Regulators Likely To Act Against The Hartford
By DIANE LEVICK, Staff Writer
November 4, 2005
The Hartford trumpeted a 9 percent earnings increase Thursday, but also said attorneys general are likely to take action against the company because of certain broker pay practices.
The Hartford Financial Services Group Inc. beat analysts' estimates for third-quarter earnings, although it lowered the company's own forecast for full year 2005.
New York and Connecticut attorneys general have been investigating certain aspects of The Hartford's group annuity business, including how it pays brokers for selling the products.
Although the probes were previously disclosed, the company said Thursday in a federal filing that the states "are likely to take some action at the conclusion of their respective investigations into the company's broker compensation practices in the single premium group annuity business."
Single premium group annuities - a very small piece of The Hartford's business - are typically sold to fund retirement plans of employers that are going out of business or that want to be relieved of pension liability. The Hartford says those annuities reflected a sizable part of the $31 million of sales of institutional annuities during the first nine months of this year.
The Hartford is now facing "likely" enforcement action on three fronts. The company had already said that action by New York Attorney General Eliot Spitzer and the Securities and Exchange Commission would likely stem from "market timing" by some customers and "directed brokerage" practices.
Market timing is rapid and frequent trading in mutual funds, which can benefit some investors at the expense of others. The Hartford's mutual funds are available to purchasers of variable life insurance or annuity products, and to certain retirement plans.
In directed brokerage, mutual funds direct their securities trades to certain brokers as a reward for the brokers' sales of the mutual funds. The Hartford has said it discontinued the practice in 2003 in connection with its sale of mutual funds.
In addition to asking about broker pay, subpoenas in the group annuity investigation have asked how The Hartford sells the products, and how it chooses mutual funds that are offered as investment options within the annuities.
Connecticut Attorney General Richard Blumenthal says he's working with Spitzer on the group annuity probe.
"Our ongoing investigation has uncovered serious and significant issues, and I believe action is very likely," Blumenthal said. "It will involve remedies appropriate to the problems we've uncovered," he added, declining to elaborate.
Joshua King, a spokesman for The Hartford, said, "We are cooperating fully and actively with the regulators, but the timing for a resolution is difficult for us to predict."
King declined to discuss what the allegations or punishment may be. Enforcement action can involve fines and settlements, and multimillion-dollar settlements have become commonplace in insurance industry investigations.
Many officials have been looking into payment of bonus commissions to brokers by insurers that want business steered their way, and whether the payments are disclosed to customers.
After the stock market closed Thursday, The Hartford reported a 9 percent increase in third-quarter net income, to $539 million, or $1.76 a share. A year earlier, net income was $494 million, or $1.66 a share.
Operating income rose 20 percent, to $560 million, or $1.82 a share in the quarter, beating the Thomson First Call analysts' consensus of $1.52 a share.
Operating income, which excludes realized investment gains and losses and certain other items, was $468 million, or $1.57 a share, a year earlier. The 2004 quarter benefited from $216 million of tax-related items from prior years.
The Hartford's return on equity was 17 percent for the 12 months that ended Sept. 30, and assets under management reached a record $316 billion, said Ramani Ayer, the company's chief executive.
The Hartford lowered its 2005 full-year forecast for operating earnings to between $7.30 and $7.60 a share because of hurricane claims. Previously, the company forecast $7.55 to $7.85 a share.
Analysts' consensus was $7.48 a share, but their estimates may not have factored in all hurricanes, such as Wilma, which happened in the fourth quarter.
Hurricane claims affected the company's property-casualty profits in the third quarters of 2004 and 2005, although The Hartford's exposure to this year's Gulf Coast storms was much less than many other major insurers.
Operating income in the segment was $232 million in this year's quarter, which included $130 million after-tax because of hurricanes. The results also reflected a $24 million after-tax charge to increase environmental claim reserves. Property-casualty operating income a year earlier was $13 million.
The Hartford's life operations posted $368 million of operating income in this year's third quarter. That reflects a 20 percent increase from $306 million a year earlier, which excludes $190 million in tax-related items.
Sales in Japan operations were $3 billion, up 31 percent in the third quarter from a year earlier, with variable annuities contributing $2.8 billion of the total.
The Hartford also disclosed Thursday that its board allowed a shareholder rights agreement, known as a "poison pill," to expire Nov. 1 without replacing it. Companies adopt the stock-related agreements to deter hostile takeovers, but shareholders often don't like them, and companies sometimes drop them.