The Hartford Financial Services Group, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2013; filed July 29, 2013. The filing identifies the registrant as The Hartford Financial Services Group, Inc. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP.
Business context
The Hartford provides property and casualty insurance, group benefits, mutual fund services, and legacy life and annuity products. Following its strategic realignment, the Company is focusing on Property & Casualty, Group Benefits, and Mutual Funds, while reducing and managing its Talcott Resolution runoff annuity and life businesses.
- Retirement Plans was sold to MassMutual on January 1, 2013, and Individual Life was sold to Prudential on January 2, 2013.
- The Company announced an agreement to sell Hartford Life International Limited, its U.K. variable annuity business, for approximately $285 million. Closing was subject to regulatory approvals and expected by year-end 2013.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $5.465 billion, up 20% | $14.508 billion, up 20% |
| Net loss | $190 million, versus $101 million loss | $431 million, versus $5 million loss |
| Net loss available to common shareholders per diluted share | $0.42 loss, versus $0.26 loss | $0.99 loss, versus $0.06 loss |
| Loss from continuing operations, net of tax | $64 million loss | $304 million loss |
| Operating cash flow | Not separately provided for the quarter | $408 million, versus $1.236 billion |
- Earned premiums declined 3% in the quarter and 4% year to date, while fee income declined 37% in both periods, primarily reflecting divestitures.
- Net investment income was $2.056 billion in the quarter and $5.474 billion year to date, compared with a $568 million loss and $3.260 billion of income, respectively, in the prior-year periods. The comparison was heavily affected by mark-to-market results on trading equity securities supporting international variable annuities.
- Net realized capital gains were a $648 million loss in the quarter and a $958 million gain year to date. The year-to-date gain included approximately $1.5 billion of gains associated with the Retirement Plans and Individual Life dispositions.
- Core earnings, a non-GAAP measure, were $324 million for the quarter and $781 million year to date, compared with $274 million and $697 million, respectively.
- Comprehensive loss was $1.765 billion for the quarter and $3.200 billion year to date, driven primarily by declines in unrealized securities gains, hedging instruments, and foreign currency translation.
Segment highlights
| Segment | Q2 2013 net income/(loss) | Year-to-date net income/(loss) |
|---|---|---|
| Property & Casualty Commercial | $192 million | $445 million |
| Consumer Markets | $15 million | $92 million |
| Property & Casualty Other Operations | $(71) million | $(50) million |
| Group Benefits | $61 million | $103 million |
| Mutual Funds | $20 million | $38 million |
| Talcott Resolution | $(332) million | $(626) million |
| Corporate | $(75) million | $(433) million |
- Property & Casualty Commercial’s combined ratio improved to 98.4% in the quarter and 96.2% year to date, versus 100.5% and 100.1%.
- Consumer Markets’ combined ratio improved to 101.0% in the quarter and 96.5% year to date, versus 112.6% and 99.8%, primarily because of lower catastrophe losses.
- Group Benefits’ premiums declined 13% in the quarter and 14% year to date, but its after-tax margin excluding buyouts and realized gains improved to 3.9% and 3.6%, respectively.
- Talcott Resolution was adversely affected by variable annuity hedge losses of $820 million in the quarter and $1.029 billion year to date, compared with gains of $611 million and losses of $594 million in the prior-year periods.
Balance sheet, debt, liquidity, and capital
- Total assets were $294.833 billion at June 30, 2013, compared with $298.513 billion at December 31, 2012.
- Total investments were $105.520 billion, including $64.881 billion of available-for-sale fixed maturities and $23.362 billion of trading equity securities.
- Stockholders’ equity declined to $19.013 billion from $22.447 billion, largely because accumulated other comprehensive income fell to $74 million from $2.843 billion.
- Total debt was $6.625 billion, down from $7.126 billion; long-term debt was $6.105 billion. The Company repurchased approximately $800 million of senior notes and issued $300 million of 4.3% senior notes due 2043.
- Cash was $1.740 billion at June 30, 2013. The Company had no commercial paper or borrowings outstanding under its $1.75 billion revolving credit facility and was in compliance with its covenants.
