The Hartford Financial Services Group, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2020. The Hartford provides property and casualty insurance, group life and disability products, and mutual fund and exchange-traded product services through Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds, and Corporate. The results include the Navigators Group acquisition completed May 23, 2019. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenues | $4,956 million | $4,940 million | Flat |
| Earned premiums | $4,391 million | $3,940 million | Up 11% |
| Net investment income | $459 million | $470 million | Down 2% |
| Net realized capital gains (losses) | $(231) million | $163 million | Unfavorable change |
| Income before taxes | $344 million | $775 million | Down 56% |
| Net income | $273 million | $630 million | Down 57% |
| Net income available to common stockholders | $268 million | $625 million | Down 57% |
| Diluted earnings per share | $0.74 | $1.71 | Down 57% |
| Core earnings | $485 million | $507 million | Down 4% |
| Operating cash flow | $298 million | $279 million | Up 7% |
Benefits, losses and loss adjustment expenses increased 9% to $2,916 million. Amortization of deferred policy acquisition costs increased 23% to $437 million, and insurance operating costs and other expenses increased 12% to $1,176 million. The company’s overall reported net margin was approximately 5.5%, compared with approximately 12.8% in the prior-year quarter. Core earnings excluded $232 million of net realized capital losses, $13 million of acquisition-related costs, and a $29 million change in deferred gain on retroactive reinsurance, among other tax effects.
Balance sheet, capital, debt and liquidity
- Total assets were $68.7 billion at March 31, 2020, versus $70.8 billion at December 31, 2019.
- Total investments were $50.4 billion, including $40.2 billion of available-for-sale fixed maturities, $1.2 billion of equity securities, $4.4 billion of mortgage loans, and $2.5 billion of short-term investments.
- Stockholders’ equity declined to $15.3 billion from $16.3 billion, primarily because after-tax accumulated other comprehensive income moved from a $52 million gain to a $957 million loss.
- Total debt declined to $4.349 billion from $4.848 billion after repayment at maturity of $500 million of 5.5% senior notes on March 30, 2020. Debt was 28% of stockholders’ equity and 22% of total capitalization.
- Cash and restricted cash totaled $301 million at quarter-end. The holding company had $840 million of available fixed maturities, short-term investments, investment sales receivable, and cash; a $750 million revolving credit facility with no borrowings; a $750 million commercial paper program with no outstanding commercial paper; and access to a $2.0 billion intercompany liquidity agreement.
- Operating, investing, and financing cash flows were $298 million, $777 million, and $(1,027) million, respectively. Financing uses included debt repayment, $150 million of share repurchases, and $113 million of common and preferred dividends paid.
- Expected 2020 subsidiary dividends were $850 million to $900 million from Property & Casualty, $300 million to $350 million from Group Benefits, and $100 million to $125 million from Hartford Funds, subject to COVID-19 effects, regulatory limits, earnings, and capital requirements.
Material changes versus the prior comparable period
- Commercial Lines earned premiums increased 27% to $2.265 billion, primarily due to Navigators, but net income fell 67% to $121 million. The combined ratio worsened to 99.1% from 96.1%, and the underlying combined ratio increased to 94.9% from 92.7%.
- Personal Lines earned premiums declined 3% to $774 million, while net income increased 2% to $98 million. The combined ratio improved to 86.7% from 93.2%, aided by lower auto frequency, lower catastrophe losses, and favorable prior-year development.
- Group Benefits revenue declined 2% to $1.498 billion and net income declined 12% to $104 million. The total loss ratio improved to 71.9% from 74.7%, but the expense ratio increased to 26.2% from 23.4%. COVID-19 adversely affected the Group Disability loss ratio by approximately 2.3 points.
- Hartford Funds net income increased 20% to $36 million despite Hartford Funds assets under management declining 13% year over year to $102.2 billion at March 31, 2020. Net mutual fund and ETP outflows were $1.4 billion, compared with inflows of $874 million in Q1 2019.
- Fixed-maturity fair value declined $1.9 billion from December 31, 2019, primarily because credit spreads widened. Gross unrealized losses increased to $955 million from $55 million, while net unrealized losses in OCI were $1.009 billion after tax.
- Equity securities generated a $386 million net loss, including a $277 million unrealized loss on equity securities still held at quarter-end. The company also recorded $12 million of additional fixed-maturity credit loss allowances, $2 million of mortgage-loan credit loss allowances, and $5 million of intent-to-sell impairments.
- The company adopted the expected credit loss standard on January 1, 2020, reducing retained earnings by $18 million after tax. COVID-19-related recession scenarios increased allowances for premiums receivable, mortgage loans, reinsurance recoverables, and other exposures.
Outlook, management commentary and risks
- Management expects COVID-19 to reduce 2020 written and earned premiums, particularly in small commercial and Commercial Lines, as business closures, lower payrolls, weaker demand, and policyholder financial stress affect exposures and collections.
- Personal auto premiums were expected to decline by approximately $52 million in Q2 2020 because of a 15% refund on April and May premiums. The company expected a comparable reduction in incurred losses from lower driving activity.
- Management expects lower 2020 net investment income because of near-zero interest rates, lower floating-rate yields, lower reinvestment rates, and the decision to hold proceeds in liquid short-term investments. Alternative investment losses may be recognized with a lag in Q2 2020.
- Commercial Lines and Group Benefits may experience higher COVID-19 claims, including workers’ compensation, general liability, surety, group life, short-term disability, and paid family leave. Property claims, coverage litigation, and legal expenses may also increase.
- The company withdrew the reliability of previously provided outlook ranges: 2020 combined ratios, underlying combined ratios, and Group Benefits margins may be above or below the ranges included in the 2019 Form 10-K.
- Potential legislation or regulation could retroactively require business interruption coverage or expand workers’ compensation coverage for COVID-19, creating material exposure. Regulators may also require additional refunds, discounts, payment flexibility, or suspension of cancellations.
- Run-off asbestos and environmental reserves were $842 million and $112 million net, respectively. The company had incurred $640 million of cumulative adverse development under its $1.5 billion A&E adverse development cover, leaving $860 million of stated coverage. Further development beyond treaty limits could materially affect earnings and liquidity.
- The company has not recognized potential PG&E wildfire subrogation recoveries estimated at approximately $300 million to $325 million because confirmation of the bankruptcy plan and ultimate recoveries remain uncertain.
- Goodwill was $1.913 billion. No goodwill impairment was recorded after a COVID-19-related review, but a prolonged or worsening downturn could require an interim impairment test.
- Management stated that employees largely transitioned to remote work without material operational impact at quarter-end, but cybersecurity, vendor, technology, claims-processing, and business-continuity risks remain.
Most important facts for investors to verify
- Whether COVID-19-related insurance claims, regulatory actions, premium refunds, and coverage litigation materially exceed the company’s Q1 estimates.
- Subsequent-quarter movements in fixed-maturity credit spreads, equity markets, OCI, realized investment losses, and credit loss allowances.
- Commercial Lines reserve development, particularly marine, general liability, workers’ compensation pools, surety, and Navigators-related exposures.
- Actual 2020 premium retention, new business, policy cancellations, receivable collections, and subsidiary dividend capacity.
- Whether the company resumes or suspends the remaining $650 million share-repurchase authorization.
- PG&E plan confirmation and the amount and timing of any wildfire subrogation recoveries.
- Remaining capacity and performance of the A&E and Navigators adverse development covers, including the effect of retroactive reinsurance accounting.
- Potential goodwill impairment, additional investment impairments, and changes in ratings or collateral requirements under derivative and Lloyd’s arrangements.