The Hartford Releases 1Q Financial Results

The Hartford reported core earnings of $564 million for the three months ended March 31, (first quarter 2014), up 23 percent from $457 million in first quarter 2013, reflecting improved results in all of the company's business segments.

In a release on April 28, the Company noted that core earnings per diluted share rose 27 percent to $1.18 from $0.93 in first quarter 2013, reflecting the growth in core earnings and the accretive impact of share repurchases over the past 12 months.

First quarter 2014 net income totaled $495 million, or $1.03 per diluted share, compared with a first quarter 2013 net loss of $241 million, or $0.58 per diluted share. First quarter 2014 net income includes $70 million of net realized capital losses, after-tax and deferred acquisition costs (DAC), excluded from core earnings compared with a first quarter 2013 net capital gain of $19 million, after-tax and DAC, excluded from core earnings. First quarter 2013 net loss also included an unlock charge of $541 million, after-tax, and a $138 million after-tax charge for extinguishment of debt.

"The Hartford's first quarter earnings were outstanding, reflecting the strong fundamentals of the P&C, Group Benefits and Mutual Funds businesses," said The Hartford's Chairman, President and CEO Liam E. McGee. "Despite the challenging winter weather, each business segment delivered core earnings growth over the prior year. Margins are improving and premiums are growing in P&C, while Group Benefits has achieved a substantial turnaround and Mutual Funds reported positive net flows.

"This morning's announcement on our agreement to sell the Japan annuity company marks an important turning point for The Hartford. The transaction will materially reduce The Hartford's risk profile at attractive economics, and positions us to create even greater value for shareholders. We are very pleased with The Hartford's transformation, and remain focused on continuing to drive profitable growth in our businesses," added McGee.

First quarter 2014 financial results included the following items that had a favorable $58 million, after-tax, or $0.12 per diluted share, impact on both net income and core earnings compared with items that increased net income and core earnings by a total of $27 million, after-tax, or $0.05 per diluted share, in first quarter 2013:

-Catastrophe losses in first quarter 2014 were approximately equal to the company's $57 million, after-tax, outlook but were higher than first quarter 2013 catastrophe losses of $21 million, after-tax, which were $36 million lower than the company's outlook;

-Favorable P&C (Combined) prior year loss and loss adjustment expense reserve development (PYD) of $26 million, after-tax, or $0.05 per diluted share, compared with first quarter 2013 unfavorable PYD of $9 million, after-tax, or $0.02 per diluted share; and

-A reduction in the estimated liability for New York State Workers' Compensation Board assessments (NY Assessments) of $32 million, after-tax, or $0.07 per diluted share, due to a change in legislation effective Jan. 1.

PROPERTY & CASUALTY (COMBINED) First Quarter 2014 Highlights:

-Written premiums grew 3 percent over first quarter 2013

-Combined ratio, before catastrophes and PYD, of 87.9

-Core earnings rose 21 percent to $386 million compared with $318 million in first quarter 2013

First quarter 2014 written premiums increased 3 percent over the prior year period, comprised of 1 percent growth in P&C Commercial and 6 percent growth in Consumer Markets.

First quarter 2014 underwriting gain was $253 million, up 64 percent from an underwriting gain of $154 million in first quarter 2013 as a result of improved current accident year results and favorable PYD, partially offset by higher catastrophe losses. First quarter 2014 underwriting gain also included a $49 million, before tax ($32 million, after-tax), benefit, or 2.0 points on the combined ratio, related to NY Assessments. Including this benefit, the combined ratio for first quarter 2014 improved 3.8 points to 89.8 compared with 93.6 in first quarter 2013.

Catastrophe losses totaled $86 million, before tax, in first quarter 2014, approximately equal to the company's $87 million outlook, but increased substantially, largely from prior year catastrophes, from first quarter 2013 catastrophe losses of $32 million, before tax. Favorable PYD totaled $40 million, before tax, in first quarter 2014, compared with an unfavorable $14 million, before tax, in first quarter 2013.

The first quarter 2014 P&C (Combined) combined ratio, before catastrophes, PYD and the 2.0 point benefit related to NY Assessments, improved 1.9 points to 87.9 compared with 91.8 in first quarter 2013. This improvement reflects better results in both P&C Commercial and Consumer Markets.

