HARTFORD INSURANCE GROUP, INC. quarterly report, Q3 FY2018

Business Context and Reporting Period

The Hartford Financial Services Group, Inc. is an insurance and financial-services holding company with reporting segments comprising Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Corporate. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, with comparisons to the same periods in 2017. Deloitte & Touche performed a review of the interim financial information and reported no material modifications were necessary.

Financial Results and Key Metrics

Metric	Q3 2018	Q3 2017	9M 2018	9M 2017
Total revenues	$4,842 million	$4,192 million	$14,322 million	$12,575 million
Income from continuing operations, net	$427 million	$145 million	$1,289 million	$296 million
Net income	$432 million	$234 million	$1,611 million	$572 million
Diluted EPS	$1.19	$0.64	$4.42	$1.54
Operating cash flow	Not separately provided	Not separately provided	$1,842 million	$1,524 million
Net investment income	$444 million	$404 million	$1,323 million	$1,209 million
Net realized capital gains	$38 million	$26 million	$60 million	$105 million

Q3 net income margin was approximately 8.9% of revenue, compared with approximately 5.6% in Q3 2017. Nine-month net income margin was approximately 11.2%, compared with approximately 4.5% in the prior-year period. Core earnings, a non-GAAP measure, were $418 million in Q3 and $1,291 million for the nine months, compared with $130 million and $721 million, respectively.

Earned premiums increased 16% in Q3 and 15% for the nine months, primarily reflecting the Aetna U.S. group life and disability acquisition.
Fee income increased 18% in Q3 and 16% for the nine months, supported by Group Benefits and Mutual Funds.
Property & Casualty combined ratio improved to 97.3 in Q3 from 107.1 and was 93.2 for the nine months versus 99.8 in 2017. Commercial Lines Q3 combined ratio was 96.1; Personal Lines was 98.4.
Q3 catastrophe losses were $169 million before tax, versus $352 million in 2017. Nine-month catastrophe losses were $460 million, versus $657 million.
Q3 prior accident-year development was favorable by $60 million before tax; nine-month development was favorable by $139 million, compared with unfavorable development of $1 million in 2017.
Mutual Funds segment assets under management were $121.1 billion at September 30, 2018, up 8% from $111.7 billion a year earlier. Nine-month Mutual Funds net income rose to $112 million from $73 million.

Balance Sheet, Debt and Liquidity

Total assets were $61.4 billion and stockholders’ equity was $12.7 billion at September 30, 2018. Equity declined 6% from December 31, 2017, principally because AOCI declined to a $1.5 billion loss from $663 million of income.
Debt totaled $4.7 billion, consisting of $413 million of short-term debt and $4.3 billion of long-term debt, compared with $5.0 billion at year-end 2017. Debt-to-capitalization remained 27%.
Cash was $102 million at quarter-end. Total investments were $46.1 billion, including $36.2 billion of available-for-sale fixed maturities and $3.5 billion of short-term investments.
The holding company had approximately $2.3 billion of fixed maturities, short-term investments, investment sales receivable and cash. No borrowings were outstanding under the $750 million revolving credit facility or the $750 million commercial paper program.
Expected holding-company liquidity requirements over the next 12 months included a $413 million debt maturity, approximately $285 million of debt interest, approximately $435 million of common dividends, and approximately $2.2 billion for the planned Navigators acquisition.
Operating cash flow exceeded investing and financing cash uses; cash decreased by $78 million during the nine months, ending at $102 million.

Material Changes Versus the Prior Comparable Period

Results benefited from the November 2017 acquisition of Aetna’s U.S. group life and disability business. Group Benefits revenue increased 63% in Q3 and 62% for the nine months, while segment net income increased 8% and 23%, respectively.
The May 31, 2018 sale of the life and annuity run-off business removed substantial assets and liabilities from the consolidated balance sheet. The sale generated approximately $1.5 billion of net proceeds, and the Hartford retained a 9.7% interest in the acquiring partnership.
Income from discontinued operations was $5 million in Q3 and $322 million for the nine months, compared with $89 million and $276 million in the prior-year periods. The 2018 nine-month amount primarily reflected reductions in the estimated loss on the life and annuity sale, including retained tax benefits and stranded AOCI tax effects.
2017 included a $750 million pretax pension settlement charge, which materially depressed prior-year nine-month results.
Stockholders’ equity excluding AOCI increased to $14.2 billion from $12.8 billion, while reported equity declined because of lower unrealized investment gains and the removal of Talcott Resolution-related AOCI.
The company adopted new accounting guidance for equity securities, resulting in fair-value changes being reported in earnings rather than AOCI. It also adopted guidance allowing certain stranded Tax Reform effects to be reclassified from AOCI to retained earnings.

Outlook, Commentary, Risks and Unusual Items

The company agreed to acquire The Navigators Group for $70 per share, or approximately $2.1 billion in cash. Closing was expected in the first half of 2019, subject to shareholder and regulatory approvals. The filing states that failure to close could create securities volatility and transaction costs; integration risks also remain.
Management expected 2018 annualized net investment income yield, excluding limited partnerships and other alternative investments, to approximate the 2017 portfolio yield, although it could be higher if reinvestment rates remain above sales and maturity yields.
Higher interest rates reduced fixed-maturity valuations and increased gross unrealized losses to $607 million from $130 million at year-end 2017. Management concluded the affected securities were temporarily depressed and did not intend, nor expect to be required, to sell them.
Net asbestos reserves were $1.1 billion and net environmental reserves were $214 million. The company’s adverse-development cover with National Indemnity Company provides up to $1.5 billion of protection; $285 million had been ceded by September 30, leaving approximately $1.2 billion of stated coverage available.
Asbestos and environmental reserve estimates remain highly uncertain and future adverse development could materially affect earnings and liquidity, particularly after the $650 million ceded-loss threshold or if the treaty limit is exceeded.
Ordinary-course litigation is generally expected to be immaterial, but certain lawsuits with large or indeterminate claims could materially affect individual periods. A mutual-fund fee litigation judgment was affirmed on appeal in August 2018, and management considered a material adverse outcome remote.
A two-level downgrade by Moody’s or S&P, based on September 30 derivative values, would have required approximately $8 million of additional collateral; a one-level downgrade would not have required additional collateral.

Important Facts for Investors to Verify

Whether the Navigators acquisition closed as planned, its final purchase price, financing and integration results.
Subsequent catastrophe losses, property-casualty reserve development and workers’ compensation claim-frequency trends.
The adequacy of asbestos and environmental reserves, future annual reserve reviews and recoveries under the NICO adverse-development cover.
Changes in interest rates, credit spreads and equity markets and their effects on AOCI, investment valuations, realized gains and Mutual Funds assets under management.
Holding-company liquidity after the January 2019 debt maturity, planned dividends, the Navigators cash payment and any approved extraordinary dividend from Hartford Fire.
The sustainability of earnings after separating acquisition-related benefits, favorable reserve development, catastrophe variability, discontinued-operations items, tax effects and other unusual items.