The Hartford Financial Services Group, Inc. — Q2 2015 Form 10-Q Summary
Business context and reporting period
The filing covers the quarter and six months ended June 30, 2015. The Hartford provides property and casualty insurance, group benefits, mutual funds and runoff life and annuity products, primarily in the United States. The Japanese business sold in June 2014 is reported as discontinued operations. The interim financial statements are unaudited and prepared under U.S. GAAP.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Total revenues | $4,685 million | $4,616 million | $9,302 million | $9,228 million |
| Income from continuing operations, net of tax | $413 million | $150 million | $880 million | $616 million |
| Net income (loss) | $413 million | $(467) million | $880 million | $28 million |
| Diluted EPS from continuing operations | $0.96 | $0.32 | $2.04 | $1.30 |
| Net investment income | $796 million | $768 million | $1,605 million | $1,592 million |
| Operating cash flow | Not separately reported for the quarter | $1,109 million | $510 million |
Core earnings were $389 million for the quarter and $841 million for the six months, compared with $144 million and $645 million, respectively, in the prior-year periods. Core earnings exclude selected realized gains and losses, discontinued operations, debt extinguishment costs and other items.
- Property and casualty written premiums increased 4% for the quarter and 3% for the six months.
- The property and casualty combined ratio before catastrophes and prior-year development improved to 88.9% for the quarter and 89.0% for the six months, from 92.7% and 89.8%, respectively.
- Current-year catastrophe losses were $139 million before tax in the quarter and $222 million for the six months, versus $196 million and $282 million in the comparable periods.
- Group Benefits after-tax core earnings margin, excluding buyouts, was 6.3% for the quarter and 6.1% for the six months.
- The annualized after-tax investment yield was 3.1% for the quarter. The new-money yield declined to 3.5% from 3.8% in the prior-year quarter.
Balance sheet, debt and liquidity
- Total assets were $241.0 billion at June 30, 2015, compared with $245.0 billion at December 31, 2014. Total investments were $74.4 billion and separate account assets were $131.5 billion.
- Stockholders’ equity was $18.2 billion, down from $18.7 billion, primarily because accumulated other comprehensive income declined to $188 million from $928 million as unrealized investment gains decreased.
- Total debt was $5.525 billion, down 10% from $6.109 billion at year-end. Debt-to-stockholders’ equity was 30%, compared with 33% at year-end.
- Cash was $493 million at June 30, 2015. Operating cash flow for the first six months was $1.109 billion; investing activities provided $468 million and financing activities used $1.468 billion.
- The holding company had approximately $1.5 billion of cash, short-term investments and fixed maturities. It had no commercial paper outstanding and no borrowings under its $1.0 billion revolving credit facility.
- Near-term holding-company requirements include $167 million of senior notes maturing, approximately $335 million of interest payments and approximately $330 million of common dividends.
Material changes versus the prior comparable period
- Quarterly net income improved by $880 million, principally because the prior-year quarter included a $617 million after-tax loss from discontinued operations related to the Japan business sale.
- Continuing-operations earnings rose 175% in the quarter and 43% for the six months, supported by improved property and casualty underwriting, lower catastrophe losses, higher investment income and better Talcott Resolution results.
- Talcott Resolution generated $217 million of quarterly continuing-operations income, compared with $113 million, as runoff reduced benefits and expenses and produced favorable assumption updates. Account value declined 7% year over year to approximately $163.7 billion.
- Unfavorable prior-year property and casualty development was $220 million before tax in the quarter and $218 million for the six months, compared with $249 million and $209 million, respectively. Second-quarter development included $146 million of asbestos strengthening and $52 million of environmental strengthening.
- The company redeemed $296 million of 4.0% senior notes for $317 million, including a make-whole premium, resulting in a $21 million pretax loss on extinguishment of debt.
- The company repurchased approximately 6.0 million shares for $250 million in the quarter and 12.1 million shares for $500 million in the first six months. In July 2015, the board increased and extended repurchase authorization to $4.375 billion through December 31, 2016.
Guidance, outlook, commentary and risks
- Management expects the 2015 annualized net investment income yield, excluding limited partnerships and alternative investments, to decline slightly because reinvestment rates remain below portfolio yields.
- The company expects to repay $275 million of 5.5% senior notes at maturity in October 2016 and the 7.3% senior notes due in November 2015. It also expects to use approximately $180 million of remaining debt-capital-management authorization during 2015 and 2016, subject to market conditions.
- Asbestos and environmental reserves remain highly uncertain. Net reserves were approximately $2.1 billion at June 30, 2015, within management’s estimated range of $1.7 billion to $2.4 billion. Additional liabilities could be material to operating results and liquidity.
- The portfolio is exposed to interest-rate, credit-spread, equity-market, foreign-exchange and energy-sector volatility. Rising rates reduced after-tax net unrealized investment gains by $921 million during the quarter.
- Variable annuity guarantees and related hedging programs create earnings, capital and liquidity volatility. At June 30, 2015, variable annuity account value with guarantees was approximately $49.4 billion, with gross net amount at risk of $3.7 billion and retained net amount at risk of $0.8 billion.
- Derivative agreements could require additional collateral or settlement following certain financial-strength downgrades. The filing states 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.
- The company is defending mutual-fund litigation alleging excessive advisory and distribution fees. Management cannot reasonably estimate a potential loss or range of loss.
- A.M. Best upgraded the holding company and Hartford Fire Insurance Company in May 2015; the filing cautions that ratings may change and could affect competitiveness, financing access and borrowing costs.
Important facts for investors to verify
- Whether property and casualty underwriting improvement persists after catastrophe losses and prior-year reserve development.
- Future asbestos and environmental claim emergence, reserve adequacy and reinsurance recoverability.
- The sustainability of alternative-investment income and the effect of lower reinvestment yields on net investment income.
- Variable annuity guarantee exposure, hedge effectiveness and sensitivity to equity markets, interest rates, volatility and policyholder behavior.
- Capital deployment priorities, including share repurchases, dividends, debt repayment and the resulting effect on statutory capital and ratings.
- The outcome and potential financial impact of mutual-fund litigation and other legal or regulatory matters.