The Hartford Reports Second Quarter 2013 Financial Results

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The Hartford Reports Second Quarter 2013 Financial Results

  • Core earnings* totaled $324 million, or $0.66 per diluted share, including $95 million, or $0.19 per diluted share, of losses from prior year development
  • Net loss of $190 million, or $0.42 per diluted share, compared with net loss of $101 million, or $0.26 per diluted share, in second quarter 2012
  • Standard Commercial renewal written pricing increased 8%, in line with the last three quarters
  • P&C combined ratio, before catastrophes and prior year development*, improved to 91.8 from 93.6 in second quarter 2012
  • Annualized full surrender rates of Japan and U.S. variable annuities increased to 34.8% and 17.5%, respectively
  • Equity repurchase authorization for 2013-2014 expanded in June to $1.25 billion; repurchases totaled $118 million in second quarter 2013
  • Quarterly dividend increased by 50% to $0.15 per share

HARTFORD, Conn.--(BUSINESS WIRE)-- The Hartford (NYS: HIG) reported core earnings of $324 million, or $0.66 per diluted share, for the three months ended June 30, 2013 (second quarter 2013), up 18% from $274 million, or $0.56per diluted share, in second quarter 2012. The improvement from the prior year quarter was principally due to higher core earnings in Property & Casualty (P&C), Group Benefits and Mutual Funds and a lower core loss in Corporate.


The company reported a second quarter 2013 net loss of $190 million, or $0.42 per diluted share, which included $421 million, after-tax, of realized capital losses, principally from the company's international variable annuity (VA) hedging programs, and a $126 million, after-tax, loss from discontinued operations due to the agreement to sell Hartford Life International Limited (HLIL) for approximately $285 million in cash. Second quarter 2012 net loss totaled $101 million, or $0.26 per diluted share, and included a $587 million, after-tax, loss on extinguishment of debt and realized capital gains of $369 million, after-tax, principally from international VA hedging programs.

"The Hartford continues to deliver shareholder value through profitable growth, reduced risk and capital management," said The Hartford's Chairman, President and CEO Liam E. McGee. "This quarter, P&C, Group Benefits and Mutual Funds margin improvements drove core earnings for those businesses up 28% compared with second quarter 2012. We remain focused on achieving renewal written price increases in P&C Commercial, which averaged 8% this quarter for Standard Commercial, in line with the last three quarters. In June, we expanded the 2013 and 2014 equity repurchase program by $750 million, to a total of $1.25 billion, and increased the quarterly dividend by 50%."

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

"We continue to make progress reducing the size and risk of Talcott Resolution," said Executive Vice President and Chief Financial Officer Christopher J. Swift. "During the second quarter, variable annuity surrender activity increased, with full surrenders rising to 34.8% on the Japan block and to 17.5% in the U.S., reflecting policyholder behavior in strong markets and our management of the block. In addition, we agreed to sell our U.K. variable annuity business at attractive economics to a subsidiary of Berkshire Hathaway."

CONSOLIDATED FINANCIAL RESULTS

   
($ in millions except per share data)Three Months Ended
   June 30, 2013   June 30, 2012   Change2
Core earnings (losses):            
Property & Casualty   $140   $101   39%
Group Benefits   $37   $34   9%
Mutual Funds   $20   $19   5%
Sub-Total   $197   $154   28%
Talcott Resolution   $196   $200   (2)%
Corporate   ($69)   ($80)   (14)%
Core earnings   $324   $274   18%
Net loss   ($190)   ($101)   88%
Net loss available to common shareholders per share   $(0.42)   $(0.26)   62%
Weighted average diluted common shares outstanding   489.0   485.8   1%
Core earnings available to common shareholders per diluted share1   $0.66   $0.56   18%

[1] Includes dilutive potential common shares and, in second quarter 2012, assumed conversion of preferred shares

[2] 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

Second quarter 2013 net income and core earnings included unfavorable prior year development (PYD) of $95 million, after-tax, or $0.19 per diluted share on a core earnings basis, including $91 million, after-tax, associated with the company's annual ground-up review of asbestos and environmental reserves and $52 million, after-tax, due to the closing of the New York Fund for Reopened Cases (NY25A). Second quarter catastrophe losses were in line with management's forecast at $121 million, after-tax.

