Business Context and Reporting Period
The Hartford Financial Services Group, Inc. filed this Form 10-Q for the three months ended March 31, 2013. The company provides property and casualty insurance, group benefits, mutual fund and legacy life and annuity products. Its strategic realignment is focused on Property & Casualty, Group Benefits and Mutual Funds, while Talcott Resolution manages runoff annuity and other legacy businesses.
In January 2013, the company completed the sales of its Retirement Plans business to MassMutual and Individual Life business to Prudential. Both transactions were structured primarily as reinsurance arrangements, and the company retained primary liability to policyholders.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenues | $9,178 million | $7,661 million | 20% |
| Earned premiums | $3,252 million | $3,442 million | (6%) |
| Fee income | $707 million | $1,134 million | (38%) |
| Net investment income | $3,556 million | $3,936 million | (10%) |
| Net realized capital gains | $1,595 million | $(910) million | Improved by $2,505 million |
| Income from continuing operations, net of tax | $(241) million | $97 million | Declined $338 million |
| Net income available to common shareholders | $(251) million | $86 million | Declined $337 million |
| Diluted EPS | $(0.58) | $0.18 | Declined |
| Operating cash flow | $186 million | $1,140 million | Declined $954 million |
| Total assets | $297.0 billion | $298.5 billion at Dec. 31, 2012 | Down $1.5 billion |
| Stockholders’ equity | $20.9 billion | $22.4 billion at Dec. 31, 2012 | Down $1.5 billion |
Comprehensive loss was $1.435 billion, compared with comprehensive income of $173 million in the prior-year quarter, primarily reflecting an $889 million decline in unrealized securities gains, a $108 million decline in cash-flow hedging instruments and a $220 million adverse foreign-currency translation adjustment.
Segment Results
- Property & Casualty Commercial net income increased to $253 million from $189 million. The combined ratio improved to 94.0% from 99.7%, driven by lower catastrophe losses and improved current accident-year results.
- Consumer Markets net income declined to $77 million from $108 million. The combined ratio worsened to 92.0% from 87.0%, mainly because the prior-year period benefited from favorable reserve development.
- Group Benefits net income increased to $42 million from $18 million, with the after-tax margin excluding buyouts and realized gains improving to 3.2% from 0.5%.
- Mutual Funds net income declined to $18 million from $20 million despite total assets under management remaining approximately stable at $92.4 billion.
- Talcott Resolution reported a net loss of $294 million versus a $170 million loss. The deterioration primarily reflected a $541 million after-tax Unlock charge, compared with a $214 million benefit in 2012.
- Corporate reported a net loss of $358 million versus $96 million, primarily due to a $138 million after-tax loss on extinguishment of debt and higher restructuring-related costs.
Material Changes Versus the Prior Comparable Period
- Revenue increased because Q1 2013 included $1.574 billion of net realized gains related to the Retirement Plans and Individual Life dispositions. These gains were substantially offset by $1.574 billion of reinsurance losses on dispositions before tax.
- The company recognized a $541 million after-tax Unlock charge, principally from higher projected costs associated with expanding the Japan variable annuity hedging program. The International Annuity DAC balance was fully amortized as of March 31, 2013.
- Variable annuity hedge-program losses improved to $230 million from $1.223 billion, although international program losses remained $192 million.
- Deferred policy acquisition costs and present value of future profits declined to $2.431 billion from $5.725 billion at December 31, 2012, reflecting business-disposition amortization and the Unlock charge.
- Total debt declined to $6.327 billion from $7.126 billion after the company repurchased approximately $800 million of senior notes. Total debt-to-capitalization improved to 23% from 24%.
- The company repurchased 1.8 million common shares for $45 million and 200,000 warrants for $3 million during the quarter. The board authorized a $500 million equity repurchase program through December 31, 2014.
- Separate account assets increased to $145.2 billion from $141.6 billion, while total investments declined to $114.8 billion from $134.3 billion, primarily because $17.3 billion of invested assets were transferred in connection with the business sales.
Guidance, Outlook, Risks and Unusual Items
- For 2013, management expects Property & Casualty Commercial written premium growth to be flat to low single digit and expects the combined ratio before catastrophes and prior accident-year development to improve.
- Consumer Markets written premiums are expected to be flat to slightly higher, with the full-year combined ratio before catastrophes and prior accident-year development expected to be broadly flat.
- Group Benefits premiums are expected to decline because of pricing discipline and the loss of a large account, but management expects disability results and profitability to improve.
- Talcott Resolution account values and earnings are expected to decline over time as the legacy annuity book runs off. Management expects international variable annuity hedging to remain a significant source of earnings volatility.
- Management expects lower reinvestment rates to reduce full-year 2013 net investment income by approximately $10 million to $15 million after tax.
- Asbestos and environmental net reserves were $2.03 billion at March 31, 2013, within an estimated range of $1.6 billion to $2.4 billion. The annual reserve studies were scheduled for completion in the second quarter of 2013, and adverse developments could materially affect results, liquidity and financial condition.
- Reinsurance recoverables increased to $22.4 billion, including $9.2 billion from MassMutual and $9.1 billion from Prudential. Trust assets securing these balances were $8.8 billion and $6.5 billion, respectively; collection and reinsurer-credit risk remain material.
- A downgrade of one rating level could require approximately $14 million of additional derivative collateral, while a two-level downgrade could require approximately $30 million. Moody’s downgraded Hartford Life and Annuity Insurance Company to Baa2 in February 2013, affecting seven derivative counterparty relationships.
- The company reported adequate liquidity for anticipated needs over the next twelve months. It held $2.1 billion of cash, short-term investments and fixed maturities at the holding company, had no commercial paper outstanding and had no borrowings under its $1.75 billion revolving credit facility.
- Statutory capital and surplus increased to $15.5 billion from $14.1 billion at December 31, 2012, including $7.6 billion for U.S. life subsidiaries and $7.9 billion for property and casualty subsidiaries.
Important Facts for Investors to Verify
- Assess recurring earnings excluding the $1.5 billion of disposition-related realized gains, the offsetting reinsurance losses, the $541 million after-tax Unlock charge and the $138 million after-tax debt-extinguishment loss.
- Review the sustainability of Property & Casualty underwriting improvement, including catastrophe experience, commercial auto and workers’ compensation reserve development, and Consumer Markets’ auto loss trends.
- Monitor the runoff of Talcott Resolution, annuity surrenders, Japan currency and equity-market exposure, hedging effectiveness and future DAC or reserve Unlocks.
- Evaluate the credit quality and liquidity of the investment portfolio, including $842 million of gross unrealized losses, structured securities, financial-sector exposure and the low-interest-rate reinvestment outlook.
- Verify the collectability and collateral coverage of MassMutual and Prudential reinsurance recoverables and the company’s continuing primary policyholder obligations under the reinsurance arrangements.
- Track ratings, derivative collateral requirements, statutory capital, dividend restrictions and the company’s execution of its debt-reduction and share-repurchase plans.
- Review unresolved mutual-fund fee litigation, asbestos and environmental reserve uncertainty, tax-law proposals affecting the dividends-received deduction, and other regulatory or legal contingencies.