The Hartford Financial Services Group, Inc. — Q2 2022 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2022. The Hartford provides commercial and personal property-and-casualty insurance, group life and disability products, and mutual fund and ETF investment management services. Reporting segments are Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds, and Corporate. The sale of Continental Europe Operations was completed on December 29, 2021.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Earned premiums | $4.810 billion | $4.460 billion | $9.461 billion | $8.803 billion |
| Total revenues | $5.373 billion | $5.589 billion | $10.766 billion | $10.888 billion |
| Net investment income | $541 million | $581 million | $1.050 billion | $1.090 billion |
| Net realized gains/(losses) | $(338) million | $147 million | $(483) million | $227 million |
| Net income | $442 million | $905 million | $887 million | $1.154 billion |
| Net income available to common stockholders | $437 million | $900 million | $877 million | $1.144 billion |
| Diluted EPS | $1.32 | $2.51 | $2.62 | $3.17 |
| Core earnings | $714 million | $836 million | $1.275 billion | $1.039 billion |
| Operating cash flow | — | $1.403 billion | $1.597 billion |
Q2 net income available to common stockholders declined 51%, while six-month earnings declined 23%. Core earnings increased 52% for the six-month period but declined 15% in the second quarter, primarily reflecting volatile investment results and other excluded items.
- Commercial Lines earned premiums increased 12% in Q2 and 11% for the first six months. Its combined ratio improved to 87.3% in Q2 and 88.7% year to date.
- Personal Lines earned premiums declined 2% in both periods. Its combined ratio deteriorated to 101.8% in Q2 and 96.1% year to date, driven by higher automobile and homeowners loss costs and less favorable prior-year development.
- Group Benefits premiums and other considerations increased 6% in both periods. Net income declined 39% in Q2 and 45% year to date, despite lower excess mortality claims, because of lower investment results, higher expenses, and a higher disability loss ratio.
- Hartford Funds average assets under management declined 9% in Q2 and 2% for the six-month period; ending AUM declined 17% year over year to $127.4 billion. Net mutual fund and ETF flows were outflows of $2.0 billion in Q2 and $2.4 billion year to date.
Balance sheet, capital, debt and liquidity
- Total assets were $72.4 billion at June 30, 2022, versus $76.6 billion at December 31, 2021. Total stockholders’ equity declined to $14.2 billion from $17.8 billion, primarily due to accumulated other comprehensive losses.
- Accumulated other comprehensive loss was $3.262 billion at June 30, compared with accumulated other comprehensive income of $172 million at year-end 2021. The change was primarily caused by higher interest rates and wider credit spreads reducing the fair value of available-for-sale fixed maturities.
- Long-term debt declined 12% to $4.355 billion following the April redemption of $600 million of 7.875% junior subordinated debentures. The company recorded a $9 million pretax loss on extinguishment.
- Cash and restricted cash were $348 million at June 30. The holding company had approximately $1.1 billion of fixed maturities, short-term investments, investment sales receivable and cash, no borrowings under its $750 million revolving credit facility, and no borrowings under its $2.0 billion intercompany liquidity agreement.
- Expected holding-company liquidity requirements for the next 12 months included $194 million of debt interest, $21 million of preferred dividends, and $505 million of common dividends, before share repurchases.
- Six-month financing cash outflows were $1.773 billion, including $850 million of share repurchases, $600 million of debt repayment, and $257 million of common dividends.
Material changes versus the prior comparable period
- Investment performance reversed sharply: net realized losses were $338 million in Q2 versus gains of $147 million in Q2 2021, driven principally by equity-market declines and losses on fixed-maturity sales.
- Net unrealized losses on fixed maturities were $3.474 billion after tax for the first six months, compared with a $630 million after-tax loss in the prior-year period. Gross unrealized losses on available-for-sale fixed maturities were $2.572 billion at June 30.
- Commercial Lines underwriting improved substantially year to date, helped by premium growth, lower catastrophes, and favorable prior-year reserve development.
- Personal Lines underwriting weakened materially, with the Q2 combined ratio exceeding 100% because of higher claim severity, weather losses, and reduced favorable reserve development.
- Operating cash flow declined $194 million year over year, while investing activities generated $387 million versus a $579 million use of cash in the prior-year period.
- Common shares outstanding declined through repurchases. The company repurchased 12.0 million shares for $850 million in the first six months and had $448 million remaining under the then-current authorization at June 30.
Outlook, commentary, risks and unusual items
- Management expected 2022 annualized net investment income yield excluding limited partnerships and other alternative investments to remain consistent with 2021 levels, supported by higher reinvestment rates, subject to market conditions and non-routine income items.
- The Hartford Next program is expected to produce annual insurance operating-cost and other expense reductions of approximately $540 million by 2022 and $625 million by 2023 relative to 2019. Total program costs are expected to be approximately $393 million, with $253 million incurred through June 30, 2022.
- The company recorded $27 million of catastrophe losses, net of reinsurance, related to the Ukraine conflict, plus $11 million of reinstatement premiums. Direct Russian investment exposure had amortized cost of $16 million, fair value of $7 million, and a $9 million credit-loss allowance; there were no investments in Belarus or Ukraine.
- The company’s $787 million Boy Scouts of America settlement remained subject to bankruptcy and court approvals. The filing stated that adverse outcomes or failure of conditions could materially affect results.
- Asbestos and environmental reserves remain highly uncertain. The A&E adverse development cover with NICO has a $1.5 billion limit; $1.015 billion of cumulative adverse development had been ceded by June 30, leaving $485 million of available limit. Run-off A&E net reserves were $485 million, and a $365 million deferred gain was recorded.
- More than 300 COVID-19 business-income lawsuits had been filed against Hartford entities. Management could not reasonably estimate a loss or range of loss, and adverse outcomes in aggregate could materially affect results or liquidity.
- Primary risks include catastrophe and weather losses, inflation and claim severity, reserve estimation, equity and fixed-income market volatility, credit and reinsurance counterparty risk, regulatory and legal developments, cyber risk, and potential ratings downgrades.
Important facts for investors to verify
- Whether Personal Lines pricing and claims actions improve the underlying combined ratio, particularly automobile severity and homeowners losses.
- The sustainability of Commercial Lines’ favorable underwriting performance and reserve development.
- The effect of interest rates, credit spreads, equity markets and alternative-investment valuations on earnings, AOCI, capital and liquidity.
- The status and final cost of the Boy Scouts settlement and future asbestos and environmental reserve development, including remaining A&E reinsurance capacity.
- Hartford Funds’ asset levels, net flows and fee income trends amid continued market volatility.
- The pace of share repurchases, subsidiary dividend capacity, debt obligations and compliance with financial-strength and credit-rating requirements.