The Hartford Reports Fourth Quarter 2012 Financial Results; Announces 2013 Outlook And Capital Manag

The Hartford Reports Fourth Quarter 2012 Financial Results; Announces 2013 Outlook And Capital Management Plan

  • Fourth quarter 2012 core earnings* of $265 million, or $0.54 per diluted share, including $218 million of catastrophe losses, after tax
  • Fourth quarter 2012 net loss of $46 million, or $0.13 per diluted share
  • Property & Casualty Standard Commercial renewal written price increases averaged 9% in the fourth quarter of 2012 and 8% for full year 2012
  • Fourth quarter 2012 Property & Casualty combined ratio, excluding catastrophes and prior year development*, was 95.4 compared with 98.2 in the fourth quarter 2011
  • Closed sales of Woodbury Financial and U.S. Annuity new business capabilities in 2012; closed sales of Retirement Plans and Individual Life in early January 2013
  • 2013 core earnings outlook of $1.375 billion to $1.475 billion
  • Capital management plan to repurchase $500 million of common stock and to reduce debt by $1.0 billion

HARTFORD, Conn.--(BUSINESS WIRE)-- The Hartford (NYS: HIG) reported a net loss of $46 million, or $0.13 per diluted share, for the three months ended Dec. 31, 2012 (fourth quarter 2012) compared with net income of $118 million, or $0.23 per diluted share, for the quarter ended Dec. 31, 2011 (fourth quarter 2011). The decline in net income compared to the prior year quarter was due to higher catastrophe losses, largely from Storm Sandy, restructuring and other costs, hedging losses on runoff annuity blocks, and increased net realized capital losses due to the sales of the Retirement Plans and Individual Life businesses.


Fourth quarter 2012 core earnings** declined to $265 million, or $0.54 per diluted share, from $301 million, or $0.61per diluted share, in the fourth quarter of 2011. The decrease in fourth quarter 2012 results was due to higher catastrophe losses as a result of Storm Sandy in the company's Property & Casualty (P&C) operations which were offset by improved results in Group Benefits, Corporate and Talcott Resolution, which is comprised of the company's legacy Wealth Management runoff businesses, as well as the Individual Life and Retirement Plans businesses that were sold in January, 2013.

The company also announced that it has reviewed with the Connecticut Insurance Department its capital management plans and that it has received approval from the Department for a $1.2 billion extraordinary dividend from its Connecticut domiciled life insurance companies. In addition, it expects to dissolve the company's Vermont life reinsurance captive and return approximately $300 million of surplus to the holding company. These actions are expected to be completed by the end of the first quarter of 2013.

*Denotes financial measures not calculated based on generally accepted accounting principles ("non-GAAP").
**The company changed the calculation of core earnings in the fourth quarter of 2012. Please see the Discussion of Non-GAAP Financial Measures section below for the current definition of core earnings and reconciliations to net income.

The company also announced that it expects to reduce debt by approximately $1 billion, including the repayment of the 2013 and 2014 debt maturities totaling $520 million. In addition, The Hartford's Board of Directors has authorized a $500 million share repurchase program, expiring at Dec. 31, 2014.

"The Hartford had a strong finish to 2012 and the fourth quarter concluded a year of strategic accomplishments for the company," said The Hartford's Chairman, President and Chief Executive Officer Liam E. McGee. "Following the successful close of the sales of the life businesses, we enter 2013 with a sharper focus on the P&C, Group Benefits and Mutual Funds businesses. We are also very pleased to share our capital management plans, which will be accretive to shareholders and effectively balance a number of critical goals for The Hartford, including paying down debt, returning capital to shareholders and further strengthening our financial flexibility to take actions to reduce risk in the legacy annuity liabilities."

