HARTFORD INSURANCE GROUP, INC. quarterly report, Q2 FY2014

Business Context and Reporting Period

The filing is The Hartford Financial Services Group, Inc.’s unaudited Form 10-Q for the quarter and six months ended June 30, 2014. The company provides property and casualty insurance, group benefits, mutual fund services and legacy life and annuity products, including runoff operations managed by Talcott Resolution.

The filing reflects the completed June 30, 2014 sale of Hartford Life Insurance KK, the company’s Japanese annuity business, to ORIX Life Insurance Corporation. The transaction materially affected reported results and balance-sheet composition. The independent accountant’s review identified no material modifications required for conformity with U.S. GAAP.

Financial Performance and Key Metrics

Metric	Three months ended June 30	Six months ended June 30
Total revenues	$4.616 billion, down 2%	$9.228 billion, down 16%
Income from continuing operations, net of tax	$150 million, down 36%	$616 million, up 29%
Net income available to common shareholders	$(467) million; diluted EPS $(1.00)	$28 million; diluted EPS $0.06
Core earnings	$144 million	$645 million
Net investment income	$768 million, down 9%	$1.592 billion, down 4%
Net realized capital gains/(losses)	$(4) million	$(39) million
Operating cash flow	Not separately provided for the quarter	$510 million, versus $408 million

The second-quarter net loss included a $617 million after-tax loss from discontinued operations, principally the $659 million after-tax loss on the Japanese business sale. Excluding discontinued operations and other specified items, core earnings were $144 million versus $231 million in the prior-year quarter. Six-month net income improved from a $431 million loss in 2013 to $28 million in 2014, largely because the prior-year period included significant business-disposition gains and losses, debt-extinguishment costs and other restructuring-related items.

Earned premiums increased 1% to $3.319 billion in the quarter and 1% to $6.621 billion for the six months.
Fee income declined 2% in both periods, reflecting the runoff and disposition of certain businesses.
Net investment income declined primarily because of lower income from fixed maturities and limited partnerships. The six-month annualized investment yield excluding limited partnerships was approximately 4.2%, compared with 4.3% in 2013.
After-tax net unrealized gains in the investment portfolio increased $569 million during the second quarter, primarily because of lower interest rates and tighter credit spreads.
Property and casualty written premiums increased 3% in the quarter and 2% for the six months. P&C Commercial’s combined ratio before catastrophes and prior-year development improved to 91.1% from 93.1% in the quarter and to 89.5% from 93.1% for the six months.
Consumer Markets produced a second-quarter combined ratio of 106.3%, affected by wind, hail, winter-weather and fire losses; its six-month combined ratio was 96.5%.
Group Benefits’ after-tax margin excluding buyouts and realized gains or losses increased to 6.0% in the quarter and 5.5% for the six months.
Mutual Fund assets under management increased 17% year over year to $74.3 billion at June 30, while total assets under management, including annuity mutual fund assets, increased 10% to $98.9 billion.

Financial Position, Debt and Liquidity

Total assets were $254.713 billion at June 30, 2014, compared with $277.884 billion at December 31, 2013. The decline primarily reflected the sale of the Japanese business and the transfer of related assets. Separate account assets were $141.523 billion. Stockholders’ equity increased to $19.428 billion from $18.905 billion, principally because accumulated other comprehensive income improved from a $79 million loss to $1.162 billion of income.

Total investments were $76.239 billion, down from $98.401 billion, primarily because of the HLIKK disposition. Fixed maturities available-for-sale were $60.246 billion.
Cash was $1.512 billion at June 30, versus $1.428 billion at year-end.
Total debt was $6.108 billion, down from $6.544 billion. Long-term debt was $5.819 billion and short-term debt was $289 million.
The company had no outstanding borrowings under its $1.75 billion revolving credit facility and remained in compliance with all covenants. The facility requires minimum consolidated net worth of $14.9 billion and includes debt-to-capitalization limits.
Holding-company liquidity consisted of approximately $1.3 billion of cash, short-term investments and fixed maturities. Operating cash flows were considered adequate for anticipated requirements over the following twelve months.
For the six months, investing activities provided $1.729 billion and financing activities used $2.040 billion. Financing uses included $651 million of share repurchases, $200 million of debt repayment and $134 million of common dividends.

