HARTFORD INSURANCE GROUP, INC. quarterly report, Q1 FY2016

The Hartford Financial Services Group, Inc. — Q1 2016 Form 10-Q Summary

Business context and reporting period

The Hartford is an insurance and financial services holding company offering commercial and personal property and casualty insurance, group benefits, mutual funds, and runoff life and annuity products through Talcott Resolution. This filing covers the three months ended March 31, 2016, compared primarily with the three months ended March 31, 2015, and presents unaudited interim U.S. GAAP financial statements.

Financial performance and key metrics

Metric	Q1 2016	Q1 2015	Change
Total revenues	$4.391 billion	$4.617 billion	Down 5%
Net income	$323 million	$467 million	Down 31%
Diluted EPS	$0.79	$1.08	Down 27%
Core earnings	$385 million	$452 million	Down 15%
Earned premiums	$3.404 billion	$3.322 billion	Up 2%
Net investment income	$696 million	$809 million	Down 14%
Net realized capital gains (losses)	$(155) million	$5 million	Declined $160 million
Operating cash flow	$398 million	$447 million	Down 11%

Income before taxes was $381 million versus $625 million; income tax expense was $58 million versus $158 million. The effective tax rate benefited from a $25 million partial reduction in the capital-loss deferred tax valuation allowance.
Comprehensive income was $906 million, including $583 million of other comprehensive income, principally from higher unrealized securities gains.
Property and casualty written premiums increased 1%. The combined ratio before catastrophes and prior-year development improved to 89.9% from 91.7%.
Catastrophe losses increased to $91 million from $83 million, while prior accident-year development shifted to $33 million unfavorable from $2 million favorable. Personal Lines was the principal source of deterioration, with a 99.9% combined ratio versus 92.1%.
Commercial Lines net income was $228 million versus $240 million, despite an improved combined ratio. Personal Lines net income fell to $20 million from $76 million.
Group Benefits net income was $50 million versus $52 million; core earnings margin decreased to 5.5% from 5.9%.
Talcott Resolution net income fell to $17 million from $111 million. Total account value declined 9% year over year to $152.4 billion, including a 17% decline in variable annuity account value to $42.5 billion.

Balance sheet, debt, liquidity and capital

Total assets were $227.493 billion at March 31, 2016, compared with $228.348 billion at December 31, 2015. Stockholders’ equity increased to $18.112 billion from $17.642 billion, largely due to higher accumulated other comprehensive income.
Total investments were $73.910 billion, including $60.693 billion of available-for-sale fixed maturities. Gross unrealized losses on available-for-sale securities declined to $468 million from $699 million.
Total debt was $5.323 billion; debt to stockholders’ equity was 29% and debt to capitalization was 23%. Short-term debt increased to $690 million, primarily reflecting current maturities, while long-term debt declined to $4.633 billion.
The holding company held approximately $1.8 billion of cash, short-term investments and fixed maturities. It had no commercial paper outstanding and no borrowings under its $1 billion revolving credit facility.
Expected holding-company liquidity uses over the next twelve months include $275 million of senior notes maturing in October 2016, $416 million maturing in March 2017, approximately $330 million of interest payments and approximately $330 million of common dividends.
Cash flow used for financing was $565 million, including $350 million of share repurchases and $85 million of common dividends paid. The quarterly dividend declared was $0.21 per share.
The company repurchased 8.4 million common shares for $350 million during the quarter. Approximately $980 million remained under the repurchase authorization at March 31, 2016.
Statutory capital was $14.856 billion, consisting of $6.084 billion for life subsidiaries and $8.772 billion for property and casualty subsidiaries.

Material changes, outlook and unusual items

The earnings decline was driven mainly by the $160 million year-over-year deterioration in net realized capital gains and losses, lower investment income, unfavorable personal auto reserve development and higher catastrophe losses.
Investment income from limited partnerships and alternative investments fell sharply, including losses on hedge funds. Management expects net investment income excluding alternative investments to decline if interest rates remain at current levels because reinvestment rates are below current portfolio yields.
The company adopted revised variable-interest-entity consolidation guidance on January 1, 2016. The adoption was not material to the financial statements but changed the presentation of certain investment funds and limited partnerships.
On March 16, 2016, the company agreed to acquire Maxum Specialty Insurance Group for $170 million, subject to post-closing adjustments and regulatory approvals. Closing was expected in the third quarter of 2016; management did not expect a material financial impact.
The company disclosed an expected approximately $316 million prepayment in May 2016 related to its asbestos settlement obligation concerning Pittsburgh Corning. This approximates the amount reserved.
Net asbestos and environmental reserves were approximately $1.9 billion at March 31, 2016, within an estimated range of $1.5 billion to $2.3 billion. Management stated that future developments could require material changes affecting results and liquidity.
The Mutual Funds Litigation remains unresolved. The court largely denied summary judgment in March 2016, granted judgment on certain claims, and ruled that damages for surviving claims would be based on potentially excessive advisory fees. The company cannot reasonably estimate any possible loss or range of loss.
Forward-looking risks include interest-rate and credit-spread movements, equity-market volatility, variable-annuity guarantee exposures, reinsurance recoverability, catastrophe and long-tail claims, asbestos and environmental liabilities, litigation, regulatory changes, rating downgrades, counterparty failures and cybersecurity or operational disruptions.

Important facts for investors to verify

Whether the decline in net realized capital losses and alternative-investment income persists or reverses in subsequent quarters.
Personal Lines auto liability loss-cost trends, catastrophe activity and the sustainability of the improved underlying P&C combined ratio.
The adequacy of asbestos and environmental reserves and the timing and amount of the Pittsburgh Corning payment.
The runoff pace, guarantee exposure and hedging performance of Talcott Resolution, including the effect of equity markets, interest rates and policyholder behavior.
Liquidity after debt maturities, dividends, repurchases, acquisitions and potential collateral requirements on derivatives.
Potential outcomes and financial exposure from the Mutual Funds Litigation and other legal or regulatory proceedings.
The effect of the Department of Labor fiduciary rule, proposed tax changes and future accounting standards on mutual funds, annuities and earnings.