"In the fourth quarter, pricing continued to improve across our P&C and Group Benefits businesses, with P&C Standard Commercial renewal written price increases of 9%. Group Benefits core earnings were up significantly in the fourth quarter. Consumer Markets achieved a combined ratio improvement of 2.4 points, excluding catastrophes and prior year development. I also want to express my appreciation for the professionalism and dedication demonstrated by my Hartford colleagues in response to Storm Sandy," added McGee.

The company also reported net income for the year ended Dec. 31, 2012 of $350 million, or $0.66 per diluted share, compared with 2011 net income of $712 million, or $1.40 per diluted share. The decline in net income was largely due to the second quarter $587 million loss on extinguishment of debt incurred as a result of the debt refinancing and increases in 2012 for net realized capital losses due to hedging of the company's runoff annuity blocks and for restructuring and other costs associated with the sales of the Retirement Plans, Individual Life and other businesses.

2012 core earnings totaled $1.4 billion, or $2.88 per diluted share, compared with $1.1 billion, or $2.24 per diluted share, in 2011. The increase in 2012 core earnings was principally due to a significant reduction in unfavorable prior year loss and loss adjustment expense reserve development (prior year development or PYD) in the company's P&C operations compared with 2011.

           

CONSOLIDATED FINANCIAL RESULTS

 
($ in millions except per share data)         Three Months Ended     For The Years Ended
Three Months Ended        

Dec. 31,
2012

 

Dec. 31,
2011

 

Change 3

   

Dec. 31,
2012

 

Dec. 31,
2011

  Change
Net income (loss)         ($46)   $118   NM     $350   $712   (51)%
Net income (loss) available to common shareholders per diluted share         $(0.13)   $0.23   NM     $0.66   $1.40   (53)%
Core earnings (losses):                                
Property & Casualty         $54   $130   (58)%     $714   $279   156%
Group Benefits         39   17   129%     101   86   17%
Mutual Funds         16   20   (20)%     74   98   (24)%
Talcott Resolution         211   197   7%     827   952   (13)%
Corporate         (55)   (63)   13%     (313)   (299)   (5)%
Core earnings         $265   $301   (12)%     $1,403   $1,116   26%
Weighted average common shares outstanding         488.9   489.6   —%     486.8   498.7   (2)%
Core earnings available to common shareholders per diluted share2         $0.54   $0.61   (11)%     $2.88   $2.24   29%
Book value per diluted share         $46.59   $44.31   5%              
Book value per diluted share (ex. AOCI)¹         $40.79   $41.73   (2)%              

[1] Accumulated other comprehensive income (AOCI)
[2] Includes dilutive potential common shares and assumed conversion of preferred shares
[3] The Hartford defines increases or decreases greater than or equal to 200%, or changes from a net gain to a net loss position, or vice versa, as "NM" or not meaningful.

Net income and core earnings included the following items which totaled $190 million, after tax, in 2012 and $163 million, after tax, in the fourth quarter of 2012:

2012:

  • 2012 catastrophe losses of $706 million, before tax ($459 million, after tax), which was approximately $210 million, after tax, or $0.43 per diluted share on a core basis, higher than the company's 2012 catastrophe forecast;
  • Favorable prior year development of $4 million, before tax ($3 million, after tax), or $0.01 per diluted share on a core basis; and
  • A $17 million tax benefit in the fourth quarter, or $0.03 per diluted share on a core basis, associated with retiree prescription drug benefits.

Fourth Quarter 2012:

  • 2012 catastrophe losses totaled $335 million, before tax ($218 million, after tax), which was approximately $174 million, after tax, or $0.36 per diluted share on a core basis, higher than the company's fourth quarter 2012 catastrophe forecast;
  • Unfavorable prior year development of $9 million, before tax ($6 million, after tax), or $0.01 per diluted share on a core basis; and
  • A $17 million tax benefit in the fourth quarter, or $0.03 per diluted share on a core basis, associated with retiree prescription drug benefits.

2013 OUTLOOK

The Hartford currently expects 2013 full year core earnings of between $1.375 billion and $1.475 billion, compared with $1.403 billion in 2012.

