The Hartford Financial Services Group, Inc. — FY 2015 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2015. The filing is an annual report, not a quarterly filing. The registrant is The Hartford Financial Services Group, Inc., which provides property and casualty insurance, group benefits, mutual funds and runoff life and annuity products. At year-end, total assets were $228.3 billion and stockholders’ equity was $17.6 billion.
Financial performance and condition
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenues | $18.377 billion | $18.614 billion | Down $237 million |
| Income from continuing operations | $1.673 billion | $1.349 billion | Up $324 million |
| Net income | $1.682 billion | $798 million | Up $884 million |
| Diluted EPS | $3.96 | $1.73 | Up $2.23 |
| Core earnings | $1.650 billion | $1.548 billion | Up $102 million |
| Net cash from operating activities | $2.756 billion | $1.886 billion | Up $870 million |
| Total debt | $5.359 billion | $6.109 billion | Down 12% |
| Stockholders’ equity | $17.642 billion | $18.720 billion | Down 6% |
Earned premiums increased to $13.577 billion from $13.336 billion. Fee income declined to $1.839 billion from $1.996 billion, primarily because of Talcott Resolution runoff. Net investment income declined 3.9% to $3.030 billion. Net realized capital losses were $156 million, compared with $16 million of gains in 2014, largely reflecting variable-annuity hedge results.
After-tax annualized investment yield was 3.0%, unchanged from 2014; new money yield declined to 3.4% from 3.6%. Net unrealized investment gains declined by $1.091 billion, primarily because of wider credit spreads and higher interest rates.
Operating cash flow was $2.756 billion, investing activities provided $485 million and financing activities used $3.144 billion. Financing uses included $1.250 billion of share repurchases, $773 million of debt repayments and $316 million of common dividends paid. The company ended the year with $448 million of consolidated cash.
Insurance and segment results
- Commercial Lines: Net income of $1.003 billion versus $983 million. Written premiums increased 4%. The combined ratio before catastrophes and prior-year development improved to 90.0 from 91.5.
- Personal Lines: Net income declined to $187 million from $207 million. The combined ratio before catastrophes and prior-year development deteriorated to 92.0 from 90.6, driven by higher auto loss costs and increased non-weather homeowners claims.
- Property & Casualty Other Operations: Net loss improved to $53 million from $108 million, but included $218 million of unfavorable prior-year development, principally asbestos and environmental reserves.
- Group Benefits: Net income was $187 million versus $191 million. Core earnings margin improved to 5.6% from 5.2%; the total loss ratio increased to 77.4% from 76.2%, while the expense ratio improved to 26.1% from 28.2%.
- Mutual Funds: Net income was $86 million versus $87 million. Total segment assets under management declined to $91.962 billion from $93.619 billion, although mutual fund assets increased 2% to $74.413 billion.
- Talcott Resolution: Net income was $430 million versus a $187 million loss, helped by lower DAC amortization and a favorable assumption unlock. Total account value declined to approximately $155.6 billion from $168.4 billion as the legacy annuity business continued to run off.
Material changes versus the prior comparable period
- Net income benefited from the absence of the $551 million after-tax discontinued-operations loss recorded in 2014, including the loss on the sale of the Japanese annuity business.
- Continuing-operations income increased despite lower fee income, lower investment income and net realized capital losses. Contributing factors included improved current-year property and casualty underwriting, lower expenses, a favorable Talcott Resolution DAC unlock and tax benefits.
- Property and casualty written premiums increased 3%, with Commercial Lines up 4% and Personal Lines up 1%.
- Property and casualty catastrophe losses declined modestly to $332 million before tax from $341 million.
- Unfavorable prior accident-year development increased to $250 million from $228 million, driven primarily by asbestos and environmental claims.
- Total debt decreased by $750 million after maturities, redemption of senior notes and other repayments. The company repurchased approximately 28.4 million shares for $1.250 billion.
- Accumulated other comprehensive income declined from a $928 million gain to a $329 million loss, primarily because of lower unrealized investment gains and pension-related changes.
Outlook, risks and unusual items
For 2016, management projected Commercial Lines written-premium growth in the low single digits and a combined ratio before catastrophes and prior-year development of approximately 89.0% to 91.0%. Personal Lines written-premium growth was expected to decline slightly, with a projected combined ratio of approximately 90.0% to 92.0%. Group Benefits projected a core earnings margin of approximately 5.5% to 6.0%. Mutual Funds expected moderate earnings growth assuming average historical market performance, while Talcott Resolution earnings and account values were expected to continue declining as the block ran off.
Key risks include low interest rates, credit-spread widening, equity-market declines, variable-annuity guarantee exposure, catastrophe losses, adverse loss-reserve development, asbestos and environmental claims, reinsurer and derivative-counterparty credit risk, ratings downgrades, regulatory changes, litigation, cybersecurity incidents and execution risk related to capital management and expense initiatives.
Net asbestos and environmental reserves were approximately $1.982 billion at year-end, within management’s estimated range of $1.6 billion to $2.4 billion. The company increased net asbestos reserves by $146 million and net environmental reserves by $55 million in 2015. Management stated that ultimate liabilities could exceed recorded reserves materially.
The company reported a $52 million after-tax favorable Talcott Resolution unlock, a $21 million pretax loss on extinguishment of debt, $102 million of pretax investment impairments and a $94 million tax benefit from reducing the deferred-tax valuation allowance on capital-loss carryovers. A mutual-funds litigation matter seeks recovery of advisory and distribution fees; management stated that the possible loss could not reasonably be estimated.
Liquidity appeared adequate for anticipated needs. The holding company had $1.7 billion of fixed maturities, short-term investments and cash, no commercial paper outstanding and no borrowings under its $1.0 billion revolving credit facility. Insurance subsidiaries had aggregate statutory capital of $15.154 billion, and reported RBC ratios above regulatory action levels.
Important facts for investors to verify
- Reconcile GAAP net income of $1.682 billion with core earnings of $1.650 billion, including the effects of tax benefits, realized losses, unlocks and discontinued operations.
- Assess the sustainability of Commercial Lines underwriting improvement and the deterioration in Personal Lines auto and homeowners results.
- Review asbestos and environmental reserve adequacy, including the $1.6 billion to $2.4 billion estimated reserve range and future ground-up evaluations.
- Monitor Talcott Resolution runoff, surrender rates, variable-annuity guarantee exposure, hedging performance and the effect on statutory capital.
- Evaluate sensitivity to interest rates, credit spreads, equity markets and investment impairments, including the $699 million of unrealized losses on available-for-sale securities.
- Confirm the availability and regulatory constraints on subsidiary dividends supporting holding-company debt service, dividends and share repurchases.
- Review reinsurance recoverables of $23.189 billion, including $20.674 billion of life-related recoverables and the $266 million allowance for uncollectible property and casualty reinsurance.
- Track debt maturities, derivative collateral requirements and potential collateral calls following ratings downgrades.
- Consider the impact of pending mutual-fund litigation and other insurance, asbestos, environmental and regulatory proceedings.