01—Abstract
Summary
Summary of the 10-K filed March 1, 2013. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) enters 2013 as a smaller, more focused insurer after a strategic realignment announced in March 2012.
Total assets were $298.5 billiona and stockholders' equity was $22.4 billion at December 31, 2012. Management is concentrating on Property & Casualty, Group Benefits and Mutual Funds, and has placed the U.S. annuity book into runoff, sold Woodbury Financial Services, and completed the sales of Retirement Plans and Individual Life in January 2013. The Talcott Resolution runoff segment still carries about $228 billion of account values, so the legacy variable annuity book remains a major source of earnings and capital volatility.
Reported 2012 results were weak: net loss of $38 millionb (versus net income of $712 million in 2011), driven by a $587 million after-tax loss on extinguishment of debt, a $388 million after-tax reinsurance loss on the Individual Life disposition, and $711 million of pre-tax net realized capital losses, mostly from the international variable annuity hedge program. Core earnings, a non-GAAP measure, were $1.4 billion, up from $1.1 billion. The P&C Commercial combined ratio before catastrophes and prior-year development improved to 96.6, and Consumer Markets improved to 90.8.
Management guides to margin expansion in 2013 and announced a capital management plan (a $500 millionc equity repurchase through 2014 and roughly $1.0 billion of debt reduction). For investors, the central questions are whether the realignment reduces earnings volatility and capital sensitivity to equity and interest-rate markets, and whether the variable annuity hedge program and statutory surplus can absorb further stress. The filing flags several risks, including low interest rates, potential ratings downgrades (Moody's cut Hartford Life and Annuity to Baa2 in February 2013), asbestos and environmental reserve uncertainty, and a pending mutual fund fee lawsuit.
02—Key points
Key Highlights
- Strategic realignment: focus on Property & Casualty, Group Benefits and Mutual Funds; annuities placed in runoff; Retirement Plans and Individual Life sold in January 2013.
- 2012 net loss of $38 million (vs. $712 million net income in 2011), reflecting debt extinguishment loss ($587M after-tax), Individual Life disposition loss ($388M after-tax) and realized capital losses of $711M pre-tax.
- Core earnings of $1.4 billion in 2012, up from $1.1 billion in 2011 (non-GAAP measure).
- Capital management plan authorized January 31, 2013: $500 million equity repurchase through December 31, 2014 and approximately $1.0 billion of debt reduction.
- Property & Casualty Commercial combined ratio before catastrophes and prior-year development improved to 96.6 in 2012 (from 97.3); guidance for 2013 is 92.5 to 95.5.
- Talcott Resolution still manages approximately $228 billion of account values, including $94 billion of U.S. and international variable annuities, with elevated surrender rates (U.S. full surrender rate 10.9%).
- Ratings pressure: Moody's downgraded Hartford Life and Annuity Insurance Company to Baa2 in February 2013, triggering termination rights for seven derivative counterparties that the company is renegotiating.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2012filed March 1, 2013Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $22.09B$21.73B | +1.6% |
| Operating Expenses | $5.09B$5.27B | −3.4% |
| Operating Income | $220.00M$573.00M | −61.6% |
| Interest Expense | $457.00M$508.00M | −10.0% |
| Net Income | -$38.00M$712.00M | −105.3% |
| EPS (Basic) | $-0.18$1.51 | −111.9% |
| EPS (Diluted) | $-0.17$1.40 | −112.1% |
| Shares Outstanding (Basic) | 437.70M445.00M | −1.6% |
| Shares Outstanding (Diluted) | 465.90M478.00M | −2.5% |
05—Questions
Frequently Asked Questions
Why did Hartford report a net loss in 2012 when it had earned $712 million in 2011?
The 2012 loss was driven by several non-recurring or volatile items: a $587 million after-tax loss on repurchasing its 10% junior subordinated debentures from Allianz; a $388 million after-tax reinsurance loss on the sale of the Individual Life business, including goodwill impairment; and $711 million of pre-tax net realized capital losses, mainly from the international variable annuity hedge program as equity markets rose and the yen weakened. Excluding these items, core earnings were $1.4 billion.
What is the Talcott Resolution segment, and why does it matter to investors?
Talcott Resolution (formerly Life Other Operations) is a runoff business containing the U.S. and international variable annuities, institutional and private-placement life insurance, and the businesses sold in January 2013. It manages about 1.7 million annuity contracts with roughly $163 billion of account values. Its results are sensitive to equity markets, interest rates and currency, and it produces substantial earnings volatility through hedge programs and Unlock adjustments. Management expects account values and earnings to decline over time as the book shrinks.
How strong is the capital position, and what limits dividends from the insurance subsidiaries?
Total stockholders' equity was $22.4 billion, and aggregate statutory capital and surplus was about $14.1 billion. Property & casualty subsidiaries can pay up to about $1.4 billion in 2013 without prior approval, while life subsidiaries have negative earned surplus and cannot pay regular dividends in 2013 without approval. The holding company received a $1.2 billion extraordinary dividend from its Connecticut life subsidiaries in February 2013. Common dividends are $0.10 per quarter, subject to board discretion.
What are the key risks an investor should monitor?
Key risks include sustained low interest rates pressuring net investment income; equity market declines that increase variable annuity guarantee exposure and statutory reserve needs; further ratings downgrades that could raise borrowing costs and trigger derivative collateral calls (about $37 million to $57 million additional collateral for one- to two-notch downgrades); asbestos and environmental reserves of $2.1 billion net, which could develop adversely; and a mutual fund fee lawsuit that management cannot yet quantify. The company also notes the risk of catastrophe losses, with 2012 current-year catastrophes of $706 million pre-tax.
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