Second quarter 2012 included the following items that decreased net income by $95 million, after-tax, and core earnings by $98 million, after-tax, or $0.20 per diluted share on a core earnings basis:

  • Second quarter 2012 catastrophe losses that were higher than the company's forecast by approximately $105 million, after-tax, or $0.21 per diluted share;
  • Unfavorable PYD of $32 million, after-tax, or $0.07 per diluted share on a core earnings basis, including $33 million, after-tax, associated with the company's annual ground-up review of asbestos and environmental reserves; and
  • Net income of $42 million, or $0.09 per diluted share, and core earnings of $39 million, or $0.08 per diluted share, from the Retirement Plans and Individual Life businesses that were sold in first quarter 2013, and HLIL, which was classified as a discontinued operation effective March 31, 2013.

PROPERTY & CASUALTY (CONSOLIDATED)
Second Quarter 2013 Highlights:

  • Core earnings rose 39% due to improved underwriting results compared with second quarter 2012
  • Combined ratio improved to 105.4 from 107.5 in second quarter 2012
  • Combined ratio, before catastrophes and PYD, improved to 91.8 from 93.6 in second quarter 2012
      
PROPERTY & CASUALTY
($ in millions)   Three Months Ended
    

Jun. 30
2013

   

Jun. 30
2012

   Change

Underwriting gain (loss)*

   $(132)   $(183)   (28)%
Investment income   $338   $319   6%
Core earnings   $140   $101   39%
Net income   $136   $84   62%
Expense ratio   28.5   28.6   0.1
Combined ratio   105.4   107.5   2.1
Combined ratio before catastrophes and PYD   91.8   93.6   1.8
PYD, before tax   $146   $49   198%
Current accident year catastrophe losses, before tax   $186   $290   (36)%
Written premiums   $2,501   $2,472   1%

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.

Second quarter 2013 P&C (Consolidated) net income was $136 million and core earnings were $140 million, 62% and 39% increases, respectively, primarily reflecting a reduced underwriting loss and higher limited partnership and other alternative investment income compared with second quarter 2012. The improved underwriting results in P&C (Consolidated) were principally due to better Consumer Markets and P&C Commercial underwriting results driven by lower catastrophe losses and improved current accident year underwriting margins that were partially offset by increased unfavorable PYD in P&C Other Operations and, to a lesser extent, P&C Commercial.

Second quarter 2013 combined ratio and underwriting loss were 105.4 and $132 million, respectively, compared with 107.5 and $183 million in second quarter 2012. Before catastrophes and PYD, second quarter 2013 P&C (Consolidated) combined ratio improved to 91.8 compared with 93.6 in second quarter 2012, reflecting improved underwriting margins in both P&C Commercial and Consumer Markets.

Catastrophe losses totaled $186 million, before tax, in second quarter 2013 compared with $290 million, before tax, in second quarter 2012. Unfavorable PYD totaled $146 million, before tax, in second quarter 2013 compared with unfavorable PYD of $49 million, before tax, in second quarter 2012. Unfavorable PYD in second quarter 2013 was comprised of $37 million from P&C Commercial and $141 million from P&C Other Operations, principally due to the company's annual ground-up asbestos and environmental reserve study, partially offset by favorable PYD of $32 million in Consumer Markets. Second quarter 2013 P&C Commercial unfavorable PYD included $80 million for NY25A, before tax.

Second quarter 2013 P&C (Consolidated) written premiums increased 1% over the prior year period, reflecting 1% growth in P&C Commercial Markets and 2% growth in Consumer Markets.

