The Hartford Financial Services Group, Inc. — 2018 Second-Quarter Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing covers the insurance and financial-services holding company and its Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Corporate businesses. Interim financial statements were reviewed by Deloitte & Touche LLP and were not audited.
Financial performance and position
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $4.789 billion, up 14% | $9.480 billion, up 13% |
| Income from continuing operations, net of tax | $434 million, versus $(152) million | $862 million, versus $151 million |
| Net income | $582 million, versus $(40) million | $1.179 billion, versus $338 million |
| Diluted earnings per share | $1.60, versus $(0.11) | $3.24, versus $0.90 |
| Core earnings | $412 million, versus $303 million | $873 million, versus $591 million |
| Operating cash flow | $1.270 billion, versus $894 million |
- Earned premiums increased 15% in the quarter and 14% year to date, primarily reflecting the Aetna U.S. group life and disability acquisition. Fee income increased 14% and 15%, respectively.
- Net investment income increased 8% in the quarter to $428 million and 9% year to date to $879 million. The after-tax annualized investment yield was 3.3% in the quarter versus 3.0% in the prior-year quarter.
- Property & Casualty combined ratio improved to 95.7% in the quarter from 97.1%; the six-month ratio was 94.8% compared with 97.0%. Current accident-year catastrophe losses were $188 million in the quarter and $291 million year to date.
- Group Benefits net income rose 39% in the quarter to $96 million and 32% year to date to $150 million. The acquisition increased premiums and investment income, while integration costs and higher group-life losses partially offset results.
- Mutual Funds net income increased 54% in the quarter to $37 million and 51% year to date to $71 million. Total segment assets under management were $117.041 billion at June 30, up 9% from June 30, 2017.
- At June 30, total assets were $60.775 billion, stockholders’ equity was $12.546 billion and cash was $147 million. Accumulated other comprehensive income was $(1.353) billion, primarily reflecting lower unrealized investment gains and the removal of Talcott Resolution-related AOCI.
- Total debt was $4.675 billion, consisting of $413 million of short-term debt and $4.262 billion of long-term debt. Debt-to-capitalization was 27%, unchanged from year-end 2017.
Material changes versus the prior comparable period
- On May 31, 2018, the Company sold its life and annuity run-off business, Talcott Resolution, for approximately $1.4 billion of cash after a $300 million pre-closing dividend. Including transaction costs and a retained 9.7% partnership interest, net proceeds were approximately $1.5 billion.
- The sale generated $148 million of discontinued-operations income in the second quarter and $317 million for the first six months. The results include tax benefits and a $213 million reduction in the estimated loss on sale during the six-month period.
- The Company acquired Aetna’s U.S. group life and disability business through a $1.452 billion reinsurance transaction in November 2017. The acquisition materially increased Group Benefits premiums, reserves, investment income and expenses in 2018.
- The 2017 comparison was burdened by a $750 million pretax pension settlement charge, approximately $488 million after tax. The absence of that charge was a major contributor to the improvement in reported earnings.
- Stockholders’ equity declined 7% from December 31, 2017, while equity excluding AOCI increased 8%. Book value per diluted share declined to $34.44 from $37.11, primarily because of the AOCI reduction.
- The Company adopted new accounting guidance for equity securities, resulting in fair-value changes being recognized in earnings rather than OCI. It also adopted revenue-recognition guidance and reclassified certain mutual-fund distribution costs.
Guidance, outlook, commentary and risks
- Management expects 2018 annualized investment income yield, excluding limited partnerships and other alternative investments, to approximate the 2017 portfolio yield, although results may vary with reinvestment rates, portfolio composition and non-routine income.
- The Company expects renewal premium from the Foremost-branded small commercial renewal-rights agreement beginning in the third quarter of 2018.
- Holding-company liquidity included approximately $2.3 billion of cash, short-term investments and fixed maturities at June 30. Expected next-twelve-month requirements included $413 million of debt maturities, approximately $275 million of interest and approximately $435 million of common dividends, subject to Board discretion.
- The amended revolving credit facility provides $750 million of capacity through March 2023; no borrowings were outstanding and $3 million of letters of credit had been issued. Commercial paper was also zero outstanding at June 30. The Company reported compliance with financial covenants.
- For the remainder of 2018, P&C subsidiaries had $125 million of dividend capacity and Hartford Life and Accident Insurance Company had no dividend capacity. The Board subsequently increased the quarterly dividend from $0.25 to $0.30 per share, effective for the October 2018 payment.
- Net asbestos reserves were $1.125 billion and net environmental reserves were $223 million. The NICO adverse-development cover had approximately $1.2 billion of remaining coverage after $285 million of cumulative ceded adverse development. Adverse development exceeding the $650 million premium threshold or the $1.5 billion treaty limit could materially affect earnings and liquidity.
- Key risks include catastrophe and weather losses, unfavorable reserve development, asbestos and environmental claims, investment-market volatility, higher interest rates and credit spreads, counterparty and reinsurance collectability, rating downgrades, regulatory restrictions on subsidiary dividends, litigation, cybersecurity and changes in tax or accounting rules.
- The Mutual Funds litigation remains on appeal after judgments for the Company’s subsidiaries; management states that the potential loss cannot reasonably be estimated.
Investor verification checklist
- Verify the economic and accounting effects of the Talcott Resolution sale, including retained tax benefits, the 9.7% partnership interest, transition-service revenues and removal of AOCI.
- Separate recurring operating performance from discontinued-operations income, tax benefits, favorable reserve development, realized investment gains and the prior-year pension settlement comparison.
- Monitor Personal Lines premium contraction and profitability, including the second-quarter 104.9% combined ratio, despite improved underlying results.
- Review Group Benefits integration costs, group-life mortality, Aetna-related reserves and the sustainability of favorable disability reserve development.
- Assess investment sensitivity to interest rates and credit spreads, including the increase in gross unrealized losses on available-for-sale securities to $550 million from $130 million at year-end.
- Confirm statutory capital, dividend capacity, debt maturities, credit ratings and compliance with the $9 billion minimum consolidated net-worth covenant excluding AOCI.
- Track fourth-quarter 2018 asbestos and environmental reserve reviews and the remaining NICO adverse-development-cover capacity.