This outlook is a management estimate based on business, competitive, capital market, catastrophe loads and other assumptions. Key business and market assumptions included in this outlook are set forth in the table below. This outlook is subject to change for many reasons, including unusual or unpredictable items, such as catastrophe losses, tax benefits or charges, prior year development, investment results, and other items. The company has frequently experienced unusual or unpredictable benefits and charges that were not anticipated in previously provided guidance.

         
2013 OUTLOOK
($ in millions)
          2013 Outlook   2012
Core earnings         $1,375 - $1,475   $1,403
Key business drivers and market assumptions:              
P&C Commercial combined ratio, excl. catastrophes and PYD1         92.5-95.5   96.6
Consumer Markets combined ratio, excl. catastrophes and PYD2         89.5-92.5   90.8
Catastrophe loss ratio         4.8%   7.1%
Group Benefits loss ratio         77.0-80.0   79.5
Group Benefits core earnings         mid-high teens growth   $101
Talcott Resolution core earnings         $ 260-$280 million decline   $827
Annualized investment yield3         4.1%   4.3%
S&P 500 annualized return, incl. dividends         9.0%   15.8%
10 Year Treasury yield         2.10%   1.78%
Yen/$         90.0   86.5

[1] Catastrophe budget of 2.5% included in 2013 outlook; 2012 actual catastrophes were 5.2% of earned premium in P&C Commercial.
[2] Catastrophe budget of 8.6% included in 2013 outlook; 2012 actual catastrophes were 10.5% of earned premium in Consumer Markets.
[3] Yields calculated using annualized net investment income (excluding income related to equity securities, trading) divided by the monthly average invested assets at cost, amortized cost, or adjusted carrying value, as applicable, excluding equity securities, trading, repurchase agreement and dollar roll collateral, and consolidated variable interest entity non-controlling interests.

Investors should consider the risks and uncertainties that may cause the company's actual results to materially differ from the 2013 outlook set forth above, including, but not limited to, those set forth in the discussion of forward looking statements at the end of this release and the risk factors included in the company's quarterly report on Form 10-Q for the quarters ended March 31, 2012, June 30, 2012, and Sept. 30, 2012, and annual report on Form 10-K for the year ended Dec. 31, 2011.

PROPERTY & CASUALTY (CONSOLIDATED)

Highlights:

  • Fourth quarter 2012 core earnings declined 58% to $54 million compared with the prior year quarter due to Storm Sandy
  • 2012 P&C core earnings were $714 million, up 156% over 2011
  • Fourth quarter 2012 combined ratio, excluding catastrophes and prior year development, improved to 95.4 from 98.2 in the fourth quarter of 2011
  • 2012 combined ratio, excluding catastrophes and prior year development, improved to 94.8 from 95.5 in 2011
  • P&C investment income declined 1% in 2012 compared with 2011 driven by a decrease in new money investment rates due to a decline in market yields and credit spreads
 
PROPERTY & CASUALTY
($ in millions)         Three Months Ended     For The Years Ended
         

Dec. 31,
2012

  Dec. 31,
2011
  Change     Dec. 31,
2012
  Dec. 31,
2011
  Change
Written premiums         $2,314   $2,340   (1)%     $9,847   $9,852   —%
Underwriting loss*         $(229)   $(67)   NM     $(189)   $(671)   72%
Investment income         $301   $292   3%     $1,232   $1,248   (1)%
Core earnings         $54   $130   (58)%     $714   $279   156%
Net income         $80   $137   (42)%     $770   $416   85%
Combined ratio         109.2   102.7   (6.5)     101.9   106.8   4.9
Combined ratio, excl. PYD and catastrophes         95.4   98.2   2.8     94.8   95.5   0.7

PYD, before tax

        $9   $98   91%     $(4)   $367   NM
Catastrophe losses, before tax         $335   $14   NM     $706   $745   5%
                   

Property & Casualty (Consolidated) includes the financial results of the company's three P&C segments: P&C Commercial, Consumer Markets and P&C Other Operations.

