The Hartford Financial Services Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended June 30, 2019. 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 company completed its $2.136 billion cash acquisition of The Navigators Group on May 23, 2019. The former life and annuity business was sold in May 2018 and is reported as discontinued operations in the prior-year periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenues | $5,092 million | $4,789 million | $10,032 million | $9,480 million |
| Income from continuing operations, net of tax | $372 million | $434 million | $1,002 million | $862 million |
| Net income available to common stockholders | $372 million | $582 million | $997 million | $1,179 million |
| Diluted EPS from continuing operations | $1.02 | $1.19 | $2.73 | $2.37 |
| Diluted net EPS | $1.02 | $1.60 | $2.73 | $3.24 |
| Net cash from operating activities | Not separately reported | Not separately reported | $1,004 million | $1,270 million |
Q2 net income available to common stockholders declined 36%, while six-month net income declined 15%. The declines primarily reflect the absence of the prior-year life and annuity discontinued-operations gain. Continuing-operations income increased 16% for the six-month period.
Reported net income margins were approximately 7.3% in Q2 2019 versus 12.1% in Q2 2018, and 10.0% for the first six months versus 12.4% in the prior-year period. Core earnings, a non-GAAP measure, were $485 million in Q2 and $992 million for the six months, compared with $412 million and $873 million, respectively.
- Earned premiums increased 5% in Q2 and 3% for the six months, driven primarily by Commercial Lines and Navigators.
- Net investment income increased 14% in Q2 to $488 million and 9% for the six months to $958 million.
- Net realized capital gains were $80 million in Q2 and $243 million for the six months, versus $52 million and $22 million in the comparable periods.
- Q2 catastrophe losses were $138 million, down from $188 million; six-month catastrophe losses were $242 million, down from $291 million.
- Property and casualty prior accident-year development was unfavorable by $35 million in Q2 and $24 million for the six months, compared with favorable development of $47 million and $79 million, respectively, in 2018.
- Stockholders’ equity was $15.292 billion at June 30, 2019, up from $13.101 billion at year-end 2018, primarily due to higher accumulated other comprehensive income and earnings retained after dividends.
Segments and operating performance
| Segment net income | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Commercial Lines | $191 million | $372 million | $554 million | $670 million |
| Personal Lines | $62 million | $6 million | $158 million | $95 million |
| Property & Casualty Other Operations | $11 million | $5 million | $34 million | $22 million |
| Group Benefits | $113 million | $96 million | $231 million | $150 million |
| Hartford Funds | $38 million | $37 million | $68 million | $71 million |
| Corporate | $(43) million | $66 million | $(43) million | $171 million |
- Commercial Lines earned premiums increased 14% in Q2 and 9% for the six months. The combined ratio was 100.3% in Q2 and 98.3% for the six months, versus 90.1% and 91.7%. The underlying combined ratio was 93.2% and 92.9%, respectively.
- Personal Lines earned premiums declined 6% in Q2 and 7% for the six months, but the combined ratio improved to 97.5% and 95.4%, respectively, primarily because of lower catastrophe losses.
- Group Benefits net income increased 18% in Q2 and 54% for the six months. The six-month loss ratio improved to 74.7% from 76.5%.
- Hartford Funds’ ending mutual fund and ETP assets under management were $106.9 billion, up 5% year over year. Total Hartford Funds AUM, including Talcott Resolution separate accounts, was $121.3 billion.
Debt, liquidity and capital
- Total debt was $4.550 billion at June 30, 2019, comprising $500 million of short-term debt and $4.050 billion of long-term debt, compared with $4.678 billion at December 31, 2018.
- Debt-to-stockholders’ equity improved to 30% from 36%, and debt-to-capitalization improved to 23% from 26%.
- Cash and restricted cash were $283 million at June 30, 2019, compared with $147 million at June 30, 2018.
- Holding-company liquid assets were approximately $0.8 billion. The company had no borrowings under its $750 million revolving credit facility and no commercial paper outstanding.
- Expected holding-company requirements over the next 12 months included $500 million of debt maturing in March 2020, approximately $290 million of debt interest, approximately $21 million of preferred dividends, and approximately $440 million of common dividends, subject to board discretion.
- The company had $1.0 billion of share-repurchase authorization through December 31, 2020. It repurchased 0.5 million shares for $27 million during the first six months, leaving $973 million available at June 30.
Material changes, outlook and unusual items
- The Navigators acquisition contributed $178 million of revenue and $141 million of net losses from May 23 through June 30, including the $91 million Navigators adverse-development-cover premium and a $97 million pretax increase in acquired reserves. The ADC provides up to $300 million of coverage above a $100 million retention; $209 million of limit remained at June 30.
- The acquisition added $623 million of goodwill, $580 million of other intangible assets, and approximately $2.1 billion of net identifiable assets and goodwill to the balance sheet. Acquisition-date valuations remain provisional.
- Management expects 2019 annualized net investment income yield, excluding limited partnerships and other alternative investments, to approximate the 2018 portfolio yield, but notes that results may change with portfolio composition and market conditions.
- Management stated that insurance operating cash flows and liquidity were sufficient for anticipated demands over the next 12 months. It did not provide a consolidated earnings or revenue forecast.
- Navigators was temporarily noncompliant with certain financial covenants under Lloyd’s letter-of-credit facilities because of acquisition-related reserve increases and other adjustments. The company obtained a temporary waiver and was negotiating covenant amendments.
Risks and contingencies
- Run-off asbestos and environmental reserves were $935 million and $139 million, respectively. Management states that ultimate liabilities could materially exceed recorded reserves, although they are not currently reasonably estimable.
- An existing A&E adverse-development cover had approximately $977 million of coverage remaining at June 30, 2019; cumulative ceded adverse development was $523 million against the $1.5 billion treaty limit.
- Key risks include unfavorable loss development, catastrophe and severe-weather losses, reinsurance recoverability, investment-credit and interest-rate volatility, ratings downgrades, regulatory capital requirements, litigation, cyber incidents, Brexit-related disruption, and changes in tax or accounting rules.
- Ordinary-course litigation is not expected to be material to consolidated financial condition, but the filing notes that particular matters could materially affect results or cash flows in a quarterly or annual period.
- The filing is unaudited; Deloitte & Touche reported that its review disclosed no material modifications necessary for conformity with U.S. GAAP.
Important facts for investors to verify
- Whether Navigators’ reserve adequacy and covenant compliance improve, and whether the temporary waivers are replaced with permanent amendments.
- Commercial Lines loss trends, especially general liability, professional liability, marine and other acquired Navigators exposures.
- Future catastrophe experience and prior-year reserve development, including the upcoming fourth-quarter A&E reserve review.
- Availability and collectability of reinsurance, including the remaining Navigators ADC and A&E treaty capacity.
- Holding-company liquidity after the March 2020 debt maturity, dividends, share repurchases and restricted subsidiary-dividend capacity.
- Investment portfolio sensitivity to interest rates, credit spreads, equity markets and unrealized losses, as well as the effect on reported book value and capital.