Business Context and Reporting Period
The filing is The Hartford Financial Services Group, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The company provides commercial and personal property and casualty insurance, group benefits, mutual fund and ETF services, and continues to run off legacy life and annuity businesses through Talcott Resolution.
The company completed acquisitions of Maxum Specialty Insurance Group and Lattice Strategies LLC on July 29, 2016, and agreed to sell its U.K. property and casualty runoff subsidiaries for approximately $268 million, subject to regulatory approval and other closing conditions.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Total revenues | $4,695 million | $4,562 million | $13,763 million | $13,864 million |
| Net income | $438 million | $381 million | $977 million | $1,261 million |
| Diluted EPS | $1.12 | $0.90 | $2.45 | $2.94 |
| Core earnings | $413 million | $364 million | $920 million | $1,205 million |
| Earned premiums | $3,484 million | $3,404 million | $10,332 million | $10,117 million |
| Net investment income | $772 million | $730 million | $2,203 million | $2,335 million |
| Net realized capital gains (losses) | $(17) million | $(44) million | $(119) million | $(30) million |
| Operating cash flow | Not separately provided | Not separately provided | $1,405 million | $2,000 million |
Q3 net income increased 15%, while nine-month net income declined 23%. Q3 diluted EPS benefited from lower share count, with weighted-average diluted shares down to 390.5 million from 423.0 million. The company’s Q3 property and casualty combined ratio was 96.5%, down from 97.3%; a ratio below 100% indicates underwriting profit.
- Q3 earned premiums increased 2%; nine-month earned premiums increased 2%.
- Q3 fee income declined 4% and nine-month fee income declined 7%, primarily reflecting Talcott Resolution runoff.
- Q3 net investment income increased 6%, driven mainly by limited partnerships and alternative investments; nine-month net investment income declined 6%.
- Q3 annualized investment yield was 4.5%, compared with 4.1% in the prior-year quarter.
- Q3 catastrophe losses were $80 million, compared with $76 million; nine-month catastrophe losses were $355 million, compared with $298 million.
- Stockholders’ equity was $18.658 billion at September 30, 2016, including $987 million of AOCI, compared with $17.642 billion at December 31, 2015.
- Total debt was $5.325 billion, versus $5.359 billion at year-end 2015. Debt represented 22% of total capitalization, compared with 23% at year-end.
- Cash was $810 million at September 30, 2016, versus $448 million at December 31, 2015.
Material Changes Versus Prior Comparable Period
- Q3 earnings improved due to lower realized capital losses, higher investment income, lower operating expenses, and a smaller Talcott Resolution unlock charge. Results included a $59 million pretax estimated loss on the pending U.K. runoff sale, substantially offset by a $65 million tax benefit.
- Nine-month earnings declined because of lower investment and fee income, higher property and casualty losses, greater unfavorable reserve development, and higher realized capital losses.
- Property and casualty prior-year reserve development increased to $409 million unfavorable for nine months from $255 million unfavorable. The 2016 amount included $197 million of asbestos reserve strengthening, $71 million of environmental reserve strengthening, and $140 million of personal auto liability reserve increases.
- Personal Lines produced a $4 million nine-month net loss versus $136 million of net income in the prior-year period. Its nine-month combined ratio increased to 104.2% from 97.5%, primarily due to auto liability frequency and severity and unfavorable prior-year development.
- Commercial Lines nine-month net income increased to $740 million from $710 million, with a combined ratio improving to 93.3% from 94.2%.
- Group Benefits nine-month net income increased 11% to $167 million, although its total loss ratio worsened to 78.4% from 77.0% due to higher group life severity.
- Talcott Resolution nine-month net income fell to $199 million from $402 million. Account value declined to approximately $151.9 billion from $155.6 billion, reflecting runoff and net outflows.
- The company repurchased 24.6 million shares for $1.05 billion during the first nine months. In October, the board authorized an additional $1.3 billion repurchase plan through December 31, 2017.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that, if third-quarter auto frequency and severity trends continued, the full-year 2016 Personal Lines combined ratio before catastrophes and prior-year development would be at the high end of the 93.0% to 94.0% range.
- Management expects net investment income excluding limited partnerships and alternative investments to decline if interest rates remain at prevailing low levels because reinvestment rates are lower than portfolio yields.
- Liquidity was described as sufficient for anticipated needs over the next twelve months. The holding company had $1.7 billion of cash, short-term investments and fixed maturities, and no commercial paper or revolving-credit borrowings outstanding at quarter-end.
- Near-term holding-company obligations included $275 million of senior notes maturing in October 2016, $416 million maturing in March 2017, approximately $320 million of debt interest, and approximately $335 million of expected common dividends. The $275 million maturity was repaid on October 17, 2016.
- Asbestos and environmental reserves were approximately $1.8 billion net at September 30, 2016, within an estimated range of $1.4 billion to $2.3 billion. Management stated that additional adverse development could materially affect earnings and liquidity.
- The Mutual Funds Litigation seeks recovery of advisory fees and other damages; a November 2016 bench trial on liability was scheduled. The company stated that potential loss cannot reasonably be estimated.
- Derivative agreements include rating-triggered collateral and termination provisions. The aggregate fair value of derivatives with credit-risk contingent features in a net liability position was $1.4 billion; the company had posted $1.6 billion of collateral in the ordinary course.
- Material market exposures include interest rates, credit spreads, equity markets, foreign exchange, catastrophe losses, reinsurance collectability, policyholder behavior, and the guarantees in the runoff variable annuity portfolio.
Investor Verification Items
- Verify the resolution and final economics of the U.K. property and casualty runoff sale, including the estimated $59 million pretax loss and $65 million tax benefit.
- Monitor asbestos, environmental, commercial auto and personal auto reserve development, including whether the stated reserve ranges remain adequate.
- Assess Personal Lines profitability against the disclosed 93.0% to 94.0% full-year combined-ratio-before-catastrophes-and-prior-development outlook.
- Reconcile reported net income with core earnings and isolate the effects of realized capital losses, DAC unlocks, tax benefits and other unusual items.
- Track Talcott Resolution runoff, variable annuity account values, surrender rates, guarantee exposure and hedge-program volatility.
- Review statutory capital, insurer dividend capacity, debt maturities, ratings and collateral requirements because these affect holding-company liquidity and financial flexibility.
- Confirm the status and potential exposure of the Mutual Funds Litigation and other asbestos, environmental and regulatory matters.