The Hartford Financial Services Group, Inc. — 2017 Q1 Form 10-Q Summary
Business context and reporting period
The filing covers the three months ended March 31, 2017. The Hartford operates primarily in Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Talcott Resolution, which manages legacy life and annuity business in runoff. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
The filing identifies the registrant as The Hartford Financial Services Group, Inc., although the request metadata refers to Hartford Insurance Group.
Key financial metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenues | $4.655 billion | $4.410 billion | 6% |
| Earned premiums | $3.473 billion | $3.404 billion | 2% |
| Fee income | $455 million | $445 million | 2% |
| Net investment income | $728 million | $696 million | 5% |
| Net realized capital gains (losses) | $(20) million | $(155) million | Improved by $135 million |
| Income before income taxes | $487 million | $381 million | 28% |
| Net income | $378 million | $323 million | 17% |
| Diluted earnings per share | $1.00 | $0.79 | 27% |
| Cash dividends declared per share | $0.23 | $0.21 | 10% |
Net income was $378 million, or $1.00 per diluted share. Management reported core earnings of $378 million versus $385 million in the prior-year quarter; core earnings exclude specified realized capital gains and losses and other items.
Operating cash flow was $225 million, down from $398 million. Investing activities used $1.208 billion, primarily because of a $1.317 billion net increase in short-term investments. Financing activities provided $436 million, including $1.115 billion from increased securities lending and repurchase-related balances, $500 million of debt issuance and $325 million of share repurchases. Ending cash was $337 million, compared with $479 million at March 31, 2016.
Balance sheet, debt and liquidity
- Total assets were $225.388 billion, including $72.189 billion of investments and $116.582 billion of separate account assets.
- Stockholders’ equity was $17.009 billion, up from $16.903 billion at December 31, 2016. Book value per diluted share increased to $45.25 from $44.35.
- Total debt was $5.137 billion, consisting of $320 million of short-term debt and $4.817 billion of long-term debt. Debt represented approximately 30% of stockholders’ equity and 23% of total capitalization.
- The company held $1.3 billion of cash, short-term investments and fixed maturities at the holding company, had no commercial paper outstanding and had no borrowings under its $1 billion revolving credit facility.
- Expected holding-company liquidity requirements over the next twelve months included $320 million of debt maturities, approximately $320 million of interest payments and approximately $335 million of common dividends, subject to Board approval.
- Insurance subsidiaries had reported 2017 dividend capacity of approximately $1.5 billion for property and casualty subsidiaries, $207 million for Hartford Life and Accident Insurance Company and $1 billion for Hartford Life Insurance Company, subject to regulatory requirements.
Material changes versus the prior comparable period
- Net income increased primarily because net realized capital losses declined substantially and net investment income increased.
- Property and casualty earned premiums increased 1%, with Commercial Lines growth partly offset by a decline in Personal Lines.
- The consolidated property and casualty combined ratio increased to 97.4 from 94.7, primarily because catastrophe losses rose to $150 million from $91 million and current accident-year loss costs increased. Unfavorable prior-year development improved to $12 million from $33 million.
- Commercial Lines underwriting gain declined to $68 million from $145 million; its combined ratio increased to 96.0 from 91.1.
- Personal Lines underwriting gain increased to $7 million from $1 million, despite lower earned premiums. Its combined ratio improved modestly to 99.3 from 99.9, but catastrophe losses increased to $79 million from $47 million.
- Group Benefits net income declined to $45 million from $50 million, primarily because of a $20 million pretax state guaranty fund assessment, or approximately $13 million after tax.
- Mutual Funds net income increased to $23 million from $20 million. Total segment assets under management increased to $103.2 billion from $90.4 billion, supported by market appreciation, positive net flows and the Schroders fund addition.
- Talcott Resolution net income increased to $68 million from $17 million, primarily because of lower realized capital losses. Total account value declined approximately 1% year over year to $150.9 billion, and variable-annuity account value declined 4% to $40.9 billion.
- The company repurchased 6.7 million common shares for $325 million during the quarter. Approximately $975 million remained under the $1.3 billion repurchase authorization at March 31, 2017.
Guidance, outlook, commentary and unusual items
- Management expected 2017 net investment income yield, excluding limited partnerships and other alternative investments, to be slightly below the 2016 portfolio yield because of lower reinvestment rates and anticipated lower make-whole payments and mortgage-loan prepayment penalties.
- The company adopted new stock-compensation guidance in 2017, recognizing a $7 million excess tax benefit in earnings.
- The company adopted a full yield-curve approach for pension interest-cost estimation, reducing first-quarter pretax benefit expense by $9 million without changing total benefit obligations.
- The company issued $500 million of junior subordinated notes in February 2017 and repaid $416 million of senior notes at maturity in March 2017. The new notes carry interest at three-month LIBOR plus 2.125%; an April 2017 interest-rate swap was expected to convert the payments to an effective fixed rate of approximately 4.39%.
- The pending sale of the U.K. property and casualty runoff subsidiaries, for approximately $262 million net of transaction costs, was expected to close in the second quarter of 2017, subject to customary conditions. Assets held for sale were $923 million and liabilities held for sale were $661 million at March 31, 2017.
- An adverse development cover with National Indemnity Company, effective December 31, 2016, provides up to $1.5 billion of protection for adverse asbestos and environmental reserve development. The company paid a $650 million premium; cumulative development above that amount may produce significant earnings charges before any deferred gain is recognized.
- Management identified significant exposure to market volatility, interest rates, equity markets, credit spreads, catastrophe losses, reserve development, reinsurance recoverability, variable-annuity guarantees, litigation, regulatory changes, ratings downgrades and cybersecurity or operational disruptions.
- Derivative agreements could require additional collateral or immediate settlement after specified financial-strength rating downgrades. A two-level downgrade by Moody’s or S&P, based on March 31 market values, would have required approximately $10 million of additional collateral.
- The Mutual Funds Litigation was decided in favor of the company’s subsidiaries in February 2017, but plaintiffs appealed to the U.S. Court of Appeals for the Third Circuit. Management stated that potential losses could not reasonably be estimated.
Most important facts for investors to verify
- Whether elevated catastrophe losses and adverse commercial automobile and general-liability trends persist and affect the property and casualty combined ratio.
- The adequacy of asbestos and environmental reserves, including development above the $650 million ADC premium and the $1.5 billion treaty limit.
- The sustainability of net investment income as legacy annuity assets run off and portfolio reinvestment yields remain pressured.
- Variable-annuity guarantee exposure, including $3.1 billion of gross GMDB net amount at risk and $0.6 billion of retained net amount at risk at March 31, 2017.
- Holding-company liquidity, subsidiary dividend approvals, debt refinancing and the effect of continued share repurchases on capital and ratings.
- Reinsurance counterparty recoverability, especially the significant recoverables from MassMutual and Prudential.
- The impact of the Department of Labor fiduciary rule and other regulatory or legislative developments on the Mutual Funds business.