Business Context and Reporting Period
The Hartford Financial Services Group, Inc. Form 10-Q covers the three and nine months ended September 30, 2013, with comparisons to the corresponding 2012 periods and to December 31, 2012. The filing describes a strategic realignment toward Property & Casualty, Group Benefits, and Mutual Funds, while placing Individual Annuity and other legacy businesses into runoff or sale processes. The filing was reviewed by Deloitte & Touche and is unaudited.
During 2013, the Company completed sales of Retirement Plans to MassMutual and Individual Life to Prudential, and classified its U.K. variable annuity business as held for sale pending the planned sale of Hartford Life International Limited.
Key Financial Metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenues | $5,641 million | $6,332 million | $20,149 million | $18,422 million |
| Income from continuing operations, net of tax | $298 million | $(7) million | $(6) million | $(55) million |
| Net income (loss) | $293 million | $13 million | $(138) million | $8 million |
| Net income (loss) available to common shareholders | $293 million | $3 million | $(148) million | $(23) million |
| Diluted earnings per common share | $0.60 | $0.01 | $(0.33) | $(0.05) |
| Core earnings | $505 million | $433 million | $1,286 million | $1,130 million |
| Operating cash flow | Not separately provided | Not separately provided | $903 million | $2,212 million |
Q3 continuing-operations earnings benefited from lower expenses, improved Property & Casualty results, and the absence of the prior-year Individual Life disposition charge. Reported results remained highly affected by variable-annuity hedging, policyholder behavior assumptions, business dispositions, and other realized gains and losses.
Financial Condition, Liquidity, and Capital
- Total assets were $283.9 billion at September 30, 2013, compared with $298.5 billion at year-end 2012.
- Total investments were $103.1 billion, down from $134.3 billion, primarily because $17.3 billion of invested assets transferred with the Retirement Plans and Individual Life dispositions, assets classified as held for sale, and lower market values.
- Stockholders’ equity was $18.9 billion, down from $22.4 billion. Accumulated other comprehensive income declined from $2.8 billion to $(17) million, primarily reflecting realized gains reclassified in connection with the dispositions and market-related losses.
- Total debt was $6.3 billion, down from $7.1 billion; long-term debt was $6.1 billion. Debt-to-capitalization was 25%, compared with 24% at December 31, 2012.
- Cash was $1.4 billion at September 30, 2013, compared with $2.4 billion at year-end 2012. Nine-month investing cash flow was positive $1.7 billion, while financing cash flow was negative $3.5 billion.
- The Company had $1.75 billion of unused revolving credit capacity through January 2016 and no borrowings under the facility. It was in compliance with all financial covenants.
- Holding-company liquidity included approximately $1.8 billion of cash, short-term investments, and fixed maturities. The Company also received a $1.2 billion extraordinary dividend from Connecticut life subsidiaries and $711 million of dividends from Property & Casualty subsidiaries during the first nine months.
- The Company repurchased 12.7 million common shares for $375 million and 1.6 million warrants for $33 million during the first nine months. The authorized equity repurchase program totaled $1.25 billion, with $842 million remaining at September 30.
Material Changes Versus the Prior Comparable Period
- Q3 net income increased to $293 million from $13 million; nine-month net income declined to a $138 million loss from $8 million of income.
- Core earnings increased 17% in Q3 and 14% for the nine-month period, to $505 million and $1.286 billion, respectively.
- Earned premiums declined 2% in Q3 and 4% for nine months, while fee income declined 36% and 37%, respectively, reflecting the business sales and runoff activities.
- Total net investment income increased 2% in Q3 and 46% for nine months, largely because of gains and income from trading equity securities supporting international variable annuities. Income from fixed-income and other securities declined 21% in both periods.
- Net realized capital gains were a $162 million loss in Q3 versus a $95 million gain in 2012. For nine months, net realized gains were $796 million versus a $266 million loss, including $1.575 billion of gains associated with the business dispositions.
- Property & Casualty Commercial net income increased 6% in Q3 and 23% for nine months. Its combined ratio improved to 98.1% from 99.1% in Q3 and to 96.9% from 99.8% for nine months.
