The Hartford Financial Services Group, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2020. The Hartford provides property and casualty insurance, group life and disability products, and mutual fund and exchange-traded products. Reporting segments are Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds, and Corporate. Results reflect the COVID-19 pandemic, the May 2019 acquisition of Navigators Group, and severe financial-market volatility.
The interim financial statements were reviewed by Deloitte & Touche LLP and were not audited. The filing states that the financial statements conform to U.S. GAAP.
Financial performance and condition
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenues | $5,068 million | $5,092 million | $10,024 million | $10,032 million |
| Earned premiums | $4,234 million | $4,166 million | $8,625 million | $8,106 million |
| Fee income | $298 million | $326 million | $618 million | $640 million |
| Net investment income | $339 million | $488 million | $798 million | $958 million |
| Net realized capital gains (losses) | $109 million | $80 million | $(122) million | $243 million |
| Income before taxes | $592 million | $456 million | $936 million | $1,231 million |
| Net income | $468 million | $372 million | $741 million | $1,002 million |
| Net income available to common stockholders | $463 million | $372 million | $731 million | $997 million |
| Diluted EPS | $1.29 | $1.02 | $2.03 | $2.73 |
| Operating cash flow | Not separately provided | Not separately provided | $1,267 million | $1,004 million |
Q2 net income available to common stockholders increased 24%, primarily from favorable prior-year property and casualty reserve development, lower Personal Lines automobile claim frequency, and higher realized capital gains. Six-month net income available to common stockholders declined 27%, largely because of first-quarter equity-market losses, lower investment income, COVID-19 losses, and higher catastrophe losses.
- Net investment income declined 31% in Q2 and 17% for the first six months, reflecting lower reinvestment rates, lower floating-rate yields, higher liquidity, and a $71 million pretax loss on limited partnerships and alternative investments in Q2.
- Q2 direct COVID-19 incurred losses were $251 million pretax, including $213 million in Property & Casualty and $38 million in Group Benefits.
- Common stockholders’ equity was $16.6 billion excluding AOCI and $17.1 billion including AOCI at June 30, 2020. Total AOCI was $479 million, compared with $52 million at December 31, 2019, primarily because of unrealized gains on fixed maturities.
- Total investments were $53.0 billion, including $42.2 billion of available-for-sale fixed maturities, $4.4 billion of mortgage loans, $1.8 billion of alternative investments, and $3.7 billion of short-term investments.
- Debt was $4.35 billion at June 30, 2020, down from $4.85 billion at year-end after repayment of $500 million of senior notes at maturity. Debt-to-stockholders’ equity was 25%, compared with 30% at December 31, 2019.
- Cash and restricted cash were $372 million at June 30, 2020, compared with $283 million at June 30, 2019.
Material changes versus the prior comparable period
- Commercial Lines earned premiums increased 9% in Q2 and 17% for the first six months, mainly because of Navigators. Excluding Navigators, Commercial Lines premiums declined, reflecting lower new business, reduced exposures, lower premium retention, and COVID-19 effects.
- Commercial Lines reported a Q2 underwriting loss of $332 million versus a $5 million loss in Q2 2019; the combined ratio increased to 115.4% from 100.3%. The six-month combined ratio was 107.1% versus 98.3%.
- Personal Lines net income increased to $371 million in Q2 from $62 million and to $469 million for the first six months from $158 million. The improvement reflected lower automobile claim frequency and favorable prior-year catastrophe reserve development, partly offset by $81 million of automobile premium credits.
- Group Benefits net income declined 11% in both Q2 and the first six months, to $101 million and $205 million, respectively. Favorable disability experience was offset by COVID-19 group life claims, lower investment income, and higher expenses.
- Hartford Funds net income increased 3% in Q2 and 10% for the first six months, despite lower fee income. Ending Hartford Funds AUM was $117.8 billion, down 3% year over year, and mutual fund and ETP net flows were negative $2.1 billion for the first six months.
- The company repurchased 2.7 million common shares for $150 million during the first six months, but made no repurchases from April 1 through July 28, 2020. $650 million remained under the authorization, subject to conditions.
- The company adopted the expected-credit-loss accounting standard on January 1, 2020, reducing retained earnings by $18 million after tax. At June 30, allowances included $183 million for premiums receivable, $43 million for mortgage loans, and $32 million for available-for-sale fixed maturities.
Guidance, outlook, commentary, and risks
- Management expected 2020 net investment income to be lower than 2019 because of near-zero interest rates, lower reinvestment yields, and a larger short-term investment position.
- Management expected Commercial Lines’ 2020 combined ratio to be worse than the outlook range in the 2019 Form 10-K because of COVID-19 losses, higher catastrophe losses, and increased sexual molestation and abuse reserves. Personal Lines’ combined ratio was expected to be better than the prior outlook range because of favorable automobile frequency and catastrophe reserve development.
- Management expected written-premium declines to continue through the remainder of 2020, including higher small-commercial cancellations, lower new business, reduced workers’ compensation payroll exposure, and lower Personal Lines new business.
- On July 30, 2020, the company announced the Hartford Next operational transformation and cost-reduction program. It targets approximately $500 million of annual expense reductions by 2022, with estimated program costs of approximately $360 million through and after 2022.
- COVID-19 business-income litigation had produced more than 150 lawsuits as of July 29, 2020, including 45 proposed nationwide or statewide class actions in approximately 25 states. Management could not reasonably estimate a loss or range of loss, and adverse outcomes could materially affect results.
- The company recorded $289 million of pretax estimated PG&E subrogation benefit in Q2 and received an initial $216 million distribution, net of attorney costs, in July 2020. The ultimate recovery remains dependent on final claim allocations.
- As of June 30, 2020, $640 million of cumulative adverse asbestos and environmental development had been ceded under the A&E adverse development cover, leaving $860 million of available limit. Navigators’ adverse development cover had $110 million of remaining limit.
- Liquidity resources included $1.3 billion at the holding company, a $750 million revolving credit facility, a $750 million commercial paper program with no outstanding borrowings, and a $2.0 billion intercompany liquidity agreement. Management stated that liquidity was sufficient and that no borrowings or Federal Home Loan Bank advances had occurred.
- Principal risks include pandemic-related claims and litigation, recessionary effects on premiums and receivables, investment losses and credit impairments, low interest rates, catastrophe losses, reserve uncertainty, reinsurance counterparty risk, regulatory actions, rating downgrades, cyber and operational risks, and potential future goodwill impairment.
Most important facts for investors to verify
- Whether COVID-19 claims, business-income litigation, workers’ compensation presumptions, and potential retroactive coverage legislation produce losses materially above recorded reserves.
- The sustainability of favorable Personal Lines reserve development and the $289 million PG&E subrogation benefit.
- Commercial Lines’ underlying combined ratio, premium retention, new business trends, and the extent of further COVID-19-related deterioration.
- Future investment income, credit-loss allowances, alternative-investment valuations, and unrealized gains or losses as interest rates and credit spreads change.
- The adequacy and collectibility of reinsurance recoverables, including the remaining A&E and Navigators ADC limits.
- Progress, costs, and realized savings from Hartford Next, including the targeted $500 million annual expense reduction by 2022.
- Capital and liquidity capacity, subsidiary dividend availability, rating actions, and the timing of any resumption of share repurchases.