P&C Commercial
Second Quarter 2013 Highlights:

  • Underwriting gain of $25 million compared with a $7 million underwriting loss in second quarter 2012 reflecting improved current accident year results and lower catastrophes
  • Standard Commercial renewal written price increases rose to 8% in second quarter 2013 compared with 7% in second quarter 2012
  • Middle Market workers' compensation and property both achieved written pricing increases in the 9-10% range during second quarter 2013
P&C COMMERCIAL         
($ in millions)   Three Months Ended
    

June 30,
2013

   June 30,
2012
   Change
Underwriting gain (loss)   $25   $(7)   NM
Combined ratio   98.4   100.5   2.1
Combined ratio before catastrophes and PYD   93.1   94.5   1.4
Written premiums   $1,533   $1,516   1%
Standard commercial rate increases   8%   7%   1.0

P&C Commercial underwriting gain was $25 million in second quarter 2013 compared with an underwriting loss of $7 million in second quarter 2012. The improvement in underwriting results was due to improved current accident year results and lower catastrophes, which were slightly offset by higher unfavorable PYD. Second quarter 2013 catastrophe losses totaled $44 million, before tax, for 14 events compared with $74 million, before tax, for 13 events in second quarter 2012. Unfavorable PYD increased to $37 million, before tax, in second quarter 2013 compared with unfavorable PYD of $19 million, before tax, in second quarter 2012. Second quarter 2013 unfavorable PYD included $80 million ($52 million, after-tax) due to NY25A.

The combined ratio before catastrophes and PYD improved to 93.1 in second quarter 2013 compared with 94.5 in second quarter 2012, reflecting improved underwriting margins in Middle Market and Specialty driven by the company's pricing and underwriting initiatives since mid-year 2011.

P&C Commercial renewal written pricing continued to be strong, achieving increases in all standard commercial business lines in second quarter 2013. Standard Commercial, which is comprised of Small Commercial and Middle Market, achieved renewal written pricing increases of 8%, a 1 point increase over second quarter 2012 and stable with first quarter 2013. Middle Market pricing increased 8%, including Middle Market workers' compensation and property pricing increases in the 9-10% range during second quarter 2013.

Written premiums grew 1% from $1,516 million in second quarter 2012 to $1,533 million in second quarter 2013, driven by growth in Small Commercial and Middle Market, up 2% and 1%, respectively. Written premium growth reflects higher pricing on renewals in Small Commercial and stronger new business production in Middle Market. Policy count retention in Small Commercial was 80% in second quarter 2013 compared with 82% in second quarter 2012. Middle Market policy count retention for second quarter 2013 was 79%, an improvement from 73% in second quarter 2012. New business premium for Small Commercial and Middle Market totaled $241 million, up 13% from $213 million in second quarter 2012 driven by Middle Market workers' compensation, property, auto and general liability.

Consumer Markets
Second Quarter 2013 Highlights:

  • Written premiums rose 2% compared with second quarter 2012 due to strong new business and improved retention
  • Combined ratio, excluding catastrophes and PYD, improved to 88.9 compared with 91.3 in second quarter 2012
  • Auto policy count retention improved 2 points and homeowners improved 1 point compared with second quarter 2012
CONSUMER MARKETS         
($ in millions)   Three Months Ended
    

June 30,
2013

   

June 30,
2012

   Change
Underwriting loss   $(9)   $(114)   (92%)
Combined ratio   101.0   112.6   11.6
Combined ratio before catastrophes and PYD   88.9   91.3   2.4
Written premiums   $967   $950   2%

Consumer Markets reported an underwriting loss of $9 million in second quarter 2013, down from an underwriting loss of $114 million in second quarter 2012 due to favorable loss trends, including reduced current accident year catastrophe losses and more favorable PYD. Second quarter 2013 underwriting results included current accident year catastrophe losses of $142 million, before tax, compared with $216 million, before tax, in second quarter 2012. Favorable PYD was $32 million, before tax, in second quarter 2013 compared with favorable PYD of $23 million, before tax, in second quarter 2012. Favorable PYD in second quarter 2013 was predominantly due to favorable PYD on catastrophes driven by Storm Sandy.

