01—Abstract
Summary
Summary of the 10-K filed February 26, 2016. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) closed 2015 with net income of $1,682 milliona, or $3.96 per diluted share, up sharply from $798 million ($1.73) in 2014.
The improvement was driven mainly by a $560 millionb smaller loss from discontinued operations (the 2014 Japan annuity sale), lower DAC amortization from a favorable Talcott Resolution unlock, and a $237 million decline in total revenues that was more than offset by lower benefits and expenses. Core earnings, a non-GAAP measure the company emphasizes, rose to $1,650 million from $1,548 million. Book value per diluted share excluding AOCI rose to $43.76 from $40.71, while total stockholders' equity fell to $17.6 billion from $18.7 billion because net unrealized gains on securities declined by about $1.1 billion as credit spreads widened and rates rose.
The Property & Casualty franchise is the core earnings engine. Commercial Lines posted a combined ratio before catastrophes and prior-year development of 90.0 (from 91.5), and written premium grew 4%c. Personal Lines deteriorated, with that same ratio rising to 92.0 from 90.6, driven by auto loss costs.
Unfavorable prior-year reserve development of $250 milliond, mostly asbestos and environmental claims, remains a recurring concern. Group Benefits core earnings margin improved to 5.6%, and Mutual Funds remains stable. Talcott Resolution, the runoff annuity book, continues to shrink (account value about $156 billion, down from $168 billion), with management expecting earnings to decline over time.
Capital management remains a priority: the company repurchased $1.25 billion of stock in 2015, reduced total debt to $5.4 billion from $6.1 billion, and holds $1.3 billion of remaining equity repurchase authorization through 2016. Risks highlighted in the filing include a prolonged low-rate environment, equity-market sensitivity of variable annuity guarantees, reserve uncertainty, and possible tax or regulatory changes, including the proposed DRD limitation in the federal budget.
02—Key points
Key Highlights
- Net income rose to $1,682M ($3.96 diluted EPS) from $798M ($1.73) in 2014; core earnings rose to $1,650M from $1,548M.
- Book value per diluted share (ex-AOCI) rose to $43.76 from $40.71, while total equity fell to $17.6B from $18.7B due to a $1.1B decline in unrealized gains.
- Commercial Lines combined ratio before catastrophes and prior-year development improved to 90.0 from 91.5; Personal Lines worsened to 92.0 from 90.6.
- Unfavorable prior-year reserve development of $250M, driven by asbestos and environmental reserves, continues to weigh on results.
- Talcott Resolution (annuity runoff) account value fell to about $156B from $168B; management expects earnings to decline as the book runs off.
- Returned capital through $1.25B of share repurchases and reduced total debt to $5.4B from $6.1B; $1.3B of repurchase authorization remains.
- 2016 outlook: Commercial Lines combined ratio of 89–91, Personal Lines 90–92, Group Benefits core margin of 5.5–6.0%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2015filed February 26, 2016Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $16.00B$18.61B | −14.1% |
| Operating Expenses | $3.46B$4.03B | −14.1% |
| Operating Income | $1.19B$1.35B | −11.9% |
| Interest Expense | $346.00M$376.00M | −8.0% |
| Net Income | $1.68B$798.00M | +110.8% |
| EPS (Basic) | $4.05$1.81 | +123.8% |
| EPS (Diluted) | $3.96$1.73 | +128.9% |
| Shares Outstanding (Basic) | 415.50M441.80M | −6.0% |
| Shares Outstanding (Diluted) | 425.20M460.20M | −7.6% |
05—Questions
Frequently Asked Questions
Why did net income improve so much in 2015?
Most of the $884M increase came from a $560M smaller loss from discontinued operations, which in 2014 included a loss on the sale of the Japan annuity business. Lower DAC amortization from a favorable Talcott Resolution unlock and lower operating expenses also contributed, partly offset by $156M of net realized capital losses.
Is the decline in stockholders' equity a concern?
The decline was mainly driven by a $1.1B drop in net unrealized gains on the investment portfolio from wider credit spreads and higher interest rates, not operating losses. Book value excluding AOCI actually increased to $43.76 per diluted share, so the change is largely a mark-to-market effect that can reverse.
How concentrated is the business in auto and asbestos exposure?
Personal auto liability and workers' compensation are the largest reserve lines. Asbestos and environmental reserves total about $2.0B net, and the filing notes that estimates remain highly uncertain. The company reported $250M of unfavorable prior-year development in 2015, and further adverse development could materially affect results.
What is the outlook for Talcott Resolution and capital returns?
Talcott's earnings are expected to decline as variable annuity surrenders and runoff reduce the book. Parent-level capital returns depend heavily on dividends from the insurance subsidiaries, so declining Talcott earnings may reduce the cash available for buybacks and debt reduction in future years.
06—Continue