01—Abstract
Summary
Summary of the 10-K filed February 24, 2012. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported 2011 net income of $1.68 billiona, a sharp recovery from net losses of $887 million in 2009 and a $887 million loss... more precisely, 2010 net income of $1.68 billion versus a 2010 figure restated in this filing, with 2011 total revenues of $21.9 billion and total stockholders' equity rising to $22.9 billion at year-end, up from $20.3 billion.
Book value growth was driven largely by a $2.2 billionb improvement in accumulated other comprehensive income as interest rates fell, which lifted the value of the fixed-income portfolio. Underlying operating performance was mixed: catastrophe losses rose, Property & Casualty Commercial's combined ratio before catastrophes and prior-year development deteriorated to 97.2%, and the company took a $530 million after-tax Unlock charge tied to variable annuity hedging costs and weaker separate-account returns. Reserve strengthening for asbestos ($290 million pre-tax) and workers' compensation also weighed on results.
Management is in the middle of a strategic review of its business portfolio, including the possible separation of its property-casualty and life businesses, and has signaled a shift toward protecting statutory surplus over GAAP earnings stability. Statutory surplus fell to $14.8 billionc, and management expects life-company surplus to be flat to negative in 2012. Investors should weigh the strong capital and balance-sheet recovery against persistent earnings volatility from variable annuity guarantees, elevated asbestos exposure, and the uncertain outcome of the strategic review.
02—Key points
Key Highlights
- Net income of $1.68 billion in 2011 versus a net loss of $887 million in 2009; diluted EPS of $1.30 (2011).
- Total stockholders' equity of $22.9 billion at December 31, 2011, up from $20.3 billion, driven by a $2.2 billion swing in AOCI as interest rates declined.
- A $530 million after-tax Unlock charge in 2011 (vs. a $111 million benefit in 2010) reflected higher variable annuity hedging costs and below-target separate account returns.
- Asbestos reserve strengthening of $290 million pre-tax in 2011 and workers' compensation reserve increases weighed on Property & Casualty results; the P&C Commercial combined ratio rose to 104.5%.
- Statutory surplus declined to $14.8 billion, with management expecting life-company statutory surplus to be flat to negative in 2012.
- Ongoing strategic review of the business portfolio, including a possible separation of property-casualty and life operations, with no decisions yet made.
- Quarterly dividend held at $0.10 per share; a $500 million share repurchase program was authorized in July 2011, of which $94 million had been used through February 17, 2012.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 24, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $21.73B$22.05B | −1.4% |
| Operating Expenses | $5.27B$5.33B | −1.1% |
| Operating Income | $573.00M$2.26B | −74.7% |
| Interest Expense | $508.00M$508.00M | 0.0% |
| Net Income | $712.00M$1.64B | −56.5% |
| EPS (Basic) | $1.51$2.60 | −41.9% |
| EPS (Diluted) | $1.40$2.40 | −41.7% |
| Shares Outstanding (Basic) | 445.00M431.50M | +3.1% |
| Shares Outstanding (Diluted) | 478.00M481.50M | −0.7% |
05—Questions
Frequently Asked Questions
Why did net income swing so sharply from 2010 to 2011?
Net income declined in 2011 mainly because of a $530 million after-tax Unlock charge (versus a benefit in 2010), higher catastrophe losses of $484 million after-tax, and unfavorable prior-year reserve development including asbestos strengthening. Higher variable annuity hedge losses also contributed, partly offset by a favorable tax settlement and the gain on the sale of Specialty Risk Services.
Is the company's capital position improving?
Stockholders' equity rose to $22.9 billion, largely from unrealized gains on the investment portfolio. However, statutory surplus fell to $14.8 billion, and management warned that life-company statutory surplus could be flat to negative in 2012, so RBC and ratings pressure remain key watch items.
What are the main risks from the variable annuity business?
The company guarantees minimum benefits on variable annuities, so equity market declines, low interest rates, and yen weakness increase its potential liabilities and hedging costs. These exposures cause earnings volatility under U.S. GAAP and can also strain statutory capital and credit ratings.
What is the status of the strategic review and possible divestitures?
Management is evaluating its business portfolio, which could include separating the property-casualty and life businesses, runoff of certain lines, or acquisitions and divestitures. No decisions had been made as of the filing, and such transactions could be dilutive, costly, or subject to regulatory and rating-agency approvals.
06—Continue