01—Abstract
Summary
Summary of the 10-K filed February 23, 2018. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported a 2017 net loss of $3.1 billiona, driven by a $3.3 billion estimated loss on the pending sale of its life and annuity run-off business (classified as discontinued operations, with the sale expected to close by June 30, 2018), a $877 million Tax Reform charge from the reduction of net deferred tax assets, and a $488 million after-tax pension settlement charge.
Excluding these items and discontinued operations, core earnings were $1,014 millionb, up from $912 million in 2016, reflecting growth in Group Benefits (boosted by the November 2017 Aetna U.S. group life and disability acquisition) and Mutual Funds (AUM up to $115 billion, including run-off assets). Underlying P&C performance was mixed: the consolidated P&C combined ratio was 100.0, with catastrophe losses of $836 million (hurricanes Harvey and Irma, California wildfires) partly offset by $41 million of favorable prior-year reserve development, and the Personal Lines combined ratio deteriorated to 104.2 while Commercial Lines was 97.3. The company's forward outlook points to improvement: management guides to a 2018 Commercial Lines combined ratio of 93.0 to 95.5 and a Personal Lines combined ratio of 96.0 to 98.0, citing lower catastrophe losses and automobile profit-improvement initiatives.
The Tax Reform rate cut is expected to benefit 2018 earnings, though management cautions that competitive pricing could pass some of that benefit to customers. Capital management was curtailed: equity repurchases were suspended in October 2017 and no 2018 repurchase plan is expected, while the dividend was raised to $0.25c per quarter. Book value per diluted share fell to $37.11 from $44.35.
Key risks for investors include reserve adequacy in long-tail lines (workers' compensation, general liability, and asbestos and environmental claims, with $1.2 billiond of remaining coverage under the NICO adverse development cover), catastrophe exposure, the execution and closing risk of the life and annuity sale, and the potential for further rating actions. Holding company liquidity of $1.1 billion, $1.4 billion of available P&C subsidiary dividend capacity, and $1.0 billion of revolving credit capacity provide a solid near-term liquidity cushion.
02—Key points
Key Highlights
- Net loss of $3.1 billion ($8.61 per share) versus 2016 net income of $896 million, driven primarily by a $2.9 billion loss from discontinued operations tied to the pending sale of the life and annuity run-off business.
- Core earnings rose to $1,014 million from $912 million in 2016, excluding realized gains, pension settlement, Tax Reform impact, and discontinued operations.
- Tax Reform charge of $877 million from remeasuring net deferred tax assets at the new 21% federal rate, partly offset by an expected earnings benefit in 2018.
- Property & Casualty combined ratio of 100.0 (vs. 100.1 in 2016) with catastrophe losses of $836 million, up from $416 million; favorable prior-year reserve development of $41 million.
- Guidance for 2018 targets Commercial Lines combined ratio of 93.0–95.5 and Personal Lines combined ratio of 96.0–98.0, reflecting lower expected catastrophe losses and automobile profitability improvements.
- Capital returns scaled back: equity repurchases of $1.03 billion in 2017 were suspended in October 2017, with no 2018 repurchase plan expected; quarterly dividend increased to $0.25.
- Book value per diluted share declined to $37.11 from $44.35, reflecting the sale-related loss and the Tax Reform charge; total stockholders' equity fell 20% to $13.5 billion.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2017filed February 23, 2018Financial Statements
FY2017 against FY2016
| Line item | FY2017FY2016 | Change |
|---|---|---|
| Revenue | $17.16B$16.29B | +5.3% |
| Operating Expenses | $4.56B$3.52B | +29.4% |
| Operating Income | -$262.00M$613.00M | −142.7% |
| Interest Expense | $316.00M$327.00M | −3.4% |
| Net Income | -$3.13B$896.00M | −449.4% |
| EPS (Basic) | $-8.61$2.31 | −472.7% |
| EPS (Diluted) | $-8.61$2.27 | −479.3% |
| Shares Outstanding (Basic) | 363.70M387.70M | −6.2% |
| Shares Outstanding (Diluted) | 363.70M394.80M | −7.9% |
05—Questions
Frequently Asked Questions
Why did Hartford report a large net loss in 2017 when core earnings were positive?
The net loss of $3.1 billion was driven mainly by a $3.3 billion estimated loss on the sale of the life and annuity run-off business, which is reported as discontinued operations. Other non-recurring charges included an $877 million Tax Reform deferred tax charge and an $750 million pre-tax ($488 million after-tax) pension settlement. Core earnings, which exclude these items, were $1,014 million.
When is the life and annuity run-off sale expected to close, and what does Hartford keep?
The sale to Hopmeadow Acquisition, Inc. is expected to close by June 30, 2018, subject to regulatory approval. Hartford receives roughly $1.4 billion in cash after a $300 million pre-closing dividend, plus a 9.7% limited partnership stake valued at $164 million, and retains estimated tax benefits of about $700 million. Until closing, results from the run-off business flow to the buyer, so the loss estimate is largely unchanged by ongoing earnings.
What are the main risks in Hartford's P&C reserves?
The most significant reserve risks are in long-tail lines such as workers' compensation ($9.6 billion net reserves), general liability, and asbestos and environmental (A&E) claims. Hartford has $1.2 billion of remaining coverage under the NICO adverse development cover for A&E, which limits exposure to further adverse development. A 2.5-point change in personal auto severity trend could move reserves by about $80 million, while a 2% change in workers' compensation paid development could shift them by about $400 million.
Will Hartford resume share buybacks?
Not currently. Hartford suspended 2017 equity repurchases on October 13, 2017 and does not expect to authorize a repurchase plan in 2018. The company instead raised its quarterly dividend to $0.25 per share and cited the holding company's $1.1 billion of cash and investments and $1.4 billion of P&C subsidiary dividend capacity as sources for shareholder returns and debt obligations.
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