01—Abstract
Summary
Summary of the 10-K filed February 21, 2020. Cited figures are marked; the original filing is the authoritative source.
The Hartford Financial Services Group (HIG) closed 2019 with strong results across its business lines.
Full-year income from continuing operations available to common stockholders was $2.06 billiona ($5.66 per diluted share), up sharply from 2018, with ROE of 14.4%. Book value per diluted share rose 25% to $43.85, driven largely by lower interest rates and tighter credit spreads lifting AOCI, plus net income in excess of dividends. Total revenues grew 9% to $20.7 billion, led by Commercial Lines (helped by the May 2019 Navigators Group acquisition for $2.1 billion) and Group Benefits, partly offset by a decline in Personal Lines.
The quality of results has some caveats. Core earnings rose to $2.06 billionb from $1.58 billion, but 2019 included favorable catastrophe comparisons and a lower group disability loss ratio that management does not expect to fully repeat. The company guides to lower 2020 Group Benefits net income margin (6.25%–7.25% vs. 8.8%), a Commercial Lines combined ratio of 95.5–97.5, a Personal Lines combined ratio of 98.5–100.5 with heavier catastrophe assumptions, and lower investment yields as reinvestment rates fall.
Navigators integration is still in progress, and Navigators required $91 millionc of ADC reinsurance premium plus $97 million of reserve strengthening at acquisition. Asbestos and environmental reserves were increased by $132 million gross in Q4 2019, largely ceded to NICO under an adverse development cover with $860 million of remaining coverage.
Capital management remained active: the company repurchased $200 milliond of stock in 2019 with $800 million of authorization remaining, raised $1.38 billion in new senior notes to refinance maturing debt, and increased its quarterly dividend to $0.325 per share in February 2020. Management flagged the Personal Lines business as needing to return to top-line growth, and the Brexit transition and reinvestment-rate pressure as ongoing watch items.
02—Key points
Key Highlights
- Net income available to common stockholders of $2.06 billion, or $5.66 per diluted share, up from $4.06 in 2018 (continuing operations); ROE of 14.4%.
- Book value per diluted share rose 25% to $43.85, largely from lower rates and tighter credit spreads lifting unrealized gains in AOCI.
- Total revenues of $20.7 billion, up 9%, driven by Commercial Lines (including Navigators Group, acquired May 2019 for $2.1 billion) and Group Benefits; Personal Lines revenue declined.
- Commercial Lines combined ratio of 97.7 in 2019 (vs. 92.6 in 2018), with 2020 guidance of 95.5–97.5; Personal Lines combined ratio improved to 95.0 from 106.3 on lower catastrophe losses.
- Group Benefits net income margin of 8.8% in 2019, with 2020 guidance lowered to 6.25%–7.25% on expected less favorable long-term disability claim incidence and lower investment income.
- A&E exposure remains managed via the NICO adverse development cover: $1.5 billion limit with $860 million of coverage remaining after $640 million of ceded development through 2019.
- Shareholder returns: $200 million in buybacks during 2019 with $800 million authorization remaining; quarterly common dividend raised to $0.325 for 2020.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2019filed February 21, 2020Financial Statements
FY2019 against FY2018
| Line item | FY2019FY2018 | Change |
|---|---|---|
| Revenue | $20.74B$18.95B | +9.4% |
| SG&A Expenses | $4.58B$4.28B | +7.0% |
| Operating Expenses | $4.58B$4.28B | +7.0% |
| Operating Income | $2.08B$1.49B | +40.4% |
| Interest Expense | $259.00M$298.00M | −13.1% |
| Net Income | $2.08B$1.81B | +15.4% |
| EPS (Basic) | $5.72$5.03 | +13.7% |
| EPS (Diluted) | $5.66$4.95 | +14.3% |
| Shares Outstanding (Basic) | 360.90M358.40M | +0.7% |
| Shares Outstanding (Diluted) | 364.90M364.10M | +0.2% |
05—Questions
Frequently Asked Questions
Did the Navigators Group acquisition improve The Hartford's financial position?
The acquisition added about $2.1 billion of cash consideration, $6.4 billion of acquired assets, and $580 million of identifiable intangibles, and it expanded Commercial Lines product breadth in global specialty. However, 2019 results absorbed a $91 million ADC premium, a $97 million reserve charge at acquisition, and $17 million of transaction costs. Management is still working to improve the acquired book's profitability through pricing and underwriting actions, and integration is not complete, so the long-term benefit remains to be proven.
What are the main risks to earnings heading into 2020?
Key risks include lower investment yields as reinvestment rates decline, continued workers' compensation rate pressure, and higher expected catastrophe losses in Personal Lines (7.1 points assumed in 2020 vs. 4.4 in 2019). Group Benefits margins are expected to compress due to less favorable long-term disability incidence and recoveries. Legacy asbestos and environmental reserves remain uncertain, though the NICO cover limits net exposure up to $1.5 billion.
How is The Hartford returning capital to shareholders?
The company repurchased 3.4 million shares for $200 million in 2019 under a $1.0 billion authorization that runs through December 31, 2020, leaving $800 million available. It also paid $434 million in common dividends in 2019 and declared a $0.325 quarterly dividend in February 2020, up from $0.30. Buybacks are dependent on market conditions and other factors.
Is the Personal Lines business recovering?
Not yet on a top-line basis. Personal Lines earned premiums fell 6% in 2019 to $3.2 billion as non-renewals outpaced new business, and management expects written premium to decline again in 2020, with new business growth concentrated in the direct channel. Profitability improved in 2019 mainly because catastrophe losses fell, and the 2020 combined ratio guidance of 98.5–100.5 implies some deterioration.
What is the status of the company's legacy asbestos and environmental exposure?
The company increased gross asbestos reserves by $76 million and environmental reserves by $56 million in its Q4 2019 review, citing higher mesothelioma settlement values and coal ash and PFAS remediation costs. Both increases were offset by equal recoverables under the NICO adverse development cover, so there was no net income impact in 2019. Net A&E reserves were $994 million at year-end 2019, and the company expects to keep reviewing them regularly.
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