Business Context and Reporting Period
Company: The Hartford Financial Services Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Overview: The Hartford is a financial holding company providing investment products and life and property & casualty insurance. The reporting period was significantly impacted by the global recession, financial market stress, and rating downgrades by major agencies (Fitch, S&P, A.M. Best, Moody's) in early 2009. The Company suspended new sales in its Japan and European operations and is evaluating strategic options for its Institutional markets business.
Key Financial Metrics
| Metric (in millions, except per share) | Q1 2009 | Q1 2008 |
|---|---|---|
| Total Revenues | $5,394 | $1,544 |
| Net Income (Loss) | $(1,209) | $145 |
| Net Income (Loss) per Share (Basic/Diluted) | $(3.77) | $0.46 |
| Total Assets | $276,168 | $287,583 |
| Total Liabilities | $268,281 | $278,223 |
| Stockholders' Equity | $7,860 | $9,268 |
| Net Cash Provided by Operating Activities | $1,010 | $567 |
| Net Cash Used for Investing Activities | $(1,011) | $(1,820) |
| Net Cash Provided by Financing Activities | $126 | $1,350 |
Material Changes vs. Prior Period
- Net Loss: The Company reported a net loss of $1.2 billion in Q1 2009, a reversal from a net income of $145 million in Q1 2008. This decline was driven primarily by a $1.5 billion after-tax Deferred Policy Acquisition Costs (DAC) "Unlock" charge in the Life segment and significant declines in assets under management due to equity market depreciation.
- Investment Performance: Net investment income (loss) improved from a loss of $2.4 billion in Q1 2008 to income of $196 million in Q1 2009. This improvement was largely due to a reduction in mark-to-market losses on equity securities held for trading (supporting international variable annuities) compared to the prior year, partially offset by lower yields on fixed maturities and losses in alternative investments.
- Realized Gains/Losses: Net realized capital gains were $84 million in Q1 2009, compared to losses of $1.4 billion in Q1 2008. The shift to gains was primarily driven by favorable changes in the valuation of Guaranteed Minimum Withdrawal Benefit (GMWB) liabilities and related derivatives.
- Property & Casualty: Net income for the Property & Casualty segment decreased to $112 million from $326 million in the prior year, driven by higher realized capital losses, lower investment income, and reduced underwriting results.
Guidance, Outlook, and Risks
- Outlook: Management expects continued pressure on capital and earnings due to the recessionary environment. The Company is actively de-risking its variable annuity product features and increasing rider fees. It expects Ongoing Operations written premiums to be lower in 2009 and combined ratios to be higher than 2008 levels due to increased loss costs and expenses.
- Capital Resources: The Company applied to participate in the U.S. Treasury's Capital Purchase Program (CPP) but approval is pending. It has $375 million in commercial paper maturing in Q1/Q2 2009 which must be repaid from existing liquidity as rating downgrades rendered it ineligible for the Commercial Paper Funding Facility (CPFF).
- Rating Downgrades: Major rating agencies downgraded the Company's senior debt and financial strength ratings in February and March 2009, with negative outlooks. Further downgrades could trigger collateral requirements on derivative agreements and restrict access to capital markets.
- Legal Proceedings: The Company faces various litigation risks, including broker compensation litigation, ERISA class actions regarding its investment plan, and structured settlement class actions. Asbestos and environmental claims remain subject to significant uncertainty.
Key Facts for Investor Verification
- DAC Unlock Impact: Verify the specific assumptions used in the $1.5 billion DAC Unlock charge and the sensitivity of future earnings to equity market performance and lapse rates.
- GMWB Liability Valuation: Review the changes in model assumptions (credit standing, behavior risk margins) that drove the $723 million pre-tax gain on GMWB derivatives, as these are highly sensitive to market volatility.
- Liquidity Position: Confirm the Company's ability to repay the $375 million commercial paper obligation without accessing the CPFF, given the current market conditions.
- Investment Portfolio Quality: Assess the extent of unrealized losses in the fixed maturity portfolio, particularly in commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS), and the criteria used to determine "other-than-temporary" impairments.
- Strategic Actions: Monitor the progress of the suspension of sales in Japan/Europe and the potential disposition of business lines to stabilize capital ratios.