The Hartford(US:HIG)2022-10-27 20:21Part I - Financial Information Financial Statements This section presents the unaudited condensed consolidated financial statements for The Hartford Financial Services Group, Inc. as of September 30, 2022, including statements of operations, comprehensive income, balance sheets, changes in stockholders' equity, and cash flows, along with detailed notes covering significant accounting policies, segment performance, investments, derivatives, reserves, and other financial details Condensed Consolidated Statements of Operations Highlights | Indicator | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $5,580M | $5,686M | $16,346M | $16,574M | | Income before income taxes | $431M | $583M | $1,526M | $1,996M | | Net income | $339M | $482M | $1,226M | $1,636M | | Net income available to common stockholders | $333M | $476M | $1,210M | $1,620M | | Diluted EPS | $1.02 | $1.36 | $3.65 | $4.54 | Condensed Consolidated Balance Sheets Highlights | Indicator | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total investments | $50,661M | $57,749M | | Total assets | $71,801M | $76,578M | | Total liabilities | $58,846M | $58,735M | | Total stockholders' equity | $12,955M | $17,843M | Condensed Consolidated Statements of Cash Flows Highlights | Indicator | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $2,924M | $2,889M | | Net cash used for investing activities | ($705M) | ($1,748M) | | Net cash used for financing activities | ($2,253M) | ($963M) | Note 3 - Segment Information The company operates in five main segments: Commercial Lines, Personal Lines, P&C Other Operations, Group Benefits, and Hartford Funds, with Commercial Lines being the largest contributor to net income at $1,058 million for the nine months ended September 30, 2022, and total earned premiums and fee income growing to $15.4 billion year-to-date Net Income (Loss) by Segment (YTD ended Sep 30) | Segment | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Commercial Lines | $1,058 | $1,055 | | Personal Lines | $47 | $304 | | P&C Other Operations | ($6) | $26 | | Group Benefits | $184 | $207 | | Hartford Funds | $117 | $155 | | Corporate | ($174) | ($111) | | Total Net Income | $1,226 | $1,636 | Total Earned Premiums and Fee Income by Segment (YTD ended Sep 30) | Segment | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Commercial Lines | $7,833 | $7,053 | | Personal Lines | $2,218 | $2,240 | | Group Benefits | $4,511 | $4,260 | | Hartford Funds | $803 | $884 | | Corporate | $37 | $38 | | Total | $15,402 | $14,475 | Note 5 - Investments The company reported net realized losses of $649 million for the nine months ended September 30, 2022, a significant shift from net realized gains of $297 million in the prior year, primarily due to net unrealized losses on equity securities and fixed maturities, while the mortgage loan portfolio grew to $5.9 billion Net Realized Gains (Losses) (YTD ended Sep 30) | Component | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Gross gains on sales of fixed maturities | $54 | $162 | | Gross losses on sales of fixed maturities | ($256) | ($54) | | Net realized and unrealized gains (losses) on equity securities | ($450) | $134 | | Net credit losses on fixed maturities, AFS | ($15) | $4 | | Change in ACL on mortgage loans | ($7) | $12 | | Total Net Realized (Losses) Gains | ($649) | $297 | - As of September 30, 2022, fixed maturities (AFS) in an unrealized loss position totaled $33.4 billion in fair value, with gross unrealized losses of $3.9 billion, a significant increase from December 31, 2021, when unrealized losses were $144 million9899 Mortgage Loans by Property Type (Amortized Cost) | Property Type | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Industrial | $2,146M (36.0%) | $1,931M (35.7%) | | Multifamily | $2,222M (37.2%) | $1,833M (33.9%) | | Office | $611M (10.2%) | $627M (11.6%) | | Retail | $948M (15.9%) | $951M (17.6%) | | Total | $5,967M | $5,412M | Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses For the nine months ended September 30, 2022, the company recorded favorable prior accident year development of $147 million for its P&C business, a reversal from $170 million of unfavorable development in the prior-year period, driven by workers' compensation, package business, and personal auto liability, while Group Benefits also saw favorable development of $323 million P&C Prior Accident Year Development (YTD ended Sep 30) | Line of Business | 2022 (in millions) | 2021 (in millions) | | :--- | :--- | :--- | | Workers' compensation | ($143) | ($113) | | General liability | $33 | $451 | | Package business | ($35) | ($66) | | Automobile liability (Comm. & Pers.) | $9 | ($64) | | Catastrophes | ($32) | ($98) | | Total Prior Accident Year Development | ($147) | $170 | - For the nine months ended September 30, 2022, favorable development in workers' compensation was driven by lower than estimated claim severity for accident years 2014-2018, while