First quarter 2014 P&C (Combined) core earnings were $386 million, an increase of 21 percent from $318 million in first quarter 2013, largely due to improved underwriting results. First quarter 2014 net income was $363 million compared with $351 million in first quarter 2013, as improved underwriting results were reduced by net realized capital losses not included in core earnings of $23 million, after-tax, in first quarter 2014, compared with net realized capital gains not included in core earnings of $33 million, after-tax, in first quarter 2013.

P&C Commercial First Quarter 2014 Highlights:

-Written premiums grew 1 percent, driven by growth of 3 percent in Small Commercial and 4 percent in Middle Market

-Standard Commercial renewal written pricing increases remained strong, averaging 7 percent in first quarter 2014

-Combined ratio, before catastrophes and PYD, of 87.7

First quarter 2014 written premiums grew 1 percent to $1,669 million from $1,645 million in first quarter 2013 as a result of 3 percent growth in Small Commercial and 4 percent growth in Middle Market, offset by an 8 percent reduction in Specialty Commercial. Written premium growth resulted from rate increases and higher retention in Small Commercial and Middle Market and stronger new business production in Middle Market. The reduction in Specialty Commercial written premiums was due to 2013 underwriting initiatives in the Programs line, where premiums declined 43 percent due to the company's exit from transportation programs. Excluding Programs, Specialty Commercial written premiums grew 16 percent driven by growth in National Accounts.

Renewal written pricing increases in Standard Commercial, which is comprised of Small Commercial and Middle Market, remained strong at 7 percent and above loss cost inflation trends in first quarter 2014 and included price increases in all business lines. Renewal written pricing increases averaged 7 percent and 6 percent in Small Commercial and Middle Market, respectively.

New business premium for Small Commercial was essentially flat with first quarter 2013 at $131 million, while Middle Market new business premium rose 14 percent to $111 million from first quarter 2013. Policy count retention in Small Commercial was 83 percent in first quarter 2014, up one point from 82 percent in first quarter 2013. Middle Market policy count retention for first quarter 2014 was 81 percent, up 4 points from 77 percent in first quarter 2013.

P&C Commercial underwriting gain was $136 million in first quarter 2014 versus an underwriting gain of $91 million in first quarter 2013 due to the NY Assessments expense benefit and improved current accident year results, partially offset by higher catastrophe losses. The first quarter 2014 combined ratio, before catastrophes and PYD, improved 5.4 points to 87.7 in first quarter 2014 compared with 93.1 in first quarter 2013. The improvement was driven by a 2.2 point improvement in underwriting results driven by Small Commercial and Middle Market and a 3.2 point expense benefit related to NY Assessments.

The first quarter 2014 combined ratio of 91.2 was up slightly over first quarter 2013 excluding the NY Assessments, largely due to increased catastrophes that were partially offset by favorable PYD in first quarter 2014. First quarter 2014 catastrophe losses totaled $60 million, before tax, compared with $6 million, before tax, in first quarter 2013. Favorable PYD totaled $7 million, before tax, in first quarter 2014 compared with unfavorable PYD of $8 million, before tax, in first quarter 2013.

Consumer Markets First Quarter 2014 Highlights:

-Written premiums rose 6 percent over first quarter 2013

-New business premium increased 16 percent year over year, driven by auto

-Combined ratio improved to 86.5 compared with 92.0 in first quarter 2013

First quarter 2014 written premiums in Consumer Markets rose 6 percent from first quarter 2013 as a result of strong new business premium growth, improved policy retention, and sustained renewal written price increases. New business premium in first quarter 2014 totaled $136 million, 16 percent higher than first quarter 2013 new business premium of $117 million due to strong auto new business growth across all channels, but particularly in AARP Agency and Other Agency. First quarter 2014 premium retention for auto improved 1 point to 89 percent and homeowners increased by 1 point to 93 percent. First quarter 2014 renewal written price increases averaged 5 percent in auto and 8 percent in homeowners, compared with 5 percent and 6 percent, respectively, in first quarter 2013.

Consumer Markets recorded an underwriting gain of $125 million in first quarter 2014 compared with an underwriting gain of $72 million in first quarter 2013. First quarter 2014 combined ratio was 86.5, 5.5 points better than first quarter 2013 combined ratio of 92.0, primarily due to an improved expense ratio and favorable PYD. Catastrophe losses totaled $26 million, before tax, in first quarter 2014, flat with first quarter 2013. Favorable PYD in first quarter 2014 totaled $34 million, before tax, and was due to favorable development on prior year catastrophes and homeowners, compared with unfavorable PYD of $4 million, before tax, in first quarter 2013.