- Consumer Markets net income declined 28% in Q3 but increased 5% for nine months. Its combined ratio worsened to 91.9% from 87.9% in Q3 but improved to 94.9% from 95.8% for nine months.
- Group Benefits net income was broadly flat in Q3 and increased 61% for nine months, supported by improved loss ratios and claims experience despite lower premiums.
- Talcott Resolution generated $7 million of Q3 net income versus a $121 million loss, but reported a $619 million nine-month loss versus $149 million of income, primarily due to large DAC and other assumption unlock charges and international hedging losses.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2013 Property & Casualty Commercial written-premium growth of flat to low single digits and improvement in the combined ratio before catastrophes and prior-year development.
- Consumer Markets written premiums were expected to increase approximately 2%, with a flat to slightly improved full-year combined ratio before catastrophes and prior-year development.
- Group Benefits premiums were expected to decline because of pricing discipline and the loss of a large account, while disability profitability was expected to improve.
- Talcott Resolution is intended to reduce the size and risk of the legacy variable-annuity portfolio. Management expected account values and fee income to decline over time, while international hedging would continue to create significant earnings volatility.
- Nine-month 2013 included an $881 million pretax DAC and related unlock charge, including an $887 million charge from increased Japan variable-annuity hedging costs. The Q3 unlock charge was $104 million pretax, or $67 million after tax.
- The Company strengthened net asbestos reserves by $130 million and environmental reserves by $10 million in 2013. Net asbestos and environmental reserves were approximately $2.1 billion at September 30, within a disclosed estimated range of $1.7 billion to $2.4 billion.
- Current-year catastrophe losses were $66 million in Q3 and $284 million for nine months, compared with $10 million and $371 million in the 2012 periods.
- The Company’s AFS portfolio had $1.3 billion of gross unrealized losses at September 30, up from $1.1 billion at year-end, primarily because of higher interest rates. Management concluded that no additional impairments were required for securities classified as temporarily depressed.
- Reinsurance recoverables increased to $23.1 billion from $4.7 billion, primarily from the MassMutual and Prudential transactions. Recoverables from MassMutual and Prudential were $9.5 billion and $9.6 billion, respectively, secured by assets held in trust.
- Derivative agreements with rating triggers had $1.1 billion of net liability exposure and $1.3 billion of collateral posted. A one-notch downgrade could require approximately $6 million of additional collateral; a two-notch downgrade could require approximately $27 million.
- Standard & Poor’s downgraded Hartford Life Insurance Company’s financial strength rating to BBB+ in June 2013. One counterparty obtained a termination right, although management expected to renegotiate the trigger without disrupting hedging programs.
- The filing identifies risks from interest rates, equity markets, foreign currency movements, credit spreads, variable-annuity policyholder behavior, reinsurance collectability, catastrophe losses, asbestos and environmental claims, litigation, regulatory developments, rating downgrades, valuation assumptions, and cybersecurity or operational events.
Most Important Facts for Investors to Verify
- Reconcile reported net income with core earnings and isolate the effects of unlock charges, variable-annuity hedge results, dispositions, debt extinguishment, restructuring, and discontinued operations.
- Assess the sustainability of Property & Casualty Commercial underwriting improvement and the deterioration in Q3 Consumer Markets results.
- Review the adequacy and sensitivity of asbestos, environmental, long-tail, and other Property & Casualty reserves.
- Evaluate the credit quality, interest-rate sensitivity, unrealized losses, and impairment risk of the investment portfolio.
- Confirm the collectability and collateral coverage of the $19.1 billion of MassMutual and Prudential reinsurance recoverables.
- Monitor Talcott Resolution runoff, surrender rates, Japan variable-annuity guarantees, hedging costs, and future DAC recoverability.
- Verify debt reduction, share repurchases, dividend capacity, statutory capital, rating actions, and the effect of any downgrade-related collateral requirements.
- Review the unresolved Mutual Funds Litigation, for which management stated that a loss or range of loss could not reasonably be estimated.