01—Abstract
Summary
Summary of the 10-K filed February 22, 2019. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) reported a sharp rebound in 2018 GAAP results after a difficult 2017.
Net income available to common stockholders was $1,801 milliona, or $4.95 per diluted share, versus a net loss of $3,131 million in 2017. The swing reflects the absence of 2017's $3.3 billion after-tax loss on the sale of the life and annuity business (completed May 31, 2018), the absence of an $877 million Tax Reform charge, and the absence of a $488 million after-tax pension settlement charge. Management's non-GAAP core earnings rose to $1,575 million from $1,014 million, and the company's own key metrics show continued underlying profitability in Commercial Lines and Group Benefits, partly offset by Personal Lines, where the combined ratio rose to 106.3 on heavy catastrophe losses and homeowners weakness.
Book value per diluted share fell to $35.06b from $37.11, driven by a $2.2 billion decline in AOCI from widening credit spreads and higher rates. Total stockholders' equity was $13.1 billion. The balance sheet was reshaped by the life and annuity divestiture, with total assets falling to $62.3 billion from $225.3 billion.
Capital management is shifting toward growth and deal activity: the company issued $334 millionc of 6.0% Series G preferred stock, announced a $1.0 billion buyback authorization running through 2020, and agreed to acquire The Navigators Group for $2.1 billion in cash, expected to close in spring 2019. Key forward-looking items include a Commercial Lines combined ratio guidance of 94.5 to 96.5 for 2019 (versus 92.6 in 2018), with less favorable prior-year development expected, and a Personal Lines combined ratio guidance of 97.5 to 99.5 (versus 106.3). The company also carries a $977 million remaining adverse development cover from NICO on asbestos and environmental reserves, which limits but does not eliminate tail risk on its A&E exposure.
02—Key points
Key Highlights
- Net income available to common stockholders was $1,801M ($4.95 diluted EPS), a turnaround from a $3,131M net loss in 2017 that included a $3.3B after-tax loss on the life/annuity sale.
- Core earnings rose to $1,575M from $1,014M, a non-GAAP measure management emphasizes as the underlying operating performance indicator.
- Book value per diluted share declined to $35.06 from $37.11, mainly due to a $2.2B decline in AOCI from wider credit spreads and higher interest rates.
- Commercial Lines underwriting strengthened (combined ratio 92.6 vs 97.3), while Personal Lines deteriorated (combined ratio 106.3 vs 104.2) on $546M of current-year catastrophe losses and homeowners pressure.
- The company announced a $2.1B cash acquisition of The Navigators Group (expected close late March or April 2019) and a $1.0B share repurchase authorization through 2020.
- Full-year 2018 catastrophe losses were $821M net of reinsurance, roughly flat with 2017, while favorable prior-year reserve development of $167M helped results.
- Total assets fell to $62.3B from $225.3B after the May 2018 sale of the life and annuity business, leaving a more concentrated P&C and Group Benefits profile.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2018filed February 22, 2019Financial Statements
FY2018 against FY2017
| Line item | FY2018FY2017 | Change |
|---|---|---|
| Revenue | $18.95B$17.16B | +10.4% |
| SG&A Expenses | $4.28B— | — |
| Operating Expenses | $4.28B$4.56B | −6.2% |
| Operating Income | $1.49B-$262.00M | +666.8% |
| Interest Expense | $298.00M$316.00M | −5.7% |
| Net Income | $1.81B-$3.13B | +157.7% |
| EPS (Basic) | $5.03$-8.61 | +158.4% |
| EPS (Diluted) | $4.95$-8.61 | +157.5% |
| Shares Outstanding (Basic) | 358.40M363.70M | −1.5% |
| Shares Outstanding (Diluted) | 364.10M363.70M | +0.1% |
05—Questions
Frequently Asked Questions
Why did HIG swing from a large loss in 2017 to strong net income in 2018?
The 2017 results were depressed by a $3.3B after-tax loss on selling the life and annuity business, an $877M charge from reducing deferred tax assets under Tax Reform, and a $488M after-tax pension settlement charge. None of these recurred in 2018, and 2018 also benefited from a lower 21% federal tax rate and higher Group Benefits income after the Aetna group life and disability acquisition.
How is the core P&C business performing, and what is guided for 2019?
P&C combined ratio improved to 97.8 from 100.0. Commercial Lines was the strength, at 92.6 (underlying 91.5), while Personal Lines lagged at 106.3 due to heavy wildfire and storm losses and homeowners underwriting weakness. For 2019, management guides the Commercial Lines combined ratio to 94.5 to 96.5 and the Personal Lines combined ratio to 97.5 to 99.5, with lower catastrophe assumptions offset by less favorable reserve development and higher marketing spend.
What are the main risks around the asbestos and environmental (A&E) reserves?
Net A&E reserves total about $1.25B. HIG has an adverse development cover with National Indemnity (Berkshire Hathaway) that protects up to $1.5B of further adverse development above a $650M premium. As of year-end 2018, about $977M of that cover remained available. Adverse development beyond the cover limit would fall to earnings, and the company notes significant uncertainty in estimating these long-tail liabilities.
How is the company managing capital after the divestiture and the Navigators deal?
The holding company had $3.4B of cash and investments at year-end 2018 and expects about $2.2B of Navigators acquisition cash outflow in 2019. Expected sources include Group Benefits dividends of $250-300M, Hartford Funds dividends of $100-125M, and cash tax receipts of $600-700M. The company issued $334M of preferred stock in November 2018, repaid a $413M senior note in January 2019, and authorized a $1.0B buyback, which management expects to use mostly in 2020.
What should investors watch in 2019?
Key items include whether the Navigators acquisition closes on schedule and integrates successfully, the trajectory of Personal Lines pricing and profitability as auto and homeowners rate increases moderate, Commercial Lines workers' compensation pricing (guided flat to down), A&E reserve developments under the NICO cover, and the impact of rising credit spreads and interest rates on book value per share.
06—Continue