The Hartford Reports First Quarter 2013 Financial Results

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The Hartford Reports First Quarter 2013 Financial Results

  • Core earnings* of $456 million, or $0.92 per diluted share
  • Net loss of $241 million, or $0.58 per diluted share
  • Standard Commercial renewal written price increases averaged 9%
  • Combined ratio, before catastrophes and prior year development*, of 91.8 compared with 93.9 in the first quarter of 2012
  • Sales of Individual Life and Retirement Plans closed in January 2013
  • Japan variable annuity hedging programs expanded in the first quarter of 2013 to effectively eliminate currency and equity market risk

HARTFORD, Conn.--(BUSINESS WIRE)-- The Hartford (NYS: HIG) reported core earnings of $456 million, or $0.92 per diluted share, for the three months ended March 31, 2013 (first quarter 2013), up 7% from $426 million, or $0.87per diluted share, for the three months ended March 31, 2012 (first quarter 2012). Improved core earnings in the company's go forward Property and Casualty (P&C), Group Benefits and Mutual Funds businesses and lower core losses in Corporate were partially offset by reduced core earnings from Talcott Resolution, the company's run-off life and annuity operation, due to the January 2013 sales of the Retirement Plans and Individual Life businesses and lower core earnings from annuities.

The company reported a first quarter 2013 net loss of $241 million, or $0.58 per diluted share, compared with net income of $96 million, or $0.18 per diluted share, in the first quarter of 2012. First quarter net income included a $541 million, after tax, unlock charge principally due to the expanded hedging of the international variable annuity block, and a $138 million, after tax, loss on extinguishment of debt.


"The Hartford reported strong performance in the first quarter of 2013," said The Hartford's Chairman, President and CEO Liam E. McGee. "Our go-forward businesses delivered core earnings growth of 19% across Property and Casualty, Group Benefits and Mutual Funds. P&C Standard Commercial renewal written price increases averaged 9% and our consolidated P&C combined ratio, ex-catastrophes and prior year development, improved by more than 2 points to 91.8. Group Benefits core earnings of $30 million were significantly improved from last year and gross sales for Mutual Funds were up 34% over first quarter 2012. We are pleased with the progress we are making with these businesses, as well as their outlook for profitable growth."

*Denotes financial measures not calculated based on generally accepted accounting principles ("non-GAAP").

"During the quarter, we executed a major portion of our capital management plan and effectively eliminated the currency and equity market risk of the Japan variable annuity block with an expanded hedging program," said Executive Vice President and Chief Financial Officer Christopher J. Swift. "Talcott Resolution is now capital self-sufficient, the company's capital flexibility is significantly enhanced, and our capital generation outlook is improved. As a result, we are developing the next phase of our 2013 and 2014 capital management plans."

CONSOLIDATED FINANCIAL RESULTS

($ in millions except per share data)  Three Months Ended

 

  

March 31,
2013

  

March 31,
2012

  Change3
Net income (loss)  ($241)  $96  NM
Net income (loss) available to common shareholders per diluted share  $(0.58)  $0.18  NM
Core earnings (losses):         
Property & Casualty  $318  $284  12%
Group Benefits  30  5  NM
Mutual Funds  20  20  —%
Talcott Resolution  161  219  (26)%
Corporate  (73)  (102)  (28)%
Core earnings  $456  $426  7%
Weighted average diluted common shares outstanding  493.1  489.9  1%
Core earnings available to common shareholders per diluted share1  $0.92  $0.87  6%
Book value per diluted share  $42.43  $43.25  (2)%
Book value per diluted share (ex. AOCI)2  $39.09  $40.55  (4)%

[1] Includes dilutive potential common shares and assumed conversion of preferred shares
[2] Accumulated other comprehensive income (AOCI)
[3] The Hartford defines increases or decreases greater than or equal to 200%, or changes from a net gain to a net loss position, or vice versa, as "NM" or not meaningful.