- Holding-company liquidity included approximately $2.2 billion of cash, short-term investments, and fixed maturities. The Company received a $1.2 billion extraordinary dividend from Connecticut life subsidiaries and approximately $340 million from a Vermont captive.
- The Company repurchased 5.2 million common shares for $145 million and 1.1 million warrants for $21 million during the first six months. The authorized equity repurchase program was increased to $1.25 billion, with $1.1 billion remaining at June 30.
- Statutory capital and surplus was $14.693 billion at June 30, 2013, comprising $6.884 billion for U.S. life subsidiaries and $7.809 billion for property and casualty subsidiaries.
Material changes versus the prior comparable period
- Net loss widened year to date primarily because of a $505 million after-tax Talcott Resolution unlock charge, international variable annuity hedge losses, the $102 million after-tax loss on the HLIL sale, and asbestos reserve strengthening.
- The Company recorded a $138 million after-tax loss on debt extinguishment in 2013, compared with $587 million in 2012.
- Deferred policy acquisition costs fell to $2.472 billion from $5.725 billion, reflecting accelerated amortization and write-offs related to the business dispositions and the Japan variable annuity hedge-cost assumption change.
- Reinsurance recoverables increased to $22.720 billion from $4.666 billion, primarily because of the reinsurance transactions supporting the sold businesses. Recoverables from MassMutual and Prudential were $9.3 billion and $9.4 billion, respectively.
- Gross unrealized losses on available-for-sale securities increased to $1.322 billion from $1.062 billion, primarily because of higher interest rates and wider credit spreads.
Guidance, outlook, risks, and unusual items
- Management expected 2013 Property & Casualty Commercial written premiums to be flat to low-single-digit growth, with improvement in the combined ratio before catastrophes and prior-year development.
- Consumer Markets written premiums were expected to be flat to slightly higher, with a flat to slightly improved underlying combined ratio.
- Group Benefits premiums were expected to decline because of pricing discipline and the loss of a large account, while disability results were expected to improve.
- Management estimated that lower reinvestment rates would reduce 2013 annual net investment income by approximately $10 million to $15 million after tax.
- Talcott Resolution account values and fee income were expected to decline over time as the legacy annuity block experiences surrenders and other runoff actions. Japan variable annuity surrender rates increased materially, reducing guarantee exposure but also reducing fee income.
- The Company expected approximately $332 million of total pre-tax restructuring and other costs, of which approximately $261 million had been incurred by June 30, 2013.
- Net asbestos and environmental reserves were strengthened by $130 million and $10 million, respectively, in the second quarter. Net asbestos and environmental reserves totaled approximately $2.115 billion and were estimated within a range of $1.7 billion to $2.5 billion.
- Legal proceedings include a mutual fund advisory-fee lawsuit for which management could not reasonably estimate a loss or range of loss. Asbestos and environmental claims remain subject to potentially material adverse development.
- A downgrade of Hartford Life Insurance Company to BBB+ by S&P affected one derivative counterparty relationship. Derivative contracts with rating-related collateral provisions had net liabilities of approximately $1.1 billion and could require additional collateral of approximately $30 million after a one-level downgrade or $53 million after a two-level downgrade.
- Key market risks include interest rates, equity markets, Japanese yen movements, volatility, credit spreads, reinsurance collectability, catastrophe losses, long-tail claims, and policyholder behavior.
Investor verification checklist
- Reconcile reported net loss with core earnings and quantify the effect of variable annuity hedging, unlocks, divestitures, and discontinued operations.
- Review the sustainability of Property & Casualty underwriting improvement, including catastrophe experience and prior-year reserve development.
- Assess the adequacy and volatility of asbestos and environmental reserves and the stated $1.7 billion to $2.5 billion reserve range.
- Evaluate the collectability and collateralization of the $18.7 billion of MassMutual and Prudential reinsurance recoverables.
- Monitor debt reduction, rating actions, derivative collateral requirements, and compliance with the revolving credit facility covenants.
- Assess the impact of rising surrender rates and continued runoff on Talcott Resolution account values, fee income, capital, and liquidity.
- Review unrealized investment losses, credit impairments, Japanese government exposure, and sensitivity to further increases in interest rates or widening credit spreads.