Fiscal 2012 Form 10-K Summary
Company and period: The Hartford Financial Services Group, Inc. reported results for the fiscal year ended December 31, 2012. The filing is an annual Form 10-K; fourth-quarter information is included in the annual results and unaudited quarterly data. The Hartford is primarily an insurance and financial services company with Property & Casualty, Group Benefits, Mutual Funds and runoff annuity operations.
Business Context and Strategic Positioning
- Management realigned the company around Property & Casualty, Group Benefits and Mutual Funds, while placing Individual Annuities into runoff.
- The company sold Woodbury Financial Services and its U.S. individual annuity new-business capabilities during 2012, and completed sales of Retirement Plans and Individual Life in January 2013.
- Talcott Resolution manages legacy annuity and life businesses; total account value was approximately $228.1 billion at year-end, down from $235.3 billion in 2011.
- Total assets were $298.5 billion and total stockholders’ equity was $22.4 billion at December 31, 2012.
Key Financial Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenues | $26.4 billion | $21.9 billion | Higher, primarily from trading investment returns |
| Earned premiums | $13.6 billion | $14.1 billion | Down 3% |
| Fee income | $4.4 billion | $4.8 billion | Down 7% |
| Total net investment income | $8.8 billion | $2.9 billion | Higher; included $4.6 billion of trading gains |
| Net realized capital losses | $711 million | $145 million | Losses increased |
| Net income (loss) | $(38) million | $712 million | Declined |
| Net income (loss) available to common shareholders | $(80) million | $670 million | Declined |
| Diluted EPS | $(0.18) | $1.40 | Declined |
| Net cash provided by operating activities | $2.7 billion | $2.3 billion | Higher |
| Total debt | $7.1 billion | $6.2 billion | Up 15% |
| Cash | $2.4 billion | $2.6 billion | Down modestly |
Operating Performance
- Property & Casualty Commercial net income increased to $547 million from $526 million. The combined ratio before catastrophes and prior accident-year development improved to 96.6 from 97.3.
- Consumer Markets net income increased substantially to $166 million from $7 million. Its combined ratio improved to 97.4 from 101.3, while the ratio before catastrophes and prior-year development improved to 90.8 from 91.9.
- Property & Casualty Other Operations generated $57 million of net income versus a $117 million loss, reflecting lower asbestos and environmental reserve strengthening.
- Group Benefits net income increased to $129 million from $92 million. The loss ratio remained 79.5%, while after-tax margin excluding realized gains and losses improved to 2.4% from 1.9%.
- Mutual Funds net income declined to $71 million from $98 million. Total assets under management increased to $87.6 billion from $85.5 billion, but net flows remained negative.
- Talcott Resolution net income declined to $1 million from $540 million, largely because of variable-annuity hedge losses, disposition-related charges and restructuring costs.
- Corporate reported a $1.0 billion net loss, compared with a $434 million loss, primarily due to debt extinguishment and disposition-related charges.
Material Changes Versus the Prior Comparable Period
- The company recorded a $910 million pretax loss on extinguishment of debt, including the repurchase of $1.75 billion of 10% junior subordinated debentures from Allianz.
- Net realized capital losses increased to $711 million, driven largely by $1.3 billion of variable-annuity hedge-program losses, including $1.5 billion of international-program losses.
- A $533 million pretax reinsurance loss on the Individual Life disposition included a $342 million goodwill impairment and a $191 million premium-deficiency accrual.
- After-tax Unlock activity shifted to a $31 million benefit from a $473 million charge in 2011.
- Property and casualty prior accident-year development improved to a $4 million net favorable adjustment from $367 million of unfavorable development in 2011.
- Current-year catastrophe losses were $706 million pretax, primarily related to Storm Sandy and severe storms, compared with $745 million in 2011.
- Accumulated other comprehensive income improved to $2.8 billion from $1.3 billion, mainly due to improved unrealized investment gains.
- The company retrospectively adopted ASU 2010-26, reducing previously reported deferred policy acquisition costs and changing certain prior-period amounts.
Debt, Liquidity and Capital
- The company issued $1.55 billion of senior notes and $600 million of junior subordinated debentures in April 2012 to help fund the Allianz debt repurchase.
