HARTFORD INSURANCE GROUP, INC. quarterly report, Q1 FY2010

Business Context and Reporting Period

This unaudited Form 10-Q covers The Hartford Financial Services Group, Inc. for the three months ended March 31, 2010, with comparisons to the first quarter of 2009 and December 31, 2009. The company provides life insurance, annuities, retirement and investment products, and property and casualty insurance. The filing was reviewed by Deloitte & Touche LLP, not audited.

Key Financial Metrics

Metric	Q1 2010	Q1 2009 / Prior Period
Total revenues	$6.319 billion	$5.394 billion
Income before income taxes	$535 million	$(2.017) billion
Net income	$319 million	$(1.209) billion
Net loss available to common shareholders	$(164) million	$(1.209) billion
Diluted loss per common share	$(0.42)	$(3.77)
Net cash from operating activities	$488 million	$1.010 billion
Cash at period end	$2.079 billion	$1.851 billion
Total assets	$317.282 billion	$307.717 billion at December 31, 2009
Total stockholders’ equity	$17.840 billion	$17.865 billion at December 31, 2009
Total debt	$6.872 billion	$5.839 billion at December 31, 2009
Available liquidity	$12.873 billion	Prior comparable value not provided

Reported net income was approximately 5.0% of revenue and pretax income was approximately 8.5% of revenue. These calculated margins were heavily affected by investment-market results, derivative valuations, and the prior-year DAC unlock charge.

Earned premiums declined 8% to $3.527 billion, while fee income increased 2% to $1.189 billion.
Net investment income rose to $1.761 billion from $196 million, primarily because trading equity securities supporting International variable annuities generated $701 million versus a $724 million loss in Q1 2009.
Net realized capital losses were $276 million, compared with $84 million of gains in Q1 2009. Net OTTI losses recognized in earnings were $152 million.
Life generated $186 million of net income versus a $1.258 billion loss; Property & Casualty generated $257 million versus $112 million.
Property & Casualty ongoing operations produced $201 million of underwriting income. The combined ratio was 91.7, compared with 89.9 in Q1 2009.
Total investments were $127.351 billion, including $75.584 billion of fixed maturities and $32.053 billion of trading equity securities.

Material Changes Versus the Prior Comparable Period

The principal improvement was the change from a $1.209 billion consolidated net loss to $319 million of net income. Management attributed much of the change to a $1.494 billion after-tax DAC unlock charge in Q1 2009 versus an $85 million after-tax unlock benefit in Q1 2010.
Net income remained negative for common shareholders because of $483 million of preferred stock dividends and accelerated accretion related to the Treasury preferred-stock redemption.
Life segment results improved by $1.444 billion, with every major Life segment improving except Group Benefits, which declined to $51 million from $69 million, and Institutional, which remained loss-making at $(88) million.
Property & Casualty ongoing underwriting results declined $53 million. Middle Market underwriting income fell to $12 million from $69 million, while Specialty Commercial improved to $52 million from $23 million.
The company issued $1.1 billion of senior notes, approximately 59.6 million common shares for net proceeds of $1.6 billion, and $556 million of Series F mandatory convertible preferred stock.
On March 31, 2010, the company repurchased all $3.4 billion of Series E preferred stock held by the U.S. Treasury. Treasury retained warrants for approximately 52 million common shares at a $9.79 exercise price.
Total debt increased 18% from year-end, while total stockholders’ equity was essentially unchanged. Accumulated other comprehensive loss improved from $(3.312) billion to $(2.377) billion, primarily because of lower unrealized investment losses.
The company adopted new variable-interest-entity consolidation guidance, increasing assets by $432 million, liabilities by $406 million, and opening retained earnings by $26 million.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management expected lower U.S. variable annuity sales to continue through 2010 and fixed annuity sales to remain pressured until interest rates rise. Continued equity-market volatility or lower interest rates could increase GMWB hedging costs and earnings volatility.
International annuity sales in Japan and Europe had been suspended, with restructuring focused on profitability and capital efficiency. The company expected to complete the sale of its Brazil joint venture interest in Q2 2010.
Management expected 2010 Personal Lines written premiums to be relatively flat and full-year combined ratios to be approximately 92.0 before catastrophes and prior accident-year development. Small Commercial, Middle Market, and Specialty Commercial full-year combined ratios were expected to be higher than 2009 levels.
Group Benefits sales declined 26% in Q1, and management expected lower full-year sales because of competitive pricing and disciplined underwriting. Disability incidence and unfavorable morbidity were being monitored.
The company recorded $112 million of additional mortgage-loan valuation allowances and $152 million of net OTTI losses in earnings. Commercial real estate, CMBS, CRE CDOs, RMBS, financial-services securities, and other structured investments remain significant exposure areas.
AFS securities had $5.646 billion of gross unrealized losses at March 31, 2010, including $4.925 billion on securities in a loss position for at least 12 months. Management stated that it did not intend, and did not expect to be required, to sell these securities before recovery.
Asbestos and environmental reserves were $2.13 billion net of reinsurance, within a reported estimated range of $1.67 billion to $2.44 billion. Management warned that future developments could materially affect results, financial condition, or liquidity.
A proposed structured-settlement class-action settlement of $72.5 million was accrued in Q1 and remained subject to final documentation and court approval. Other litigation is described as not expected to be material, although adverse outcomes could materially affect a particular period.
Derivative agreements with rating-related collateral provisions had $650 million of net liabilities and $613 million of posted collateral. A one-level downgrade by Moody’s or S&P could require approximately $35 million of additional collateral; a two-level downgrade could require approximately $57 million.
The company had $1.9 billion available under its revolving credit facility and no commercial paper outstanding. It expected approximately $515 million of interest payments, $275 million of senior-note maturities, and approximately $90 million of common dividends over the next 12 months.
Statutory surplus was estimated at $15.150 billion at March 31, 2010, compared with $14.651 billion at year-end. Ratings outlooks remained negative from Fitch and S&P, while A.M. Best moved certain outlooks to stable.

Important Facts for Investors to Verify

Whether earnings improvement remains after excluding the unusually favorable 2010 DAC unlock and the unusually adverse 2009 unlock.
The sustainability of Life earnings given variable-annuity guarantee exposure, hedging volatility, market sensitivity, and substantial Level 3 valuations.
Future OTTI charges, mortgage-loan allowances, commercial real estate performance, and recovery assumptions for unrealized investment losses.
Actual statutory capital, risk-based-capital ratios, insurer dividends available to the holding company, and the effect of credit-rating changes.
The final outcome and cash cost of the $72.5 million structured-settlement settlement and other pending litigation.
Whether Property & Casualty pricing and underwriting actions offset declining commercial premiums, higher expense ratios, catastrophe losses, and potential unfavorable reserve development.
Potential dilution from the Series F mandatory convertible preferred stock and Treasury and Allianz warrants.
The impact of pending tax, insurance, derivatives, financial-sector, and systemic-risk regulation on capital requirements, taxes, operating costs, and product demand.