The board subsequently authorized an additional $775 million of share-repurchase capacity, bringing the authorization for 2014–2015 to $2.775 billion. The company also entered into a $525 million accelerated share repurchase agreement in July 2014 and authorized up to $500 million of additional debt reduction by year-end 2014.

Material Changes, Outlook and Unusual Items

The Japanese annuity sale generated $963 million of cash proceeds and a $659 million after-tax disposal loss. The company retained reinsurance exposure to approximately $1.1 billion of Japanese 3Win fixed payout annuities.
The sale reduced life, annuity and disability obligations by approximately 5.6%, or $18 billion, and substantially reduced related investment assets and derivatives.
Property and Casualty Other Operations recorded $249 million of prior-year reserve strengthening in the second quarter, including $212 million for asbestos and $27 million for environmental claims. Net asbestos and environmental reserves totaled approximately $2.1 billion at June 30 and were within management’s estimated range of $1.7 billion to $2.5 billion.
Catastrophe losses were $196 million in the quarter and $282 million for the six months, versus $186 million and $218 million, respectively, in the prior-year periods.
Management expects the annualized investment-income yield excluding limited partnerships to remain broadly consistent with the current 2014 level, subject to portfolio mix and market conditions.
The company expects Talcott Resolution account values and related fee income to decline over time because of surrenders and the runoff of the annuity block. U.S. variable annuity account value was $58.4 billion at June 30, down from $62.6 billion a year earlier.
Restructuring and other costs incurred were $28 million in the first six months. Estimated total restructuring and other costs, including amounts incurred, were $374 million, with substantial completion expected over the following twelve months.

Risks and Contingencies

Results remain sensitive to interest rates, credit spreads, equity markets, volatility, foreign exchange rates and real-estate values. Lower rates can reduce investment income and increase variable-annuity hedging costs; equity declines can increase guarantee obligations and required capital.
Asbestos and environmental liabilities are highly uncertain and could exceed recorded reserves, with potentially material effects on results and liquidity.
Reinsurance recoverables totaled $22.949 billion, including $18.884 billion related to sold businesses. Collection depends on reinsurer performance, although substantial balances from MassMutual and Prudential were secured by assets held in trust.
Derivative agreements with rating-related collateral triggers had approximately $1.0 billion of net liabilities. A one-level downgrade could require approximately $4 million of additional collateral, and a two-level downgrade approximately $24 million.
Moody’s downgraded Hartford Life Insurance Company to Baa2 in March 2014. Fitch announced in July 2014 that it planned to withdraw ratings on the company and subsidiaries for commercial reasons.
The company faces litigation involving mutual fund advisory fees and other insurance-related claims. Management could not reasonably estimate a possible loss range for the mutual fund litigation.
TRIPRA terrorism reinsurance was scheduled to expire at the end of 2014 unless reauthorized, potentially increasing terrorism exposure.

Investor Verification Checklist

Reconcile reported net loss with core earnings and isolate the effects of the HLIKK disposal, discontinued operations, reserve strengthening, catastrophe losses and investment volatility.
Review asbestos and environmental reserve adequacy, the disclosed $1.7 billion–$2.5 billion reserve range and future claim emergence.
Monitor P&C Commercial underwriting improvement versus Consumer Markets’ elevated catastrophe-affected results.
Assess the runoff rate, surrender activity, hedging performance and capital requirements of Talcott Resolution’s variable-annuity block.
Verify holding-company liquidity after the July 2014 dividends, share repurchases, accelerated share repurchase and planned debt reduction.
Track insurer financial-strength ratings, derivative collateral requirements and statutory capital, including the effects of market movements and regulatory changes.