HARTFORD INSURANCE GROUP, INC. quarterly report, Q3 FY2014

Business Context and Reporting Period

The Hartford Financial Services Group, Inc. filed this Form 10-Q for the quarter and nine months ended September 30, 2014. The company operates primarily through Property & Casualty Commercial, Consumer Markets, Property & Casualty Other Operations, Group Benefits, Mutual Funds and Talcott Resolution. It continues to manage runoff life and annuity businesses and is strategically focused on property and casualty, group benefits and mutual funds.

The filing was reviewed by Deloitte & Touche LLP and was not audited. On June 30, 2014, the company completed the sale of Hartford Life Insurance KK, its Japan business, for $963 million in cash proceeds, subject to purchase-price adjustments. The transaction generated a $659 million after-tax loss and reduced reported discontinued-operations losses.

Financial Results and Key Metrics

Metric	Q3 2014	Q3 2013	First nine months 2014	First nine months 2013
Total revenues	$4,769 million	$4,862 million	$13,997 million	$15,896 million
Income from continuing operations, net of tax	$388 million	$365 million	$1,004 million	$841 million
Net income (loss)	$388 million	$293 million	$416 million	$(138) million
Diluted EPS from continuing operations	$0.86	$0.74	$2.15	$1.71
Diluted EPS including discontinued operations	$0.86	$0.60	$0.89	$(0.28)
Net cash from operating activities	Not separately provided	Not separately provided	$895 million	$903 million

Earned premiums were $3.337 billion in the quarter, essentially unchanged year over year, and $9.958 billion for the nine-month period, up 1%.
Fee income declined 3% in the quarter and 2% year to date. Net investment income increased 3% in the quarter to $810 million but declined 2% year to date to $2.402 billion.
Net realized capital gains were $69 million in the quarter and $30 million year to date, compared with $131 million and $1.796 billion, respectively, in the prior-year periods. The 2013 year-to-date amount included approximately $1.5 billion of gains associated with business dispositions.
Core earnings, a non-GAAP measure, were $477 million in the quarter versus $416 million in the prior-year quarter and $1.122 billion for the nine months versus $1.037 billion.
Q3 Property & Casualty Commercial net income increased to $280 million from $174 million. Its combined ratio before catastrophes and prior-year development improved to 90.2% from 93.3%.
Consumer Markets net income increased to $73 million from $68 million in the quarter, while nine-month net income declined to $142 million from $160 million. Its nine-month combined ratio before catastrophes and prior-year development improved to 88.8% from 89.6%.
Group Benefits net income increased to $37 million from $31 million in the quarter and to $143 million from $134 million year to date. The after-tax margin excluding realized gains and losses improved to 4.5% from 3.9% in the quarter and 5.2% from 3.7% year to date.
Mutual Funds net income increased 16% in the quarter and 12% year to date. Total assets under management were $96.2 billion at quarter-end, up 4% from the prior year.
Talcott Resolution reported $28 million of continuing-operations income in the quarter versus $80 million in the prior year. Its total account value declined to approximately $186 billion from $222 billion, reflecting the Japan sale, runoff and net outflows.

Balance Sheet, Debt and Liquidity

Total assets were $247.1 billion at September 30, 2014, down from $277.9 billion at December 31, 2013, primarily because of the Japan business disposition and runoff of Talcott Resolution.
Total investments were $76.2 billion, including $59.6 billion of available-for-sale fixed maturities, $5.7 billion of mortgage loans and $5.0 billion of short-term investments. Cash was $440 million, compared with $1.428 billion at year-end.
Stockholders’ equity was $18.835 billion, broadly unchanged from $18.905 billion at year-end. Accumulated other comprehensive income improved to $1.077 billion from a $79 million loss, largely because of unrealized investment gains.
Total debt was $6.108 billion, down from $6.544 billion. Debt-to-equity was 32% and debt-to-capitalization was 25%, compared with 35% and 26%, respectively, at year-end.
The company had $2.4 billion of holding-company cash, short-term investments and fixed maturities. It also had a $1.75 billion revolving credit facility, with no borrowings outstanding, and was in compliance with all covenants.
For the first nine months, operating cash flow was $895 million, investing cash flow was $1.919 billion and financing cash flow was negative $3.676 billion. Financing uses included $1.5 billion for treasury-stock purchases, $200 million of debt repayment and $213 million of common dividends.
The board authorized an equity repurchase program of up to $2.775 billion through December 31, 2015. The company paid $845 million for share repurchases in the third quarter and $1.496 billion in the first nine months, including its accelerated share repurchase agreement.

