The Hartford Financial Services Group, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
The Hartford is an insurance and financial services holding company with principal segments in Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits and Hartford Funds. This unaudited Form 10-Q covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. The interim financial statements received a review report from Deloitte & Touche LLP without identified material modifications.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenues | $5.589 billion, up 10% | $10.888 billion, up 9% |
| Net income | $905 million, up 93% | $1.154 billion, up 56% |
| Net income available to common stockholders | $900 million, up 94% | $1.144 billion, up 56% |
| Diluted EPS | $2.51, versus $1.29 | $3.17, versus $2.03 |
| Core earnings | $836 million, versus $438 million | $1.039 billion, versus $923 million |
| Net cash from operating activities | Not separately presented | $1.597 billion, versus $1.267 billion |
Earned premiums increased 5% in the quarter and 2% year to date, while fee income increased 26% and 18%, respectively. Net investment income increased 71% in the quarter to $581 million and 37% year to date to $1.090 billion, primarily from limited partnerships and alternative investments and higher invested assets. Net realized capital gains were $147 million in the quarter and $227 million year to date, compared with $109 million and a $122 million loss, respectively, in 2020.
Approximate net income margins were 16.2% for the quarter and 10.6% year to date, based on reported total revenues. Core earnings were affected by the exclusion of certain realized gains and losses, restructuring costs, integration costs and retroactive reinsurance items.
At June 30, 2021, total assets were $74.732 billion, total stockholders’ equity was $18.244 billion and common stockholders’ equity excluding AOCI was $17.340 billion. Long-term debt was $4.354 billion, representing 24% of stockholders’ equity and 19% of total capitalization. Cash and restricted cash were $308 million. Total investments were $56.787 billion, including $44.023 billion of available-for-sale fixed maturities.
Material changes versus the prior comparable period
- Commercial Lines earned premiums increased 9% in the quarter and 4% year to date. The segment reported net income of $569 million in the quarter and $698 million year to date, versus a $66 million loss and $55 million of income, respectively, in 2020.
- Commercial Lines’ combined ratio improved to 88.9% from 115.4% in the quarter and to 99.0% from 107.1% year to date. The underlying combined ratio improved to 89.4% and 90.3%, respectively.
- Personal Lines net income declined to $118 million in the quarter and $253 million year to date, primarily due to less favorable prior-year reserve development and higher automobile claim frequency as miles driven recovered.
- Group Benefits net income increased to $170 million in the quarter but declined to $179 million year to date. Year-to-date results reflected $210 million of excess mortality claims, compared with $45 million in 2020.
- Hartford Funds net income increased 33% in the quarter and 32% year to date. Mutual fund and ETP assets under management were $138.511 billion at June 30, up 32% from a year earlier, with $3.214 billion of year-to-date net inflows versus $2.099 billion of outflows in 2020.
- COVID-19 and excess mortality claims totaled $22 million in the second quarter and $244 million year to date, compared with $242 million and $258 million, respectively, in 2020. Property COVID-19 losses were not recorded in the 2021 periods.
- Current accident-year catastrophe losses were $128 million in the quarter and $342 million year to date, including February winter storms, wind and hail events, and tropical storms.
- The Company sold its 9.7% retained interest in Talcott Resolution on June 30, 2021, receiving $217 million and recording a $46 million pretax gain.
- The Company repurchased $691 million of common stock, or approximately 11 million shares, during the first six months. The repurchase authorization was increased to $2.5 billion in April 2021; an additional $116 million was repurchased through July 27, 2021.
Guidance, outlook, management commentary and unusual items
- Management expects 2021 net investment income yield, excluding limited partnerships, alternative investments and certain non-routine items, to be below the 2020 portfolio yield because of lower short-term rates and reinvestment rates.
- The Hartford Next cost-reduction program is expected to produce approximately $540 million of annual insurance operating cost savings by 2022 and $625 million by 2023, relative to 2019. Total program costs are estimated at $391 million, including approximately $152 million of restructuring costs.
- For 2021, management expects approximately $1.0 billion to $1.1 billion of 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.
- The Company expects to use approximately $1.5 billion of its repurchase authorization during 2021, subject to market conditions, capital needs and rating considerations.
- The pending sale of Continental Europe Operations is expected to close in the second half of 2021, subject to customary conditions and regulatory approvals. The estimated pretax loss on the sale was approximately $66 million, including $18 million recognized in the first six months of 2021.
- As of June 30, 2021, the Company had $1.7 billion of holding-company liquid assets, a $750 million undrawn revolving credit facility and up to $2.0 billion available under an intercompany liquidity agreement. No borrowings were outstanding under these facilities.
Risks and contingencies
- More than 250 COVID-19 business-income coverage lawsuits had been filed against Hartford entities, including more than 50 purported class actions. Management could not reasonably estimate a loss or range of loss; adverse outcomes could materially affect operating results.
- The Company recorded additional reserves for sexual molestation and abuse claims, including claims involving the Boy Scouts of America. The proposed $650 million settlement remained uncertain after the Boy Scouts sought relief from its obligations in bankruptcy proceedings.
- As of June 30, 2021, the Company had incurred $860 million of cumulative adverse asbestos and environmental development ceded under its NICO adverse development cover, leaving $640 million of available limit. Net run-off reserves included $646 million for asbestos and $74 million for environmental claims.
- The Navigators adverse development cover had $46 million of remaining limit after $254 million of the $300 million limit was utilized.
- Insurance reserves, catastrophe losses, excess mortality, asbestos and environmental claims, reinsurance collectibility, investment valuations, credit losses, interest rates, equity markets, climate and weather events, cyber incidents and regulatory or tax changes remain significant sources of earnings and liquidity volatility.
- A downgrade in financial strength or credit ratings could increase collateral requirements for derivatives, restrict access to capital and raise borrowing costs. Management stated that current ratings would not require additional derivative collateral based on June 30 market values.
Important facts for investors to verify
- Whether Commercial Lines’ improved underwriting performance and 99.0% year-to-date combined ratio are sustainable after catastrophe and reserve-development effects.
- The persistence of unusually strong alternative-investment returns and the sensitivity of earnings to lower reinvestment yields and equity-market declines.
- Future excess mortality and disability trends in Group Benefits as pandemic effects evolve.
- The ultimate cost and legal outcome of Boy Scouts claims, COVID-19 business-interruption litigation, and asbestos and environmental liabilities.
- Completion and final economics of the Continental Europe Operations sale.
- The pace of share repurchases relative to statutory capital, liquidity, financial-strength ratings and dividend capacity.
- Future development of the NICO adverse development covers and the amount of remaining protection available for adverse reserve development.