unfavorable development in general liability was driven by increased settlement costs for large claims from 2016-2019188189 - Group disability prior period reserve estimates decreased by approximately $275 million YTD, driven by lower long-term disability claim incidence, strong recoveries, and higher estimated claim termination rates213 Note 13 - Commitments and Contingencies The company is involved in various legal proceedings, including over 300 lawsuits related to COVID-19 business interruption claims, ongoing management of run-off asbestos and environmental (A&E) claims partially mitigated by a reinsurance agreement with NICO, and a pending settlement agreement with the Boy Scouts of America for $787 million related to sexual abuse claims - The company has been named in over 300 lawsuits seeking coverage for business income losses due to COVID-19, which it denies citing lack of direct physical damage and virus exclusions235236 - A settlement agreement with the Boy Scouts of America (BSA) for $787 million was executed in February 2022, pending final court approval after bankruptcy court approval in September 2022203204 - The company has an Adverse Development Cover (A&E ADC) with NICO to reinsure A&E loss development, with $1,015 million of the $1.5 billion limit utilized, leaving $485 million of available coverage as of September 30, 2022207251 Note 14 - Equity The company actively repurchased $1.2 billion (17 million shares) of its common stock during the nine months ended September 30, 2022, and authorized a new $3.0 billion share repurchase program in July 2022, with $3.1 billion remaining available for repurchases as of September 30, 2022 - During the nine months ended September 30, 2022, the company repurchased $1.2 billion (17 million shares) of its common stock256 - In July 2022, the Board of Directors approved a new share repurchase authorization for up to $3.0 billion, effective from August 1, 2022, to December 31, 2024, with $3.1 billion remaining available for repurchases under all programs as of September 30, 2022256 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a 30% decrease in Q3 net income available to common stockholders to $333 million, driven by net realized investment losses and lower net investment income, while core earnings for Q3 rose to $471 million from $442 million year-over-year, detailing segment performance, cost reduction plans, enterprise risks, and capital position Reconciliation of Net Income to Core Earnings | (in millions) | Three Months Ended Sep 30, 2022 | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2021 | | :--- | :--- | :--- | :--- | :--- | | Net income available to common stockholders | $333 | $476 | $1,210 | $1,620 | | Adjustments (Net realized losses, restructuring, etc.) | $138 | ($34) | $536 | ($139) | | Core earnings | $471 | $442 | $1,746 | $1,481 | - The 'Hartford Next' operational transformation plan is expected to achieve annual expense savings of approximately $560 million by 2022 and $625 million by 2023, relative to 2019 levels, with cumulative savings for the nine months ended Sep 30, 2022, at $413 million335338 Commercial Lines Commercial Lines reported net income of $286 million for Q3 2022, down from $357 million in Q3 2021, primarily due to net realized losses and lower investment income, despite an improved underwriting result and a combined ratio of 94.3% Commercial Lines Underwriting Ratios (Q3) | Ratio | 2022 | 2021 | Change (pts) | | :--- | :--- | :--- | :--- | | Total loss and loss adjustment expense ratio | 62.6% | 69.2% | (6.6) | | Expense ratio | 31.5% | 31.8% | (0.3) | | Combined ratio | 94.3% | 101.2% | (6.9) | | Underlying combined ratio | 89.3% | 87.2% | 2.1 | - Written premiums grew 10% in Q3 2022 to $2.8 billion, driven by growth across Small Commercial, Middle & Large Commercial, and Global Specialty segments, reflecting strong new business, retention, and renewal price increases422445 Personal Lines Personal Lines reported a net loss of $36 million in Q3 2022, a sharp decline from a $51 million net income in Q3 2021, due to higher current accident year loss costs in both auto and homeowners, increased catastrophe losses, and less favorable prior year development, resulting in a combined ratio of 109.6% Personal Lines Underwriting Ratios (Q3) | Ratio | 2022 | 2021 | Change (pts) | | :--- | :--- | :--- | :--- | | Total loss and loss adjustment expense ratio | 82.5% | 71.2% | 11.3 | | Expense ratio | 27.1% | 27.4% | (0.3) | | Combined ratio | 109.6% | 98.7% | 10.9 | | Underlying combined ratio | 95.9% | 91.8% | 4.1 | - The underlying combined ratio for Automobile increased to 102.6% in Q3 2022 from 99.7% in Q3 2021, driven by an increase in average physical damage claim severity470485 Group Benefits Group Benefits net income rose to $86 million in Q3 2022 from $28 million in Q3 2021, primarily driven by a significant reduction in excess mortality losses to $26 million from $212 million in the prior-year