Material Changes Versus the Prior Comparable Period

Quarterly net income rose 32% to $388 million, primarily because of the absence of discontinued-operations losses, improved P&C underwriting, lower catastrophe losses and higher investment income.
Nine-month net income improved from a $138 million loss to $416 million profit. The comparison is significantly affected by 2013 business-disposition gains and losses, a 2013 $213 million debt-extinguishment loss and discontinued-operations results.
Current-quarter catastrophe losses declined to $40 million from $66 million, while nine-month catastrophe losses increased to $322 million from $284 million.
Prior-year P&C reserve development was favorable by $10 million in the quarter, compared with $17 million of strengthening in the prior year. For the nine months, 2014 included $199 million of strengthening, primarily from asbestos and environmental reserves, versus $177 million in 2013.
The annual policyholder-behavior review produced a $102 million after-tax third-quarter DAC, sales-inducement and benefit-reserve unlock charge, versus $104 million in the prior year. The charge primarily reflected lower future estimated gross profits on fixed annuities and higher variable-annuity unit costs.
The company’s available-for-sale securities unrealized loss position improved substantially, with gross unrealized losses declining to $345 million from $1.077 billion at year-end.

Guidance, Outlook, Risks and Unusual Items

Management expected the full-year 2014 net investment income yield to remain relatively consistent with the nine-month yield. New-money yields declined to 3.2% from 4.4% because of lower interest rates, tighter credit spreads and investment of Japan-sale proceeds in short-duration assets.
Management expects Talcott Resolution account values and earnings to decline over time as surrenders, runoff and potential third-party transactions reduce the book of business.
The company expects to repay the 4.0% and 7.3% senior notes maturing in 2015. A previously contemplated allocation of up to $500 million for debt reduction was deferred to 2015 because of market conditions.
Asbestos and environmental reserves were strengthened by $212 million and $27 million, respectively, during the first nine months. Net asbestos and environmental reserves were approximately $2.0 billion at September 30, 2014, with management-estimated reserves ranging from $1.6 billion to $2.4 billion.
The Mutual Funds litigation alleges excessive advisory and distribution fees. The possible loss or range of loss was not reasonably estimable as of the filing date.
Derivative agreements could require additional collateral if financial-strength ratings decline. A one-level downgrade could require approximately $6 million of additional collateral, while a two-level downgrade could require approximately $26 million, based on September 30 market values.
Key exposures include interest rates, credit spreads, equity markets, foreign exchange, variable-annuity policyholder behavior, catastrophe losses, long-tail claims, reinsurer collectability, regulatory changes and litigation.
TRIPRA terrorism protection was scheduled to expire at the end of 2014 unless reauthorized, creating potential exposure to changes in terrorism coverage and pricing.
Management stated that insurance-operations liquidity was sufficient for anticipated demands over the next twelve months. However, sales of invested assets to meet liquidity needs could produce realized losses.

Most Important Facts for Investors to Verify

Whether P&C underwriting improvements, particularly the sub-100% combined ratios, persist after catastrophe losses and reserve development normalize.
The adequacy and volatility of asbestos, environmental and other long-tail reserves, including the stated $1.6 billion to $2.4 billion estimated range.
The effect of continued low interest rates on investment yields, DAC recoverability, fixed-annuity profitability and variable-annuity hedging costs.
The pace of Talcott Resolution runoff, surrender activity, account-value declines and future fee-income erosion.
The financial strength of reinsurers supporting approximately $22.8 billion of net reinsurance recoverables, including $18.8 billion related to sold businesses.
The effect of share repurchases and the accelerated share repurchase agreement on capital, share count and future earnings per share.
Potential collateral requirements and earnings volatility arising from derivatives and rating-sensitive collateral provisions.
The outcome and potential financial exposure from the Mutual Funds litigation and other asbestos, environmental and insurance-related proceedings.