The Hartford Financial Services Group, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2016. The Hartford operates through Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Talcott Resolution, including runoff life and annuity businesses. The interim financial statements are unaudited and prepared under U.S. GAAP.
Financial results and key metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $4.677 billion, essentially flat year over year | $9.068 billion, down 3% |
| Net income | $216 million, down 48% | $539 million, down 39% |
| Diluted earnings per share | $0.54, versus $0.96 | $1.34, versus $2.04 |
| Core earnings | $122 million, versus $389 million | $507 million, versus $841 million |
| Earned premiums | $3.444 billion, up 2% | $6.848 billion, up 2% |
| Fee income | $422 million, down 10% | $848 million, down 9% |
| Net investment income | $735 million, down 8% | $1.431 billion, down 11% |
| Net realized capital gains | $53 million, versus $9 million | $(102) million, versus $14 million |
| Operating cash flow | Not separately presented | $816 million, versus $1.109 billion |
The second-quarter effective tax result was a $46 million benefit, including a $53 million benefit from reducing the valuation allowance on capital loss carryforwards. The six-month tax expense was $12 million, including a $78 million benefit from the same item.
Property and casualty performance weakened materially. The consolidated P&C combined ratio was 112.0% in the second quarter, up from 102.8%, reflecting catastrophe losses of $184 million and unfavorable prior-year development of $351 million. For the first six months, catastrophe losses were $275 million and unfavorable prior-year development was $384 million.
- Commercial Lines second-quarter net income was $240 million, down 7%; the combined ratio was 95.0% versus 92.2%.
- Personal Lines reported a $53 million net loss versus $41 million of income; the combined ratio was 112.6% versus 99.2%.
- Property & Casualty Other Operations reported a $154 million net loss, driven largely by asbestos and environmental reserve increases.
- Group Benefits net income was $55 million, down 2%, with a 6.0% net income margin versus 6.3%.
- Mutual Funds net income was $20 million, down 9%; average segment assets under management declined to $90.9 billion.
- Talcott Resolution net income was $104 million, down 52%, as the variable annuity block continued to run off.
Balance sheet, debt and liquidity
- Total assets were $227.616 billion at June 30, 2016, compared with $228.348 billion at December 31, 2015.
- Total investments were $75.144 billion, including $61.241 billion of available-for-sale fixed maturities.
- Stockholders’ equity was $18.559 billion, up from $17.642 billion, primarily because accumulated other comprehensive income increased to $900 million from $(329) million.
- Total debt was $5.324 billion, consisting of $690 million of short-term debt and $4.634 billion of long-term debt. Debt-to-capitalization was 22%.
- Holding-company cash, fixed maturities and short-term investments totaled approximately $1.8 billion. The company had no commercial paper outstanding and no borrowings under its $1 billion revolving credit facility.
- Operating cash flow was adequate for anticipated liquidity needs. The holding company expected next-twelve-month requirements to include $691 million of senior-note maturities, approximately $325 million of interest payments and approximately $325 million of common dividends.
- The company repurchased 16.2 million shares for $700 million during the first six months and declared quarterly dividends of $0.21 per share.
Material changes versus the prior comparable periods
- Net income and core earnings declined sharply because of higher P&C losses, lower investment income, lower fee income and adverse runoff-business results.
- Fee income fell primarily because of the continued Talcott Resolution variable annuity runoff. Talcott account value declined to $151.2 billion from $163.7 billion a year earlier; variable annuity account value declined 15% to $41.7 billion.
- Net investment income declined as limited-partnership and alternative-investment income fell substantially; management also cited lower reinvestment yields in the low-interest-rate environment.
- Net realized capital gains improved in the second quarter but turned to a six-month loss, partly because of losses on modified coinsurance, equity and interest-rate derivatives.
- Net asbestos reserves increased $197 million and net environmental reserves increased $71 million following annual reserve reviews. Net asbestos and environmental reserves totaled approximately $1.9 billion, within a stated estimated range of $1.4 billion to $2.3 billion.
- AOCI improved by $1.229 billion in the first half, primarily from higher unrealized investment gains as interest rates declined and credit spreads tightened.
Guidance, outlook, risks and unusual items
- Management expects the full-year 2016 Personal Lines combined ratio before catastrophes and prior-year development to be 93.0% to 94.0%, reflecting higher auto liability frequency and severity, partly offset by pricing and underwriting initiatives.
- Management expects investment income yields to decline if interest rates remain at current levels because reinvestment rates are below portfolio yields.
- The filing identifies material sensitivity to interest rates, equity markets, credit spreads, foreign exchange rates, catastrophe activity, policyholder behavior, reinsurance collectability and valuation assumptions for variable-annuity guarantees and investments.
- Derivative agreements had $1.3 billion of net liabilities subject to credit-rating-related collateral or termination provisions. Management stated that a one- or two-level downgrade by Moody’s or S&P would not have required additional collateral based on June 30 market values, but requirements could change with market movements.
- The company recorded a $315 million payment related to the PPG asbestos settlement, contributing to lower operating cash flow.
- The company announced pending acquisitions of Maxum Specialty Insurance Group for approximately $170 million and Lattice Strategies; both were expected to close in the third quarter and were not expected to be material.
- After quarter-end, the company agreed to sell U.K. P&C runoff subsidiaries to Catalina Holdings UK Limited. Closing was expected in the fourth quarter, with no material gain or loss expected net of tax.
- The Mutual Funds Litigation remains unresolved; management cannot reasonably estimate any possible loss or range of loss. The matter could proceed to trial as early as September 2016.
- The Department of Labor fiduciary rule, Brexit-related market volatility and continuing regulatory developments may affect the company’s investment, mutual fund and runoff businesses.
Important facts for investors to verify
- Whether Personal Lines auto loss frequency and severity improve enough to achieve the stated 93.0%–94.0% full-year underlying combined-ratio outlook.
- Whether asbestos and environmental claims continue to develop above current reserves and whether the $1.4 billion–$2.3 billion reserve range remains appropriate.
- The sustainability of the $53 million second-quarter tax benefit and the $78 million first-half tax benefit from deferred tax valuation allowance reductions.
- The effect of continued Talcott Resolution runoff on fee income, investment income, guarantee exposure, DAC amortization and hedging results.
- Investment portfolio credit quality, unrealized losses, reinvestment yields and the potential for additional OTTI or derivative losses.
- Statutory capital, ratings and dividend capacity of the insurance subsidiaries, particularly after dividends and capital-market volatility.
- Potential outcomes of the Mutual Funds Litigation, pending transactions and the sale of the U.K. runoff subsidiaries.