HARTFORD INSURANCE GROUP, INC. quarterly report, Q3 FY2012

The Hartford Financial Services Group, Inc. — 2012 Q3 Form 10-Q

Business context and reporting period

Quarterly report for the three and nine months ended September 30, 2012, filed November 1, 2012. The Hartford provides property and casualty insurance, group benefits, life insurance, annuity, retirement-plan, mutual-fund and related financial services. Management’s strategy is to focus on Property & Casualty, Group Benefits and Mutual Funds; place Individual Annuities into runoff; and sell or pursue alternatives for Individual Life, Retirement Plans and Woodbury Financial Services.

Key financial metrics

Metric	Q3 2012	Q3 2011	9M 2012	9M 2011
Total revenues	$6,442 million	$4,520 million	$18,677 million	$16,221 million
Net income	$401 million	$60 million	$396 million	$594 million
Net income available to common shareholders	$391 million	$50 million	$365 million	$563 million
Diluted EPS from continuing operations	$0.83	$0.10	$0.79	$0.99
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$2,212 million	$1,624 million

Earned premiums declined 3% to $3,401 million in the quarter and $10,243 million for nine months. Fee income declined 6% and 7%, respectively.
Net investment income was $1,740 million in Q3 and $5,086 million for nine months, compared with losses of $828 million and income of $1,590 million in the prior-year periods. The change primarily reflected market movements in trading equity securities supporting international variable annuities.
Net realized capital gains were $119 million in Q3, versus $575 million in Q3 2011; nine-month results were a $202 million loss versus a $241 million gain.
Income from continuing operations was $403 million in Q3 and $400 million for nine months. The nine-month effective tax benefit was $136 million.
Total assets were $308.9 billion at September 30, 2012, including $137.2 billion of investments and $148.4 billion of separate-account assets. Stockholders’ equity was $23.4 billion, up from $21.5 billion at December 31, 2011.
Total debt was $7.1 billion, comprising $320 million of short-term debt and $6.8 billion of long-term debt. Debt represented 23% of total capitalization.
Cash increased to $2.7 billion from $2.6 billion at year-end. The holding company reported $1.3 billion of cash, short-term investments and fixed maturities available for liquidity.
Property & Casualty Commercial produced nine-month net income of $502 million, with a 99.8% combined ratio. Consumer Markets produced $152 million, with a 95.8% combined ratio. Group Benefits produced $83 million, while Mutual Funds produced $56 million.
Core earnings, a non-GAAP measure, were $378 million in Q3 and $1,109 million for nine months, compared with $50 million and $638 million, respectively.

Material changes versus the prior comparable periods

Q3 net income improved materially, primarily because the after-tax variable-annuity “Unlock” charge declined to $79 million from $469 million and catastrophe losses declined to $7 million from $134 million.
Nine-month net income fell 33%, primarily because of a $587 million after-tax loss on extinguishment of debt, lower net realized capital gains, and lower discontinued-operations income. These effects were partly offset by lower catastrophe losses, a much smaller $11 million after-tax Unlock charge, and lower asbestos reserve strengthening.
Commercial Markets benefited from lower catastrophe losses and improved Property & Casualty Commercial underwriting in the quarter. Consumer Markets returned to profitability, helped by lower catastrophe losses and favorable prior-year reserve development.
Stockholders’ equity increased primarily through $2.0 billion of after-tax improvement in accumulated other comprehensive income, largely from higher unrealized gains on available-for-sale securities.
The company issued $1.55 billion of senior notes and $600 million of junior subordinated debentures, while repurchasing $1.75 billion of Allianz-held junior subordinated debentures and $300 million of warrants. It also repurchased 8.0 million common shares for $149 million.
Gross unrealized losses on available-for-sale securities declined to $1.4 billion from $2.7 billion at year-end, primarily due to tighter credit spreads and lower interest rates. Nine-month other-than-temporary impairment losses recognized in earnings were $164 million.

Guidance, outlook, risks and unusual items

Management expected low-single-digit full-year written-premium growth in Property & Casualty Commercial and a full-year combined ratio before catastrophes and prior-year development in the mid-to-upper 90s.
Group Benefits premiums were expected to decline, with an elevated loss ratio due to persistent group long-term-disability claim incidence, lower claim terminations and higher severity.
Consumer Markets written premiums were expected to decline, although policy retention and new business trends were improving. The full-year combined ratio before catastrophes and prior-year development was expected to be flat to slightly lower than 2011.
The planned sales of Woodbury Financial Services, Retirement Plans and Individual Life remained subject to regulatory approvals and customary closing conditions. The Retirement Plans and Individual Life transactions were not expected to produce a material gain or loss based on then-current information. The Individual Annuity business was placed into runoff, and new U.S. annuity policies were reinsured to Forethought beginning May 1, 2012.
Restructuring and other costs totaled $110 million pre-tax through September 30, against an estimated total of approximately $250 million, primarily for severance, professional fees, contract terminations and asset impairments.
Asbestos and environmental reserves were highly uncertain. Net reserves were $2.14 billion, within management’s estimated range of $1.7 billion to $2.5 billion; future adverse development could materially affect earnings, financial condition and liquidity.
Variable-annuity results remained sensitive to equity markets, interest rates, volatility, foreign exchange rates and policyholder behavior. International hedge-program losses were $474 million for nine months, versus gains of $571 million in the prior-year period.
Derivative agreements included rating triggers. A downgrade of one rating level could require approximately $22 million of additional collateral, and a two-level downgrade could require approximately $41 million. One counterparty retained a termination right on derivatives with $1.0 billion notional value and $35 million fair value.
The company maintained $1.75 billion of revolving-credit capacity, had no borrowings under its commercial-paper or revolving-credit programs, and was in compliance with credit-facility covenants.
The company stated that liquidity was sufficient for anticipated needs over the next twelve months. Key risks included low interest rates, market volatility, credit deterioration, catastrophe losses, reinsurance performance, regulatory changes, litigation and potential goodwill or deferred-tax-asset impairments.

Important facts for investors to verify

Completion timing, regulatory approvals and final economics of the Individual Life, Retirement Plans and Woodbury transactions, and the final closing adjustment for Retirement Plans.
Statutory capital, risk-based-capital ratios and dividend capacity of insurance subsidiaries; the September 30, 2012 statutory surplus figures were estimates pending filings.
Future variable-annuity hedge results, policyholder behavior assumptions, DAC recoverability and sensitivity to equity, interest-rate, volatility and yen movements.
Adequacy of asbestos and environmental reserves relative to the disclosed $1.7 billion to $2.5 billion range and future reserve development.
Credit quality and impairment risk in the investment portfolio, particularly structured securities, commercial real estate, financial services and European exposures.
Potential collateral or settlement requirements arising from ratings-based derivative provisions and any developments in the mutual-funds litigation.
The impact of the retrospective adoption of ASU 2010-26, which reduced previously reported beginning stockholders’ equity by approximately $1.6 billion after tax and revised prior-period results.