Business Context and Reporting Period
Registrant: The Hartford Financial Services Group, Inc. (the filing text does not identify “HARTFORD INSURANCE GROUP, INC.” as the registrant). The company provides property and casualty insurance, life insurance, annuities, retirement products, mutual funds and investment products, principally in the United States, while administering previously sold Japan and U.K. business.
Period: Quarterly report for the three and nine months ended September 30, 2010, compared with the corresponding 2009 periods; balance sheet comparison is September 30, 2010 versus December 31, 2009. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
Key Financial Metrics
| Metric | Three months ended Sept. 30 | Nine months ended Sept. 30 |
|---|---|---|
| Total revenues | $6,673 million vs. $5,230 million | $16,328 million vs. $18,261 million |
| Net income (loss) | $666 million vs. $(220) million | $1,061 million vs. $(1,444) million |
| Net income available to common shareholders | $656 million vs. $(282) million | $557 million vs. $(1,509) million |
| Diluted EPS | $1.34 vs. $(0.79) | $1.21 vs. $(4.52) |
| Net realized capital losses | $(261) million vs. $(1,219) million | $(526) million vs. $(1,816) million |
| Net cash provided by operating activities | Not separately presented | $2,245 million vs. $2,745 million |
Earned premiums were $3,513 million in the third quarter, essentially unchanged, and $10,546 million year to date, down 3%. Fee income rose 3% in the quarter and 6% year to date. Net investment income was $2,126 million in the quarter, up 26%, but $2,391 million year to date, down 56%, primarily because 2009 included substantially stronger equity-securities trading results.
Benefits, losses and expenses totaled $5,751 million in the quarter and $14,878 million year to date. DAC and present-value-of-future-profits amortization declined to $438 million in the quarter and $2,027 million year to date. Goodwill impairment was $153 million year to date, compared with $32 million in 2009.
At September 30, 2010, total assets were $313,926 million, investments were $133,590 million, cash was $1,707 million, total stockholders’ equity was $20,909 million and total debt was $6,603 million. The company reported no short-term debt, $6,603 million of long-term debt and $13,269 million of stated available liquidity after derivative collateral and Japan variable-annuity cash adjustments.
Common dividends were $0.05 per share for the quarter and $0.15 per share year to date. The statutory surplus estimate for U.S. life subsidiaries was $7,557 million and for property and casualty subsidiaries was $7,690 million at September 30, 2010.
Material Changes Versus Prior Comparable Period
- Quarterly and year-to-date profitability improved sharply, primarily because realized investment losses and DAC unlock effects were materially less adverse than in 2009.
- The third-quarter DAC unlock produced a $193 million after-tax benefit, compared with $63 million in 2009. The nine-month 2010 benefit was $48 million versus a $1.071 billion after-tax charge in 2009.
- Net realized capital losses declined to $526 million year to date from $1.816 billion, while net OTTI losses recognized in earnings declined to $375 million from $1.074 billion.
- Accumulated other comprehensive income improved to $194 million from a $(3,312) million loss at year-end 2009, principally due to higher unrealized values of available-for-sale securities.
- The company issued $1.1 billion of senior notes, 59.6 million common shares for net proceeds of approximately $1.6 billion and $556 million of mandatory convertible preferred stock. It used capital raised and other funds to redeem $3.4 billion of Treasury-held preferred stock.
- Cash from operating activities declined to $2.245 billion from $2.745 billion; financing cash flow changed from a $1.692 billion inflow to a $2.395 billion outflow, largely because of the Treasury preferred-stock redemption.
- Reporting segments were reorganized into Commercial Markets, Consumer Markets and Wealth Management, with prior periods recast for comparability.
- Segment net income improved year to date in Property & Casualty Commercial to $782 million from $484 million, Global Annuity to $141 million from a $1.304 billion loss, Life Insurance to $224 million from $18 million, Retirement Plans to $38 million from a $162 million loss, and Mutual Funds to $67 million from $17 million. Group Benefits declined slightly to $145 million from $148 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2010 Property & Casualty Commercial written premiums to grow in the low single digits. Its nine-month combined ratio before catastrophes and prior accident-year development was 92.8%, and the full-year ratio was expected to exceed 91.2% in 2009.
- Consumer Markets written premiums were expected to decline for full-year 2010 because of lower auto and AARP/agency new business and retention. The nine-month combined ratio before catastrophes and prior development was 92.6%, with the full-year ratio expected to be slightly above 92.3%.
- Group Benefits faced lower sales and higher disability morbidity, including increased incidence and lower claim terminations. Management expected lower full-year sales than in 2009.
- Global Annuity expected continued lower variable-annuity sales, net outflows and depressed fixed-annuity sales because of low interest rates. Management also noted higher hedging costs and capital requirements for living-benefit guarantees.
- The variable-annuity hedge program generated a $273 million pretax net realized loss in the third quarter, driven primarily by lower interest rates and rising U.S. equity markets. The company deliberately maintained reduced dynamic hedge protection and greater emphasis on macro hedging for statutory-surplus protection, increasing U.S. GAAP earnings volatility.
- Asbestos and environmental reserves were highly uncertain. Nine-month net reserve strengthening included $172 million for asbestos and $64 million for environmental claims. Net asbestos and environmental reserves totaled approximately $2.24 billion and were estimated within a range of $1.78 billion to $2.55 billion.
- Derivative agreements had $429 million of net liability fair value subject to credit-rating-related collateral or termination provisions. A one-level downgrade could require approximately $24 million of additional collateral; a two-level downgrade could require approximately $44 million.
- Other risks include equity-market declines, low or rising interest rates, credit-spread widening, commercial real-estate deterioration, foreign-exchange movements, catastrophe losses, unfavorable reserve development, reinsurance collectibility, regulatory changes including Dodd-Frank, litigation, goodwill impairment and deferred-tax-asset valuation allowances.
- Subsequent to quarter-end, the company announced the planned sale of its Canadian mutual-fund business, subject to regulatory approval, and estimated an after-tax gain of $40 million to $45 million.
Investor Verification Checklist
- Verify the registrant and ticker identity because the request metadata names Hartford Insurance Group, while the filing names The Hartford Financial Services Group, Inc.
- Assess the sustainability of earnings excluding realized investment losses, DAC unlocks, goodwill impairment and other market-sensitive items.
- Review variable-annuity guarantee exposure, hedging effectiveness, policyholder behavior assumptions and sensitivity to equity markets, interest rates, volatility and the yen.
- Evaluate the adequacy and uncertainty of asbestos, environmental and other long-tail reserves, including reinsurance recoverability.
- Reconcile reported liquidity with collateral requirements, policyholder surrender demands, debt maturities and restrictions on dividends from insurance subsidiaries.
- Monitor credit ratings, statutory surplus, risk-based capital requirements and potential collateral demands under derivative contracts.
- Review the investment portfolio’s exposure to commercial real estate, CMBS, CRE CDOs, RMBS, financial-services issuers and long-duration unrealized losses.
- Confirm the effect of the planned Canadian mutual-fund sale, pending litigation and implementation of Dodd-Frank on future earnings, capital and liquidity.