Before catastrophes and PYD, first quarter 2014 combined ratio improved 1.2 points to 87.4 from 88.6 in first quarter 2013 due to a lower expense ratio as a result of higher earned premiums and reduced marketing spending. The first quarter 2014 current accident year loss ratio of 63.6 deteriorated modestly from 63.4 in first quarter 2013, primarily driven by adverse winter weather in January and February.

P&C Other Operations

First quarter 2014 underwriting loss was $8 million compared with $9 million in first quarter 2013. First quarter 2014 results included unfavorable PYD of $1 million, before tax, while first quarter 2013 had unfavorable PYD of $2 million, before tax.

GROUP BENEFITS First Quarter 2014 Highlights:

-Core earnings of $45 million, up 50 percent from first quarter 2013, due primarily to improved group long-term disability results

-After-tax core earnings margin improved to 5.1 percent compared with 3.2 percent in first quarter 2013

-Loss ratio improved 2.9 points from first quarter 2013 to 74.5 percent

First quarter 2014 Group Benefits core earnings totaled $45 million, a 50 percent increase from $30 million in first quarter 2013, primarily due to improved group long-term disability resulting from improved long-term disability incidence trends, continued strong long-term disability recoveries and improved pricing. Net income in first quarter 2014 totaled $51 million, up 21 percent from $42 million in first quarter 2013, reflecting higher core earnings, partially offset by lower net realized capital gains excluded from core earnings of $6 million, after-tax, in first quarter 2014 compared with $12 million, after-tax, in first quarter 2013.

The loss ratio of 74.5 percent in first quarter 2014 improved by 2.9 points from 77.4 percent in first quarter 2013 due to improved group long-term disability results. The group disability loss ratio, which combines both short-term and long-term disability results, improved by 7.5 points to 82.4 percent from 89.9 percent in first quarter 2013. As a result of improved loss trends, the after-tax core earnings margin rose to 5.1 percent from 3.2 percent in first quarter 2013.

In first quarter 2014, fully insured ongoing premiums were $776 million, down 4 percent from first quarter 2013. The reduction in premiums was primarily due to continued management actions related to the Association-Financial Institutions block of business. Excluding this block of business, fully insured Group Benefits premiums declined 1 percent from first quarter 2013.

MUTUAL FUNDS First Quarter 2014 Highlights:

-Retail and retirement mutual fund (Mutual Funds) net flows of $18 million were positive for the first time since first quarter 2011

-Core earnings were $21 million, up 5 percent from first quarter 2013

-Total Mutual Funds assets under management (AUM) of $73.3 billion at March 31, an 11 percent increase from March 31, 2013

First quarter 2014 Mutual Funds net flows totaled $18 million, the first positive quarter since first quarter 2011, compared with net outflows of $498 million in first quarter 2013. The improvement in net flows reflects a 9 point improvement in the annualized redemption rate (gross redemptions divided by beginning of period AUM) from 30 percent in first quarter 2013 to 21 percent in first quarter 2014. Mutual Funds sales totaled $3.7 billion, down 10 percent from first quarter 2013, due to lower sales of fixed income retail mutual funds.

Total core earnings for the Mutual Funds segment rose 5 percent to $21 million in first quarter 2014 compared with $20 million in first quarter 2013. First quarter 2014 net income was $21 million, up 17 percent from $18 million in first quarter 2013. Core earnings and net income grew as a result of increased revenue from higher average AUM reflecting improved net flows and higher equity capital market levels. Core earnings for Mutual Funds increased, partially offset by lower core earnings from annuity mutual funds (Annuity) that are associated with the company's run-off U.S. VA block.

Total AUM rose 6 percent to $98.3 billion at March 31, from $92.4 billion at March 31, 2013 due to 11 percent growth in Mutual Funds AUM during that time period, partially offset by a 6 percent decline in Annuity AUM, reflecting the run-off of that block of business.

TALCOTT RESOLUTION First Quarter 2014 Highlights:

-Announced agreement to sell Japan annuity business for $895 million; expected to close in July 2014

-Transaction will permanently eliminate The Hartford'sJapan variable annuity (VA) risk

-U.S. VA policy counts declined 3 percent from Dec. 31, 2013 while annualized full surrender rate was 12 percent during first quarter 2014

First Quarter 2014 Results

Talcott Resolution first quarter 2014 core earnings were $175 million, an 8 percent increase over $162 million in first quarter 2013 due to higher limited partnerships and other alternative investment income, lower DAC amortization and lower costs from the Enhanced Surrender Value (ESV) program that, in total, more than offset the decline in fee income due to VA surrender activity over the past 12 months. First quarter 2013 core earnings included $25 million, after-tax, of costs for the company's ESV program, while first quarter 2014 results did not include material ESV program costs.