First quarter 2013 net income and core earnings included the following items that increased both net income and core earnings by $27 million, after tax, or $0.05 per diluted share:

  • First quarter 2013 catastrophe losses that were lower than the company's forecast by approximately $36 million, after tax ($0.07 per diluted share on a core earnings basis); first quarter 2013 catastrophe losses totaled $21 million, after tax; and
  • First quarter 2013 unfavorable prior year development (PYD) of $14 million, before tax ($9 million, after tax, or $0.02 per diluted share on a core earnings basis).

First quarter 2012 included the following items that increased net income by $57 million, after tax, and core earnings by $58 million, after tax, or $0.12 per diluted share on a core earnings basis:

  • First quarter 2012 catastrophe losses that were lower than the company's forecast by approximately $1 million, after tax; catastrophe losses totaled $46 million, after tax;
  • Favorable PYD of $29 million, before tax ($19 million, after tax, or $0.04 per diluted share on a core earnings basis); and
  • Net income of $37 million and core earnings of $38 million (or $0.08 per diluted share) from the Retirement Plans and Individual Life businesses that were sold on January 1, and January 2, respectively, of 2013.


PROPERTY & CASUALTY (CONSOLIDATED)
First Quarter 2013 Highlights:

  • First quarter 2013 core earnings rose 12% due to better underwriting results compared with the first quarter of 2012
  • First quarter 2013 combined ratio improved to 93.6 from 95.6 in the first quarter of 2012
  • First quarter 2013 combined ratio, before catastrophes and prior year development (PYD), improved to 91.8 from 93.9 in the first quarter of 2012
PROPERTY & CASUALTY
($ in millions)  Three Months Ended
   March 31,
2013
  March 31,
2012
  Change
Written premiums  $2,523  $2,549  (1)%
Underwriting gain  $154  $108  43%
Investment income  $312  $317  (2)%
Core earnings  $318  $284  12%
Net income  $351  $324  8%
Combined ratio  93.6  95.6  2.0
Combined ratio before catastrophes and PYD  91.8  93.9  2.1
PYD, before tax  $14  $(29)  NM
Catastrophe losses, before tax  $32  $71  (55)%

P&C (Consolidated) includes the consolidated financial results of the company's three P&C segments: P&C Commercial, Consumer Markets and P&C Other Operations.

First Quarter 2013 Results

First quarter 2013 P&C net income was $351 million and core earnings were $318 million, up 8% and 12%, respectively, over the first quarter of 2012. The increases reflect an improvement in the combined ratio and underwriting gain from 95.6 and $108 million, respectively, in the first quarter of 2012 to 93.6 and $154 million in the first quarter of 2013. The improvement in the combined ratio and underwriting gain was principally due to improved P&C Commercial underwriting margins as a result of the company's pricing and underwriting initiatives that began in 2011.

During the quarter, the company also had lower catastrophe losses that were partially offset by unfavorable PYD compared to the first quarter of 2012. Before catastrophes and PYD, the P&C (Consolidated) combined ratio in the first quarter of 2013 was 91.8 compared with 93.9 in the first quarter of 2012, reflecting improved underwriting margins in P&C Commercial. Catastrophe losses totaled $32 million, before tax, in the first quarter of 2013 compared with $71 million, before tax, in the first quarter of 2012. Unfavorable PYD totaled $14 million, before tax, in the first quarter of 2013 compared with favorable PYD of $29 million, before tax, in the first quarter of 2012. Unfavorable PYD in the first quarter of 2013 was comprised of $8 million from P&C Commercial, $4 million from Consumer Markets and $2 million from P&C Other.

First quarter 2013 written premiums declined 1% over the prior year period, as lower premiums in P&C Commercial Markets were partially offset by 2% written premium growth in Consumer Markets.

