The Hartford Financial Services Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023, compared with the same periods in 2022. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP. The filing covers the insurance and financial services businesses of The Hartford, including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds and Corporate.
Financial performance and condition
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenues | $6.049 billion | $5.373 billion | $11.959 billion | $10.766 billion |
| Earned premiums | $5.220 billion | $4.810 billion | $10.283 billion | $9.461 billion |
| Net investment income | $540 million | $541 million | $1.055 billion | $1.050 billion |
| Net realized gains/(losses) | $(64) million | $(338) million | $(71) million | $(483) million |
| Net income | $547 million | $444 million | $1.082 billion | $887 million |
| Net income available to common stockholders | $542 million | $439 million | $1.072 billion | $877 million |
| Diluted EPS | $1.73 | $1.32 | $3.39 | $2.62 |
| Core earnings | $588 million | $716 million | $1.124 billion | $1.275 billion |
| Operating cash flow | Six-month measure | $822 million | $1.403 billion |
Q2 net income margin was approximately 9.0% of revenue, versus approximately 8.3% in the prior-year quarter. Six-month net income margin was approximately 9.0%, versus approximately 8.2%. Core earnings declined despite higher GAAP net income because the prior-year period included substantially larger realized investment losses and the company excludes most realized gains and losses from core earnings.
- Balance sheet: Total assets were $73.895 billion at June 30, 2023, compared with $73.008 billion at December 31, 2022. Stockholders’ equity was $14.152 billion, up from $13.676 billion.
- Investments: Total investments were $52.668 billion. Fixed maturities available for sale were $37.497 billion, with gross unrealized losses of $3.055 billion, primarily reflecting higher interest rates and wider spreads relative to purchase dates.
- Debt and liquidity: Long-term debt was $4.360 billion. Debt represented 24% of total capitalization and 31% of stockholders’ equity. Holding-company liquidity included approximately $900 million of liquid assets, an undrawn $750 million revolving credit facility and $1.9 billion available under an intercompany liquidity agreement.
- Cash flow: Operating cash flow fell by $581 million year over year, primarily due to higher claims payments, taxes, operating expenses and the $787 million Boy Scouts of America settlement payment. Financing cash outflows included $700 million of share repurchases and $268 million of common dividends.
- Capital returns: The company repurchased 9.7 million shares for $700 million during the first six months. Approximately $2.0 billion remained under the $3.0 billion authorization at June 30, 2023. The quarterly common dividend was $0.425 per share.
Material changes versus the prior comparable period
- GAAP net income available to common stockholders increased 23% in Q2 and 22% for the first six months, mainly because realized investment losses were significantly lower than in 2022.
- Earned premiums increased 9% in both the quarter and first six months, supported by Commercial Lines and Group Benefits growth, pricing increases and higher insured exposures.
- Commercial Lines earned premiums increased 10% in Q2 and 11% year to date. Underwriting gain declined 24% in Q2 and 21% year to date because of higher catastrophe losses, higher current accident-year loss ratios and less favorable prior-year reserve development. The underlying combined ratio was 88.3% in Q2 and 88.4% year to date.
- Personal Lines reported a $60 million Q2 net loss and a $61 million six-month net loss, compared with net income of $6 million and $83 million, respectively. The six-month combined ratio increased to 110.5% from 96.1%, driven by automobile severity, catastrophe losses and unfavorable prior-year development.
- Group Benefits net income increased to $121 million in Q2 and $213 million year to date, compared with $106 million and $98 million. The six-month total loss ratio improved to 73.6% from 76.0%, while the Q2 ratio worsened to 72.1% from 70.1%.
- Hartford Funds net income increased to $45 million in Q2 and $86 million year to date, despite lower fee income and lower average assets under management. Ending AUM was $129.9 billion, up 2% year over year, while net outflows continued.
- Accumulated other comprehensive loss improved to $(3.524) billion from $(3.841) billion, primarily due to lower unrealized losses on available-for-sale fixed maturities.
- The company adopted updated long-duration insurance accounting guidance on January 1, 2023, with retrospective adjustments to certain comparative amounts and balances.
Guidance, outlook, commentary and risks
- Management expects the 2023 annualized net investment income yield, excluding limited partnerships and other alternative investments, to exceed the 2022 portfolio yield because of higher reinvestment rates and the higher interest-rate environment. The filing does not provide consolidated earnings guidance.
- The Hartford Next transformation program is expected to deliver approximately $625 million of annual insurance operating-cost savings relative to 2019 in 2023. Total program costs are estimated at approximately $388 million, including approximately $127 million of restructuring costs.
- Personal Lines remains pressured by automobile claim severity, repair and bodily-injury inflation, weather losses, higher homeowners claim severity and policy non-renewals. Pricing increases are substantial, but the filing does not indicate that profitability has yet normalized.
- Catastrophe losses were $226 million in Q2 and $411 million for the first six months, including tornado, wind, hail and winter-storm events.
- The company paid the $787 million Boy Scouts of America settlement on April 20, 2023. Appeals remain pending; an adverse outcome relating to approval of the BSA reorganization plan could materially affect results.
- COVID-19 business-income litigation remains unresolved. The company reports more than 300 lawsuits, including more than 60 purported class actions, and states that potential losses cannot currently be reasonably estimated.
- Run-off asbestos and environmental reserves were $327 million net at June 30, 2023. The related adverse development cover had $256 million of remaining coverage; adverse development beyond the $1.5 billion treaty limit could materially affect earnings or liquidity.
- Other principal risks include unfavorable reserve development, severe weather and climate-related losses, reinsurance counterparty risk, investment credit and interest-rate risk, market volatility, cyber and operational risk, regulatory changes, litigation and rating downgrades.
- The company transitioned its $500 million junior subordinated debentures from LIBOR to three-month CME Term SOFR plus the applicable spread adjustment beginning July 1, 2023. Related swaps continue to convert the floating-rate payments to an effective fixed rate of approximately 4.39%.
Important facts for investors to verify
- Whether Personal Lines pricing and underwriting actions are sufficient to offset persistent automobile and homeowners severity, catastrophe losses and unfavorable reserve development.
- The sustainability of Commercial Lines underwriting profitability as catastrophe activity and favorable prior-year reserve development fluctuate.
- Future realized and unrealized investment losses, credit-loss allowances and the effect of interest rates on the large fixed-maturity portfolio and AOCI.
- Development of asbestos and environmental reserves, remaining adverse-development-cover capacity and the outcome of BSA-related appeals.
- The potential financial exposure from COVID-19 business-income litigation, including class certification and appellate outcomes.
- Actual operating cash flow after settlement payments, claims payments, dividends and share repurchases, and the continued availability of holding-company liquidity.
- Progress against Hartford Next savings targets and the remaining restructuring and implementation costs.
- The company’s statutory capital, insurance financial-strength ratings and any changes to regulatory restrictions on subsidiary dividends or capital requirements.