The Hartford Announces Q3 2009 Results

HARTFORD, Conn., Nov 03, 2009 -- The Hartford Financial Services Group, Inc. (NYSE: HIG) today reported its third quarter 2009 results.

"The Hartford's third quarter core earnings results demonstrate a resilient company that is emerging from the challenges of the last 18 months," said Liam E. McGee, The Hartford's Chairman and Chief Executive Officer. "In my first month on the job, I have found that the core attributes that initially drew me to The Hartford are sound. The company today has a strong capital foundation; a trusted, well-respected, 200-year-old brand; solid operating franchises; positive relationships with its distribution partners; and a dedicated group of employees committed to winning in the marketplace.

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"There are clearly challenges, including the economy and the potential for a second downturn in the equity and credit markets, as well as the performance of our investment portfolio. We remain focused on managing through these issues. Our protection and wealth management franchises are stable and performing well, we are seeing signs that business momentum is building, and the company is focused on its path forward," added McGee.

The Hartford reported a third quarter 2009 net loss of $220 million, or $0.79 per diluted share, compared with a third quarter 2008 net loss of $2.6 billion, or $8.74 per diluted share. Core earnings for the third quarter of 2009 were $660 million, or $1.56 per diluted share, compared with a core loss of $422 million or $1.40 per diluted share, in the prior period.

Third quarter 2009 net income reflected a DAC unlock benefit of $63 million, after tax and third quarter 2009 core earnings included a $232 million benefit from the DAC unlock. The lower net income benefit relates to a $169 million charge primarily related to the company's macro hedging program. Third quarter 2008 net income reflected a $932 million after-tax charge related to the DAC unlock, and third quarter 2008 core earnings reflected a $923 million after-tax charge related to the DAC unlock.

The net realized capital loss for the third quarter of 2009 was $885 million, after tax, primarily due to after-tax impairments of $336 million and an after-tax loss of $435 million from the company's variable annuity hedging programs. Third quarter 2008 results included a net realized capital loss of $2.2 billion, after tax.

REVIEW OF BUSINESS UNIT RESULTS

Property and Casualty Operations

Written premiums* for The Hartford's property and casualty operations in the third quarter were $2.4 billion, down 6% from the third quarter of 2008 largely as a result of weaker economic conditions which particularly affected commercial lines. The company is seeing momentum in new business submissions in all segments, but particularly strong in personal lines and small commercial.

Core earnings were $246 million, up 58% from the $156 million reported in the prior year period. Net income was $190 million for the third quarter of 2009, including the effect of a $58 million net realized capital loss. In the third quarter of 2008, property and casualty operations reported a net loss of $774 million, including the effect of a $929 million net realized capital loss.

The current accident year combined ratio for ongoing operations in the third quarter of 2009, excluding catastrophes, was 93.8%, compared with 91.8% in the prior-year period. The third quarter of 2009 included $135 million, or 5.5 points, of net favorable prior year development primarily related to small commercial and middle market workers compensation, professional liability, personal lines auto liability and middle market general liability claims.

Personal Lines

Personal lines written premiums for the third quarter of 2009 grew 2% over the prior-year period to $1.0 billion. Written premiums in the company's agency business rose 4% in the third quarter, with AARP written premiums up 2% over the prior period. New business premium was very strong, increasing 26% over the third quarter of 2008, while the number of policies in force grew 2% year-over-year as investments in new products and increased consumer shopping continued to drive new business submissions. During the quarter, the company continued its successful launch of its AARP product through agents, with the product already in 14 states, and 6 additional states rolling out in the fourth quarter.

The third quarter 2009 current accident year combined ratio, excluding catastrophes, was 94.5%, compared to 88.3% in the prior-year period. The increase in the combined ratio was largely due to current accident year reserve strengthening, in response to an uptick in auto frequency and lower average premium. The third quarter of 2009 included 9.1 points of current accident year catastrophes related to significant hail and wind storms in the Midwest and Colorado.

Small Commercial

Written premiums for small commercial were $626 million for the third quarter of 2009, compared with $652 million in the prior year period. The decline in year-over-year written premium was driven by weaker economic conditions that have resulted in business closings and an overall reduction in exposures as businesses reduce coverages and shrink payrolls. New business premium was up 20% over the prior-year period as product enhancements made in 2009 had a positive impact and the company capitalized on policyholder shopping.

Third quarter 2009 profitability continued to be very strong, with a current accident year combined ratio, excluding catastrophes, of 86.0% as compared to 87.7% in the third quarter of 2008. The third quarter of 2009 included 2.9 points of current accident year catastrophes.

Middle Market

Written premiums for middle market were $496 million for the third quarter of 2009, compared with $571 million in the year-ago period. Written premiums were lower due mainly to weaker economic conditions combined with the company's ongoing disciplined approach to evaluating and pricing risks. The company continued to target profitable growth opportunities in a highly competitive environment.

