The Hartford Financial Services Group, Inc. — FY 2009 Form 10-K
Business context and reporting period
The filing covers the fiscal year ended December 31, 2009, with comparisons to 2008 and 2007. The Hartford is a U.S.-focused insurance and financial-services holding company with Life and Property & Casualty operations. It acquired Federal Trust Corporation in June 2009, becoming a savings and loan holding company, and participated in the U.S. Treasury Capital Purchase Program.
At December 31, 2009, total assets were $307.7 billion and total stockholders’ equity was $17.9 billion. The holding company depends principally on dividends from subsidiaries to fund debt service, dividends and other obligations.
Financial performance and key metrics
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Earned premiums | $14.424 billion | $15.503 billion | Down 7% |
| Fee income | $4.576 billion | $5.135 billion | Down 11% |
| Total net investment income | $7.219 billion | $(6.005) billion | Improved materially |
| Net realized capital losses | $(2.010) billion | $(5.918) billion | Losses reduced |
| Total revenues | $24.701 billion | $9.219 billion | Improved materially |
| Net income (loss) | $(887) million | $(2.749) billion | Loss narrowed |
| Net loss available to common shareholders | $(1.014) billion | $(2.757) billion | Loss narrowed |
| Diluted loss per common share | $(2.93) | $(8.99) | Improved |
| Operating cash flow | $2.974 billion | $4.192 billion | Down 29% |
| Total debt | $5.839 billion | $6.221 billion | Down 6% |
| Cash and cash equivalents | $2.142 billion | $1.811 billion | Up 18% |
| Liquidity available | $13.802 billion | Not clearly provided | — |
Net investment income excluding equity securities, trading declined to $4.031 billion from $4.335 billion, reflecting lower fixed-income yields and alternative-investment losses. Equity securities, trading generated $3.188 billion in 2009 versus a $10.340 billion loss in 2008, largely reflecting the recovery in Japanese variable-annuity markets.
Ongoing Property & Casualty operations remained profitable, with 2009 underwriting results of $943 million and a combined ratio of 90.4, compared with 90.7 in 2008. Life reported a $1.287 billion net loss, improved from a $2.443 billion loss in 2008. Property & Casualty reported $983 million of net income, compared with $92 million in 2008.
Material changes versus the prior comparable period
- Net loss narrowed primarily because net realized losses and other-than-temporary impairments decreased, and the variable-annuity hedge program produced a $631 million gain versus a $639 million loss in 2008.
- Other-than-temporary impairment losses recognized in earnings were $1.508 billion, compared with $3.964 billion in 2008. The company also recorded $683 million of non-credit impairments in other comprehensive income.
- The company recorded a $1.034 billion after-tax DAC Unlock charge, compared with a $932 million charge in 2008. The charge reflected revised market-return and policyholder-behavior assumptions.
- Life fee income declined as average variable-annuity and mutual-fund account values remained below pre-crisis levels, although year-end Retail assets under management improved to $140.8 billion from $119.0 billion.
- Property & Casualty earned premiums declined 5% in Ongoing Operations, driven by economic pressure, lower exposures, pricing competition and strategic reductions in certain businesses.
- Property & Casualty prior-year reserves developed favorably by $186 million overall. Ongoing Operations recorded $428 million of favorable development, partly offset by $242 million of unfavorable development in Other Operations.
- Other Operations strengthened net asbestos reserves by $138 million and environmental reserves by $75 million. Net asbestos and environmental reserves were approximately $1.9 billion and $312 million, respectively, at year-end.
- Stockholders’ equity increased from $9.268 billion to $17.865 billion, primarily because of the $3.4 billion Treasury CPP investment, $887 million of common-stock issuance and improved unrealized investment values.
- The company issued 56.1 million common shares for net proceeds of $887 million and issued $3.4 billion of Series E preferred stock and warrants to Treasury. Common dividends were reduced to $0.05 per share per quarter.
Debt, liquidity and capital
- Short-term debt was $343 million and long-term debt was $5.496 billion. The company had no commercial paper outstanding at year-end.
- The holding company had $2.2 billion of cash, short-term investments and fixed maturities available for its obligations. Expected holding-company requirements over the following twelve months included approximately $450 million of interest, $275 million of senior-note maturities, $80 million of common dividends and $170 million of preferred dividends.
