The Hartford Financial Services Group
shares plummeted more than 29% Friday, after the insurer swung to a fourth-quarter loss, slashed its dividend and was noticeably silent about an application for government bailout funds.
The Hartford on late Thursday reported a net loss of $806 million, or $2.71 per diluted share, compared to a net gain of $595 million, or $1.88 per diluted share, in the year-ago period. As a result, the company plans to cut its dividend to 5 cents per share, from 32 cents per share.
The losses come from a $610 million realized investment loss in addition to a $208 million loss on core operations, or underwriting during the quarter. In the fourth quarter 2007, the company realized investment losses of $230 million but had an $840 million gain in its core operations.
For the full-year 2008, the company lost $2.7 billion, compared to a $2.9 billion gain in 2007.
Noticeably absent from The Hartford's earnings announcement and analyst call was any mention of the status of Hartford's application to the Office of Thrift Supervision to become a savings and loan and to participate in the Treasury's Capital Purchase Program.
in November announced intentions to buy small savings and loans, which would make them eligible for aid under the government program, but none have yet received assistance. Aegon subsequently dropped its efforts to buy a bank and seek government funds.
A Hartford spokesman on Friday said the company did not have an update on the status of its application.
Shares fell as far as $10.66, but more recently were down 18% to $12.38 amid the market's strong rally Friday.
Declines in The Hartford's underlying assets and associated fee revenue related to its variable annuity business continued to be a major problem. Variable annuity deposits in the fourth quarter were $1.2 billion, down from $3.1 billion in the prior-year quarter. Fourth-quarter 2008 net outflows were $1.9 billion, compared with net outflows of $1.1 billion in fourth quarter 2007.
As a result, variable annuity assets under management ended the quarter at $74.6 billion, compared with $119 billion in the fourth quarter of 2007. Fee income on the business declined $331 million.
In its earnings call, The Hartford stressed that it was taking steps to restructure its variable annuity products to reduce its risk and remain competitive. Namely, it would be simplifying the structure of its products, which would reduce the expense to the company and also allow it to minimize price increases. In addition, it modified its variable annuity hedging strategy to better protect statutory capital by reducing risk to volatility and interest rate changes.
Reflecting the uncertainty in the market and increased demand for guaranteed rates, the company's fixed annuity deposits increased to $848 million in the fourth quarter of 2008, compared to $128 million in 2007.
The Hartford also announced that its estimated year-end statutory risk-based capital ratio for its life insurance subsidiary, Hartford Life and Accident, would be 385%. This is down substantially from its Dec. 5 estimate of 535%, primarily because the company decided to downstream only $1.5 billion of the $2.5 billion investment from
The company maintained that the $1 billion kept at the holding company level would allow it to remain flexible, but wouldn't elaborate in what way. The wisdom of this decision is questionable, given that the additional $1 billion would have boosted the life company's risk-based capital, although the company insisted that the $1 billion would be available at any time for downstreaming.
The Hartford on Dec. 31 had $13.2 billion of net unrealized losses, with $6 billion of that coming from its commercial mortgage-backed security (CMBS) portfolio. Its total CMBS holdings were valued at $8.8 billion at the end of the year, compared to $17 billion at Dec. 31, 2007. CMBS make up 10% of the company's invested assets, but 40% of its investment loss and has a 60% market to book ratio.
Analysts on the earnings call raised concerns that Moody's Investors Service had announced it will be doing a comprehensive review of the entire CMBS market in 2009 and that downgrades were expected. CEO Ramani Ayer said impact of such downgrades to Hartford would be immaterial.
The company also pointed out that it is seeking relief from certain capital and reserve requirements from the Connecticut Department of Insurance, its primary regulator. It feels that cash flow testing under a required reserving method called AG39 resulted in a $600 million reserve redundancy, which directly impacts its capital and surplus. Likewise, it is also seeking relief in the recognition of its
which also impacts capital.
The company said relief from both of these items would result in a 75-point increase in its risk-based capital ratio and argues that it will be moving to a less-stringent reserve calculation in 2009, known as VA CARVM, which it feels more accurately reflects needed reserves. The company did not indicate when it expected a decision on the appeal.
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