01—Abstract
Summary
Summary of the 10-K filed February 19, 2021. Cited figures are marked; the original filing is the authoritative source.
The Hartford (HIG) closed 2020 with $1.7 billiona in net income available to common stockholders ($4.76 per diluted share, down 17% and 16% respectively), driven by a swing from 2019 realized capital gains to 2020 losses, $278 million of direct P&C COVID-19 claims, $239 million of excess group life mortality, and $104 million of Hartford Next restructuring costs.
Book value per diluted share rose 15% to $50.39b, and ROE was 10%. Underlying operations were mixed: the P&C combined ratio improved 0.8 points to 100.4 on a reported basis, Personal Lines benefited from low auto frequency during the pandemic, and Group Benefits net income margin fell 2.4 points to 6.4%. The company is in the middle of integrating Navigators Group, acquired in May 2019, and is pursuing the Hartford Next cost program targeting roughly $500 million of annual savings by 2022.
Management guides to a weaker 2021 Group Benefits margin (3.5% to 4.5%) and Commercial Lines combined ratio of 93.5 to 95.5, while flagging persistent workers' compensation rate pressure, a declining reinvestment yield (2020 reinvestment rate 2.5%), and a pending sale of the Continental Europe operations. Balance-sheet items investors should watch include $1.5 billionc in share repurchase authorization for 2021-2022, a $1.7 billion A&E and pandemic-related litigation overhang (more than 230 COVID business income lawsuits), and the NICO adverse development cover, which has $640 million of remaining limit against Run-off A&E reserves. Holding company liquidity was $1.8 billion, and debt-to-capitalization fell to 19% after repaying $500 million of senior notes.
02—Key points
Key Highlights
- Net income available to common stockholders fell 17% to $1.7 billion ($4.76 diluted EPS), mainly due to a $409 million pre-tax swing from realized capital gains to losses and $278 million of P&C COVID-19 claims.
- Book value per diluted share rose 15% to $50.39, supported by net income in excess of dividends and a $1.4 billion increase in unrealized gains on AFS fixed maturities from lower interest rates.
- Total revenues were $20.5 billion, down 1%, as Navigators-driven Commercial Lines growth was offset by investment losses, pandemic-related premium declines, and lower net investment income.
- Net investment income fell 5% to $1.8 billion, as the average reinvestment rate of 2.5% was well below the 3.4% yield on maturities; management expects further pressure in 2021.
- Group Benefits net income margin fell 2.4 points to 6.4% due to $239 million of excess group life mortality from COVID-19, and 2021 guidance is for a further decline to 3.5% to 4.5%.
- Hartford Next targets about $500 million of annual cost savings relative to 2019 by 2022, with $158 million of restructuring charges expected in total and $104 million incurred in 2020.
- Capital return: a $1.5 billion repurchase authorization covers 2021 and 2022, and the company repaid $500 million of 5.5% senior notes in 2020, lowering debt-to-capitalization to 19%.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2020filed February 19, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $20.52B$20.74B | −1.0% |
| SG&A Expenses | $4.48B$4.58B | −2.2% |
| Operating Income | $1.74B$2.08B | −16.7% |
| Interest Expense | $236.00M$259.00M | −8.9% |
| Net Income | $1.74B$2.08B | −16.7% |
| EPS (Basic) | $4.79$5.72 | −16.3% |
| EPS (Diluted) | $4.76$5.66 | −15.9% |
| Shares Outstanding (Basic) | 358.30M360.90M | −0.7% |
| Shares Outstanding (Diluted) | 360.60M364.90M | −1.2% |
05—Questions
Frequently Asked Questions
Why did Hartford's earnings decline in 2020 despite a lower combined ratio in P&C?
Earnings fell mainly because of the swing from $395 million of net realized capital gains in 2019 to a $14 million loss in 2020, which includes $214 million of equity security losses in Q1. Other headwinds were $278 million of direct P&C COVID-19 losses, $239 million of group life excess mortality, $104 million of restructuring costs, and lower net investment income. These were partly offset by favorable non-COVID auto claim frequency, lower catastrophe-adjusted operating expenses, and $71 million of net favorable prior-year P&C development (before the NICO deferred gain).
How significant is the COVID-19 litigation exposure?
Management says more than 230 lawsuits have been filed against Hartford writing companies seeking coverage for business interruption losses, and some seek extra-contractual damages. The company denies coverage, citing policy exclusions for virus losses and the absence of direct physical loss, and says virtually no plaintiffs have quantified losses. Management cannot yet estimate a range of loss, but acknowledges that adverse outcomes could be material to operating results. Investors should treat this as an open, unquantified risk.
What are the main risks in the A&E reserves and the NICO adverse development cover?
The A&E ADC with NICO (a Berkshire Hathaway subsidiary) covers up to $1.5 billion of adverse development above existing net A&E reserves. As of year-end 2020, $860 million has been ceded, leaving $640 million of remaining coverage. The $650 million premium was paid up front, so ceded losses above that amount create a deferred gain that is recognized slowly, meaning future adverse development still hits earnings in the near term. Asbestos and environmental reserves were increased by $236 million in Q4 2020, mainly for PFAS and higher asbestos settlement rates.
What does the 2021 outlook imply for earnings and capital?
Management expects Commercial Lines combined ratio of 93.5 to 95.5 (vs. 100.4 in 2020), Personal Lines combined ratio of 94 to 96 (vs. 75.5 in 2020, which benefited from low COVID-era auto frequency), and Group Benefits net income margin of 3.5% to 4.5% (vs. 6.4%). Dividend capacity is $1.7 billion from P&C subsidiaries and $295 million from HLA, with $500 million of common dividends expected. Net investment income yield is expected to be lower, and workers' compensation pricing is expected to remain under pressure.
Is the dividend and buyback capacity sufficient?
The company declared a $0.35 quarterly common dividend in February 2021 (up from $0.325) and has about $1.8 billion of holding company liquidity plus a $750 million revolving credit facility, with no borrowings outstanding. A $1.5 billion repurchase authorization runs from January 2021 through December 2022, and $56 million was repurchased through February 18, 2021. Parent liquidity is supported by subsidiary dividends, and the company states that it manages capital to withstand significant economic stress. Share repurchases remain discretionary and depend on capital position and rating considerations.
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