The Hartford Financial Services Group, Inc. — FY 2019 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2019. The Hartford is a financial-services holding company providing property and casualty insurance, group benefits insurance and services, mutual funds, and exchange-traded products. Principal reporting segments are Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds, and Corporate.
The company completed the $2.1 billion cash acquisition of The Navigators Group on May 23, 2019. Navigators’ results are included in Commercial Lines from the acquisition date. The life and annuity business sold in May 2018 is reported as discontinued operations for prior periods.
Financial performance and condition
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenues | $20.740 billion | $18.955 billion | +9% |
| Income from continuing operations | $2.085 billion | $1.485 billion | +$600 million |
| Net income available to common stockholders | $2.064 billion | $1.801 billion | +$263 million |
| Diluted continuing-operations EPS | $5.66 | $4.06 | +14% |
| Net income ROE | 14.4% | Not clearly provided in filing excerpt | Not clearly provided |
| Net cash from operating activities | $3.489 billion | $2.843 billion | +$646 million |
| Total assets | $70.817 billion | $62.307 billion | +14% |
| Stockholders’ equity | $16.270 billion | $13.101 billion | +24% |
| Total debt | $4.848 billion | $4.678 billion | +4% |
- Earned premiums increased to $16.923 billion from $15.869 billion. Commercial Lines earned premiums rose 18%, including Navigators; Personal Lines declined 6%; Group Benefits was approximately flat.
- Net investment income increased to $1.951 billion from $1.780 billion, while net realized capital gains improved to $395 million from a $112 million loss.
- After-tax investment yield increased 10 basis points to approximately 4.1%; management expects lower 2020 investment yield excluding limited partnerships and other alternative investments because of lower reinvestment rates.
- Cash and restricted cash ended at $262 million, compared with $121 million at December 31, 2018. Insurance operations held substantial liquidity in fixed maturities, short-term investments, and cash.
- Book value per diluted share increased 25% to $43.85, primarily from earnings retained after dividends and higher unrealized investment gains in accumulated other comprehensive income.
- The consolidated property and casualty combined ratio improved to 96.9% from 98.1% in 2018, based on the filing’s reported annual improvement of approximately 0.6 points; segment-specific ratios were 97.7% for Commercial Lines and 95.0% for Personal Lines.
Material changes versus the prior comparable period
- Commercial Lines benefited from the Navigators acquisition, premium growth, and higher investment income, but its underwriting gain declined to $189 million from $525 million. The Commercial Lines combined ratio deteriorated to 97.7% from 92.6%, largely because of higher current accident-year losses, less favorable prior-year development, higher expenses, and Navigators reserve increases.
- Personal Lines returned to profitability, with net income of $318 million compared with a $32 million loss. Its combined ratio improved to 95.0% from 106.3%, primarily due to sharply lower catastrophe losses, although earned premiums and policies in force declined.
- Group Benefits net income increased to $536 million from $340 million. The total loss ratio improved to 72.3% from 75.3%, primarily due to favorable group disability incidence and recoveries.
- Hartford Funds net income was broadly stable at $149 million versus $148 million. Year-end assets under management increased to $126.958 billion from $104.840 billion, primarily due to market appreciation and slightly positive net flows.
- Operating cash flow increased, but investing cash usage rose to $2.148 billion, including $1.901 billion of net cash paid for Navigators. Financing cash usage was $1.191 billion and included debt repayments, dividends, and $200 million of share repurchases.
- The company issued $1.4 billion of senior notes in August 2019 and repaid $1.065 billion of senior notes, recognizing a $90 million loss on extinguishment of debt.
- Accumulated other comprehensive income improved from a $1.579 billion loss to $52 million of income, largely reflecting lower interest rates and tighter credit spreads.
Guidance, outlook, risks, contingencies, and unusual items
- For 2020, management expected Commercial Lines written premiums to increase, supported by a full year of Navigators premiums, and projected a combined ratio of approximately 95.5% to 97.5%.
- Personal Lines written premiums were expected to decline because non-renewals were expected to exceed new business. The projected 2020 combined ratio was approximately 98.5% to 100.5%, versus 95.0% in 2019.
- Group Benefits fully insured ongoing premiums were expected to grow modestly. Management projected a 2020 net income margin of 6.25% to 7.25% and core earnings margin of 6.5% to 7.5%, below 2019 levels because of less favorable disability claims experience and lower investment income.
- Management expected Hartford Funds net income to increase assuming continued equity-market growth and positive net flows, but noted that market volatility and fee pressure create uncertainty.
- Run-off asbestos and environmental reserves were $994 million net at year-end, including $874 million of asbestos and $120 million of environmental reserves. The NICO adverse-development cover had $860 million of remaining available coverage under its $1.5 billion limit.
- Property and casualty reserves are highly judgmental, particularly for workers’ compensation, general liability, professional liability, assumed reinsurance, asbestos, and environmental claims. Net P&C unpaid-loss and loss-adjustment reserves were $22.986 billion; gross reserves were $28.261 billion.
- The company had not recognized a potential $300 million to $325 million recovery related to PG&E wildfire subrogation claims because confirmation of the bankruptcy reorganization plan and the ultimate recovery remained uncertain.
- Material risks include catastrophe and pandemic losses, climate and weather volatility, unfavorable reserve development, reinsurance counterparty failure, investment-market declines, low interest rates, credit-spread changes, regulatory restrictions on pricing and dividends, cyber incidents, litigation, and competitive pressure.
- LIBOR exposure included approximately $2.7 billion of floating-rate fixed-maturity investments, $10.3 billion of derivative notional expected to remain outstanding at the end of 2021, and $1.1 billion of junior subordinated debentures with LIBOR-linked rates.
- As of December 31, 2019, the company had $1.2 billion of holding-company liquid assets, a $750 million undrawn revolving credit facility, no commercial paper outstanding, and $800 million remaining under the share-repurchase authorization.
- Management and the auditors concluded that internal control over financial reporting was effective. However, Navigators, representing 10% of total assets and 5% of 2019 net revenues, was excluded from management’s internal-control assessment because it was acquired during the year.
Most important facts for an investor to verify
- Whether Navigators’ acquired reserves and underwriting performance improve as expected and whether the acquisition generates targeted synergies.
- Commercial Lines pricing and loss trends, especially commercial automobile, general liability, property, global specialty, and workers’ compensation.
- Personal Lines policy-count and premium trends, including progress in AARP Direct and the agency channel.
- Durability of favorable Group Benefits disability incidence and recovery trends.
- Future reserve development, including the adequacy and remaining coverage of the A&E and Navigators adverse-development covers.
- Investment income sensitivity to lower reinvestment rates, equity-market volatility, credit spreads, and alternative-investment returns.
- Liquidity after the $500 million debt maturity due in 2020, planned dividends, share repurchases, and required capital support for Lloyd’s operations.
- Potential effects of LIBOR transition, regulatory changes, catastrophe losses, climate trends, litigation, and reinsurance recoverability.