The Hartford Financial Services Group, Inc. — 2019 Q1 Form 10-Q
Business context and reporting period
The filing covers the three months ended March 31, 2019, with comparisons to March 31, 2018. The Hartford provides commercial and personal property and casualty insurance, group life and disability products, and mutual fund and exchange-traded products. The filing entity is The Hartford Financial Services Group, Inc., rather than “Hartford Insurance Group, Inc.”
The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP. The principal reporting segments are Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, and Hartford Funds.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenues | $4.940 billion | $4.691 billion | 5% |
| Income from continuing operations, before tax | $775 million | $519 million | 49% |
| Income from continuing operations, net of tax | $630 million | $428 million | 47% |
| Net income | $630 million | $597 million | 6% |
| Net income available to common stockholders | $625 million | $597 million | 5% |
| Diluted EPS from continuing operations | $1.71 | $1.18 | 45% |
| Diluted EPS | $1.71 | $1.64 | 4% |
| Core earnings | $507 million | $461 million | 10% |
| Net cash from operating activities | $279 million | $712 million | Down $433 million |
Earned premiums were $3.940 billion, essentially flat year over year. Fee income declined 3% to $314 million, while net investment income increased 4% to $470 million. Net realized capital gains were $163 million versus a $30 million loss in the prior-year quarter, primarily reflecting equity-market appreciation and gains from fixed-maturity portfolio management.
Total benefits, losses, and expenses were $4.165 billion, essentially unchanged. Interest expense declined 20% to $64 million, and amortization of other intangible assets declined 28% to $13 million. The effective tax rate was approximately 19% based on $145 million of tax expense on $775 million of pretax income.
Balance sheet, capital, debt, and liquidity
- Total assets were $63.324 billion at March 31, 2019, compared with $62.307 billion at December 31, 2018.
- Total investments were $47.895 billion, including $36.819 billion of available-for-sale fixed maturities and $4.203 billion of short-term investments.
- Stockholders’ equity was $14.340 billion, up from $13.101 billion, primarily due to net income and a $694 million increase in other comprehensive income.
- Total debt was $4.266 billion, down from $4.678 billion. The company repaid $413 million of 6.0% senior notes at maturity in January 2019.
- Debt-to-stockholders’ equity declined to 30% from 36%; debt-to-capitalization declined to 23% from 26%.
- Cash was $104 million at quarter-end. Operating subsidiaries held liquidity portfolios of $27.246 billion for Property & Casualty and $10.454 billion for Group Benefits, including fixed maturities, short-term investments, and cash net of derivative collateral.
- The holding company had $2.9 billion of fixed maturities, short-term investments, and cash, no commercial paper outstanding, no borrowings under its $750 million revolving credit facility, and access to a $2.0 billion intercompany liquidity agreement.
Material changes versus the prior comparable period
- Continuing-operations earnings increased substantially, driven mainly by the swing from a $30 million realized capital loss to a $163 million gain, improved Group Benefits results, higher investment income, lower interest expense, and $28 million of pretax income from the retained 9.7% interest in the former life and annuity business.
- Reported net income benefited less from these improvements because Q1 2018 included $169 million of income from discontinued operations related to the life and annuity business sold in May 2018.
- Commercial Lines earned premiums increased 4% and net income rose to $363 million from $298 million, but underwriting gain declined to $70 million from $114 million. The combined ratio worsened to 96.1% from 93.3%.
- Personal Lines earned premiums declined 7% and underwriting gain declined 19% to $54 million, although net income increased to $96 million because of realized investment gains. Policies in force declined in both automobile and homeowners.
- Group Benefits net income increased to $118 million from $54 million. The group disability loss ratio improved to 69.6% from 74.9%, and the total loss ratio improved to 74.7% from 77.4%.
- Hartford Funds net income declined to $30 million from $34 million, reflecting lower average assets under management and a contingent-consideration adjustment. Quarter-end Hartford Funds AUM was $117.589 billion, up 2% year over year, while daily average AUM declined 4%.
- Operating cash flow declined primarily because Q1 2018 included cash flows from the life and annuity business sold in May 2018. Investing cash flow improved to a $129 million inflow from a $242 million outflow, while financing cash use declined to $428 million from $677 million.
Guidance, outlook, risks, contingencies, and unusual items
- The company expected to close its $2.2 billion cash acquisition of The Navigators Group in the second quarter of 2019, subject to regulatory and customary closing conditions. A related NICO reinsurance agreement would provide up to $300 million of coverage for unfavorable development on specified Navigators reserves. The reinsurance premium was expected to be approximately $91 million pretax, or $72 million after tax, recorded when the transaction closes.
- Management expected 2019 net investment income yield, excluding limited partnerships and alternative investments, to approximate the 2018 portfolio yield, though results remained sensitive to portfolio composition and market conditions.
- The company authorized $1.0 billion of share repurchases through December 31, 2020. No common shares were repurchased during the quarter; management expected most of the authorization to be used in 2020.
- Expected holding-company liquidity requirements for the next twelve months included $2.2 billion for the Navigators acquisition, a $500 million debt maturity in March 2020, approximately $295 million of debt interest, approximately $21 million of preferred dividends, and approximately $440 million of common dividends.
- Net asbestos reserves were $1.024 billion and net environmental reserves were $196 million. The NICO adverse-development cover had incurred $523 million of ceded adverse development, leaving approximately $977 million of coverage. Adverse development above the $650 million premium threshold could create significant earnings charges before deferred gains are recognized; development exceeding the $1.5 billion treaty limit would be retained by the company.
- Property and casualty catastrophe losses were $104 million, compared with $103 million in Q1 2018, primarily from winter storms. Favorable prior accident-year development declined to $11 million from $32 million.
- Key risks include unfavorable loss development, catastrophe and weather losses, asbestos and environmental claims, investment-market and interest-rate volatility, credit and reinsurance counterparty risk, regulatory and litigation developments, cyber and operational risks, and the ability to complete and integrate the Navigators acquisition.
- Adoption of updated lease accounting resulted in a $160 million lease-payment obligation and a $150 million right-of-use asset at adoption, with no material effect on net income or cash flow.
Investor verification checklist
- Verify the closing, financing, integration costs, and reserve reinsurance terms of the Navigators acquisition.
- Assess whether Commercial Lines underwriting deterioration, particularly workers’ compensation and property losses, persists after catastrophe and reserve-development effects.
- Monitor asbestos and environmental reserve reviews scheduled for the fourth quarter and the remaining NICO ADC capacity.
- Distinguish recurring core earnings of $507 million from the $163 million of net realized capital gains and other unusual items.
- Track Personal Lines policy counts, premium retention, pricing, and expense trends following the decline in earned premiums.
- Evaluate liquidity after the acquisition, planned dividends, debt maturity, and potential share repurchases.
- Review investment portfolio sensitivity to interest rates, credit spreads, equity markets, alternative-investment returns, and unrealized gains or losses.