The third quarter 2009 current accident year combined ratio, excluding catastrophes, was 97.0%, compared with 98.4% in the prior-year period. The third quarter of 2009 included 1.2 points of current accident year catastrophes and $52 million, or 10.1 points, of net favorable prior year development largely related to workers' compensation and general liability.

Specialty Commercial

In specialty commercial, written premiums for the third quarter of 2009 were $266 million as compared to $345 million in the year-ago period. Premiums were driven lower by a combination of the effects of the economic downturn, the sale of First State Management Group, which contributed $14 million of premium in the third quarter of 2008, and lower net premiums resulting from changes in a reinsurance treaty.

The third quarter 2009 current accident year combined ratio, excluding catastrophes, was 102.6% as compared with 99.0% in the third quarter of 2008. The third quarter of 2009 included $39 million, or 13.0 points, of net favorable prior year development primarily related to professional liability.

Life Operations

Life operations assets under management were $334.3 billion at the end of the third quarter of 2009, essentially flat compared with $333.3 billion as of September 30, 2008 and up 11% from the end of the second quarter of 2009. Core earnings for the third quarter of 2009 were $499 million, up from core losses of $541 million in the prior year period.

Life reported a net loss of $323 million in the third quarter of 2009, compared with a net loss of $1.8 billion in the year-ago period. The third quarter of 2009 net loss included a $62 million after-tax benefit related to the DAC unlock and an $825 million net realized capital loss. The third quarter of 2008 included a $941 million after-tax charge related to the DAC unlock and a $1.3 billion net realized capital loss.

INDIVIDUAL MARKETS

Retail Products Group

Total retail products assets under management were $136.6 billion at September 30, 2009, compared with $146.4 billion at September 30, 2008, primarily as a result of equity market declines over the last 12 months. Assets under management increased 11% sequentially from the $123.3 billion reported at the end of the second quarter of 2009, as a result of recent market improvement. The net loss for the third quarter of 2009 was $172 million, and included a $69 million benefit related to the DAC unlock, as well as a net realized capital loss of $499 million, driven by a combination of losses on the company's variable annuity hedging programs and impairments on the investment portfolio. This compares with a third quarter 2008 net loss of $822 million, which included a DAC unlock charge of $732 million and a net realized capital loss of $283 million.

Variable annuity deposits for the quarter were $622 million, compared to $1.9 billion in the prior-year period. The year-over-year decline was due primarily to the company's product feature and pricing changes. Third quarter 2009 variable annuity net outflows were $1.7 billion, compared with $1.5 billion in the prior year period.

In October, the company introduced The Hartford's Personal Retirement Manager, an innovative new product that combines two traditional retirement planning approaches, long-term investment growth and guaranteed lifetime income potential, in a single, user-friendly, tax-deferred retirement planning vehicle.

Mutual fund deposits were $3.1 billion in the third quarter of 2009, compared with $3.6 billion in the prior-year period. Strong mutual fund performance in the third quarter contributed to sales, with 65% of The Hartford's retail mutual funds outperforming their Morningstar peers in the third quarter of 2009. Net sales were $779 million in the third quarter of 2009, compared with $816 million in the prior year period.

Individual Life

Third quarter 2009 sales for individual life were $45 million, down from $69 million in the prior-year period due to equity market volatility and disruption in the wirehouse and bank distribution channels. Life insurance in-force rose 4% over the prior-year period, primarily driven by a 13% increase in term life insurance, as customer demand shifted to fixed products.

Individual life reported net income of $4 million for the third quarter of 2009, including a net realized capital loss of $24 million and a $24 million charge related to the DAC unlock. Net loss for the third quarter of 2008 was $102 million, which included a net realized capital loss of $111 million and a $44 million charge related to the DAC unlock.

EMPLOYER MARKETS

Retirement Plans

Retirement plans assets under management were $42.7 billion at September 30, 2009, compared with $43.3 billion at the end of the third quarter of 2008. Sequentially, assets under management were up notably from the $38.8 billion reported at the end of the second quarter of 2009 due primarily to recent equity market performance. Total deposits were $1.8 billion in the third quarter of 2009, compared with $2.3 billion in the prior-year period. During the quarter, The Hartford and Lord Abbett entered into a strategic alliance to offer Lord Abbett's 401(k) plan sponsors the ability to transition their plans to The Hartford. Lord Abbett manages nearly 8,000 bundled small 401(k) plans comprising more than 59,000 participants and more than $1.2 billion in assets.

Retirement plans reported a net loss of $34 million for the third quarter of 2009, driven by a net realized capital loss of $49 million. This compares to a net loss of $160 million in the prior-year period, which included a net realized capital loss of $123 million and a $49 million charge related to the DAC unlock.

Group Benefits

Group benefits fully insured sales were $122 million in the third quarter, compared with sales of $158 million in the prior-year period largely due to the economic and competitive environment. Fully insured premiums were $1.1 billion for the third quarter of 2009, down 4% from the prior-year period. The decrease was primarily related to the effects of the economic downturn, including lower payrolls, while persistency remained high.

