The Hartford Financial Services Group, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the three and six months ended June 30, 2017. The Hartford operates through Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits, Mutual Funds, Talcott Resolution and Corporate. The interim financial statements are unaudited and were reviewed by Deloitte & Touche LLP. The filing identifies the registrant as The Hartford Financial Services Group, Inc.
The company completed the sale of its U.K. property and casualty run-off subsidiaries on May 10, 2017, for approximately $272 million net of transaction costs. The company also continued the runoff of its Talcott Resolution annuity and life businesses.
Financial performance and key metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $4.769 billion | $4.696 billion | $9.424 billion | $9.106 billion |
| Earned premiums | $3.490 billion | $3.444 billion | $6.963 billion | $6.848 billion |
| Fee income | $466 million | $441 million | $921 million | $886 million |
| Net investment income | $715 million | $735 million | $1.443 billion | $1.431 billion |
| Net realized capital gains | $75 million | $53 million | $55 million | $(102) million |
| Income before taxes | $(139) million | $170 million | $348 million | $551 million |
| Net income (loss) | $(40) million | $216 million | $338 million | $539 million |
| Diluted EPS | $(0.11) | $0.54 | $0.90 | $1.34 |
Q2 net loss margin was approximately negative 0.8%; six-month net margin was approximately 3.6%. Management reported Q2 core earnings of $389 million, compared with $122 million in the prior-year quarter, and six-month core earnings of $767 million, compared with $507 million. Core earnings is a non-GAAP measure and excludes selected realized gains and losses, pension settlements and other items.
- Property and casualty combined ratio improved to 97.1% from 112.0%, mainly because of sharply lower unfavorable prior-year reserve development and lower catastrophe losses.
- Q2 catastrophe losses were $155 million before tax, compared with $184 million; six-month catastrophe losses were $305 million, compared with $275 million.
- Prior accident-year development was favorable by $10 million in Q2 and unfavorable by $2 million for the six-month period, versus unfavorable development of $351 million and $384 million, respectively, in the comparable 2016 periods.
- Group Benefits net income increased to $69 million from $55 million in Q2 and to $114 million from $105 million for six months. The Q2 net income margin was 7.5%, compared with 6.0%.
- Mutual Funds net income increased 20% to $24 million in Q2 and 18% to $47 million for six months. Total segment assets under management were $107.7 billion at June 30, 2017, up from $91.4 billion a year earlier.
- Talcott Resolution net income was $105 million in Q2, essentially unchanged, and $173 million for six months, up from $121 million. Total account value declined 1% year over year to $149.2 billion.
Cash flow, capital, debt and liquidity
| Metric | June 30, 2017 | December 31, 2016 |
|---|---|---|
| Total assets | $225.863 billion | $223.432 billion |
| Total investments | $73.780 billion | $70.637 billion |
| Stockholders’ equity | $17.288 billion | $16.903 billion |
| Short-term debt | $320 million | $416 million |
| Long-term debt | $4.817 billion | $4.636 billion |
| Total debt | $5.137 billion | $5.052 billion |
| Cash | $362 million | $882 million |
- Six-month operating cash flow was $894 million, compared with $816 million. Investing activities used $1.476 billion, while financing activities were approximately neutral.
- Holding-company liquidity included approximately $1.2 billion of cash, short-term investments and fixed maturities, up to $1 billion of commercial paper capacity and a $1 billion revolving credit facility. No commercial paper or revolving-credit borrowings were outstanding at June 30, 2017.
- Debt-to-stockholders’ equity was 30% and debt-to-capitalization was 23%.
- The company repurchased 13.3 million shares for $650 million during the first six months and had $650 million remaining under its repurchase authorization at June 30.
- Book value per diluted share increased to $46.84 from $44.35 at December 31, 2016, primarily because of higher equity and AOCI and fewer shares outstanding.
Material changes versus the prior comparable period
- GAAP net income declined because of a $750 million pretax, $488 million after-tax pension settlement charge recognized in Q2 2017. The charge related to transferring approximately $1.6 billion of pension obligations to a group annuity contract.
- Operating performance improved excluding the pension settlement, helped by better P&C reserve development, lower Q2 catastrophe losses, higher fee income, stronger Mutual Funds results and improved Group Benefits results.
- Commercial Lines earned premiums increased 4% in both Q2 and the first half, while Personal Lines earned premiums declined 5% and 4%, respectively.
- The company issued $500 million of junior subordinated notes in February 2017 and repaid $416 million of senior notes at maturity in March 2017. The new notes bear interest at three-month LIBOR plus 2.125%; an interest-rate swap effectively fixes the rate at approximately 4.39% through 2027.
- Accumulated other comprehensive income improved from a $337 million loss at year-end 2016 to $494 million of income, primarily because of higher unrealized investment gains and pension-related changes.
Guidance, outlook, commentary and risks
- Management expects 2017 annualized net investment income yield, excluding limited partnerships and alternative investments, to be slightly below the 2016 portfolio yield because reinvestment rates remain below the average yield of maturing and sold assets.
- The company expects approximately $300 million of additional pension contributions by year-end 2017 to maintain the plan’s pre-transaction funded status.
- Expected holding-company liquidity requirements over the next twelve months included $320 million of debt maturities, a planned $500 million call of junior subordinated debentures in June 2018, approximately $315 million of debt interest, approximately $330 million of dividends and the pension contribution.
- Management expects additional subsidiary dividends of approximately $425 million from P&C subsidiaries, $300 million from Hartford Life Insurance Company and $125 million from Hartford Life and Accident Insurance Company during the remainder of 2017, subject in part to regulatory approval.
- Net asbestos reserves were $1.288 billion and environmental reserves were $259 million at June 30, 2017. The company expects its regular comprehensive reviews of both reserves in the fourth quarter.
- An adverse development cover with National Indemnity Company provides up to $1.5 billion of protection for post-December 31, 2016 adverse asbestos and environmental development. However, cumulative development exceeding the $650 million premium paid may create significant earnings charges before deferred gains are recognized, and development above the treaty limit would remain with the company.
- Key risks include unfavorable reserve development, catastrophe and weather losses, market and interest-rate volatility, credit and reinsurance counterparty risk, variable-annuity guarantee exposure, Talcott Resolution runoff, pension funding, litigation, regulatory changes, cybersecurity and potential credit-rating downgrades.
- The Mutual Funds litigation was decided in favor of the company’s subsidiaries in February 2017, but plaintiffs appealed to the Third Circuit. Management states that the potential loss cannot reasonably be estimated.
Important facts for investors to verify
- Reconcile the $40 million Q2 GAAP loss and $338 million six-month profit with the $389 million and $767 million core earnings figures, including the pension settlement and tax effects.
- Monitor P&C underlying combined ratios, commercial auto and property loss trends, catastrophe activity and future asbestos and environmental reserve reviews.
- Assess the runoff trajectory of Talcott Resolution, including account values, surrender rates, guaranteed-benefit exposure and hedge-program volatility.
- Review liquidity after planned debt redemptions, pension contributions, dividends and share repurchases, including the availability and regulatory limits on subsidiary dividends.
- Evaluate investment portfolio sensitivity to interest rates, credit spreads, unrealized losses, alternative-investment results and other-than-temporary impairments.
- Confirm the status and potential financial impact of the Mutual Funds appeal, derivative collateral requirements and other disclosed litigation and contingencies.