Business Context and Reporting Period
Company: The Hartford Financial Services Group, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: A diversified insurance and financial services company organized into two major operations: Life and Property & Casualty. The company provides investment products, life insurance, and property and casualty insurance to individual and business customers in the U.S. and internationally.
Key Financial Metrics
| Financial Metric (in millions) | Three Months Ended Sep 30, 2007 | Three Months Ended Sep 30, 2006 | Nine Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2006 |
|---|---|---|---|---|
| Total Revenues | $5,823 | $7,407 | $20,242 | $18,921 |
| Net Income | $851 | $758 | $2,354 | $1,962 |
| Earnings Per Share (Diluted) | $2.68 | $2.39 | $7.35 | $6.25 |
| Net Investment Income | $600 | $2,349 | $4,653 | $4,118 |
| Net Realized Capital Gains (Losses) | $(363) | $27 | $(565) | $(273) |
| Total Assets | $356,455 | $326,710 | $356,455 | $326,710 |
| Total Liabilities | $337,505 | $307,834 | $337,505 | $307,834 |
| Stockholders' Equity | $18,950 | $18,876 | $18,950 | $18,876 |
| Cash and Cash Equivalents | $1,952 | $1,424 | $1,952 | $1,424 |
| Short-term Debt | $822 | $599 | $822 | $599 |
| Long-term Debt | $3,670 | $3,504 | $3,670 | $3,504 |
Material Changes vs. Prior Period
- Net Income Growth: Net income increased 12% for the quarter and 20% for the nine-month period compared to the prior year. This was primarily driven by a 23% increase in Life segment net income, partially offset by a 7% decrease in Property & Casualty net income for the quarter.
- Investment Performance: Total net investment income decreased significantly (74%) for the quarter due to a shift from net gains to net losses on equity securities held for trading. However, for the nine-month period, net investment income increased 13% due to higher yields and a larger invested asset base.
- Realized Capital Losses: The company reported net realized capital losses of $363 million for the quarter and $565 million for the nine months, compared to gains of $27 million and losses of $273 million in the prior year periods. Losses were driven by impairments of fixed maturity investments and decreases in the value of non-qualifying derivatives due to widening credit spreads.
- Life Segment "Unlock": A comprehensive study of assumptions in the third quarter resulted in an "unlock" benefit, reducing amortization of deferred policy acquisition costs (DAC) and contributing to higher net income in the Life segment.
- Property & Casualty Underwriting: Ongoing Operations underwriting results decreased for the quarter but increased for the nine-month period. The combined ratio before catastrophes and prior accident year development increased to 90.6% for the quarter and 89.5% for the nine months, driven by higher loss costs in workers' compensation and property lines.
Guidance, Outlook, and Risks
- Accounting Standard Changes (SFAS 157): The company anticipates adopting SFAS 157 ("Fair Value Measurements") on January 1, 2008. This could result in a one-time realized capital loss upon adoption due to the inclusion of unobservable market risk margins in the valuation of Guaranteed Minimum Withdrawal Benefit (GMWB) riders. The company estimates a potential loss range of $170 million to $450 million depending on risk margin assumptions.
- Regulatory Settlements: The company settled investigations with the New York, Connecticut, and Illinois Attorneys General regarding broker compensation and market timing, paying $115 million ($30 million after-tax charge recorded in Q2). The company also settled a Fair Credit Reporting Act class action for $86.5 million.
- Market Risks: Significant exposure to credit spread widening, particularly in the sub-prime mortgage market, which has increased unrealized losses on fixed maturities and credit derivatives. The company also faces equity market risk related to variable annuity guarantees (GMWB, GMDB) and foreign currency risk related to Japanese operations.
- Outlook: Management expects full-year 2007 written premium in Business Insurance to be 2.5% to 4.5% lower. Personal Lines written premium growth is expected to be 2% to 4%. Specialty Commercial written premium is expected to decrease 7% to 9%.
Investor Verification Checklist
- SFAS 157 Impact: Verify the final quantification of the one-time charge expected upon adoption of SFAS 157 in 2008, specifically regarding GMWB valuations.
- Credit Exposure: Review the extent of exposure to sub-prime mortgage-backed securities and the adequacy of reserves for other-than-temporary impairments given the ongoing credit market deterioration.
- Reserve Development: Monitor Property & Casualty reserve development, particularly in workers' compensation and long-tail liability lines, as favorable development in 2007 may not persist.
- Legal Contingencies: Track the status of the broker compensation litigation (Marsh & McLennan) and the Fair Credit Reporting Act settlement reimbursement disputes.
- Dividend Policy: Confirm the sustainability of the quarterly dividend ($0.50 declared for Q3) given the volatility in investment income and potential future accounting charges.