Net income for Talcott Resolution in first quarter 2014 totaled $145 million compared with a net loss of $294 million in first quarter 2013, which included a $541 million, after-tax, charge, primarily driven by the write-off of Japan VA DAC as a result of expanded hedging programs during that quarter. First quarter 2014 net income included net realized capital losses excluded from core earnings of $44 million, after-tax and DAC, partially offset by an unlock benefit of $14 million, after-tax. First quarter 2013 net loss included a DAC unlock charge of $541 million, after-tax, net realized capital gains excluded from core earnings of $43 million, after-tax, and a net reinsurance gain on disposition of $44 million, after-tax, related to the sale of the Retirement Plans business in January 2013.

Primarily as a result of surrender activity, U.S. VA account values declined 4 percent to $59.5 billion from $61.8 billion at Dec. 31, 2013. U.S. VA policy counts as of March 31, declined 3 percent from Dec. 31, 2013, a permanent reduction in risk. In first quarter 2014, the U.S. VA annualized full surrender rate was 12.3 percent, including 1.1 points from the ESV program, compared with 14.5 percent in first quarter 2013, which included 3.5 points from the ESV program. Surrenders, excluding the impact of the ESV program, were up slightly from first quarter 2013 due to the moneyness and aging of the U.S. VA block. At March 31, only 6 percent of contracts with living benefit guarantees were in-the- money; the average moneyness of these contracts was 12 percent as of March 31.

Due largely to first quarter 2014 surrenders and lump sum annuitization withdrawals, Japan VA account values declined by 12 percent to $17.8 billion at March 31, from $20.1 billion at Dec. 31, 2013, while Japan VA policy counts as of March 31, declined 11 percent from Dec. 31, 2013, a permanent reduction in risk. The Japan VA annualized full surrender rate, which does not include lump sum withdrawals by policyholders that have reached annuitization eligibility, was 38.1 percent in first quarter 2014, up from 9.6 percent in first quarter 2013. The increase in the Japan VA surrender rate was due both to the improved moneyness level and the aging of the block. At March 31, approximately 26 percent of the contracts with living benefit guarantees, including guaranteed minimum income benefits, were in-the-money; the average moneyness of these contracts was only 4 percent at March 31.

Announcement of Agreement to Sell Japan Annuity Business

The Hartford announced an agreement to sell Hartford Life Insurance K.K. (HLIKK), its Japan annuity company, for $895 million to a subsidiary of ORIX Corp., a diversified Japanese financial services company. Closing of the sale which is expected in July, is subject to satisfaction or waiver of customary conditions, including regulatory approvals from the Japan Financial Services Agency and other regulators and other terms and conditions, as described in the purchase agreement in the company's 8-K filing with the SEC.

Concurrent with closing, all reinsurance agreements between HLIKK and The Hartford's U.S. life insurance subsidiaries will terminate, with the exception of an agreement covering about $1.1 billion of fixed payout annuities related to the 3Win product written by HLIKK.

The Company estimates that the March 31, pro forma effect of the sale is a GAAP loss of approximately $675 million, after-tax, and a statutory surplus loss of approximately $275 million, after-tax, in its U.S. life subsidiaries. The expected loss on sale and the results of operations of HLIKK prior to closing of the transaction will be reported as discontinued operations beginning in the second quarter of 2014. As discontinued operations, the results of operations of HLIKK will be excluded from income from continuing operations and from core earnings for all periods presented in the financial statements.

The Company estimates a March 31, pro forma capital benefit from the transaction of approximately $1.4 billion, including the net sales proceeds of approximately $860 million, after-tax, and an estimated reduction in capital required in the Company's U.S. life insurance subsidiaries of approximately $540 million due to the termination of certain reinsurance agreements with those subsidiaries supporting the Japan annuity business.

The purchase price is subject to potential upward or downward adjustment at the closing based on changes in the adjusted net worth of HLIKK and changes in the value of the in-force variable annuity business of HLIKK from a reference date of Dec. 31, 2013 through the date of closing. The estimated March 31, GAAP loss, statutory surplus loss and total capital benefit from the sale will be impacted by any adjustments to the purchase price, offset by any gains or losses in the Company's Japan VA hedging program. While the Company's Japan VA hedging program is designed to largely offset the effect of the purchase price adjustment on the estimated capital benefit, gains or losses from the hedging program could differ materially from the purchase price adjustment. Under such circumstances, the total capital benefit of the transaction at closing and the estimated GAAP loss and statutory surplus loss could differ materially from the estimates set forth above.

