01—Abstract
Summary
Summary of the 10-K filed February 27, 2015. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported 2014 net income of $798 milliona, or $1.73 per diluted share, up sharply from $176 million in 2013, but the improvement was driven largely by a smaller loss from discontinued operations ($551 million vs. $1,049 million) following the 2014 sale of Hartford Life Insurance KK and the 2013 sales of its U.K. annuity, Retirement Plans and Individual Life businesses.
Income from continuing operations rose 10% to $1,349 millionb, supported by a $299 million pre-tax improvement in current accident year Property & Casualty underwriting before catastrophes; the P&C combined ratio before catastrophes and prior year development improved to 91.5 from 94.4 (as reported in the filing's highlights). The core franchise, comprising Commercial Lines, Personal Lines, Group Benefits and Mutual Funds, showed steady earnings, while the legacy Talcott Resolution annuity runoff continued to shrink, with account value down to roughly $185 billion from $219 billion and a net loss of $187 million. Capital management was active: the company repurchased about $1.8 billion of stock in 2014 and has $979 million remaining under its authorization through 2015.
Total assets were $245 billionc and stockholders' equity was $18.7 billion at year-end, with book value per diluted share (excluding AOCI) rising to $40.71. Key risks for investors include ongoing asbestos and environmental reserve strengthening ($228 million of unfavorable prior-year development in 2014), sensitivity of the variable annuity book to equity markets and interest rates, a sustained low interest rate environment pressuring net investment income (which fell 3.4% to $3,154 million), and expected earnings declines from the Talcott Resolution runoff. Management expects low-to-mid single-digit Commercial Lines premium growth and a slight decline in investment yield in 2015.
02—Key points
Key Highlights
- Net income of $798 million ($1.73 per diluted share) vs. $176 million ($0.36) in 2013; income from continuing operations up 10% to $1,349 million.
- P&C combined ratio before catastrophes and prior year development improved to 91.5 from 94.4, driven by lower current accident year losses in Commercial Lines.
- Prior year reserve strengthening of $228 million pre-tax, primarily for asbestos and environmental claims ($212 million asbestos strengthening in Q2 2014).
- Talcott Resolution (legacy annuities) account value fell to about $185 billion from $219 billion; the segment still posted a $187 million net loss, though it improved from $634 million.
- Net investment income declined 3.4% to $3,154 million; annualized after-tax investment yield of 3.0%, with new money yields down to 3.6% from 3.8%.
- Repurchased about $1.8 billion of common stock in 2014; $979 million remains under the repurchase authorization expiring December 31, 2015; quarterly dividend raised to $0.18.
- Book value per diluted share (excluding AOCI) rose to $40.71 from $39.30; total stockholders' equity of $18.7 billion and total assets of $245 billion at year-end.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2014filed February 27, 2015Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $18.61B$20.67B | −10.0% |
| Operating Expenses | $4.03B$4.18B | −3.5% |
| Operating Income | $1.35B$1.23B | +10.1% |
| Interest Expense | $376.00M$397.00M | −5.3% |
| Net Income | $798.00M$176.00M | +353.4% |
| EPS (Basic) | $1.81$0.37 | +389.2% |
| EPS (Diluted) | $1.73$0.36 | +380.6% |
| Shares Outstanding (Basic) | 441.80M447.70M | −1.3% |
| Shares Outstanding (Diluted) | 460.20M490.60M | −6.2% |
05—Questions
Frequently Asked Questions
Why did net income improve so much in 2014?
Most of the improvement came from a much smaller loss from discontinued operations ($551 million in 2014 vs. $1,049 million in 2013), reflecting the absence of 2013-level losses from the U.K. and Japan annuity businesses. Income from continuing operations also rose 10%, helped by better P&C underwriting results and a $213 million loss on debt extinguishment in 2013 that did not recur, partly offset by lower investment income.
How healthy is the Property & Casualty business?
Underwriting results improved: the current accident year combined ratio before catastrophes and prior year development fell to 91.5, Commercial Lines written premium grew 3%, and Personal Lines grew 4%. Catastrophe losses rose modestly to $341 million pre-tax, and the company expects the 2015 Commercial Lines combined ratio before catastrophes to be between roughly 89.5 and 91.5.
What are the main risks to the balance sheet?
Key risks include asbestos and environmental reserves, where ultimate liabilities could exceed recorded reserves (net A&E reserves of about $2.0 billion, with an estimated range of $1.6 to $2.3 billion); exposure of the variable annuity book to equity market declines and interest rate moves; a sustained low interest rate environment; and potential rating downgrades that could raise funding costs and trigger derivative collateral calls.
What is the outlook for the Talcott Resolution segment?
Management expects Talcott Resolution account values and earnings to continue declining as the variable annuity block runs off, with the pace of surrenders a key driver. Unit costs are expected to rise as contract counts fall, creating margin compression. The company also expects variable annuity surrender rates to decline in 2015 after in-force management initiatives in 2014.
How is the company returning capital to shareholders?
In 2014 the company repurchased about $1.8 billion of common stock and paid $0.66 per share in dividends. As of February 2015 it had $979 million left under its equity repurchase authorization (expiring December 31, 2015) and declared a quarterly dividend of $0.18 per share. Management expects to receive about $600 million in 2015 dividends from its property-casualty subsidiaries, and it intends to repay $456 million of maturing senior notes in 2015.
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