P&C Commercial
First Quarter 2013 Highlights:

  • First quarter 2013 underwriting gain of $91 million compared with $4 million in the first quarter of 2012 reflecting improved current accident year results, including lower catastrophes, as well as lower unfavorable PYD
  • Standard Commercial renewal written price increases rose to 9% in the first quarter of 2013 compared with 7% in the prior year quarter
  • Middle Market workers' compensation and property achieved renewal written price increases in the low teens in the first quarter of 2013
P&C COMMERCIAL
($ in millions)  Three Months Ended
   

March 31,
2013

  March 31,
2012
  Change
Underwriting gain  $91  $4  NM
Combined ratio  94.0  99.7  5.7
Combined ratio before catastrophes and PYD  93.1  96.4  3.3
Written premiums  $1,645  $1,687  (2)%

P&C Commercial underwriting gain was $91 million in the first quarter of 2013 compared with an underwriting gain of $4 million in the first quarter of 2012. The higher underwriting gain was primarily due to improved current accident year profitability, including lower catastrophes, as well as lower unfavorable PYD. First quarter 2013 catastrophe losses totaled $6 million, before tax, significantly lower than catastrophe losses of $32 million, before tax, in the first quarter of 2012. Unfavorable PYD declined to $8 million, before tax, in the first quarter of 2013 compared with unfavorable PYD of $20 million, before tax, in the first quarter of 2012.

The combined ratio, before catastrophes and PYD, improved to 93.1 in the first quarter of 2013 compared with 96.4 in the first quarter of 2012, reflecting improved underwriting margins in each of the company's business lines (Small Commercial, Middle Market and Specialty) resulting from the company's pricing and underwriting initiatives.

Written premiums declined 2% from $1,687 million in the first quarter of 2012 to $1,645 million in the first quarter of 2013. Excluding the conversion of one large account from a retrospectively-rated program to a high-deductible policy, written premiums decreased 1% over the same period driven by the impact of pricing and underwriting actions implemented to improve profitability. Pricing increases and new business did not fully offset the impact of non-renewals.

P&C Commercial renewal written pricing continued to be strong, achieving increases in all standard commercial business lines in the first quarter of 2013. Standard Commercial, which is comprised of Small Commercial and Middle Market, averaged renewal written pricing increases of 9%, a 2 point increase over the first quarter of 2012. Middle Market pricing increased 11%, while Middle Market workers' compensation and property pricing increased in the low teens.

New business premium for Small Commercial and Middle Market totaled $231 million, down 2% from $236 million in the first quarter of 2012. Policy count retention in Small Commercial was 82% in the first quarter of 2013 compared with 84% in the first quarter of 2012. Middle Market policy count retention for the first quarter of 2013 was 77%, a decrease from 79% in the first quarter of 2012.

Consumer Markets
First Quarter 2013 Highlights:

  • First quarter 2013 written premiums rose 2% compared with first quarter 2012 due to strong new business and improved retention
  • First quarter 2013 auto and homeowners new business premium rose 5% compared with the first quarter of 2012 due to growth in AARP Direct and AARP Agency
  • First quarter 2013 combined ratio, excluding catastrophes and PYD, improved to 88.6 compared with 88.8 in the prior year quarter
  • Auto and homeowners first quarter 2013 policy count retention each improved 2 points compared with the first quarter of 2012
CONSUMER MARKETS
($ in millions)  Three Months Ended
   March 31,
2013
  

March 31,
2012

  Change
Underwriting gain  $72  $118  (39%)
Combined ratio  92.0  87.0  (5.0)
Combined ratio before catastrophes and PYD  88.6  88.8  0.2
Written premiums  $878  $861  2%

Consumer Markets reported an underwriting gain of $72 million in the first quarter of 2013, down from $118 million in the first quarter of 2012 as lower catastrophe losses were more than offset by less favorable prior year reserve development. First quarter 2013 underwriting results included current year catastrophe losses of $26 million, before tax, compared with $39 million, before tax, in the first quarter of 2012. Unfavorable PYD was $4 million, before tax, in the first quarter of 2013 compared with favorable development of $55 million, before tax, in the first quarter of 2012.