- Debt-to-capitalization increased to 24% from 22%; debt-to-stockholders’ equity increased to 32% from 29%.
- Cash provided by operating activities was $2.7 billion. The company had $1.4 billion of cash, short-term investments and fixed maturities at the holding company.
- The company had no commercial paper or revolving-credit borrowings outstanding at year-end and maintained a $1.75 billion revolving credit facility through January 2016.
- Insurance subsidiaries had aggregate statutory surplus of $14.1 billion, down from $14.8 billion. All operating insurance subsidiaries reported RBC ratios above regulatory minimums.
- Insurance-subsidiary dividends are subject to regulatory restrictions. The company expected approximately $800 million of 2013 dividends from property-casualty subsidiaries and no regular life-subsidiary dividends, although a $1.2 billion extraordinary life-subsidiary dividend was approved and paid in February 2013.
Guidance, Outlook and Management Commentary
- Management expected 2013 low-single-digit written-premium growth in Property & Casualty Commercial and a combined ratio before catastrophes and prior-year development of approximately 92.5% to 95.5%.
- Consumer Markets written premiums were expected to be flat to slightly higher, with a 2013 combined ratio before catastrophes and prior-year development of approximately 89.5% to 92.5%.
- Group Benefits premiums were expected to decline because of pricing discipline and the non-renewal of its largest account, while the disability loss ratio was expected to improve to approximately 77% to 80%.
- Talcott Resolution account values and earnings were expected to decline over time as the runoff annuity block experiences surrenders and other policyholder actions. Management noted that international hedging could continue to create significant period-to-period earnings volatility.
- On January 31, 2013, the board authorized a $500 million equity repurchase program through December 31, 2014 and a plan to reduce debt by approximately $1.0 billion, including repayment of $520 million of 2013 and 2014 maturities.
Principal Risks, Contingencies and Unusual Items
- Results remain sensitive to equity markets, interest rates, credit spreads, foreign exchange rates, volatility and real estate valuations. Sustained low interest rates could reduce investment income, margins and statutory capital.
- Variable-annuity guarantees expose the company to policyholder behavior, equity-market, interest-rate, volatility and foreign-currency risks. Derivative rating triggers could require additional collateral or settlement following downgrades.
- Net asbestos and environmental reserves were approximately $2.1 billion at year-end, within an estimated range of $1.6 billion to $2.4 billion. Ultimate liabilities could materially exceed recorded reserves.
- Property and casualty reserves totaled $18.7 billion net of reinsurance. A 3% change in workers’ compensation loss-development patterns was estimated to change reserve requirements by approximately $500 million in either direction.
- Reinsurance recoverables were $3.0 billion gross and $2.8 billion net after a $268 million allowance for uncollectible reinsurance. Reinsurer credit deterioration or disputes could affect earnings and cash flow.
- The company faces litigation, including mutual-fund advisory-fee litigation for which management could not estimate a loss range. Ordinary-course litigation was not expected to be material to consolidated financial condition, but individual matters could materially affect a particular period.
- A material weakness identified in third-quarter 2012 reporting related to the Individual Life transaction was remediated, and management and Deloitte concluded that internal control over financial reporting was effective as of December 31, 2012.
Investor Verification Checklist
- Verify the final accounting and cash proceeds for the January 2013 Retirement Plans and Individual Life transactions, including any changes to the estimated $533 million Individual Life disposition loss.
- Assess whether the planned $500 million repurchase and approximately $1.0 billion debt reduction were completed without weakening insurance-company capital or ratings.
- Review statutory surplus, RBC ratios, dividend capacity and the effect of the February 2013 Hartford Life and Annuity rating downgrade.
- Monitor variable-annuity hedge results, surrender rates, yen exposure and sensitivity to equity-market, interest-rate and volatility changes.
- Evaluate asbestos, environmental and workers’ compensation reserve development against the disclosed ranges and sensitivities.
- Reconcile GAAP net loss with core earnings of $1.4 billion and identify the sustainability of results excluding debt, disposition, restructuring, realized investment and Unlock items.