Business Context and Reporting Period
This Form 10-Q is for The Hartford Financial Services Group, Inc. for the three and six months ended June 30, 2010. The filing describes a financial holding company providing life, retirement and investment products, and property and casualty insurance. The source metadata identifies “HARTFORD INSURANCE GROUP, INC.”, but the filing registrant is The Hartford Financial Services Group, Inc.
The interim financial statements are unaudited and prepared under U.S. GAAP. Results for the interim periods are not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Earned premiums | $3,506 million, down 2% | $7,033 million, down 5% |
| Fee income | $1,195 million, up 13% | $2,384 million, up 7% |
| Total revenues | $3,336 million, down 56% | $9,655 million, down 26% |
| Net investment income | Loss of $1,496 million | Income of $265 million, down 93% |
| Net realized capital gains (losses) | Gain of $11 million | Loss of $265 million |
| Net income | $76 million, versus a $15 million loss | $395 million, versus a $1,224 million loss |
| Net income (loss) available to common shareholders | $65 million; diluted EPS $0.14 | $(99) million; diluted EPS $(0.24) |
| Operating cash flow | Not separately provided for the quarter | $1,200 million, versus $1,986 million |
| Cash balance | Not applicable | $2,998 million at June 30, versus $2,558 million |
Reported revenue and earnings were heavily affected by mark-to-market losses of $2,649 million on equity securities supporting International variable annuities, with a corresponding amount credited to policyholders. Excluding this trading-related item, total revenues were $5,985 million for the quarter and $11,603 million for the first half, compared with $5,114 million and $11,232 million, respectively, in 2009.
- Total assets were $314.2 billion at June 30, 2010, compared with $307.7 billion at December 31, 2009.
- Total investments were $128.1 billion, including $77.1 billion of available-for-sale fixed maturities and $30.2 billion of trading equity securities.
- Stockholders’ equity was $18.9 billion, up from $17.9 billion, while accumulated other comprehensive loss improved to $1.4 billion from $3.3 billion.
- Long-term debt was $6.6 billion; short-term debt was zero at June 30, compared with $343 million at year-end 2009.
- Available consolidated liquidity was $13.6 billion, including $8.7 billion of short-term investments and $3.0 billion of cash, after deducting derivative collateral and cash associated with Japan variable annuities.
- The revolving credit facility provided $1.9 billion of availability, and no commercial paper was outstanding. The company reported compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly net income improved to $76 million from a $15 million loss, primarily because 2009 included substantially higher realized capital losses and because Life earnings improved. The benefit was partly offset by a $230 million after-tax DAC unlock charge, compared with a $360 million benefit in 2009, and approximately $100 million of after-tax goodwill impairment.
- First-half net income improved to $395 million from a $1.224 billion loss. The main drivers were a smaller after-tax DAC unlock charge of $145 million versus $1.134 billion in 2009 and lower after-tax realized capital losses of approximately $242 million versus $695 million.
- Life net income increased to $274 million from a $1.082 billion loss. Property and Casualty net income increased to $445 million from $285 million, while Corporate’s net loss improved to $324 million from $427 million.
- Property and Casualty ongoing operations underwriting results declined to $279 million from $410 million for the first half. The combined ratio before catastrophes and prior accident-year development increased to 92.8 from 90.2.
- Personal Lines underwriting results declined to a $19 million loss from $65 million of income, and Middle Market declined to a $10 million loss from $125 million of income. Specialty Commercial improved to $163 million from $59 million.
- The company strengthened net asbestos reserves by $169 million in the second quarter, compared with $138 million in the second quarter of 2009. Other Operations reported a $73 million quarterly net loss versus a $49 million loss.
- The company issued approximately 59.6 million common shares for net proceeds of $1.6 billion and issued $556 million of mandatory convertible preferred stock. It redeemed $3.4 billion of Series E preferred stock held by the U.S. Treasury and recorded a $440 million charge to retained earnings for accelerated discount accretion.
- The company issued $1.1 billion of senior notes and repaid $275 million of senior notes at maturity. Total debt increased 13% from year-end, while debt to capitalization increased to 26% from 25%.
- The company adopted new variable-interest-entity consolidation guidance, increasing assets by $432 million, liabilities by $406 million and retained earnings by $26 million at January 1, 2010.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management expects lower U.S. variable annuity sales and continued net outflows through 2010 while distributors transition to the new variable annuity product. Fixed annuity sales are expected to remain pressured until interest rates rise.
- Management expects low interest rates to continue reducing fixed-maturity yields and increasing the cost and volatility of GMWB hedging. The company intentionally emphasized protection of statutory surplus, which may increase U.S. GAAP earnings volatility.
- Property and Casualty management expects 2010 combined ratios to be higher than 2009 levels in Personal Lines, Small Commercial, Middle Market and Specialty Commercial, reflecting catastrophe losses, claim severity, pricing pressure and expense trends.
- Group Benefits reported higher morbidity and lower claim terminations; management initiated pricing actions and expects lower 2010 sales following a 19% first-half sales decline.
- Institutional stable-value products experienced $1.2 billion of account-value payouts in the second quarter. The company may accelerate additional repayments and expects to fund obligations with cash, short-term investments and investment maturities.
- Net asbestos and environmental reserves were $2.25 billion at June 30, 2010, within a disclosed estimated range of $1.79 billion to $2.55 billion. Management stated that future changes could materially affect earnings, financial condition and liquidity.
- The company recorded a $153 million pretax goodwill impairment for Federal Trust Corporation and accrued $72.5 million for a structured-settlement class-action settlement, subject to final court approval.
- Derivative agreements could require additional collateral following ratings downgrades. A one-level downgrade could require approximately $29 million of additional collateral and a two-level downgrade approximately $42 million, based on June 30 market values.
- Major risks include equity and credit-market volatility, commercial real estate deterioration, interest-rate and foreign-currency movements, unfavorable loss development, catastrophe claims, reinsurance collectibility, ratings downgrades, policyholder behavior, regulatory changes, litigation and potential further DAC, goodwill or deferred-tax-asset impairments.
Most Important Facts for Investors to Verify
- Whether reported earnings remain positive after excluding volatile trading results, realized gains and losses, DAC unlocks, asbestos reserve changes and goodwill impairment.
- The sensitivity of GMWB, GMDB and GMIB liabilities and hedging results to equity markets, interest rates, volatility and the Japanese yen.
- The adequacy and potential range of asbestos, environmental, property and casualty reserves, including reinsurance recoverability.
- Life subsidiary statutory capital, risk-based capital ratios, ratings and the regulatory capacity to upstream dividends.
- The sustainability of liquidity after stable-value payouts, policyholder withdrawals, debt maturities, derivative collateral requirements and potential ratings-related collateral calls.
- Progress and market acceptance of the new variable annuity product, continuing net outflows and the profitability of the U.S. and International annuity blocks.
- The final court approval and cash impact of the $72.5 million structured-settlement litigation settlement.
- Implementation effects of the Dodd-Frank Act, including possible new capital, margin, clearing, investment and holding-company requirements.