01—Abstract
Summary
Summary of the 10-K filed February 24, 2017. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) ended 2016 with a year of weaker reported earnings, driven largely by a $650 milliona premium paid for an asbestos and environmental (A&E) adverse development cover (ADC) with National Indemnity Company, a Berkshire Hathaway subsidiary.
Net income fell to $896 millionb, or $2.27 per diluted share, from $1,682 million ($3.96) in 2015. Excluding the ADC charge and other non-core items, the company reported core earnings of $1,335 million, down from $1,650 million. Total revenues were roughly flat at $18.3 billion, with earned premiums up 2% to $13.8 billion, but fee income and net investment income declined as the Talcott Resolution annuity book continues to run off.
The core insurance franchises showed mixed results. Commercial Lines remained solid with a 92.8 combined ratio and $1,007 millionc of net income. Personal Lines swung to an underwriting loss, with its combined ratio rising to 104.8 from 97.0, driven by auto liability severity and $151 million of unfavorable prior-year development.
Total P&C prior-year reserve development was unfavorable by $457 milliond, principally from asbestos, environmental and personal auto liability reserves. Management guides to improvement in Personal Lines auto in 2017 through pricing and underwriting actions, though severity trends remain a risk. Capital management remained active: HIG repurchased $1.33 billion of common stock in 2016 and paid $334 million in dividends, with a new $1.3 billion buyback authorization running through 2017.
Book value per diluted share rose to $44.35 from $42.96 despite a 4% decline in total stockholders' equity, reflecting a 7% reduction in shares outstanding. Holding-company liquidity was $1.2 billion at year-end, and the company issued $500 million of junior subordinated notes in February 2017 to pre-fund a higher-cost debenture call in 2018.
02—Key points
Key Highlights
- Net income fell 47% to $896 million ($2.27 diluted EPS) from $1,682 million, largely due to a $650 million pre-tax loss on the NICO asbestos and environmental adverse development cover.
- Core earnings declined about 19% to $1,335 million from $1,650 million, reflecting higher auto loss costs and lower fee and investment income.
- Property & Casualty combined ratio rose to 100.1 from 96.6, with $457 million of unfavorable prior-year reserve development and $416 million of catastrophe losses.
- Personal Lines posted a combined ratio of 104.8 and an underwriting loss of $189 million, with auto liability severity the primary driver; management expects double-digit written pricing increases in 2017.
- Commercial Lines remained profitable with a 92.8 combined ratio and $1,007 million of net income, and guidance calls for low single-digit written premium growth in 2017.
- Shareholder returns were strong: $1.33 billion of buybacks (30.8 million shares) and $334 million of dividends, with book value per diluted share up to $44.35 from $42.96.
- Talcott Resolution (legacy annuities) continues to run off, with account values falling to $150 billion and 2017 core earnings guided to about $300 million, lowering future earnings contribution.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2016filed February 24, 2017Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $16.29B$16.00B | +1.8% |
| Operating Expenses | $3.52B$3.46B | +1.9% |
| Operating Income | $613.00M$1.19B | −48.4% |
| Interest Expense | $327.00M$346.00M | −5.5% |
| Net Income | $896.00M$1.68B | −46.7% |
| EPS (Basic) | $2.31$4.05 | −43.0% |
| EPS (Diluted) | $2.27$3.96 | −42.7% |
| Shares Outstanding (Basic) | 387.70M415.50M | −6.7% |
| Shares Outstanding (Diluted) | 394.80M425.20M | −7.1% |
05—Questions
Frequently Asked Questions
Why did HIG's net income fall so sharply in 2016?
The main driver was the $650 million pre-tax premium paid for the asbestos and environmental adverse development cover with National Indemnity Company, recorded as a loss on reinsurance transaction. Higher auto liability loss costs, unfavorable prior-year reserve development of $457 million, and lower fee and investment income also contributed. The company argues core earnings, which exclude the ADC charge and realized gains or losses, better reflect underlying performance.
What does the NICO adverse development cover do for investors?
It reinsures substantially all of HIG's net A&E reserve development up to $1.5 billion above roughly $1.7 billion of existing net A&E reserves at year-end 2016. This caps much of the tail risk on asbestos and environmental claims, although HIG remains liable if the reinsurer fails to pay, and cumulative adverse development above $650 million is charged to earnings until a deferred gain is recognized.
Is Personal Lines auto profitable again, and what should investors expect in 2017?
Not yet. The Personal Lines combined ratio deteriorated to 104.8 in 2016, with the auto combined ratio at 111.6. Management expects written pricing increases at or near double digits in 2017 and targets a Personal Lines combined ratio of about 99 to 101. Achieving this depends on loss cost severity moderating, which management acknowledges had not yet happened by year-end 2016.
How strong is HIG's capital position and capital return capacity?
Statutory capital was $14.3 billion, and the P&C subsidiaries' RBC ratio was above 200% of the Company Action Level, with life subsidiaries above 400%. HIG expects roughly $1.5 billion of P&C dividend capacity and about $850 million of net P&C dividends in 2017. Holding-company resources were $1.2 billion, and the $1.3 billion buyback authorization, debt maturities of $416 million in March 2017, and interest of about $320 million are funded from these sources.
What risks remain in the legacy Talcott Resolution business?
Talcott's variable annuity book faces equity market, interest rate and policyholder behavior risk, with hedging gains and losses flowing through realized capital results. Its revenues and earnings are expected to decline as contracts lapse, and 2017 core earnings are guided to about $300 million. Remaining risks include higher statutory capital needs in market declines and potential DAC write-downs if assumptions prove inaccurate.
06—Continue