Business Context and Reporting Period
The Hartford Financial Services Group, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2022. The company provides commercial and personal property and casualty insurance, group life and disability products, and mutual fund and ETF services. Reporting segments are Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds, and Corporate.
The filing was reviewed by Deloitte & Touche LLP and was not audited. The company completed the sale of its Continental Europe Operations on December 29, 2021, which affects certain period comparisons.
Financial Metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Earned premiums | $4.910 billion | $4.565 billion | $14.371 billion | $13.368 billion |
| Total revenues | $5.580 billion | $5.686 billion | $16.346 billion | $16.574 billion |
| Net investment income | $487 million | $650 million | $1.537 billion | $1.740 billion |
| Net realized gains (losses) | $(166) million | $70 million | $(649) million | $297 million |
| Net income | $339 million | $482 million | $1.226 billion | $1.636 billion |
| Net income available to common stockholders | $333 million | $476 million | $1.210 billion | $1.620 billion |
| Diluted EPS | $1.02 | $1.36 | $3.65 | $4.54 |
| Operating cash flow | Not separately provided | Not separately provided | $2.924 billion | $2.889 billion |
Q3 net income available to common stockholders declined 30%, while nine-month earnings declined 25%. Core earnings, a non-GAAP measure, increased to $471 million in Q3 from $442 million and to $1.746 billion for nine months from $1.481 billion.
Q3 net margin was approximately 6.1% based on net income and total revenues; nine-month net margin was approximately 7.5%. The filing emphasizes segment and non-GAAP ratios rather than a consolidated operating margin.
Segment Performance
- Commercial Lines: Q3 net income was $286 million versus $357 million; nine-month net income was $1.058 billion versus $1.055 billion. Q3 earned premiums increased 10%. The combined ratio improved to 94.3% from 101.2%; the underlying combined ratio increased to 89.3% from 87.2%.
- Personal Lines: Q3 net loss was $36 million versus net income of $51 million; nine-month net income was $47 million versus $304 million. The combined ratio deteriorated to 109.6% from 98.7% in Q3 and to 100.7% from 89.6% for nine months.
- Group Benefits: Q3 net income increased to $86 million from $28 million, primarily due to lower excess mortality losses. Nine-month net income declined to $184 million from $207 million. The nine-month total loss ratio excluding buyouts was 74.9%, compared with 80.1%.
- Hartford Funds: Q3 net income declined to $41 million from $56 million; nine-month net income declined to $117 million from $155 million. Ending assets under management were $117.827 billion, down 23% year over year, reflecting market declines and net outflows.
Balance Sheet, Debt, Liquidity, and Capital
| Metric | September 30, 2022 | December 31, 2021 |
|---|---|---|
| Total assets | $71.801 billion | $76.578 billion |
| Total investments | $50.661 billion | $57.749 billion |
| Long-term debt | $4.356 billion | $4.944 billion |
| Total stockholders’ equity | $12.955 billion | $17.843 billion |
| AOCI, net of tax | $(4.414) billion | $172 million |
| Cash and restricted cash | $285 million | $337 million |
- Operating cash flow was $2.924 billion; investing activities used $705 million and financing activities used $2.253 billion.
- The holding company had approximately $1.1 billion of fixed maturities, short-term investments, investment sales receivable, and cash. Its $750 million revolving credit facility and $2.0 billion intercompany liquidity agreement had no borrowings outstanding.
- The company redeemed $600 million of 7.875% junior subordinated debentures in April 2022 and recorded a $9 million pretax extinguishment loss.
- The company repurchased $1.2 billion of common stock, or approximately 17 million shares, during the first nine months. It had $3.1 billion remaining under repurchase authorizations at September 30, 2022.
- Debt to stockholders’ equity increased to 34% from 28%, and debt to capitalization increased to 25% from 22%, mainly because equity declined from unrealized investment losses and share repurchases.
