HARTFORD INSURANCE GROUP, INC. annual report, FY2022

Business Context and Reporting Period

The Hartford Financial Services Group, Inc. is an insurance and financial-services holding company reporting for the fiscal year ended December 31, 2022. Its principal businesses are Commercial Lines, Personal Lines, Group Benefits, Hartford Funds, and run-off Property & Casualty Other Operations. The company operates primarily in the United States, with additional international activity. At year-end, total assets were $73.0 billion and stockholders’ equity was $13.6 billion.

Financial Performance and Key Metrics

Metric	2022	2021	Change
Total revenues	$22.362 billion	$22.390 billion	Flat
Earned premiums	$19.390 billion	$17.999 billion	+8%
Fee income	$1.349 billion	$1.488 billion	-9%
Net investment income	$2.177 billion	$2.313 billion	-6%
Net realized gains (losses)	$(627) million	$509 million	Material decline
Income before taxes	$2.258 billion	$2.896 billion	-22%
Net income	$1.815 billion	$2.365 billion	-23%
Net income available to common stockholders	$1.794 billion	$2.344 billion	-23%
Diluted EPS	$5.44	$6.62	-18%
Core earnings	$2.492 billion	$2.178 billion	+14%
Operating cash flow	$4.008 billion	$4.093 billion	-2%

Reported earnings were pressured by a $1.136 billion before-tax swing in net realized investment results, primarily reflecting equity-market declines, losses on fixed-maturity sales, higher interest rates, and wider credit spreads. Core earnings increased because of stronger Commercial Lines underwriting, lower Group Benefits excess-mortality losses, and lower unfavorable prior-year P&C reserve development.

Commercial Lines: Earned premiums increased 11% to $10.571 billion. The combined ratio improved to 90.2 from 95.8, and underwriting gain increased to $1.032 billion from $402 million. Net income declined 8% to $1.624 billion because of lower investment income and net realized losses.
Personal Lines: Earned premiums were essentially flat at $2.949 billion. The combined ratio deteriorated to 100.3 from 90.7, driven by higher automobile and homeowners loss severity, inflation, repair costs, and catastrophe losses. Net income fell 76% to $91 million.
Group Benefits: Premiums and other considerations increased 7% to $6.057 billion. Net income increased 30% to $324 million. The total loss ratio improved to 74.6% from 81.1%, primarily because excess-mortality losses declined to $160 million from $583 million.
Hartford Funds: Year-end assets under management declined 21% to $124.107 billion, including a $7.951 billion net outflow from mutual funds and ETFs. Net income declined 25% to $162 million.

Margins, Capital, Debt and Liquidity

Consolidated net income margin was approximately 8.1%, compared with approximately 10.6% in 2021. Group Benefits net income margin improved to 5.0% from 3.9%; core earnings margin improved to 6.5% from 2.5%.
Total investments declined to $52.560 billion from $57.749 billion. Fixed maturities available-for-sale declined to $36.231 billion from $42.847 billion, while gross unrealized losses increased to $3.442 billion, mainly because of higher interest rates and wider credit spreads.
Long-term debt declined 12% to $4.357 billion after the redemption of $600 million of 7.875% junior subordinated debentures. Interest expense declined to $213 million from $234 million.
Common stockholders’ equity excluding AOCI was $17.173 billion. Total equity declined 24% to $13.631 billion, largely because after-tax AOCI moved from a $172 million gain to a $3.876 billion loss.
Operating cash flow of $4.008 billion covered operating needs. Year-end cash and restricted cash were $344 million.
The holding company had approximately $1.0 billion of liquid assets, no borrowings under its $750 million revolving credit facility, and $2.0 billion available under an intercompany liquidity agreement.
The company repurchased 22.3 million common shares for $1.6 billion in 2022 and had $2.75 billion remaining under its repurchase authorization effective through December 31, 2024. Common dividends declared were $1.58 per share.
U.S. statutory capital of the insurance subsidiaries increased to $14.682 billion from $14.324 billion. All U.S. and international insurance subsidiaries were reported to maintain capital above applicable regulatory minimums.

