The Hartford Financial Services Group, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2020. The Hartford is a holding company whose subsidiaries provide property and casualty insurance, group benefits, investment management, mutual funds and exchange-traded products, principally in the United States. The company reported five operating segments: Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits and Hartford Funds, plus Corporate.
At December 31, 2020, total assets were $74.1 billion and total stockholders’ equity was $18.6 billion. The filing identifies COVID-19, economic disruption, catastrophe exposure, reserve uncertainty, investment-market volatility and regulatory or legal developments as significant considerations.
Financial results and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenues | $20.523 billion | $20.740 billion | Down 1% |
| Net income | $1.737 billion | $2.085 billion | Down 17% |
| Net income available to common stockholders | $1.716 billion | $2.064 billion | Down 17% |
| Diluted EPS | $4.76 | $5.66 | Down 16% |
| Core earnings | $2.086 billion | $2.062 billion | Up 1% |
| Net income return on equity | 10% | Not clearly provided in the filing excerpt | — |
| Book value per diluted share | $50.39 | $43.85 | Up 15% |
| Net cash from operating activities | $3.871 billion | $3.489 billion | Up 11% |
| Net cash used in investing activities | $(2.066) billion | $(2.148) billion | Lower use of cash |
| Net cash used in financing activities | $(1.778) billion | $(1.191) billion | Higher use of cash |
| Net investment income | $1.846 billion | $1.951 billion | Down 5% |
| Net realized capital gains (losses) | $(14) million | $395 million gain | Down $409 million |
Earned premiums increased 2% to $17.288 billion, principally because Commercial Lines included a full year of Navigators Group premiums. Fee income declined 2% to $1.277 billion. The investment portfolio totaled $56.532 billion, including $45.035 billion of available-for-sale fixed maturities. Fixed-maturity investment yield declined to 3.4% from 3.8%, and total investment yield declined to 3.6% from 4.1%.
Total debt declined to $4.352 billion from $4.848 billion after repayment at maturity of $500 million of 5.5% senior notes. Debt-to-stockholders’ equity improved to 23% from 30%, and debt-to-capitalization improved to 19% from 23%.
Holding-company liquidity included $1.8 billion of fixed maturities, short-term investments, investment-sale receivables and cash; a $750 million revolving credit facility with no borrowings; and a $2.0 billion intercompany liquidity agreement with no borrowings. The company reported $239 million of cash and restricted cash at year-end.
Material changes versus the prior comparable period
- Net income available to common stockholders fell 17%, primarily because 2019 included substantial realized capital gains while 2020 included realized capital losses, along with COVID-19 claims, higher catastrophe losses, lower investment income and $104 million of Hartford Next restructuring costs.
- Commercial Lines earned premiums rose 7% to $8.910 billion, reflecting the Navigators acquisition, but net income fell 28% to $856 million. The combined ratio deteriorated to 100.4 from 97.7, and the underlying combined ratio rose to 95.5 from 94.0.
- Personal Lines earned premiums declined 6% to $3.008 billion, but net income increased to $718 million from $318 million. The combined ratio improved to 75.5 from 95.0, aided by reduced automobile claim frequency during pandemic-related restrictions and favorable prior-year catastrophe development.
- Group Benefits revenue declined 2% to $6.006 billion and net income declined 29% to $383 million. Excess group-life mortality attributable principally to COVID-19 was $239 million, while the total loss ratio increased to 74.5% from 72.3%.
- Hartford Funds net income increased 14% to $170 million. Year-end assets under management increased 10% to $139.436 billion, although mutual fund and exchange-traded product net flows were negative $3.084 billion.
- Accumulated other comprehensive income increased to $1.170 billion from $52 million, primarily because lower interest rates increased unrealized gains on available-for-sale fixed maturities.
- The company repurchased $150 million of common stock in 2020 and authorized a new $1.5 billion repurchase program effective January 1, 2021 through December 31, 2022.