- The company had a $1.9 billion revolving credit facility through August 2012 and was in compliance with its covenants. It also retained access to a $500 million contingent capital facility.
- Estimated aggregate statutory surplus increased to $14.651 billion from $12.058 billion, although the 2009 figures were estimates pending statutory filings. Statutory net income for 2009 was estimated at $2.817 billion.
- Derivative agreements with rating-related collateral provisions had $655 million of net liabilities. A one-level downgrade could require approximately $50 million of additional collateral and a two-level downgrade approximately $70 million.
Guidance, outlook and management commentary
- Management expected 2010 to remain challenging because of financial-market volatility, low interest rates, commercial-real-estate weakness, competitive pricing and uncertain economic recovery.
- Retail variable-annuity sales were expected to remain depressed. The company launched a new, lower-risk variable-annuity product in October 2009 and continued to pursue product redesign, higher fees, hedging and reinsurance to reduce guarantee risk.
- International suspended new sales in Japan and Europe and continued restructuring. The company agreed to sell its Brazilian joint venture, with expected closing in the first quarter of 2010.
- Institutional exited or stopped actively marketing several non-core businesses. Stable-value contracts experienced $3.9 billion of payouts during 2009, and management retained the option to accelerate additional repayments.
- Personal Lines premiums were expected to be relatively flat in 2010, with continued pricing increases. Small Commercial expected single-digit premium growth but a higher combined ratio. Middle Market and Specialty Commercial expected higher combined ratios than in 2009.
- Management expected Property & Casualty investment income to improve in 2010 because of greater allocation to liquid, spread-based investments and potentially better limited-partnership results.
Principal risks, contingencies and unusual items
- Variable-annuity guarantees remain highly sensitive to equity markets, interest rates, volatility, policyholder behavior and reinsurance-counterparty performance. Net GMWB and GMAB liability was approximately $2.0 billion, while GMIB and GMDB liability was $989 million, net of reinsurance.
- Asbestos and environmental reserves are inherently uncertain. Management disclosed a net reserve range of approximately $1.75 billion to $2.52 billion for these exposures, compared with $2.21 billion recorded at year-end.
- Commercial real estate and structured securities remained significant investment risks. The company held $9.6 billion of CMBS bonds at fair value and $1.319 billion of CRE CDO amortized cost, with substantial unrealized losses and significant valuation uncertainty.
- The company recognized $408 million of additions to mortgage-loan valuation allowances in 2009, increasing the allowance to $366 million.
- Ratings downgrades could reduce product sales, increase funding costs and trigger collateral calls or derivative termination rights. The company’s February 2010 ratings included A financial-strength ratings for principal insurance subsidiaries and BBB/Baa3 senior-debt ratings for the holding company.
- Participation in CPP subjects the company to dividend, compensation, regulatory and repayment restrictions. Repayment may require regulatory approval and additional capital, potentially diluting shareholders.
- Other material exposures include catastrophe losses, reinsurance collectability, litigation, regulatory changes, tax-law changes, goodwill impairment, deferred-tax-asset valuation allowances and operational or cybersecurity failures.
- The filing disclosed a structured-settlement class action scheduled for trial in September 2010, for which an adverse outcome could materially affect results or cash flows. Other disclosed litigation was generally assessed as not material, subject to litigation uncertainty.
- Restructuring, severance and other costs totaled $139 million pre-tax in 2009, primarily relating to International restructuring and organizational changes.
Most important facts for an investor to verify
- Whether Life can return to sustainable earnings after the $1.034 billion DAC Unlock charge and continued variable-annuity guarantee exposure.
- Current statutory surplus, RBC ratios, financial-strength ratings and any required capital contributions or regulatory approvals.
- The adequacy and development of asbestos, environmental, workers’ compensation and other long-tail reserves.
- Actual 2010 premium trends, combined ratios and pricing adequacy across Personal Lines, Small Commercial, Middle Market and Specialty Commercial.
- Commercial-real-estate, CMBS, CRE CDO, RMBS and mortgage-loan performance, including additional impairments or valuation allowances.
- The timing and economics of CPP repayment, preferred dividends, warrant dilution and restrictions on common dividends.
- Liquidity after holding-company debt maturities, preferred dividends, derivative collateral requirements, stable-value payouts and potential policyholder surrenders.
- Completion and proceeds of the Brazil joint-venture divestiture and the financial effect of International and Institutional restructuring.