HARTFORD INSURANCE GROUP, INC. quarterly report, Q2 FY2011

Business Context and Reporting Period

The filing is The Hartford Financial Services Group, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2011. The company provides property and casualty insurance, life insurance, annuities, retirement plans and mutual fund products, principally in the United States, while administering previously sold business in Japan and the United Kingdom. The filing was reviewed by Deloitte & Touche LLP, which reported no material modifications required to conform the interim statements to U.S. GAAP.

Key Financial Metrics

Metric	Three Months Ended June 30, 2011	Comparable 2010	Six Months Ended June 30, 2011	Comparable 2010
Total revenues	$5,401 million	$3,265 million	$11,701 million	$9,517 million
Income from continuing operations, net of tax	$104 million	$175 million	$453 million	$495 million
Net income	$24 million	$76 million	$535 million	$395 million
Net income available to common shareholders	$13 million	$65 million	$514 million	$(99) million
Diluted EPS available to common shareholders	$0.03	$0.14	$1.06	$(0.24)
Net cash provided by operating activities	Not presented for the quarter	Not presented for the quarter	$964 million	$1,200 million

Earned premiums increased 1% to $3,545 million in the quarter and were essentially flat at $7,064 million for the six-month period. Fee income increased 3% in both periods.
Total net investment income improved substantially to $507 million in the quarter from a $1,501 million loss, and to $2,418 million for six months from $254 million. The change was largely attributable to improved performance of trading equity securities supporting international variable annuities.
Net realized capital gains were $69 million in the quarter versus $9 million in 2010, but six-month net realized capital losses increased to $334 million from $265 million, primarily reflecting variable annuity hedge-program results.
Stockholders’ equity was $21,675 million at June 30, 2011, up from $20,311 million at December 31, 2010. Total assets were $317,469 million, compared with $318,346 million at year-end.
Total debt was $6,614 million, including $400 million of short-term debt and $6,214 million of long-term debt. Debt-to-capitalization was 23%, versus 25% at December 31, 2010.
Cash was $1,898 million at June 30, 2011, down from $2,062 million at year-end and $2,998 million at June 30, 2010. The company had $3.9 billion of unused commercial paper and revolving credit capacity.
The company declared common dividends of $0.10 per share in both the first and second quarters of 2011.

Material Changes Versus the Prior Comparable Period

Second-quarter net income fell 68% to $24 million, while six-month net income rose 35% to $535 million. The six-month improvement was driven mainly by a $150 million after-tax gain on the sale of Specialty Risk Services in the first quarter of 2011 and lower prior-year tax and impairment effects.
Commercial Markets earnings declined to $162 million in the quarter from $318 million and to $500 million for six months from $575 million. Property & Casualty Commercial was affected by catastrophes and unfavorable prior-year development.
Consumer Markets recorded a $174 million quarterly loss and a $64 million six-month loss, compared with losses of $13 million and income of $43 million, respectively. Catastrophe losses and a software-project write-off were significant factors.
Wealth Management earnings increased to $351 million in the quarter from $26 million and to $479 million for six months from $150 million. Global Annuity benefited from lower DAC amortization, improved hedge results, a tax settlement and a Japan reserve release.
Property & Casualty Commercial written premiums grew 8% in both the quarter and six-month period. Consumer Markets written premiums declined 6% in both periods as the company pursued pricing and underwriting actions.
Commercial Markets and Consumer Markets combined ratios before catastrophes and prior-year development were 92.8% and 91.6%, respectively, for the quarter; both remained below 100%, indicating underlying underwriting profitability despite reported catastrophe-affected ratios of 105.8% and 121.5%.
Accumulated other comprehensive loss improved from $1,001 million at year-end to $77 million at June 30, 2011, primarily due to improved investment valuations.

Guidance, Outlook, Risks and Unusual Items

Management raised full-year 2011 Property & Casualty Commercial written-premium growth expectations to the mid- to high-single-digit range. The full-year combined ratio before catastrophes and prior-year development was expected to be slightly higher than the 93.4% reported for 2010.
Group Benefits premiums were expected to remain relatively flat, with loss ratios essentially flat after elevated disability losses in 2010.
Consumer Markets written premiums were expected to decline in 2011, although management expected improvement in the underlying combined ratio through pricing, underwriting and a shift toward preferred business.
The company expected to complete a comprehensive policyholder-behavior study in the third quarter of 2011. Changes in assumptions could produce additional DAC, sales-inducement or benefit-reserve “Unlock” effects.
Second-quarter catastrophe losses were $290 million after tax, compared with $150 million in the prior-year quarter. Six-month catastrophe losses were $341 million after tax, compared with $200 million in 2010.
The company increased net asbestos reserves by $290 million in the second quarter, primarily due to higher mesothelioma claim frequency and severity. Net asbestos and environmental reserves totaled approximately $2.31 billion and were within an estimated range of $1.83 billion to $2.63 billion.
The company recorded a $73 million after-tax charge for discontinued policy-administration software costs and a $74 million after-tax loss related to the planned divestiture of Federal Trust Corporation. The transaction was expected to close in the fourth quarter of 2011, subject to approvals.
The company recorded a $52 million tax benefit from resolving an IRS matter concerning the dividends-received deduction and released $86 million of a deferred-tax-asset valuation allowance related to investment realized capital losses.
Derivative and variable-annuity results remain sensitive to interest rates, equity markets, implied volatility, foreign exchange rates, policyholder behavior and differences between hedged indices and underlying funds. A ratings downgrade could require approximately $63 million of additional collateral for a one-level downgrade or approximately $91 million for a two-level downgrade.
Other material risks include investment impairment, credit-spread widening, commercial real estate exposure, unfavorable loss development, reinsurance collectibility, asbestos and environmental claims, regulatory changes under Dodd-Frank, litigation and restrictions on dividends from insurance subsidiaries.

Important Facts for Investors to Verify

Verify the sustainability of six-month earnings excluding the $150 million Specialty Risk Services gain, tax benefits, discontinued operations and other unusual items.
Assess catastrophe exposure, the $290 million asbestos reserve strengthening and the adequacy of related reinsurance and reserves.
Review Consumer Markets’ deteriorating reported combined ratio and whether pricing and underwriting actions can offset elevated weather-related losses.
Monitor variable-annuity guarantee exposure, hedge effectiveness, DAC recoverability and the outcome of the third-quarter policyholder-behavior study.
Confirm liquidity sources, insurance-subsidiary dividend capacity, debt maturities and the potential collateral impact of ratings changes.
Evaluate investment portfolio risks, including $2.46 billion of gross unrealized losses on available-for-sale securities, commercial real estate and structured securities.
Track the Federal Trust Corporation divestiture, pending litigation settlements, asbestos and environmental developments, and any changes arising from Dodd-Frank or tax legislation.