HARTFORD INSURANCE GROUP, INC. quarterly report, Q1 FY2021

Business Context and Reporting Period

The Hartford Financial Services Group, Inc. filed an unaudited Form 10-Q for the three months ended March 31, 2021. The company provides property and casualty insurance, group life and disability products, and mutual fund and exchange-traded product services through Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds, and Corporate.

The filing was reviewed by Deloitte & Touche LLP, which reported that it was not aware of material modifications required for conformity with U.S. GAAP. The company continued to be affected by COVID-19, although management reported improving economic conditions and vaccination progress.

Financial Performance and Key Metrics

Metric	Q1 2021	Q1 2020	Change
Total revenues	$5.299 billion	$4.956 billion	Up 7%
Earned premiums	$4.343 billion	$4.391 billion	Down 1%
Fee income	$355 million	$320 million	Up 11%
Net investment income	$509 million	$459 million	Up 11%
Net realized capital gains (losses)	$80 million	$(231) million	Improved by $311 million
Income before taxes	$303 million	$344 million	Down 12%
Net income	$249 million	$273 million	Down 9%
Net income available to common stockholders	$244 million	$268 million	Down 9%
Diluted earnings per share	$0.67	$0.74	Down 9%
Operating cash flow	$759 million	$298 million	Up $461 million

Core earnings were $203 million, compared with $485 million in the prior-year quarter. The decline primarily reflected greater unfavorable property and casualty reserve development, COVID-19-related Group Benefits mortality losses, and higher catastrophe losses. Reported earnings benefited substantially from the year-over-year change from investment losses to investment gains.

Property and casualty combined ratios were 109.7% for Commercial Lines and 83.1% for Personal Lines. Commercial Lines had an underlying combined ratio of 91.2%, an improvement from 94.9%; Personal Lines had an underlying combined ratio of 83.5%, an improvement from 86.6%.

Commercial Lines net income increased to $129 million from $121 million, despite a $216 million underwriting loss compared with a $20 million underwriting gain.
Personal Lines net income increased to $135 million from $98 million, supported by lower automobile claim frequency and favorable prior-year development.
Property & Casualty Other Operations reported a $13 million net loss versus $5 million of net income, primarily due to unfavorable reserve development.
Group Benefits net income declined to $9 million from $104 million. Excess mortality claims, primarily related to COVID-19, totaled $185 million; total direct COVID-19 and excess mortality claims were $222 million versus $16 million in Q1 2020.
Hartford Funds net income increased to $47 million from $36 million. Ending Hartford Funds assets under management were $145.2 billion, up 42% year over year.

Balance Sheet, Debt, Liquidity, and Capital

Total assets were $74.201 billion at March 31, 2021, compared with $74.111 billion at December 31, 2020.
Total investments were $55.727 billion, including $43.607 billion of available-for-sale fixed maturities, $4.588 billion of mortgage loans, and $2.326 billion of limited partnerships and other alternative investments.
Total liabilities were $56.499 billion, including $38.540 billion of unpaid losses and loss adjustment expenses and $4.353 billion of long-term debt.
Stockholders’ equity declined to $17.702 billion from $18.556 billion, primarily because accumulated other comprehensive income fell to $264 million from $1.170 billion as fixed-maturity unrealized gains declined.
Debt-to-stockholders’ equity was 25%; debt-to-total capitalization was 20%.
Holding-company liquidity included $1.9 billion of fixed maturities, short-term investments, investment sales receivable, and cash. The company had no borrowings under its $750 million revolving credit facility, no intercompany liquidity borrowings, and no Federal Home Loan Bank advances.
Cash and restricted cash totaled $280 million at quarter-end, compared with $301 million at March 31, 2020.
U.S. statutory capital of the company’s insurance subsidiaries was $13.343 billion at March 31, 2021, down from $13.396 billion at January 1, 2021.

Material Changes Versus the Prior Comparable Period

Revenue increased despite a modest decline in earned premiums, driven by higher fee income, net investment income, and realized investment gains.
Benefits, losses, and loss adjustment expenses increased 15%, primarily from higher COVID-19-related Group Benefits mortality losses, unfavorable prior-year property and casualty reserve development, and February winter-storm losses.
Property and casualty prior accident-year development was unfavorable by $229 million, compared with $23 million unfavorable in Q1 2020. The 2021 amount included increased general liability reserves associated with sexual molestation and sexual abuse claims.
Current accident-year catastrophe losses increased to $214 million from $74 million, including $176 million from February winter storms.
Insurance operating costs and other expenses decreased 3%, while interest expense declined 11% following repayment at maturity of $500 million of senior notes in Q1 2020.
The company repurchased 2.4 million common shares for $123 million and paid $116 million of common dividends during the quarter.
Fixed-maturity fair value declined $1.428 billion from year-end, primarily due to higher interest rates, partly offset by tighter credit spreads. Gross unrealized losses increased to $141 million from $63 million.

Guidance, Outlook, Commentary, Risks, and Unusual Items

Management expects 2021 net investment income yield, excluding limited partnerships and other alternative investments and non-routine items, to be below 2020 levels because of lower short-term rates and lower reinvestment rates.
The Hartford Next transformation program is expected to reduce annual insurance operating costs and other expenses by approximately $540 million by 2022 and $625 million by 2023, relative to 2019. Total program costs are expected to be approximately $410 million, including approximately $164 million of restructuring costs.
The company expects the sale of its Continental Europe Operations to close in the second or third quarter of 2021, subject to customary conditions and regulatory approvals. The transaction carried an estimated $47 million pretax loss.
On April 16, 2021, the company announced a proposed $650 million settlement with the Boy Scouts of America concerning sexual molestation and sexual abuse claims. The settlement remains subject to specified conditions, including bankruptcy-court approval.
COVID-19 business-income coverage litigation involved more than 240 lawsuits, including more than 50 purported class actions in approximately 34 states. Management could not reasonably estimate any potential loss; adverse outcomes could materially affect results or cash flows.
Run-off asbestos and environmental reserves were $676 million and $79 million net, respectively. The A&E adverse development cover had $640 million of remaining limit after $860 million of cumulative adverse development. The company also had $85 million of remaining limit under the Navigators adverse development cover.
The company expects $900 million to $1.1 billion of 2021 net dividends from U.S. property and casualty subsidiaries, $250 million to $295 million from Group Benefits, and $150 million to $180 million from Hartford Funds, subject to regulatory and capital considerations.
The board increased the share-repurchase authorization from $1.5 billion to $2.5 billion in April 2021. Management expected to use approximately $1.5 billion during 2021, subject to market and capital conditions.
Key risks include pandemic developments, catastrophe and weather losses, unfavorable reserve development, asbestos and environmental claims, reinsurer or counterparty defaults, interest-rate and credit-spread movements, equity-market declines, regulatory changes, litigation, cyber risk, and potential tax-law changes.

Facts Investors Should Verify

Whether Group Benefits mortality losses and COVID-19-related claims normalize or remain elevated.
Whether Commercial Lines reserve strengthening, including Boy Scouts-related liabilities, continues in later quarters.
The ultimate cost and approval status of the proposed $650 million Boy Scouts settlement.
Developments in COVID-19 business-income litigation and any retroactive coverage legislation.
Remaining limits and collectibility under the A&E and Navigators adverse development covers.
The pace and realized benefits of the Hartford Next cost-reduction program versus its projected costs.
The effect of higher interest rates on fixed-maturity valuations and future investment income.
Actual subsidiary dividends, share repurchases, and holding-company liquidity relative to management’s stated expectations.