quarter, with fully insured ongoing premiums growing 6% to $1.5 billion and the total loss ratio improving to 72.8% - Excess mortality losses were $26 million in Q3 2022, a substantial decrease from $212 million in Q3 2021, which was the primary driver of the segment's improved profitability507515 Group Benefits Ratios, Excluding Buyouts (Q3) | Ratio | 2022 | 2021 | Change (pts) | | :--- | :--- | :--- | :--- | | Group disability loss ratio | 68.4% | 68.4% | 0.0 | | Group life loss ratio | 83.1% | 110.9% | (27.8) | | Total loss ratio | 72.8% | 84.7% | (11.9) | | Expense ratio | 25.4% | 25.2% | 0.2 | Hartford Funds Hartford Funds reported a net income of $41 million for Q3 2022, down 27% from $56 million in Q3 2021, due to lower fee income resulting from a 16% decrease in daily average assets under management (AUM) to $129.8 billion, and net outflows of $2.2 billion in the quarter - Daily average AUM decreased 16% to $129.8 billion in Q3 2022 from $155.0 billion in Q3 2021, leading to lower fee income and net income519 - The segment experienced net outflows of $2.2 billion in Q3 2022, a reversal from net inflows of $295 million in Q3 2021, which, combined with market depreciation, led to a 22% year-over-year decline in mutual fund and ETF AUM524529 Enterprise Risk Management The company categorizes its main risks as insurance, operational, and financial, managed through disciplined underwriting, exposure controls, and risk transfer via reinsurance, maintaining a detailed property catastrophe reinsurance program and a high-quality investment portfolio with 84.8% of fixed maturities rated 'A' or better Primary Catastrophe Treaty Reinsurance Coverages (as of Sep 30, 2022) | Treaty | Retention / Attachment Point | Coverage | | :--- | :--- | :--- | | Per Occurrence Property | | | | Earthquakes/Named Hurricanes | $350M | 75% of $150M xs $350M; 90% of $600M xs $500M | | Other Perils | $100M (subject to $50M AAD) | 70% of $250M xs $100M | | Aggregate Property | $700M | 100% of $200M xs $700M | | Workers' Comp | $100M | 80% of $350M xs $100M | - The company's estimated deductible under the Terrorism Risk Insurance Program (TRIPRA) is $1.7 billion for 2022555 Fixed Maturities, AFS by Credit Quality | Rating | Fair Value (Sep 30, 2022) | Percent of Total | | :--- | :--- | :--- | | US Gov't/Agencies | $5,018M | 14.0% | | AAA | $5,675M | 15.9% | | AA | $6,465M | 18.1% | | A | $8,972M | 25.1% | | BBB | $7,732M | 21.7% | | BB & below | $1,855M | 5.2% | | Total | $35,717M | 100.0% | Capital Resources and Liquidity The company maintains a strong capital and liquidity position, with the holding company holding $1.1 billion in liquid assets as of September 30, 2022, and expecting to receive approximately $1.5 billion in net dividends from its P&C subsidiaries for 2022, despite a decrease in total capitalization to $17.3 billion from $22.8 billion at year-end 2021 - As of September 30, 2022, the holding company held $1.1 billion in liquid assets and had access to a $750 million undrawn revolving credit facility636 - The company's U.S. P&C insurance subsidiaries have a dividend capacity of $2.0 billion for 2022, with approximately $1.5 billion of net dividends expected to be paid to the holding company during the year637 Capital Structure | (in millions) | Sep 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total debt | $4,356 | $4,944 | | Total stockholders' equity | $12,955 | $17,843 | | Total capitalization | $17,311 | $22,787 | | Debt to capitalization | 25% | 22% | Controls and Procedures The company's principal executive officer and principal financial officer concluded that as of September 30, 2022, the company's disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the third quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the quarter708 - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting709 Part II - Other Information Legal Proceedings Information regarding the company's legal proceedings is contained in Note 13 of the Notes to Condensed Consolidated Financial Statements - For details on legal proceedings, refer to Note 13 - Commitments and Contingencies710 Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2021 - The company's risk factors are incorporated by reference from its 2021 Form 10-K Annual Report711 Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of 2022, the company repurchased approximately 5.4 million shares of its common stock for a total of $350 million, with approximately $3.1 billion remaining available for purchase under its publicly announced share repurchase programs as of September 30, 2022 Issuer Purchases of Equity Securities (Q3 2022) | Period | Total Shares Purchased | Average Price Paid | Value of Shares Remaining for Purchase (end of period) | | :--- | :--- | :--- | :--- | | July 2022 | 1,860,590 | $64.15 | $329M | | August 2022 | 2,158,032 | $66.03 | $3,188M | | September 2022 | 1,361,856 | $66.07 | $3,098M | | Total | 5,380,478 | $65.39 | $3,098M |