Group benefits reported net income for the third quarter of 2009 of $65 million, up from a net loss of $186 million in the prior-year period. The third quarter of 2009 included a net realized capital loss of $20 million compared with a net realized capital loss of $287 million in the third quarter of 2008.

INTERNATIONAL MARKETS

As a result of the company's decision to suspend writing new business in Japan, variable annuity deposits in Japan for the third quarter of 2009 were $17 million, down from $868 million in the third quarter of 2008. Net outflows for variable annuities were $249 million for the third quarter of 2009.

International operations reported a third quarter 2009 net loss of $32 million, including an $18 million benefit related to the DAC unlock and a net realized capital loss of $107 million. Third quarter 2008 net loss was $107 million and included a net realized capital loss of $36 million and a DAC unlock charge of $116 million.

INSTITUTIONAL MARKETS

Institutional deposits for the third quarter of 2009 were $623 million, compared with $850 million in the prior-year period, with the majority of the deposits in institutional mutual funds. The decline in deposits was primarily driven by the company's decision to cease writing new business in certain lines. Institutional reported a third quarter 2009 net loss of $101 million, which included a net realized capital loss of $94 million, compared with a net loss of $393 million in the year-ago period, which included a net realized capital loss of $394 million.

INVESTMENTS

The Hartford's total investments, excluding trading securities, were $96 billion as of September 30, 2009, compared to $89 billion as of December 31, 2008. Net investment income, excluding trading securities, was $1.0 billion, before tax, in the third quarter of 2009, a decline of 5% from the prior-year period. The decline was primarily due to lower interest rates as well as the company's decision to increase its allocation to short-term investments.

Impairments were $536 million, pre-tax, in the third quarter of 2009. The majority of impairments were related to potential future credit losses on certain structured securities.

Net unrealized losses on investments were $5.8 billion, pre-tax, as of September 30, 2009, compared with $13.2 billion as of December 31, 2008. The improvement was driven by significant spread tightening across virtually all fixed maturity asset classes in the second and third quarter of 2009, partially offset by the implementation of new impairment accounting guidance.

2009 GUIDANCE

Based on the assumptions below, The Hartford currently expects 2009 core earnings per diluted share to be between $0.85 and $1.05. The company's previous guidance for 2009 core earnings per diluted share was between $0.00 and $0.20. The guidance contained within this news release is subject to unusual or unpredictable benefits or charges that might occur in 2009, as well as factors noted below. Historically, the company has frequently experienced unusual or unpredictable benefits and charges that were not anticipated in previously provided guidance.

This guidance assumes the following:

-- U.S. equity markets produce an annualized return of 9.0% (including 7.2% stock appreciation and 1.8% dividends) from the S&P 500 level of 1,057 on September 30, 2009;

-- This guidance incorporates no estimate of the effect of any fourth quarter 2009 unlock of the account values and related assumptions underlying the company's estimate of future gross profits used in the determination of certain asset and liability balances, principally life deferred acquisition costs;

-- A fourth quarter 2009 restructuring charge of $30 million, after tax;

-- Preferred dividends and amortization of discount of $128 million on the cumulative perpetual preferred stock issued under the Capital Purchase Program;

-- A full year, pre-tax underwriting loss of $225 million from other operations in property and casualty. In the last several years, underwriting losses in other operations have differed materially from the assumptions incorporated in guidance;

-- A full year catastrophe ratio of 3.6% to 4.0%;

-- A pre-tax annualized yield on limited partnerships and other alternative investments of (21%); and

-- Diluted weighted average shares outstanding of 364 million for full year 2009.

Markets worldwide have experienced persistent volatility and disruption, due largely to the stresses affecting the global financial system, which accelerated significantly in the second half of 2008 and continued into 2009. The United States, Europe and Japan have entered severe recessions that are likely to persist well into the second half of 2009 and perhaps into 2010, despite governmental intervention in the world's major economies. The likelihood that the company's 2009 earnings guidance will turn out to be incorrect is increased by virtue of these conditions. The company's actual experience in 2009 will almost certainly differ from many of the assumptions described above, and investors should consider the risks and uncertainties that may cause the company's actual results to differ from the 2009 earnings guidance, 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, 2009, June 30, 2009, and September 30, 2009, and annual report on Form 10-K for the year ended December 31, 2008.

CONFERENCE CALL

The Hartford will discuss its third quarter 2009 results in a conference call on Wednesday, November 4 at 8:00 a.m. EST. The call, along with a slide presentation, can be simultaneously accessed through The Hartford's Web site at ir.thehartford.com.

More detailed financial information can be found in The Hartford's Investor Financial Supplement for the third quarter of 2009, which is available on The Hartford's Web site, ir.thehartford.com.

Source: The Hartford