The Hartford Financial Services Group, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed May 2, 2011. The filing identifies the registrant as The Hartford Financial Services Group, Inc., an insurance and financial services holding company serving individual and business customers through Commercial Markets, Consumer Markets and Wealth Management.
Financial results and condition
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Total revenues | $6,308 million | $6,257 million | +1% |
| Earned premiums | $3,519 million | $3,527 million | Flat |
| Fee income | $1,209 million | $1,180 million | +2% |
| Net investment income | $1,919 million | $1,760 million | +9% |
| Net realized capital losses | $(403) million | $(274) million | Losses increased |
| Income from continuing operations, net of tax | $351 million | $319 million | +10% |
| Net income | $511 million | $319 million | +60% |
| Net income available to common shareholders | $501 million | $(164) million | Improved |
| Diluted EPS from continuing operations | $0.69 | $(0.42) | Improved |
| Diluted EPS including discontinued operations | $1.01 | $(0.42) | Improved |
Net income included $160 million of after-tax income from discontinued operations, including a $150 million after-tax gain on the sale of Specialty Risk Services. Continuing-operations pre-tax income declined 23% to $410 million, primarily reflecting higher realized capital losses and weaker underwriting results in Property & Casualty Commercial. Income tax expense declined to $59 million from $216 million, partly because 2010 included an $86 million deferred-tax valuation allowance charge.
- Cash flow: Operating cash flow was $474 million versus $488 million; investing cash flow was $254 million versus $99 million; financing cash flow was $(451) million versus $(652) million. Ending cash was $2,317 million.
- Balance sheet: Total assets were $322.5 billion, total liabilities were $301.5 billion and stockholders’ equity was $21.0 billion at March 31, 2011. Equity increased 3% from year-end 2010, aided by net income and improved accumulated other comprehensive loss.
- Debt and liquidity: Short-term debt was $400 million and long-term debt was $6.2 billion. Total debt was $6.6 billion, equal to 24% of capitalization. The company had $3.9 billion of commercial paper and revolving-credit availability, with no amounts outstanding, and was in compliance with its credit-facility covenants.
- Holding-company liquidity: Cash, short-term investments and fixed maturities available to the holding company totaled approximately $2.2 billion. Expected next-twelve-month holding-company requirements included approximately $500 million of interest, $400 million of senior-note maturities, $180 million of common dividends and $42 million of preferred dividends.
Material changes versus Q1 2010
- Property & Casualty Commercial net income rose to $327 million from $206 million, but continuing-operations income declined because underwriting results fell to $37 million from $149 million. Its combined ratio worsened to 97.5% from 89.6%; the ratio before catastrophes and prior-year development increased to 94.9% from 92.7%.
- Consumer Markets net income increased to $110 million from $56 million. Earned premiums declined 4%, while the combined ratio improved to 87.0% from 94.6%, supported by pricing, lower auto severity and favorable prior-year development.
- Group Benefits net income declined to $11 million from $51 million. Premiums and other considerations fell 5%, and the loss ratio excluding buyouts increased to 79.3% from 75.7%, reflecting higher disability incidence and lower claim terminations.
- Global Annuity net income declined to $50 million from $80 million. The variable-annuity hedge program produced $286 million of losses versus $35 million in 2010, while the after-tax Unlock benefit fell to $59 million from $81 million.
- Life Insurance net income increased to $35 million from $24 million, primarily from stronger investment income and partnership earnings, partly offset by unfavorable mortality.
- Retirement Plans improved to $15 million of net income from a $6 million net loss, driven by lower realized losses, higher investment income, positive net flows and market appreciation.
- Net realized capital losses increased primarily because of variable-annuity hedging losses, although other-than-temporary impairment losses recognized in earnings declined to $55 million from $152 million and mortgage-loan valuation allowances declined to $3 million from $112 million.
- The company completed the sale of Specialty Risk Services and continued to administer certain transition services for up to 24 months. Prior-period income statement amounts were reclassified for discontinued operations.
Outlook, commentary and unusual items
- Management expects Property & Casualty Commercial full-year 2011 written premium growth in the low- to mid-single digits. Its full-year combined ratio before catastrophes and prior-year development is expected to be slightly higher than the 93.4% reported for 2010.
- Group Benefits premiums are expected to remain relatively flat until economic and employment expansion improves; disability loss ratios are expected to remain essentially flat.
- Consumer Markets written premium is expected to decline as pricing and underwriting actions reposition the book toward preferred risks. Management expects profitability to improve through pricing, lower auto severity and product initiatives.
- Management expects the investment portfolio yield excluding limited partnerships to modestly improve as securities mature and are reinvested.
- The company expects to complete a comprehensive policyholder-behavior study in the third quarter of 2011. Changes in estimated gross profits could affect deferred acquisition costs, benefit reserves and earnings.
- Variable-annuity results remain highly sensitive to equity markets, interest rates, implied volatility, foreign exchange rates and policyholder behavior. The company reported a $348 million pre-tax net realized loss for the GMWB liability and related hedging programs during the quarter.
- Asbestos and environmental net reserves were $2.08 billion at March 31, 2011, within a disclosed estimated range of $1.61 billion to $2.38 billion. Management stated that ultimate liabilities could exceed recorded reserves and that additional exposure cannot currently be estimated.
- Derivative agreements with rating-related collateral provisions had $584 million of net liabilities, of which $499 million had been collateralized. A one-level downgrade could require approximately $40 million of additional collateral; a two-level downgrade could require approximately $71 million.
- The company disclosed ongoing litigation, including mutual-fund fee litigation, a securities class action, broker-compensation matters and insurance-coverage arbitration. Management generally expects no material consolidated exposure, but adverse outcomes could materially affect particular periods.
- Forward-looking results are exposed to economic recovery, interest rates, credit spreads, equity prices, foreign exchange, catastrophe losses, reinsurance performance, reserve development, regulatory changes including Dodd-Frank, tax-law changes and ratings actions.
Investor verification points
- Separate the $150 million after-tax Specialty Risk Services disposal gain from recurring operating earnings.
- Assess the sustainability of underwriting improvement in Consumer Markets against premium contraction and lower policy retention.
- Monitor Property & Casualty Commercial loss trends, catastrophe activity and the reduction in prior-year reserve releases.
- Reconcile variable-annuity hedge-program volatility, GMWB and GMDB exposures, and the effect of future market movements on statutory capital and GAAP earnings.
- Evaluate the credit quality and valuation sensitivity of the investment portfolio, including $2.95 billion of gross unrealized losses on available-for-sale securities and commercial-real-estate exposures.
- Review asbestos and environmental reserve adequacy, reinsurance recoverability and litigation contingencies.
- Confirm holding-company liquidity, dividend capacity from insurance subsidiaries, debt maturities and rating-related collateral requirements.
- Verify statutory surplus and risk-based-capital information when final first-quarter statutory filings become available; the filing’s March 31 statutory surplus amounts were estimates.