Material Changes Versus the Prior Comparable Period
- Earned premiums increased 8% in both Q3 and the first nine months, led by Commercial Lines and Group Benefits.
- Net investment income declined 25% in Q3 and 12% for nine months, primarily because of lower returns from limited partnerships and alternative investments; higher fixed-income yields provided partial offset.
- Net realized investment results changed from gains of $70 million in Q3 2021 and $297 million for nine months to losses of $166 million and $649 million, respectively. The change reflected equity-market declines, higher interest rates, wider credit spreads, and losses on fixed-maturity sales.
- OCI declined by $1.152 billion in Q3 and $4.586 billion for nine months, primarily due to unrealized losses on available-for-sale fixed maturities. Gross unrealized losses on those securities reached $3.946 billion at September 30, 2022, versus $144 million at year-end 2021.
- Commercial Lines underwriting improved because of favorable prior-year reserve development, premium growth, and lower catastrophe losses, although current accident-year loss ratios before catastrophes increased in Q3.
- Personal Lines underwriting weakened materially because of higher automobile and homeowners claim severity, higher catastrophe losses, and less favorable prior-year reserve development.
- Group Benefits benefited from lower excess mortality losses. Excess mortality losses were $26 million in Q3 2022 versus $212 million in Q3 2021, and $117 million for nine months versus $422 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2022 annualized net investment income yield, excluding limited partnerships and alternative investments, to be consistent with or slightly above the 2021 portfolio yield because of the rising-rate environment. The filing does not provide a consolidated earnings forecast.
- The Hartford Next transformation program is expected to generate annual expense savings of approximately $560 million in 2022 and $625 million in 2023 relative to 2019. Total program costs are expected to be approximately $393 million, with $273 million incurred through September 30, 2022.
- Hurricane Ian and other weather events generated $293 million of Q3 catastrophe losses and $514 million for nine months, net of reinsurance. Ukraine-related catastrophe losses totaled $27 million for nine months, and direct Russian bond exposure had an amortized cost of $12 million and fair value of $8 million.
- The company agreed to pay $787 million before tax under a settlement concerning sexual abuse claims associated with Boy Scouts of America policies, subject to remaining court and other conditions. The bankruptcy court approved the plan, but civil district court approval remained pending at the filing date.
- The company reported $455 million of net run-off asbestos and environmental reserves and a $365 million deferred gain related to its adverse development cover with National Indemnity Company. The cover had $485 million of remaining limit at September 30, 2022.
- More than 300 COVID-19 business-income insurance lawsuits had been filed, including more than 60 purported class actions. Management could not reasonably estimate any potential loss; adverse outcomes could materially affect operating results or liquidity.
- Principal risks include catastrophe and weather losses, inflation, unfavorable reserve development, asbestos and environmental claims, reinsurer or counterparty failure, investment-market declines, interest-rate and credit-spread volatility, reduced assets under management, litigation, regulatory changes, cyber incidents, and rating downgrades.
Most Important Facts for Investors to Verify
- Whether the large unrealized fixed-maturity losses remain primarily interest-rate driven and recover as securities mature, or develop into credit losses or forced-sale losses.
- Personal Lines pricing adequacy and whether the combined ratio can return below 100% amid elevated automobile and homeowners claim severity and catastrophe activity.
- Commercial Lines current accident-year loss trends, including property, workers’ compensation, and commercial automobile exposures.
- The final outcome and cash timing of the $787 million BSA settlement and any further asbestos, environmental, or other long-tail reserve development.
- The sustainability of Group Benefits’ improved excess-mortality results and the effect of disability incidence, recoveries, and reserve assumptions.
- Hartford Funds’ asset levels, net flows, and fee revenue amid market volatility and continued outflows.
- The effect of continued share repurchases and dividends on capital, debt ratios, insurance subsidiary surplus, financial-strength ratings, and liquidity.
- Any additional COVID-19 litigation exposure, regulatory action, or changes in the company’s ability to collect reinsurance recoverables.