The Hartford: What Profit?

Posted by Ray on November 3, 2009 under Main | Be the First to Comment

I was excited to see The Hartford had turned the corner to profitability, until I realized that they only had positive earnings if you excluded the losses. I am sorry, but that is accounting profits, not actual profits. Without the losses the firm posted a whopping $1.56 per share, but including the losses the firm lost $.79 per share. Of course, no one is going to look under the hood at the balance sheet in the media, so come with me for a ride at looking at an insurance company’s balance sheet.

First, let’s take a look at this statement about these quarters’ results:

“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.“

So, there is still $5.8B in losses on the books, that will have to be realized because everything is catching a bid nowadays. However, what caught my eye was new impairment accounting guidance. That is the fabled market-to-fantasy land issue that we have all been talking about. What would happen if we did not have that rule in place? I am sure you know that that $5.8B would go way up, but that must be good news, somehow.

The firm did not enjoy prosperous growth across its business lines, its P&C business was down pretty much across the board. Its variable annuity business had significant net outflows, its fixed annuities had less than $1B in net inflows. The mutual fund arm of the firm did have strong inflows of about $2.7B, but it is a low profit margin product. Its group benefits did OK with $4.4B and its individual life has margins of about 4%. Overall, it is not that strong of a report in my view as its core business were way down.

If you actually look at the balance sheet there is simply nothing to really like. Every division, except for the P&C division lost money, but had a credit from previous losses which offset the loss and made it a gain. This is a paper gain, not an actual gain at all. For example, The Hartford had a loss of ($323M) in its core life business, but Less: Net realized capital losses of $822M and what do you know, you have a profit of $499M. I know, I am being picky, why argue with a profit, right? Sorry, but a profit is something you earn, not carry forward credits or offset losses. I am not saying that The Hartford’s earnings are not legitimate, but I am saying it is just accounting.

This type of accounting realized losses were on every line of the earnings statement, which makes me think that the $.79 loss is the only number to go with here. I know we are all looking for good numbers and good news, but accounting profits are just that and not real. What happens when you have no more losses to offset anything or the rules get changed, I hope, back to mark-to-market? The Hartford is a good firm and I know they will be fine, but I do not like this quarter’s earnings at all. I do not own any long or short positions in The Hartford and I encourage you to look for yourself at the earnings report and judge it for yourself.

Here is the earnings report HERE

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Exit Stage Left

Posted by Ray on May 15, 2008 under Main | Be the First to Comment

For years The Hartford’s Director variable annuity was the rock of the variable annuity industry. For almost a decade it was the best selling broker sold variable Annuity product, behind TIAA-CREF. Last week that legacy came to an end as the Director variable annuity ceased to exist for new investors and was folded into the Hartford Leaders product.

The Hartford’s Planco division once boasted that the Director product will always be the best selling variable annuity with the Leaders product a close second. Sadly, they were the last to see that the writing was on the walls years ago and single managed variable annuity products were irrelevant. In 2005 they tried to turn the ill fated Director Annuity around by introducing a multi-managed approach, they added some 55 different sub-accounts from various managers.

What they did not count on was that their success with the Hartford Leaders product would undo what they were trying to accomplish. The Leaders variable annuity had 4 main fund families that went deep, offering many sub-accounts from each manager. All of the fund families were top shelf names, American Funds, Franklin, MFS and AIM which are among the top selling fund families in the advisor arena. The Director annuity though went for the shallow and wide, offering many Hartford sub-accounts but only a smattering of other money managers.

The Leaders annuity saw huge growth, from nothing in 2000 to $10 billion or so in recent years. That success, in our opinion, tainted the efforts of the Director product. Also, the other issue was saturation of the marketplace with both the Leaders and the Director wholesalers covering the same advisors. It was total overkill.

It was no surprise that the Director failed, it was too little too late.

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