The Hartford Financial Services Group, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2017. The Hartford operates through Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds, Talcott Resolution and Corporate. The financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
The Company completed the sale of its U.K. property and casualty run-off subsidiaries on May 10, 2017, for approximately $272 million net of transaction costs. Talcott Resolution continues to run off legacy life and annuity products.
Financial performance and key metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenues | $4,684 million | $4,715 million | $14,108 million | $13,821 million |
| Net income | $234 million | $438 million | $572 million | $977 million |
| Diluted EPS | $0.64 | $1.12 | $1.54 | $2.45 |
| Net investment income | $729 million | $772 million | $2,172 million | $2,203 million |
| Net realized capital gains | $(3) million | $(17) million | $52 million | $(119) million |
| Operating cash flow | Not separately provided | Not separately provided | $1,524 million | $1,405 million |
Q3 net income fell 47%, primarily because catastrophe losses increased materially. Nine-month net income fell 41%, largely because of a $750 million pre-tax pension settlement charge, or $488 million after tax, and higher catastrophe losses.
- Q3 P&C catastrophe losses were $352 million before tax, including $175 million from Hurricane Harvey and $157 million from Hurricane Irma. Nine-month catastrophe losses were $657 million versus $355 million in the prior-year period.
- The consolidated P&C combined ratio was 107.1% in Q3 2017 versus 96.5% in Q3 2016. The underlying combined ratio, excluding catastrophes and prior-year development, was 93.2% for Commercial Lines and 94.9% for Personal Lines in Q3.
- Commercial Lines net income was $90 million in Q3 and $579 million for nine months, down from $268 million and $730 million, respectively.
- Personal Lines net income was $8 million in Q3 and $65 million for nine months, compared with $33 million and $6 million, respectively.
- Group Benefits net income increased to $71 million in Q3 and $185 million for nine months. The nine-month total loss ratio improved to 76.2% from 78.4%.
- Mutual Funds net income increased 24% in Q3 to $26 million and 20% for nine months to $73 million. Total segment assets under management were $111.7 billion at September 30, 2017, up 18% year over year.
- Talcott Resolution net income was $80 million in Q3 and $253 million for nine months. Total account value declined 2% year over year to $149.4 billion, reflecting continued run-off and net outflows.
- Core earnings were $222 million in Q3 and $989 million for nine months, compared with $413 million and $920 million, respectively, in the prior-year periods. Core earnings exclude or adjust for specified items including realized gains and losses and the pension settlement.
Balance sheet, debt and liquidity
| Metric | September 30, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $224,211 million | $223,432 million |
| Total investments | $72,993 million | $70,637 million |
| Stockholders’ equity | $17,233 million | $16,903 million |
| Total debt | $5,138 million | $5,052 million |
| Cash | $333 million | $882 million |
- Debt-to-capitalization was 23%; debt-to-stockholders’ equity was 30%.
- The holding company had approximately $1.3 billion of cash, short-term investments and fixed maturities, no commercial paper outstanding and no borrowings under its $1 billion revolving credit facility.
- Cash used in investing activities was $1.485 billion, principally reflecting net purchases of available-for-sale securities and derivative payments. Cash used in financing activities was $658 million, including $975 million of share repurchases and $258 million of common dividends paid.
- The Company repurchased 19.3 million shares for $975 million during the first nine months. Repurchases were suspended effective October 13, 2017, and management did not expect to authorize a 2018 repurchase plan.
Material changes, outlook and unusual items
- On October 23, 2017, the Company announced an agreement to acquire Aetna’s U.S. group life and disability business through reinsurance. Expected cash consideration was $1.45 billion, with approximately $3.4 billion of invested assets and $3.3 billion of reserves expected to transfer. Closing was expected in Q4 2017, subject to customary conditions.
- The Company expected to contribute $1.65 billion to Hartford Life and Accident Insurance Company to fund the acquisition and provide capital support.
- Expected holding-company liquidity requirements over the next twelve months included $320 million of debt maturing in March 2018, an expected $500 million junior subordinated debt redemption in June 2018, approximately $315 million of debt interest, approximately $353 million of dividends and the Aetna transaction funding.
- The Company entered into a $500 million junior subordinated debt issuance in February 2017 and repaid $416 million of senior notes at maturity in March 2017.
- The Company transferred approximately $1.6 billion of pension obligations to a group annuity contract and recorded the $750 million pre-tax settlement charge. It also contributed $280 million to the qualified pension plan in September 2017.
- Management expected 2017 investment income yield, excluding limited partnerships and alternative investments, to be slightly below 2016 levels because reinvestment rates remained below portfolio yields.
- An adverse development cover with National Indemnity Company reinsures substantially all post-December 31, 2016 adverse development on asbestos and environmental reserves, up to $1.5 billion. However, adverse development exceeding the $650 million premium paid could initially result in significant earnings charges under retroactive reinsurance accounting.
Risks and contingencies
- Results remain sensitive to catastrophe frequency and severity, unfavorable loss development, asbestos and environmental claims, pricing adequacy, reinsurance collectibility and changes in regulation or litigation.
- Investment results are exposed to interest rates, credit spreads, equity markets, foreign exchange rates, market volatility and alternative-investment performance. Gross unrealized losses on available-for-sale securities were $205 million at September 30, 2017.
- Talcott’s variable-annuity guarantees create exposure to equity markets, interest rates, volatility and policyholder behavior. The Company retains risks from differences between actual and assumed behavior and hedged-index performance.
- Derivative agreements may require additional collateral or permit termination following ratings downgrades. The October 23, 2017 Moody’s downgrade of Hartford Life Insurance Company and Hartford Life and Annuity Insurance Company affected termination triggers in three derivative relationships; the Company expected to renegotiate them successfully.
- The Mutual Funds litigation remains on appeal after a February 2017 judgment for the Company’s subsidiaries. Management stated that the potential loss could not reasonably be estimated.
- Asbestos and environmental reserve adequacy remains uncertain; the Company planned its regular comprehensive reserve review for the fourth quarter of 2017.
Investor verification checklist
- Verify the final closing terms, funding sources, purchase accounting and capital impact of the Aetna group benefits transaction.
- Assess whether catastrophe losses, pricing actions and underlying combined ratios indicate improvement or deterioration in P&C underwriting.
- Reconcile reported net income with core earnings, including the pension settlement, catastrophe losses, unlocks and realized investment results.
- Monitor Talcott Resolution run-off, variable-annuity guarantee exposures, hedge effectiveness and sensitivity to equity volatility and interest rates.
- Review asbestos and environmental reserve developments and recoveries under the NICO adverse development cover.
- Evaluate liquidity after acquisition funding, expected debt redemptions, dividends and the suspension of share repurchases.