Guidance, outlook, management commentary and unusual items
- COVID-19: The company recorded $278 million of direct P&C COVID-19 incurred losses and $230 million of Group Benefits COVID-19 impacts, principally $239 million of excess group-life mortality. It also recorded a $40 million increase in the allowance for credit losses on premiums receivable and provided $81 million of personal-auto premium refunds or credits.
- 2021 Commercial Lines outlook: Management expects written-premium growth and a combined ratio of approximately 93.5% to 95.5%, compared with 100.4% in 2020. The outlook assumes 3.1 catastrophe-ratio points and lower COVID-19 claims.
- 2021 Personal Lines outlook: Management expects written premiums to be relatively flat and a combined ratio of approximately 94.0% to 96.0%, as automobile claim frequency and normal weather losses increase from unusually favorable 2020 levels. New automobile and homeowners products are scheduled to roll out beginning in 2021.
- 2021 Group Benefits outlook: Fully insured ongoing premiums are expected to increase modestly. Net income margin is expected at 3.5% to 4.5% and core earnings margin at 3.7% to 4.7%, assuming approximately $160 million of excess mortality, largely in the first half of 2021.
- Hartford Next: The company expects approximately $500 million of annual expense reductions by 2022, with estimated total program costs of approximately $410 million, including $158 million of restructuring costs. It recognized $153 million of program costs in 2020, including $104 million of restructuring costs.
- Continental Europe disposal: The company agreed to sell its Continental Europe Operations, classified the assets and liabilities as held for sale, and recorded a $48 million pretax estimated loss, or approximately $30 million after tax. Closing was expected by the second quarter of 2021, subject to approvals. Consideration includes contingent amounts tied to future claims development.
- Reserve and litigation exposures: Net P&C reserves were $23.897 billion. Reserves include $789 million of net asbestos and environmental reserves in the run-off business. The A&E adverse development cover with NICO had $640 million of remaining limit at year-end, while the Navigators adverse development cover had $91 million remaining.
- COVID-19 business-interruption litigation: More than 230 lawsuits had been filed in approximately 31 states, including more than 50 purported class actions. Management could not reasonably estimate a loss or range of loss; adverse outcomes could materially affect operating results.
- LIBOR transition: Approximately $3.6 billion of LIBOR-referenced floating-rate fixed maturities, $9.6 billion of LIBOR-referenced derivative notional and $1.1 billion of junior subordinated debentures may require transition to alternative reference rates.
- The company adopted new credit-loss guidance in 2020, reducing opening retained earnings by $18 million. It also adopted updated goodwill impairment guidance without an adoption impact; no goodwill impairment was recorded for 2020.
Most important facts for an investor to verify
- Whether Commercial Lines can achieve the guided 2021 combined-ratio improvement as COVID-19 claims decline and pricing offsets loss-cost inflation.
- The persistence of unusually favorable Personal Lines automobile frequency and prior-catastrophe reserve development, and the impact of new product rollouts.
- Actual 2021 Group Benefits mortality, disability incidence, recoveries and investment yields versus the margin guidance.
- Development of COVID-19 business-interruption litigation, workers’ compensation, financial-lines and surety claims, including any legislative or regulatory expansion of coverage.
- Future reserve development for workers’ compensation, general liability, sexual abuse claims, asbestos and environmental exposures, including the remaining NICO coverage limits.
- Investment yield pressure from low interest rates, credit losses, commercial real estate exposure and the potential effect of widening spreads on AOCI and capital.
- Execution of Hartford Next, including realized savings, remaining restructuring costs and whether the expected $500 million of annual savings is achieved.
- Completion and final economics of the Continental Europe sale, including contingent consideration tied to claims development.
- Regulatory capital, dividend capacity and rating-agency requirements before authorizing the full $1.5 billion share-repurchase program.
- The filing states that disclosure controls and internal control over financial reporting were effective, and Deloitte & Touche issued unqualified audit opinions; investors should nevertheless review the audit’s critical matters concerning reserves and fixed-maturity valuations.