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, 2013. The registrant is an insurance and financial services holding company focused on Property & Casualty, Group Benefits and Mutual Funds, while managing legacy life and annuity businesses in runoff. The filing identifies approximately 18,800 employees, $277.9 billion of total assets and $18.9 billion of stockholders’ equity at year-end.
The filing completed the strategic portfolio realignment through the sales of Retirement Plans to MassMutual, Individual Life to Prudential and the U.K. variable annuity business to Columbia Insurance Company. Talcott Resolution now primarily manages legacy annuity and other runoff obligations.
Financial Performance and Key Metrics
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Total revenues | $26.236 billion | $26.122 billion | +$114 million |
| Income from continuing operations, net of tax | $310 million | $(100) million | +$410 million |
| Net income | $176 million | $(38) million | +$214 million |
| Net income available to common shareholders | $166 million | $(80) million | +$246 million |
| Diluted EPS | $0.34 | $(0.18) | Improved |
| Core earnings | $1.742 billion | $1.386 billion | +$356 million |
| Operating cash flow | $1.237 billion | $2.681 billion | Down $1.444 billion |
| Total debt | $6.544 billion | $7.126 billion | Down 8% |
| Stockholders’ equity | $18.905 billion | $22.447 billion | Down 16% |
Revenue was supported by a $832 million increase in total net investment income, including $6.061 billion from trading equity securities, and a $1.575 billion realized gain on business dispositions. These benefits were partly offset by a $1.581 billion decline in fee income and a $405 million decline in earned premiums.
Property & Casualty Commercial net income increased to $870 million from $547 million. Its combined ratio improved to 96.1 from 102.9, and its combined ratio before catastrophes and prior-year development improved to 93.0 from 96.6. Consumer Markets net income increased to $229 million from $166 million, with a combined ratio of 95.2 versus 97.4. Group Benefits net income increased to $192 million from $129 million, and its after-tax margin excluding realized gains improved to 4.3% from 2.4%.
Mutual Funds net income increased modestly to $76 million from $71 million. Total mutual fund assets under management increased to $70.918 billion from $61.611 billion, although net flows remained negative at $(4.524) billion. Talcott Resolution reported a $634 million net loss compared with $1 million of net income, primarily because of variable annuity hedge losses, runoff-related fee declines and significant Unlock charges.
The 2013 net loss from discontinued operations was $134 million, compared with income of $62 million in 2012, primarily reflecting a $102 million after-tax loss on the sale of the U.K. variable annuity business. Other comprehensive income was a loss of $2.922 billion, largely due to declines in unrealized securities gains, hedging instruments and foreign currency translation.
Material Changes Versus the Prior Comparable Period
- Current accident-year catastrophe losses declined to $312 million from $706 million, primarily benefiting Property & Casualty results.
- Current accident-year losses before catastrophes declined to $6.3 billion from $6.6 billion.
- Prior-year reserve development shifted to $192 million of unfavorable development from $4 million of favorable development. The 2013 amount included $130 million of net asbestos strengthening, $12 million of environmental strengthening and $80 million related to the closing of the New York Section 25A Fund for Reopened Cases.
- Talcott Resolution recorded an $806 million pretax Unlock charge versus a $47 million benefit in 2012. The 2013 charge included $887 million related to higher assumed hedging costs for the Japan variable annuity block.
- Variable annuity hedge program losses increased to $1.558 billion from $1.288 billion, driven primarily by rising global equity markets and yen depreciation.
- The Company completed major divestitures and transferred substantial assets and liabilities through reinsurance arrangements. Net reinsurance recoverables increased to $23.330 billion from $4.666 billion, including $19.4 billion related to MassMutual and Prudential.
- The Company repurchased approximately $800 million of senior notes, issued $300 million of 4.3% senior notes due 2043, repaid $320 million of notes at maturity and repurchased $600 million of common stock and $33 million of warrants.
Guidance, Outlook, Risks and Unusual Items
For 2014, management expected low single-digit written premium growth in Property & Casualty Commercial and Consumer Markets. It targeted a combined ratio before catastrophes and prior-year development of approximately 90.0 to 92.0 for Property & Casualty Commercial and 87.0 to 90.0 for Consumer Markets. Group Benefits premiums were expected to decline because of actions to reduce association business, while its after-tax margin excluding buyouts and realized gains was expected to be approximately 4.5% to 5.0%. Mutual Funds earnings were expected to grow approximately 10%, assuming normal market conditions.
Talcott Resolution was expected to continue shrinking through surrenders, policyholder initiatives and potential risk-reducing transactions. Management expected declining account values and earnings, continued earnings volatility from Japan variable annuity hedges and margin pressure as the runoff block becomes smaller.
- Key market exposures include equity prices, interest rates, credit spreads, foreign exchange rates, volatility and real estate markets. The Company states that hedging may reduce economic risk while increasing GAAP and statutory earnings volatility.
- Variable annuity guarantees are sensitive to market declines, policyholder behavior, surrender rates, volatility and yen movements. The Company retained significant exposure despite reinsurance and hedging.
- Net asbestos and environmental reserves were approximately $2.007 billion at year-end, including $1.732 billion of asbestos reserves and $275 million of environmental reserves. Management disclosed that ultimate liabilities could materially exceed recorded reserves.
- The Company had $703 million of unfunded investment commitments, including $531 million for limited partnerships and $165 million primarily for commercial mortgage loans.
- Derivative agreements could require additional collateral after rating downgrades. A one-level downgrade could require approximately $12 million of additional collateral, while a two-level downgrade could require approximately $33 million.
- The Mutual Funds Litigation seeks recovery of advisory fees and related damages; the filing states that the potential loss cannot reasonably be estimated.
- TRIPRA, the principal federal backstop for large-scale terrorism losses, was scheduled to expire at the end of 2014, creating potential coverage and pricing uncertainty.
- Liquidity was described as sufficient for anticipated needs. The holding company had $1.9 billion of cash, short-term investments and fixed maturities, a $1.75 billion revolving credit facility with no borrowings outstanding at year-end, and a $500 million contingent capital facility.
Most Important Facts an Investor Should Verify
- Reconcile statutory capital, RBC ratios, dividend capacity and the availability of capital at the holding company versus regulated insurance subsidiaries.
- Assess the collectability and collateral coverage of the $20.595 billion of life insurance reinsurance recoverables, particularly the $9.9 billion due from Prudential.
- Review the sensitivity of Talcott Resolution’s guarantees, DAC, reserves and earnings to equity markets, interest rates, volatility, yen exchange rates and surrender behavior.
- Evaluate the adequacy and uncertainty of asbestos, environmental, workers’ compensation and commercial auto reserves, including the disclosed reserve sensitivities.
- Separate recurring operating performance from business-disposition gains, hedge-program losses, Unlock charges, discontinued operations and debt-extinguishment costs.
- Confirm execution of the announced $2 billion 2014–2015 equity repurchase authorization and the planned debt reduction, while monitoring impacts on ratings and statutory capital.
- Monitor the Mutual Funds Litigation, terrorism-insurance legislation, regulatory developments and any changes in reinsurance terms or counterparty credit quality.
- Note that the supplied request names “HARTFORD INSURANCE GROUP, INC.”, while the filing registrant is “THE HARTFORD FINANCIAL SERVICES GROUP, INC.”