Consumer Markets combined ratio, before catastrophes and PYD, was 88.9 in second quarter 2013, down from 91.3 in second quarter 2012. The improvement of 2.4 points reflects earned pricing increases, favorable loss cost trends and a 1 point improvement in the expense ratio. The auto combined ratio, before catastrophes and PYD, was down 2.2 points due to earned pricing increases and favorable auto liability frequency. The homeowners combined ratio, before catastrophes and PYD, was 2.3 points better than second quarter 2012 driven by earned pricing increases and favorable non-catastrophe weather claim frequency.

Second quarter 2013 written premiums rose 2% from second quarter 2012 as a result of improved premium and policy count retention and a 10% increase in new written premium from AARP Direct and AARP Agency production. Auto new business premiums were up 9% while homeowners increased 13%. Second quarter 2013 policy count retention for auto and homeowners increased by 2 points and 1 point to 86% and 87%, respectively, from second quarter 2012. Premium retention for auto and homeowners each increased by 2 points to 88% and 92%, respectively.

P&C Other Operations

Second quarter 2013 underwriting loss was $148 million compared with $62 million in second quarter 2012. Second quarter 2013 results included unfavorable PYD of $141 million, before tax, while second quarter 2012 included unfavorable PYD of $53 million, before tax. The PYD was largely due to a $130 million, before tax, increase in asbestos reserves compared with $48 million, before tax, in second quarter 2012. Environmental PYD totaled $10 million, before tax, compared with $3 million in second quarter 2012. The company completes its annual review of asbestos and environmental reserves during the second quarter of each year.

GROUP BENEFITS
Second Quarter 2013 Highlights:

  • Core earnings were $37 million, up 9% from $34 million in second quarter 2012, driven by improved group long-term disability results
  • After-tax core earnings margin was 3.9% compared with 3.2% in second quarter 2012
  • Fully insured premiums declined 13% in second quarter 2013 from second quarter 2012 primarily due to pricing discipline for new and renewal business, the loss of a large account due to pricing and other considerations, and management actions specifically related to the Association block of business
  • Loss ratio improved 2.9 points from second quarter 2012 to 75.7% driven by improving long-term disability pricing and loss trends
         
GROUP BENEFITS
($ in millions)   Three Months Ended
    

June 30,
2013

   

June 30,
2012

   

Change

Fully insured premiums¹   $822   $950   (13%)
Loss ratio   75.7%   78.6%   2.9
Core earnings   $37   $34   9%

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

Group Benefits second quarter 2013 net income rose 74% to $61 million compared with $35 million in second quarter 2012 due to higher realized capital gains and improved core earnings. Second quarter 2013 realized capital gains totaled $24 million, after-tax, compared with $0 million, after-tax, in second quarter 2012. Core earnings in second quarter 2013 were $37 million compared with $34 million in second quarter 2012, driven by improved group long-term disability results.

The loss ratio improved to 75.7 in second quarter 2013 compared with 78.6 in second quarter 2012, a 2.9 point improvement. The overall group disability loss ratio improved by 10.4 points from the prior year quarter, reflecting improved claims incidence and continued favorable claim recovery trends.

In second quarter 2013, fully insured premiums in Group Benefits were $822 million, a 13% decrease compared with $950 million in second quarter 2012. The reduction in premiums was primarily due to the effect of the company's pricing discipline for new business and case renewals, and management actions specifically related to the Association block of business.

MUTUAL FUNDS
Second Quarter 2013 Highlights:

  • Gross sales improved 32% versus second quarter 2012
  • Core earnings were $20 million, up compared with $19 million in second quarter 2012
  • Total Mutual Funds assets under management rose 7% to $63.6 billion at June 30, 2013 from $59.3 billion at June 30, 2012
         
MUTUAL FUNDS
($ in millions)   Three Months Ended
    

June 30,
2013

   

June 30,
2012

   Change
Core earnings   $20   $19   5%
Total Mutual Funds assets under management   $63,608   $59,343   7%
Average Mutual Funds assets under management   $64,708   $61,302   6%
Annuity assets under management   $25,901   $26,888   (4%)
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