Business Context and Reporting Period
The filing is The Hartford Financial Services Group, Inc.'s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The company provides property and casualty insurance, life insurance, annuities, retirement plans, mutual funds and related financial services, primarily in the United States, while administering previously sold business in Japan and the United Kingdom.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $4.520 billion, down 32% | $16.221 billion, up 1% |
| Earned premiums | $3.518 billion, approximately flat | $10.582 billion, up 1% |
| Fee income | $1.192 billion, up 2% | $3.620 billion, up 3% |
| Net investment income | $(828) million | $1.590 billion |
| Net realized capital gains | $575 million | $241 million |
| Net income | Approximately zero | $535 million, down 50% |
| Net income available to common shareholders | $(10) million | $504 million |
| Diluted earnings per common share | $(0.02) | $1.05 |
| Operating cash flow | Not separately provided for the quarter | $1.624 billion, versus $2.245 billion |
Quarterly results were heavily affected by a $1.890 billion loss in trading equity investment income, largely offset by corresponding credits to international variable-annuity policyholders, and by higher deferred policy acquisition cost amortization. Net realized gains included significant variable-annuity hedging gains.
At September 30, 2011, total assets were $305.598 billion, stockholders' equity was $22.781 billion, cash was $2.589 billion, short-term debt was $400 million and long-term debt was $6.217 billion. Total debt was $6.617 billion, or 23% of capitalization including accumulated other comprehensive income. Accumulated other comprehensive income was $1.065 billion, compared with a $1.001 billion loss at December 31, 2010.
Property and casualty underwriting weakened. The Property and Casualty Commercial combined ratio was 104.8% for the quarter and 102.8% for the nine months, compared with 84.9% and 88.0% in the prior-year periods. Consumer Markets' combined ratio was 106.8% for the quarter and 105.0% for the nine months, compared with 94.1% and 98.5%.
Material Changes Versus the Prior Comparable Period
- Third-quarter net income declined from $666 million to approximately zero; nine-month net income declined from $1.061 billion to $535 million.
- The company recorded an after-tax Unlock charge of $516 million in the quarter and $531 million for the nine months, compared with an after-tax benefit of $193 million and $48 million, respectively, in 2010. The charges reflected lower equity markets, updated policyholder behavior assumptions and costs associated with the Japan hedging strategy.
- Current accident-year catastrophe losses increased to $134 million after tax for the quarter and $475 million for the nine months, primarily from Hurricane Irene, thunderstorms, tornadoes and winter storms.
- Net asbestos reserves were strengthened by $189 million after tax during the nine months, and environmental reserves were strengthened by $12 million after tax. Net asbestos and environmental reserves totaled $2.28 billion at September 30, 2011.
- Commercial Markets net income declined to $77 million for the quarter and $577 million for the nine months. Consumer Markets reported losses of $16 million and $80 million, respectively. Wealth Management net income was $38 million for the quarter and $517 million for the nine months.
- The company recorded $85 million of income from discontinued operations for the nine months, including a $150 million after-tax gain on the sale of Specialty Risk Services, partly offset by a $74 million after-tax loss related to the Federal Trust Corporation divestiture.
- The company released $86 million of deferred-tax-asset valuation allowance during the second quarter based on additional tax-planning strategies and recorded a $52 million tax benefit from resolving an IRS dividends-received-deduction matter.
Guidance, Outlook, Risks and Unusual Items
- Management expects Property and Casualty Commercial full-year 2011 written-premium growth of mid- to high-single digits. It expects the full-year combined ratio before catastrophes and prior-year development to exceed the 93.4% recorded in 2010 because loss costs are expected to outpace pricing increases.
- Consumer Markets written premiums are expected to decline in 2011 as the company raises prices, non-renews certain policies and shifts toward preferred business. Management expects underlying profitability to improve, although weather-related claims remain elevated.
- Management continues to emphasize growth in Commercial Markets, Consumer Markets and Wealth Management, including new retirement and annuity products and expanded distribution.
- Low interest rates could reduce investment income, compress margins, increase pension expense and raise hedging costs. Equity-market declines can reduce fee income, increase guaranteed-benefit liabilities and accelerate DAC amortization.
- Variable-annuity guarantees remain a major source of market and model risk. At September 30, 2011, 56% of unreinsured U.S. GMWB contracts were in the money, with retained net amount at risk of $2.5 billion; Japan GMDB and GMIB exposures were also sensitive to equity markets and yen appreciation.
- Asbestos and environmental reserves are subject to substantial uncertainty. Management estimated a net reserve range of $1.80 billion to $2.63 billion, compared with recorded net reserves of $2.28 billion, excluding covariance.
- The holding company had approximately $2.2 billion of cash, fixed maturities and short-term investments available for liquidity. Expected next-twelve-month requirements included approximately $490 million of interest, $175 million of common dividends, $42 million of preferred dividends, a $100 million expected captive-insurance contribution and a $400 million senior-note maturity, which was repaid on October 17, 2011.
- The company had $3.9 billion of unused commercial paper and revolving-credit capacity and was in compliance with its covenants. A downgrade could require additional derivative collateral of approximately $22 million for a one-level downgrade or $33 million for a two-level downgrade.
- The company intends to adopt revised insurance acquisition-cost guidance retrospectively on January 1, 2012, which it estimated would reduce December 31, 2010 stockholders' equity by $1.4 billion to $1.7 billion after tax.
Most Important Facts for Investors to Verify
- Whether catastrophe losses, asbestos and environmental reserve strengthening, and unfavorable underwriting trends persist into subsequent periods.
- The sensitivity of earnings, statutory capital and liquidity to equity markets, interest rates, credit spreads, foreign exchange movements and policyholder behavior.
- The adequacy and recoverability of DAC and other gross-profit-based assets after the planned accounting change and future Unlocks.
- The carrying value and credit performance of commercial real estate, structured securities, financial-services investments and securities with long-duration unrealized losses.
- The actual statutory surplus, risk-based-capital metrics and financial-strength ratings of the insurance subsidiaries.
- The outcome of mutual-fund litigation, asbestos and environmental claims, derivative collateral triggers and other contingencies.
- Execution of the company's profitability initiatives, including pricing actions, product changes, distribution expansion and capital deployment or repurchase plans.