Business Context and Reporting Period
The filing is The Hartford Financial Services Group, Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2020. The company provides commercial and personal property-and-casualty insurance, group life and disability products, and mutual fund and exchange-traded product services. Reporting segments are Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Hartford Funds, and Corporate.
The interim financial statements were reviewed by Deloitte & Touche LLP, not audited. The company adopted expected-credit-loss accounting and updated goodwill impairment guidance on January 1, 2020.
Key Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Total revenues | $5.171 billion, down 3% | $15.195 billion, down 1% |
| Net income | $459 million, down 14% | $1.200 billion, down 22% |
| Net income available to common stockholders | $453 million, down 14% | $1.184 billion, down 22% |
| Diluted earnings per common share | $1.26, versus $1.43 | $3.29, versus $4.17 |
| Income before taxes | $532 million, down 19% | $1.468 billion, down 22% |
| Net investment income | $492 million, approximately flat | $1.290 billion, down 11% |
| Net realized capital gains (losses) | $6 million, versus $89 million gain | $(116) million, versus $332 million gain |
| Operating cash flow | Not separately reported for the quarter | $2.655 billion, versus $2.446 billion |
Approximate consolidated net income margin was 8.9% in the third quarter, compared with 10.0% in the prior-year quarter, and 7.9% for the first nine months, compared with 10.0% in the prior-year period. Core earnings, a non-GAAP measure, were $527 million for the third quarter and $1.450 billion for the first nine months, compared with $548 million and $1.540 billion, respectively.
Revenue and Segment Performance
- Earned premiums were $4.347 billion in the quarter, down 1%, and $12.972 billion year to date, up 4%. The year-to-date increase primarily reflects a full nine months of Navigators Group results in 2020.
- Commercial Lines net income was $323 million in the quarter, down 4%, and $378 million year to date, down 58%. Its combined ratio was 95.9% for the quarter and 103.3% year to date; the underlying combined ratio was 93.7% and 97.1%, respectively.
- Personal Lines net income was $79 million in the quarter, down 16%, and $548 million year to date, up 117%. The combined ratio was 93.3% for the quarter and 74.1% year to date; the underlying combined ratio was 81.4% and 83.0%, respectively.
- Group Benefits net income was $119 million in the quarter, down 18%, and $324 million year to date, down 14%. The nine-month net income margin was 7.2%, compared with 8.2% in 2019; core earnings margin was 7.5%, compared with 8.3%.
- Hartford Funds net income was $44 million in the quarter, up 10%, and $119 million year to date, up 10%. Period-end Hartford Funds assets under management were $123.710 billion, up 3% year over year, despite $3.365 billion of mutual fund and ETP net outflows year to date.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | September 30, 2020 | December 31, 2019 |
|---|---|---|
| Total assets | $72.319 billion | $70.817 billion |
| Total investments | $54.778 billion | $53.030 billion |
| Stockholders’ equity | $17.802 billion | $16.270 billion |
| Long-term debt | $4.351 billion | $4.348 billion |
| Total debt | $4.351 billion | $4.848 billion |
| Cash and restricted cash | $270 million | $262 million |
- Debt-to-stockholders’ equity declined to 24% from 30%, and debt-to-capitalization declined to 20% from 23%.
- The company repaid $500 million of 5.5% senior notes at maturity on March 30, 2020. No borrowings were outstanding under its $750 million revolving credit facility, $750 million commercial paper program, $2.0 billion intercompany liquidity agreement, or Federal Home Loan Bank facilities.
- Holding-company liquidity included approximately $1.6 billion of fixed maturities, short-term investments, investment sales receivable and cash. Operating cash flow exceeded dividends, share repurchases and other financing uses during the first nine months.
- Capital available to meet future obligations includes expected subsidiary dividends, tax receipts and access to contingent borrowing facilities. Dividend capacity and actual distributions remain subject to regulatory and capital requirements.
Material Changes Versus the Prior Comparable Period
- Profit declined primarily because of COVID-19 claims, higher catastrophe losses, lower net realized investment results, lower investment income, and $87 million of Hartford Next restructuring costs.
- Direct COVID-19 incurred losses were $72 million in the third quarter and $339 million for the first nine months, including $250 million in Property & Casualty and $89 million in Group Benefits.
