emphasizes protecting statutory surplus over GAAP earnings smoothness, which it expects to increase GAAP earnings volatility. Investors should weigh the 2010 recovery against these ongoing risk-management trade-offs, reserve uncertainty, and exposure to a still-fragile real estate and credit backdrop.
02—Key points
Key Highlights
- Net income of $1.68 billion in 2010, versus a net loss of $887 million in 2009; diluted EPS of $2.49 versus a loss of $2.93.
- Excluding net realized capital losses, DAC Unlocks, and goodwill impairments, earnings were down about $46 million year over year, so the underlying business was roughly flat.
- Total assets of $318.3 billion and stockholders' equity of $20.3 billion at year-end 2010, up from $17.9 billion.
- Repurchased all $3.4 billion of Series E preferred stock held by the U.S. Treasury, funded by a $1.6 billion common offering, $1.1 billion of senior notes, and $556 million of mandatory convertible preferred stock.
- Variable annuity exposure remains significant: U.S. GMWB account value of $44.8 billion and U.S. GMDB exposure of $10.7 billion gross, with the company deliberately prioritizing statutory surplus protection over GAAP earnings stability.
- Asbestos and environmental reserves of $2.14 billion net, with ongoing uncertainty; management reports total non-A&E reserves 3.2% above actuarial indication.
- Dividend increased to $0.10 per quarter for 2011 (from $0.05), and the company divested non-core businesses including its Canadian mutual fund operation and Specialty Risk Services.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2010filed February 25, 2011Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $22.05B$24.43B | −9.8% |
| Operating Expenses | $5.33B$4.37B | +21.9% |
| Operating Income | $2.26B-$1.73B | +231.0% |
| Interest Expense | $508.00M$476.00M | +6.7% |
| Net Income | $1.64B-$887.00M | +284.4% |
| EPS (Basic) | $2.60$-2.93 | +188.7% |
| EPS (Diluted) | $2.40$-2.93 | +181.9% |
| Shares Outstanding (Basic) | 431.50M346.30M | +24.6% |
| Shares Outstanding (Diluted) | 481.50M346.30M | +39.0% |
05—Questions
Frequently Asked Questions
Why did Hartford swing from a loss in 2009 to a profit in 2010?
The swing was driven mainly by non-recurring items. The 2009 results included a $1.0 billion after-tax DAC Unlock charge and $1.7 billion of after-tax net realized capital losses, while 2010 had a $111 million after-tax DAC Unlock benefit and $184 million of after-tax capital losses. Underlying earnings excluding these items were roughly flat, declining about $46 million.
Is Hartford's variable annuity business a risk to investors?
Yes. The company has large guaranteed benefit exposures (U.S. GMWB account value of $44.8 billion, with a net amount at risk of $1.1 billion after reinsurance). Declines in equity markets or interest rates increase liabilities and can reduce statutory surplus. Management has shifted its hedging to protect statutory capital, which the filing notes can increase GAAP earnings volatility and produce charges in rising equity markets.
How strong is the balance sheet after the 2010 capital actions?
Capital position improved. Stockholders' equity excluding AOCI rose to $21.3 billion, debt-to-capitalization was 17% against a 40% covenant limit, and the company had $2.0 billion of holding company cash and investments. Aggregate statutory capital and surplus of $15.5 billion increased $764 million. The company also no longer has CPP restrictions after the Series E redemption.
What are the main reserve risks?
Total property and casualty net reserves were $17.9 billion at year-end 2010. The largest uncertainty is asbestos and environmental claims, with net reserves of $2.14 billion versus an estimated range of $1.67 billion to $2.44 billion. Reserve releases of $196 million in 2010 partially offset $256 million of A&E strengthening, and the company warns that adverse developments in workers' compensation, auto, and general liability could also be material.
Will Hartford pay a higher dividend going forward?
The board declared a $0.10 quarterly dividend for 2011, up from $0.05 per quarter in 2010, payable April 1, 2011. Dividend decisions remain at the board's discretion, and holding company dividends depend on subsidiary dividends. Property-casualty subsidiaries can pay up to about $1.5 billion to the holding company in 2011 without prior approval, while life subsidiaries can pay only about $83 million.
06—Continue