CORPORATE

First quarter 2014 Corporate core losses totaled $63 million, versus core losses of $73 million in first quarter 2013. The Corporate net loss totaled $85 million in first quarter 2014 compared with a net loss of $358 million in first quarter 2013. The net loss in first quarter 2013 included a $138 million charge, after- tax, for the early extinguishment of debt and a $69 million loss on disposition, after-tax, due to a reduction in goodwill related to the sale of the Retirement Plans business in January 2013. The improvement in core losses was principally due to lower interest expense as a result of debt repayments during 2013. Interest expense decreased from $107 million, before tax, in first quarter 2013 to $95 million, before tax, in first quarter 2014.

INVESTMENTS First Quarter 2014 Highlights:

-Annualized investment yield of 4.4 percent, before tax, higher than first quarter 2013

-Annualized investment yield, excluding limited partnerships and other alternative investments, before tax, was 4.0 percent, down from 4.1 percent in first quarter 2013

-Net impairment losses, including mortgage loan loss reserves, totaled $22 million, before tax

First quarter 2014 net investment income, excluding trading securities associated with the company's Japan VA business, totaled $836 million, before tax, a 2 percent decrease from first quarter 2013. The decrease in net investment income was largely due to a reduced level of invested assets, primarily in Talcott Resolution, and lower income from repurchase agreements, compared with first quarter 2013.

Annualized investment yield, before tax, including investment income on limited partnerships and other alternative investments, was 4.4 percent in first quarter 2014, slightly higher than first quarter 2013. Limited partnerships and other alternative investments generated income of $97 million, before tax, for an annualized return of 13 percent in first quarter 2014 compared with first quarter 2013 investment income of $66 million, before tax, or 9 percent. First quarter 2014 annualized investment yield, before tax, excluding limited partnerships and other alternative investments, decreased to 4.0 percent, compared with 4.1 percent in first quarter 2013. The reduction in annualized investment yield from first quarter 2013 was primarily due to reduced income from repurchase agreements compared with first quarter 2013.

First quarter 2014 new money yields of 3.9 percent approximated the yield on securities that matured or were sold during the quarter. The duration of the general account portfolio, excluding certain assets related to hedging the VA business, was 5.0 years at March 31, shorter than the duration of 5.3 years at Dec. 31, 2013.

The credit performance of the company's general account assets remains strong. Net impairment losses in first quarter 2014, including the change in mortgage loan loss reserves, totaled $22 million, before tax, compared with $21 million, before tax, in first quarter 2013.

The fair value of total invested assets, excluding trading securities associated with the company's Japan VA business, was $79.7 billion as of March 31, compared with $78.7 billion at Dec. 31, 2013, a slight increase principally due to lower market interest rates and credit spread tightening as of March 31, compared with Dec. 31, 2013. This also impacted net unrealized gains on available- for-sale securities, which rose to $2.9 billion, before tax, as of March 31, up from $1.7 billion, before tax, as of Dec. 31, 2013.

The Hartford's stockholders' equity was $19.8 billion as of March 31, an increase of $0.9 billion, or 5 percent, from $18.9 billion as of Dec. 31, 2013, principally due to first quarter 2014 net income of $495 million and the impact of lower interest rates at March 31, on AOCI. March 31, shareholders' equity includes first quarter 2014 share repurchases totaling $300 million and common dividends of $67 million.

During first quarter 2014, the company repurchased 8.8 million common shares, which contributed to the reduction in outstanding and dilutive potential common shares from 483.0 million at Dec. 31, 2013 to 475.8 million at March 31. Under the capital management plan announced in February 2014, the company has $2 billion of equity repurchase authorization through Dec. 31, 2015. As of April 23, the company has repurchased equity totaling $600 million under this program, including $300 million in first quarter 2014 and $300 million since April 1.

Book value per diluted common share was $41.56 as of March 31, an increase of 6 percent compared with $39.14 as of Dec. 31, 2013. Excluding AOCI, book value per diluted common share* increased 2 percent to $40.17 as of March 31, compared with $39.30 as of Dec. 31, 2013.

More information:

www.thehartford.com

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