01—Abstract
Summary
Summary of the 10-K filed February 28, 2014. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported 2013 net income of $176 milliona, down from a $38 million loss in 2012, but this headline masks a sharp split between its operating businesses and its legacy variable annuity book.
Core earnings rose to $1,742 millionb from $1,386 million, driven by a Property & Casualty Commercial segment that improved its combined ratio before catastrophes and prior-year development to 93.0 from 96.6, and Consumer Markets and Group Benefits both improved. Results were pressured by a $1.6 billion loss on the international variable annuity hedge program, a $806 million pre-tax Unlock charge tied to Japan hedge cost assumptions, and a $1.57 billion pre-tax reinsurance loss on disposition from the Retirement Plans and Individual Life sales. Management has repositioned the company around Property & Casualty, Group Benefits and Mutual Funds, completing the sales of Retirement Plans, Individual Life and the U.K. annuity business in 2013 and placing the annuity book into runoff.
Talcott Resolution, the runoff segment, posted a $634 millionc net loss and account values fell to about $219 billion, with Japan full-surrender rates rising sharply to 28.8% from 3.4%. Capital actions were significant: $600 million of common stock was repurchased in 2013, debt was reduced by roughly $800 million through senior note repurchases, and a $2 billion equity buyback is authorized for 2014-2015.
For investors, the key trade-off is improving core profitability and a strengthened capital return program against continued earnings decline in Talcott Resolution, persistent variable annuity hedging volatility, and reserve uncertainty, particularly in asbestos and environmental claims and commercial auto and workers' compensation. The company's ability to execute its runoff and capital plans, and the expiring TRIPRA terrorism backstop at the end of 2014, are the main items to monitor.
02—Key points
Key Highlights
- Net income of $176 million in 2013 versus a $38 million loss in 2012; net income available to common shareholders was $166 million, or $0.34 diluted EPS.
- Core earnings rose to $1,742 million from $1,386 million, reflecting improved underwriting in Property & Casualty Commercial, where the combined ratio before catastrophes and prior-year development improved to 93.0 from 96.6.
- Talcott Resolution (runoff) posted a $634 million net loss, driven by an $806 million pre-tax Unlock charge and $1.56 billion of variable annuity hedge program losses, with Japan variable annuity surrenders rising sharply.
- Portfolio repositioning: sold Retirement Plans, Individual Life and U.K. annuity businesses in 2013, producing a $1.57 billion pre-tax reinsurance loss on disposition offset by realized gains, with total assets falling to $277.9 billion from $298.5 billion.
- Capital return: repurchased $600 million of common stock in 2013, reduced debt by about $800 million via senior note repurchases, and authorized a $2 billion equity repurchase program for 2014-2015; quarterly dividend raised to $0.15.
- Reserve risk remains elevated: $130 million net asbestos reserve strengthening in 2013, net A&E reserves of about $2.0 billion within a $1.6-2.3 billion range, and recurring commercial auto and workers' compensation development.
- Stockholders' equity declined to $18.9 billion from $22.4 billion, largely due to a $2.9 billion swing in accumulated other comprehensive income as interest rates rose and gains on sold businesses were reclassified.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2013filed February 28, 2014Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $20.67B$22.09B | −6.4% |
| Operating Expenses | $4.18B$5.09B | −18.0% |
| Operating Income | $1.23B$220.00M | +456.8% |
| Interest Expense | $397.00M$457.00M | −13.1% |
| Net Income | $176.00M-$38.00M | +563.2% |
| EPS (Basic) | $0.37$-0.18 | +305.6% |
| EPS (Diluted) | $0.36$-0.17 | +311.8% |
| Shares Outstanding (Basic) | 447.70M437.70M | +2.3% |
| Shares Outstanding (Diluted) | 490.60M465.90M | +5.3% |
05—Questions
Frequently Asked Questions
Why did The Hartford report a small net profit in 2013 when core earnings grew substantially?
Net income of $176 million was depressed by items management excludes from core earnings, including a $1.57 billion reinsurance loss on the sale of the Retirement Plans and Individual Life businesses, the $806 million pre-tax Unlock charge tied to Japan variable annuity hedge costs, realized capital losses from the international hedge program, and a $134 million loss from discontinued operations. Core earnings of $1,742 million exclude these items and better reflect the ongoing P&C, Group Benefits and Mutual Funds businesses.
What is the outlook for the Property & Casualty Commercial business in 2014?
Management expects low single-digit written premium growth in 2014, with pricing moderating due to increased competition. The combined ratio before catastrophes and prior-year development is projected at roughly 90.0 to 92.0, compared with 93.0 in 2013, reflecting expected earned pricing increases outpacing loss cost trends. Specialty lines premiums are expected to decline as the company streamlines its programs business.
What risks does the Talcott Resolution runoff segment pose for investors?
Talcott Resolution is expected to see account values and earnings decline as the variable annuity book runs off, with surrender rates rising in both the U.S. and Japan. Its international variable annuity hedge program produces unpredictable mark-to-market earnings volatility, and rising interest rates could expose certain products to disintermediation risk. Risk-reducing transactions could also lower statutory capital and shareholders' equity.
How strong is The Hartford's capital position and how is it returning capital?
Statutory capital and surplus was $14.7 billion at year-end 2013, and all U.S. property-casualty RBC ratios exceeded 200% of Company Action Level. The company repurchased $600 million of stock in 2013 and about $262 million from January through February 2014, has a $2 billion equity repurchase authorization for 2014-2015, and holds a $1.75 billion revolving credit facility. Dividends from insurance subsidiaries are limited by insurance holding company laws, and debt-to-capitalization rose to 26% from 24%.
What is the exposure from the expiring TRIPRA terrorism reinsurance program?
TRIPRA is scheduled to expire at the end of 2014 unless Congress reauthorizes it. Many policies written in 2014 extend beyond that date. The company's estimated deductible under the program is $1.2 billion for 2014, and reauthorization could narrow covered lines. Failure to renew could expose the company to substantially higher losses from a terrorist attack, and the company may need to reduce its terrorism exposure, which could affect its business.
06—Continue