- Current accident-year catastrophe losses increased by $123 million in the quarter and $203 million year to date, with 2020 losses including wildfires, hurricanes, tropical storms, civil unrest, wind and hail events, and a Midwest derecho.
- Personal automobile claim frequency improved because of reduced miles driven, partially offsetting COVID-19 losses and catastrophe activity. The company also issued $81 million of personal automobile premium refunds or credits for April through June.
- Net favorable prior accident-year development improved to $320 million year to date from $23 million in 2019, substantially aided by catastrophe reserve reductions and a $289 million PG&E subrogation benefit.
- Net investment income decreased year to date as lower interest rates reduced reinvestment yields and alternative-investment results were affected by the economic downturn. The portfolio yield was 3.4%, versus 4.1% in the prior-year period.
- Accumulated other comprehensive income increased to $856 million from $52 million, primarily from higher unrealized gains on available-for-sale fixed maturities as interest rates declined.
- The company repurchased 2.7 million common shares for $150 million during the first nine months, but made no repurchases from April 1 through October 27, 2020.
Guidance, Outlook, Commentary and Unusual Items
- Management expected Commercial Lines’ 2020 combined and underlying combined ratios to be worse than the outlook ranges in the 2019 Form 10-K because of COVID-19 claims and higher catastrophe losses, partly offset by favorable prior-year development.
- Management expected Personal Lines’ 2020 combined and underlying combined ratios to be better than the prior outlook, principally because of favorable prior-year development, lower automobile claim frequency and lower non-catastrophe homeowners’ losses.
- Group Benefits margins were trending toward the higher end of the prior outlook ranges, although results remained exposed to COVID-19 group life claims and future disability experience.
- Management expected 2020 net investment income and investment yields to be below 2019 levels because of near-zero interest rates, lower reinvestment yields and greater liquidity holdings.
- Hartford Next is expected to reduce annual insurance operating costs and other expenses by approximately $500 by 2022 and improve 2022 expense ratios. Total program costs are estimated at approximately $360 million, including approximately $150 million of restructuring costs. The company had incurred $87 million through September 30.
- The company entered into an agreement to sell its Continental Europe Operations. The transaction is expected to close by the second quarter of 2021, subject to customary conditions and regulatory approvals. The company recorded an estimated $51 million pretax loss, or $32 million after tax, and classified $167 million of assets and $153 million of liabilities as held for sale. Estimated consideration less costs to sell was approximately $14 million and includes contingent consideration that could change with future claims development.
- As of September 30, the A&E adverse development cover had $860 million of remaining limit, and the Navigators adverse development cover had $96 million of remaining limit. The company had recorded $749 million of net asbestos reserves and $101 million of net environmental reserves for run-off A&E.
- More than 200 COVID-19 business-income coverage lawsuits had been filed against Hartford writing companies, including more than 50 purported class actions in approximately 27 states. Management could not reasonably estimate any possible loss or range of loss.
- Management reported effective disclosure controls and procedures and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether COVID-19 business-income litigation, workers’ compensation, financial-lines and Group Benefits claims develop beyond current reserves and whether any legislative or regulatory action imposes retroactive coverage.
- The sustainability of favorable prior-year reserve development, including the PG&E subrogation benefit, and the potential for adverse development in general liability, sexual abuse and molestation, marine, professional liability, asbestos and environmental claims.
- The impact of prolonged low interest rates, wider credit spreads, commercial real estate stress and economic weakness on investment income, credit-loss allowances, AOCI and statutory capital.
- Commercial Lines’ ability to restore underwriting profitability after its 103.3% year-to-date combined ratio and to offset COVID-19-related exposure declines through pricing and expense reductions.
- Personal Lines’ retention, policy counts and claims frequency after premium credits and temporary payment and cancellation relief expire.
- Execution, timing and total cost of Hartford Next, including costs not yet estimated for real-estate consolidation and expected savings through 2022.
- Regulatory approval, closing conditions and potential claims-related changes affecting the Continental Europe disposition proceeds and recorded loss.
- Actual subsidiary dividend capacity, Lloyd’s capital requirements, letter-of-credit availability and the company’s continued ability to maintain liquidity without borrowing.