Material Changes Versus the Prior Comparable Period

Reported profitability declined sharply, while core earnings improved, highlighting the effect of volatile investment results and other non-core items.
Commercial Lines underwriting strengthened substantially, with premium growth, improved retention, favorable prior-year reserve development, and lower catastrophe losses.
Personal Lines performance weakened materially as automobile and homeowners loss costs rose faster than earned pricing.
Group Benefits improved as pandemic-related excess mortality declined, although mortality remained above pre-pandemic levels and operating expenses increased.
Hartford Funds experienced lower market values and net outflows, reducing fee income and earnings.
Total stockholders’ equity fell because of the large after-tax decline in unrealized fixed-maturity gains recorded in AOCI and share repurchases.
Net P&C prior-year development was unfavorable by $36 million in 2022 versus $199 million unfavorable in 2021. The 2022 amount included a $229 million charge related to additional asbestos and environmental development under retroactive reinsurance accounting.

Guidance, Outlook, Risks and Unusual Items

2023 outlook: Commercial Lines written premiums are expected to increase, with a combined ratio of 90.5% to 92.5% and an underlying combined ratio of 87.0% to 89.0%. Personal Lines written premiums are expected to increase, but the combined ratio is expected to remain elevated at 100.5% to 102.5%. Group Benefits expects premium growth and a 2023 net income margin and core earnings margin of 6.0% to 7.0%. Hartford Funds expects lower net income than in 2022, subject to market performance.
Management expects 2023 net investment income yield, excluding limited partnerships and other alternative investments, to exceed the 2022 portfolio yield because of the higher interest-rate environment.
Hartford Next is expected to produce approximately $625 million of annual insurance operating-cost and other-expense savings in 2023 relative to 2019. Total program costs are expected to be approximately $387 million, with approximately $38 million of additional costs expected in 2023.
The company recorded $27 million of catastrophe losses related to the Russia-Ukraine conflict and $11 million of related reinstatement premiums in 2022. It reported no investments in Russia, Belarus, or Ukraine at year-end.
The A&E adverse development cover with National Indemnity Company has a $1.5 billion limit. Cumulative ceded A&E development was $1.244 billion at year-end, leaving $256 million of available limit. The company recorded a $594 million deferred gain liability.
The company had $390 million of net run-off asbestos and environmental reserves, including the benefit of the A&E cover. Reserve adequacy remains highly uncertain because of litigation, PFAS exposure, insolvencies, changing legal theories, and long settlement periods.
The $787 million Boy Scouts of America settlement remained subject to final court approval. The bankruptcy court approved the plan in September 2022, but approval by the civil district court remained outstanding at filing.
More than 300 COVID-19 business-interruption lawsuits had been filed against Hartford entities. Management could not reasonably estimate any potential loss or range of loss, and adverse outcomes could materially affect results or liquidity.
Principal risk areas include inflation and social inflation, catastrophe and climate exposure, reserve development, reinsurance collectibility, market and interest-rate volatility, credit losses, regulatory constraints on pricing and dividends, cyber and operational disruption, competition, and changes in accounting or tax rules.

Most Important Facts for Investors to Verify

Whether Commercial Lines pricing and underwriting gains remain sufficient to offset higher loss costs, reinsurance costs, and catastrophe volatility.
Whether Personal Lines automobile and homeowners loss severity improves as rate increases are earned, and whether the Prevail product rollout restores profitability.
The adequacy of P&C, asbestos and environmental, and Group Benefits long-term-disability reserves; disclosed sensitivities indicate potentially material reserve variability.
The remaining availability and collectibility of the NICO adverse development covers, particularly the $256 million remaining A&E limit and the exhausted $300 million Navigators limit.
The final outcome and cash-payment timing of the $787 million Boy Scouts settlement and the potential exposure from COVID-19 business-income litigation.
The effect of interest rates and credit spreads on AOCI, statutory capital, liquidity, investment income, and realized investment losses.
Whether Hartford Funds can stabilize assets under management and reverse the $8.0 billion 2022 net outflow.
The pace and realized benefits of Hartford Next, future share repurchases, and the company’s ability to fund dividends from regulated subsidiaries.
The impact of the January 1, 2023 long-duration insurance accounting standard, including the estimated $85 million increase in future-policy-benefit reserves and related AOCI effects.