The Hartford Financial Services Group, Inc. — 2019 Third-Quarter Form 10-Q Summary
Business context and reporting period
The filing covers the three and nine months ended September 30, 2019. The Hartford 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 company completed its $2.137 billion cash acquisition of The Navigators Group on May 23, 2019. The life and annuity business sold in May 2018 remains reported as discontinued operations in prior-period comparisons, while The Hartford retains a 9.7% ownership interest in the buyer.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Change |
|---|---|---|---|
| Total revenues | $5.347 billion | $4.842 billion | 10% |
| Income from continuing operations, net of tax | $535 million | $427 million | 25% |
| Net income available to common stockholders | $524 million | $432 million | 21% |
| Diluted EPS from continuing operations | $1.43 | $1.17 | 22% |
| Core earnings | $548 million | $418 million | 31% |
| Net investment income | $490 million | $444 million | 10% |
| Net realized capital gains | $89 million | $38 million | 134% |
| Metric | Nine months 2019 | Nine months 2018 | Change |
|---|---|---|---|
| Total revenues | $15.379 billion | $14.322 billion | 7% |
| Income from continuing operations, net of tax | $1.537 billion | $1.289 billion | 19% |
| Net income available to common stockholders | $1.521 billion | $1.611 billion | (6%) |
| Diluted EPS from continuing operations | $4.17 | $3.54 | 18% |
| Core earnings | $1.540 billion | $1.291 billion | 19% |
| Net cash provided by operating activities | $2.446 billion | $1.842 billion | 33% |
Q3 P&C written premiums increased 17%, primarily from Commercial Lines and the Navigators acquisition. The P&C combined ratio improved 1.8 points year over year, while current accident-year catastrophe losses declined to $106 million from $169 million. Commercial Lines reported a 96.4% combined ratio; Personal Lines reported 92.8%.
Group Benefits net income increased to $146 million from $77 million, with the total loss ratio improving to 71.1% from 75.5%. Hartford Funds net income declined modestly to $40 million from $41 million; period-end assets under management were $120.0 billion, down 1% year over year.
At September 30, 2019, total assets were $70.256 billion, total stockholders’ equity was $16.078 billion, and total investments were $52.577 billion. Accumulated other comprehensive income improved to $214 million from a $(1.579) billion loss at December 31, 2018, largely because of higher fixed-maturity valuations.
Total debt was $4.846 billion, including $500 million of short-term debt and $4.346 billion of long-term debt. Debt-to-capitalization was 23%, compared with 26% at year-end 2018.
Material changes versus the prior comparable period
- Continuing-operations earnings improved substantially in both the quarter and year-to-date period, while year-to-date consolidated net income available to common stockholders declined because 2018 included $322 million of discontinued-operation income from the sold life and annuity business.
- Revenue and investment income benefited from the Navigators acquisition, higher invested assets, and stronger returns from limited partnerships and other alternative investments.
- Year-to-date results included $91 million of pre-tax Navigators adverse-development-cover premium and $97 million of pre-tax acquired-reserve increases.
- Q3 results included a $90 million loss on extinguishment of debt after the company issued $1.4 billion of senior notes and repaid $1.065 billion of higher-cost or assumed debt.
- Personal Lines earned premiums decreased 5% in Q3 and 6% year to date, although underwriting profitability improved because of lower catastrophe losses and improved loss experience.
- The company repurchased 1.6 million common shares for $90 million through September 30, 2019, leaving $910 million under the authorization.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a formal full-year earnings forecast. Management expected 2019 annualized net investment income yield, excluding limited partnerships and other alternative investments, to approximate the 2018 portfolio yield despite lower reinvestment rates. Management stated that insurance-operations liquidity was sufficient for anticipated requirements over the next twelve months.
Holding-company resources included approximately $1.3 billion of fixed maturities, short-term investments, and cash, a $750 million undrawn revolving credit facility, a $750 million commercial-paper program with no outstanding borrowings, and a $2.0 billion intercompany liquidity agreement. Expected near-term requirements included a $500 million debt maturity in March 2020, approximately $240 million of debt interest, planned dividends, and approximately $30 million for a Lloyd’s capital contribution.
- Key insurance risks include unfavorable loss development, catastrophe events, climate and weather variability, pricing adequacy, reinsurance availability and collectibility, and uncertainty in asbestos and environmental reserves.
- Run-off asbestos and environmental reserves were $910 million and $133 million, respectively, net of reinsurance. The company had incurred $523 million under its $1.5 billion adverse-development cover, leaving approximately $977 million of stated coverage capacity.
- The company could receive approximately $325 million from a proposed PG&E wildfire settlement, but recovery is subject to bankruptcy-court approval and other uncertainties. No benefit was recognized.
- Derivative agreements could require additional collateral following ratings downgrades. A two-level downgrade could have required approximately $8 million of additional collateral based on September 30 market values.
- The filing identifies market, credit, interest-rate, equity, foreign-currency, regulatory, litigation, cyber, acquisition-integration, and accounting-estimate risks. Navigators was excluded from management’s internal-control assessment for the permitted post-acquisition period.
Important facts for investors to verify
- Assess whether Commercial Lines underwriting trends and Navigators integration offset the acquired business’s reserve charges and higher expense levels.
- Review catastrophe exposure, prior-year reserve development, asbestos and environmental reserve adequacy, and the remaining reinsurance limits.
- Reconcile reported net income with core earnings, including realized gains, debt-extinguishment costs, acquisition costs, and discontinued operations.
- Monitor Personal Lines premium and policy-count declines, Hartford Funds fee pressure and net flows, and the effect of lower reinvestment yields.
- Verify holding-company liquidity after the March 2020 debt maturity, planned dividends, share repurchases, and Lloyd’s funding requirements.
- Consider the effect of unrealized investment gains in AOCI and potential sensitivity to interest rates, credit spreads, equity markets, and ratings changes.