Consumer Markets combined ratio, before catastrophes and PYD, was 88.6 in the first quarter of 2013, down from 88.8 in the first quarter of 2012. The improvement of 0.2 points reflected a 0.4 point improvement in the expense ratio driven by lower operating expenses and an improvement in the auto loss ratio that was partially offset by an increase in the homeowners loss ratio. The auto combined ratio, before catastrophes and PYD, was down 0.5 points due to earned pricing increases and lower underwriting expenses, partially offset by higher loss adjustment expenses. The homeowners combined ratio, before catastrophes and PYD, was 0.5 points higher than the first quarter of 2012 driven, in part, by modestly higher severity for fire and non-catastrophe weather claims.

First quarter 2013 written premiums rose 2% from the first quarter of 2012 as a result of improved premium and policy count retention and a 5% increase in new written premium due to strong production in AARP Direct and AARP Agency. Auto new business premiums were up slightly while homeowners increased 20%. First quarter 2013 policy count retention for auto and homeowners each increased by 2 points to 86% and 87%, respectively, from the first quarter of 2012. Premium retention for auto and homeowners increased by 4 points and 3 points to 88% and 92%, respectively.

P&C Other Operations
First Quarter 2013 Highlights:

First quarter 2013 underwriting loss was $9 million compared with $14 million in the first quarter of 2012. First quarter 2013 results included unfavorable PYD of $2 million, before tax, while first quarter of 2012 included unfavorable PYD of $6 million, before tax, primarily resulting from an increase in environmental reserves. The company will complete its annual ground-up reserve analysis of asbestos and environmental exposures in the second quarter of 2013.


GROUP BENEFITS
First Quarter 2013 Highlights:

  • Fully insured premiums declined 15% in the first quarter of 2013 as a result of continued pricing discipline and the previously-announced non-renewal of the segment's largest account due to pricing and other considerations
  • First quarter 2013 core earnings were $30 million, a significant improvement from $5 million in the first quarter of 2012, driven by improved group long-term disability results
  • After-tax margin on core earnings was 3.2% in the first quarter of 2013 compared with 0.5% in the first quarter of 2012
GROUP BENEFITS
($ in millions)  Three Months Ended
   March 31,
2013
  March 31,
2012
  Change
Fully insured premiums¹  $812  $954  (15%)
Loss ratio  77.4%  83%  5.6
Core earnings  $30  $5  NM

[1] Fully insured ongoing premiums excludes buyout premiums and premium equivalents

Group Benefits first quarter net income rose to $42 million compared with $18 million in the first quarter of 2012 due to improved core earnings. Core earnings in the first quarter of 2013 were $30 million compared with $5 million in the first quarter of 2012, driven by improved group long term disability results.

The loss ratio improved to 77.4% compared with 83% in the first quarter of 2012, a 5.6 point improvement. The overall group disability loss ratio improved by 8.3 points from the prior year period, reflecting improvements in the long-term disability loss ratio driven by lower severity and improved claim recoveries. Group long-term disability claims incidence was stable year over year, but remains elevated when compared to historical levels.

In the first quarter of 2013, fully insured premiums in Group Benefits were $812 million, down 15% compared with $954 million in the first quarter of 2012. The decline in premiums was a result of pricing discipline for new business and its impact on renewal persistency, and the non-renewal of the largest account in this segment due to pricing and other considerations. The impact on core earnings and net income of the non-renewal is expected to be nominal.


MUTUAL FUNDS
First Quarter 2013 Highlights:

  • First quarter 2013 gross sales improved 34% versus first quarter 2012
  • First quarter 2013 core earnings were $20 million, flat with the first quarter of 2012 as higher revenue was offset by increased distribution expenses
MUTUAL FUNDS
($ in millions)  Three Months Ended
   March 31,
2013
  March 31,
2012
  Change
Core earnings  $20  $20  —%
Total Mutual Funds assets under management  $65,808  $63,260  4%
Annuity assets under management  $26,628  $29,145  (9%)
Total assets under management  $92,436  $92,405  —%
Average assets under management  $90,042  $88,972  1%

First quarter 2013 net income for Mutual Funds totaled $18 million, down 10% compared with $20 million in the first quarter of 2012 due to higher distribution expenses combined with certain restructuring costs. Mutual Funds first quarter 2013 core earnings were $20 million, flat compared with the first quarter of 2012.

