Business Context and Reporting Period
The filing is The Hartford Financial Services Group, Inc.’s Form 10-K for the fiscal year ended December 31, 2018. The company provides commercial and personal property-and-casualty insurance, group benefits, and mutual fund and exchange-traded investment products, primarily in the United States. The filing is an annual report rather than a standalone quarterly filing, although it includes fourth-quarter information.
At December 31, 2018, total assets were $62.3 billion and total stockholders’ equity was $13.1 billion. The 2018 balance sheet reflects the May 2018 sale of the life and annuity business, which was reported as discontinued operations.
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenues | $18.955 billion | $17.162 billion |
| Income from continuing operations, before tax | $1.753 billion | $723 million |
| Income from continuing operations, net of tax | $1.485 billion | $(262) million |
| Net income available to common stockholders | $1.801 billion | $(3.131) billion |
| Diluted EPS from continuing operations | $4.06 | $(0.72) |
| Diluted EPS including discontinued operations | $4.95 | $(8.61) |
| Core earnings | $1.575 billion | $1.014 billion |
| Net cash provided by operating activities | $2.843 billion | $2.186 billion |
| Total debt | $4.678 billion | $4.998 billion |
| Cash | $121 million | $180 million |
- Earned premiums increased to $15.869 billion from $14.141 billion; fee income rose to $1.313 billion from $1.168 billion; and net investment income increased 11% to $1.780 billion.
- Net realized capital losses were $112 million in 2018 versus net realized capital gains of $165 million in 2017, primarily reflecting investment portfolio repositioning, wider credit spreads, higher interest rates and lower equity markets.
- Property-and-casualty combined ratio improved to 97.8 from 100.0. Catastrophe losses were $821 million before tax, compared with $836 million in 2017, while favorable prior-year reserve development improved to $167 million from $41 million.
- Commercial Lines earned premiums increased 3% to $7.047 billion, and its combined ratio improved to 92.6 from 97.3. Personal Lines earned premiums declined 8% to $3.399 billion, and its combined ratio deteriorated to 106.3 from 104.2.
- Group Benefits revenue increased to $6.025 billion from $4.092 billion, largely due to the Aetna U.S. group life and disability business acquired in November 2017. Net income was $340 million, with a 5.6% net income margin and a 7.0% core earnings margin.
- Hartford Funds net income increased to $148 million from $106 million. Average assets under management rose to $116.876 billion, but year-end AUM declined to $104.840 billion from $115.350 billion because of fourth-quarter market declines and continued runoff of Talcott Resolution assets.
- Stockholders’ equity declined 3% to $13.101 billion, principally due to a $2.237 billion after-tax decrease in accumulated other comprehensive income, including lower unrealized fixed-maturity gains and removal of AOCI related to the sold life and annuity business.
Material Changes Versus the Prior Comparable Period
- Reported profitability changed substantially because 2017 included a $3.3 billion after-tax loss related to the life and annuity business sale, an $877 million tax charge primarily from Tax Reform, and a $488 million after-tax pension settlement charge.
- The life and annuity business sale closed May 31, 2018 for approximately $1.4 billion of cash after a pre-closing dividend; total net proceeds were approximately $1.5 billion including the retained 9.7% ownership interest and transaction costs.
- Group Benefits benefited from a full year of the Aetna business, compared with only two months in 2017. The acquisition contributed to higher premiums, investment income and scale benefits, but also generated $47 million of integration and transaction costs in 2018.
- The company issued $500 million of 4.4% senior notes due 2048, repaid $320 million of 6.3% notes at maturity, and redeemed $500 million of 8.125% junior subordinated debentures. It also issued $334 million of Series G preferred stock.
- The company made no common-share repurchases in 2018. In February 2019, the board authorized up to $1.0 billion of repurchases through December 31, 2020.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2019 Commercial Lines written premiums to increase and projected a combined ratio of approximately 94.5 to 96.5, compared with 92.6 in 2018.
- Personal Lines written premiums were expected to decline slightly, while the combined ratio was projected at approximately 97.5 to 99.5, compared with 106.3 in 2018. The outlook assumes lower catastrophe losses but continued marketing and acquisition spending.
- Group Benefits fully insured ongoing premiums were expected to be relatively flat. The 2019 net income margin outlook was 5.5% to 6.5%, and core earnings margin guidance was 6.0% to 7.0%.
- Hartford Funds net income was expected to be relatively flat, subject to fund performance, net flows and market conditions. Management expected AUM to increase modestly if positive net flows and strong performance continued.
- The company entered into an agreement to acquire The Navigators Group for $2.1 billion in cash, with closing expected in late March or April 2019 subject to regulatory and other conditions. The company expected approximately $2.2 billion of cash needs, including transaction expenses.
- Holding-company liquidity included $3.4 billion of cash, short-term investments and fixed maturities, 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.
- Major risks include catastrophe and climate-related losses, unfavorable development of long-tail reserves, asbestos and environmental claims, reinsurance collectibility, investment and interest-rate volatility, equity-market declines, pricing and competition, cybersecurity and operational disruptions, regulatory constraints, tax-law changes, LIBOR transition, and potential difficulties integrating acquisitions.
- Net asbestos reserves were $1.051 billion and net environmental reserves were $203 million. The NICO adverse-development cover had $977 million of remaining aggregate limit at year-end; cumulative ceded losses were $523 million against the $1.5 billion limit.
- Management stated that ordinary-course litigation was not expected to be material overall, but certain matters with large or indeterminate claims could materially affect results or cash flows in an individual period.
- The company adopted new accounting guidance for equity securities and revenue recognition in 2018. It expected to recognize approximately $160 million of lease liabilities upon adoption of the new lease standard on January 1, 2019; the adoption was not expected to affect net income or cash flows.
Important Facts for Investors to Verify
- Confirm the distinction between reported net income, continuing-operations income and core earnings, particularly given the 2017 life and annuity disposal charges and other unusual items.
- Assess whether the improvement in the P&C combined ratio is sustainable after excluding catastrophe losses and favorable prior-year reserve development.
- Monitor Personal Lines’ premium contraction, policy counts, homeowners catastrophe exposure and the expected 2019 combined-ratio improvement.
- Evaluate reserve sensitivity, especially workers’ compensation, general liability, commercial automobile, group long-term disability, asbestos and environmental exposures.
- Verify completion, funding and integration of the Navigators acquisition and its effect on capital, debt and liquidity.
- Review Hartford Funds AUM, net flows and market sensitivity because fee income depends substantially on asset values.
- Confirm statutory capital, risk-based capital ratios, subsidiary dividend capacity and restrictions on upstreaming cash to the holding company.
- Review the company’s investment portfolio for exposure to credit-spread widening, interest-rate changes, equity-market declines, commercial real estate and lower-rated securities.