Fourth Quarter 2012 Results

Fourth quarter 2012 Property & Casualty net income was $80 million and core earnings were $54 million, down 42% and 58%, respectively, over the fourth quarter of 2011. The decline was largely driven by higher catastrophe losses, which were partially offset by lower unfavorable prior year development. 2012 accident year catastrophe losses in the fourth quarter of 2012 totaled $335 million, before tax, which was $174 million, after tax, above the company's fourth quarter 2012 catastrophe forecast. Catastrophe losses in the fourth quarter of 2012 were almost entirely due to Storm Sandy. The company incurred gross losses of $370 million from Storm Sandy and net losses of $350 million, after reinsurance. Current accident year catastrophes in the fourth quarter of 2011 were $14 million, before tax. Unfavorable prior year development totaled $9 million, before tax, in the fourth quarter of 2012 compared with an unfavorable $98 million, before tax, in the fourth quarter of 2011.

Excluding catastrophes and prior year development, the P&C combined ratio in the fourth quarter of 2012 was 95.4 compared with 98.2 in the fourth quarter of 2011, reflecting improved underwriting margins in P&C Commercial and Consumer Markets. Underwriting margins improved as a result of lower non-catastrophe property losses and the effect of the company's pricing and underwriting initiatives.

Fourth quarter 2012 written premiums declined 1% over the prior year period, driven by P&C Commercial Markets as efforts to rebalance the portfolio through pricing initiatives continued.

2012 Full Year Results

2012 P&C net income was $770 million and core earnings were $714 million, up 85% and 156%, respectively, over 2011 principally due to a reduction in unfavorable prior year development in 2012 compared with 2011. 2012 accident year catastrophe losses totaled $706 million, before tax ($459 million, after tax), $210 million, after tax, above the company's forecast of 2012 catastrophe losses, compared with 2011 accident year catastrophe losses of $745 million, before tax ($484 million, after tax). Prior year development was favorable by $4 million, before tax, in 2012 compared with unfavorable prior year development of $367 million, before tax, in 2011.

Excluding catastrophes and prior year development, the P&C consolidated combined ratio was 94.8 in 2012 compared with 95.5 in 2011, reflecting improved underwriting margins in P&C Commercial and Consumer Markets. Underwriting margins improved as a result of pricing initiatives and lower non-catastrophe property losses in P&C Commercial and Consumer Markets, and the company's underwriting efforts in P&C Commercial.

Written premiums in 2012 were essentially flat with 2011, reflecting a slight increase in P&C Commercial that was offset by a decline in Consumer Markets.

P&C Commercial

Highlights:

  • Fourth quarter 2012 underwriting losses were $193 million compared with $141 million in the fourth quarter of 2011 driven by higher catastrophes, partially offset by lower unfavorable prior year development
  • Continued pricing and underwriting initiatives and lower unfavorable prior year development resulted in improved P&C Commercial underwriting losses of $182 million in 2012 compared with $279 million in 2011
  • Standard Commercial renewal written price increases rose to 9% in the fourth quarter 2012 compared with 5% in the prior year quarter; 2012 rose to 8% compared with 4% in 2011
  • Renewal written price increases in Middle Market workers' compensation were 15% and 14% in the fourth quarter 2012 and full year 2012, respectively
                   
P&C COMMERCIAL
($ in millions)         Three Months Ended     For The Years Ended
         

Dec. 31,
2012

 

Dec. 31,
2011

 

Change

   

Dec. 31,
2012

 

Dec. 31,
2011

  Change
Underwriting loss         $(193)   $(141)   (37)%     $(182)   $(279)   35%
Combined ratio         112.3   109.0   (3.3)     102.9   104.6   1.7
Combined ratio, excl. catastrophes and PYD         97.8   101.1   3.3     96.6   97.3  

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