Mutual Funds assets under management increased 4% to $65.8 billion at March 31, 2013 from $63.3 billion at March 31, 2012, reflecting market appreciation of $6.3 billion, partially offset by $3.8 billion of negative net flows.


TALCOTT RESOLUTION
First Quarter 2013 Highlights:

  • The Japan variable annuity (VA) hedging program was expanded in the first quarter of 2013, effectively eliminating equity market and currency risk
  • U.S. VA account values totaling approximately $570 million were surrendered under the Enhanced Surrender Value Program (ESV), which was launched in the first quarter; the ESV program cost reduced core earnings by $25 million
  • Negative net flows in the U.S. and International VA blocks totaled $3.3 billion and $1.0 billion, respectively, in the first quarter of 2013
TALCOTT RESOLUTION
($ in millions)  Three Months Ended
   

March 31,
2013

  

March 31,
2012

  Change
Core earnings  $161  $219  (26%)
Net loss  $(294)  $(170)  73%
U.S. annuity account value  $76,297  $83,742  (9%)
International annuity account value  $32,241  $35,861  (10%)
U.S. VA annualized full surrender rate1  14.5%  9.6%  4.9
Japan VA annualized full surrender rate1  9.6%  2.8%  6.8

[1]Full surrender rate represents full contract liquidation; excludes partial withdrawals

Talcott Resolution first quarter 2013 net loss was $294 million compared with a net loss of $170 million in the first quarter of 2012. Talcott Resolution net loss for the first quarter of 2013 included the following items, which are not included in core earnings:

  • Unlock charge for market performance and assumption changes of $541 million, after tax, primarily due to expanded Japan VA hedging costs, compared with a benefit of $214 million, after tax, in the first quarter of 2012;
  • Restructuring and other costs of $1 million, after tax, compared with $0 million in the first quarter of 2012;
  • Net reinsurance gain on dispositions of $44 million, after tax, due to the sale of Individual Life and Retirement Plans businesses in January 2013; and
  • Net realized capital gain of $43 million, after tax and DAC, compared with losses of $603 million in the first quarter of 2012, principally as a result of the company's International VA hedging programs.

Talcott Resolution first quarter 2013 core earnings were $161 million, a 26% decrease compared with $219 million in the first quarter of 2012 principally due to the sale of the Individual Life and Retirement Plans businesses in January 2013. Excluding earnings from these two businesses, core earnings declined $20 million compared with the first quarter of 2012 principally due to costs for the ESV program, which totaled $25 million, after tax and DAC, as well as lower account values, partially offset by favorable market performance.

U.S. VA account values declined by 9% to $65.5 billion at March 31, 2013 from $72.2 billion at March 31, 2012 due to negative net flows of $12.1 billion. International VA account values declined by 9% to $28.7 billion at March 31, 2013 from $31.4 billion at March 31, 2012 due to negative net flows of $2.7 billion.

U.S. VA annualized full surrender rate increased in the first quarter of 2013 by 4.9 percentage points to 14.5% compared to first quarter of 2012 primarily driven by the ESV program. Japan VA annualized full surrender rate increased by 6.8 percentage points to 9.6% compared to first quarter of 2012 due to improved market levels coupled with the aging of the block in Japan.


CORPORATE

Net loss in Corporate totaled $358 million in the first quarter of 2013 compared with a net loss of $96 million in the first quarter of 2012. During the quarter, the company incurred a $138 million charge, after tax, for the early extinguishment of debt and a $69 million loss on disposition, after tax, due to write-off of goodwill; there were no corresponding charges in the first quarter of 2012. In addition, first quarter 2013 restruct

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