Market Overview

The Hartford Reports Second Quarter 2018 Income From Continuing Operations, After Tax, Of $1.19 Per Diluted Share And Core Earnings Of $1.13 Per Diluted Share

Share:
  • Income from continuing operations, after tax, totaled $434 million
    compared with a second quarter 2017 loss from continuing operations,
    after tax, of $152 million ($0.42 per diluted share), which included a
    $488 million, after tax, pension settlement charge
  • Core earnings* were $412 million, up 36% from $303 million ($0.81
    per diluted share), in second quarter 2017 due to higher income before
    income taxes in the Commercial Lines, Group Benefits and Mutual Funds
    segments and the favorable impact of a lower U.S. corporate tax rate
  • Property and casualty (P&C) combined ratio of 95.7 decreased 1.4
    points from second quarter 2017 due to higher favorable prior accident
    year development (PYD) and a better underlying combined ratio*,
    partially offset by higher current accident year catastrophe losses;
    P&C underlying combined ratio of 90.3 improved 1.3 points from second
    quarter 2017, reflecting better results in Commercial Lines and
    Personal Lines
  • Group Benefits net income of $96 million rose 39% from second
    quarter 2017 primarily due to the fourth quarter 2017 acquisition, an
    improved disability loss ratio, and the favorable impact of a lower
    U.S. corporate tax rate
  • Book value per diluted share of $34.44 declined 7% from Dec. 31,
    2017, due to lower net unrealized capital gains from
    higher
    interest rates and wider credit spreads and the sale of Talcott
    Resolution; book value per diluted share (excluding accumulated other
    comprehensive income (AOCI))* was $38.15, up 8%

* Denotes financial measure not calculated in accordance with
generally accepted accounting principles (non-GAAP); definitions of
non-GAAP measures and reconciliations to their closest GAAP measures can
be found in this news release under the heading Discussion of Non-GAAP
Financial Measures

The Hartford (NYSE:HIG) reported second quarter 2018 income from
continuing operations, after tax, of $434 million compared with a loss
from continuing operations of $152 million in second quarter 2017, which
included a $488 million, after tax, pension settlement charge. Excluding
the impact of this charge, second quarter 2018 income from continuing
operations rose $98 million over second quarter 2017 due to higher
Commercial Lines, Group Benefits and Mutual Funds income before income
taxes and the benefit of the lower U.S. corporate tax rate. Income from
continuing operations, after tax, per diluted share was $1.19 compared
with a loss from continuing operations, after tax, per diluted share of
$0.42 in second quarter 2017.

Core earnings of $412 million, or $1.13 per diluted share*, in second
quarter 2018 increased 36% from $303 million, or $0.81 per diluted
share, in second quarter 2017 driven by the Commercial Lines, Group
Benefits and Mutual Funds segments. In addition to the benefit of a
lower U.S. corporate tax rate compared with second quarter 2017, the
improvement in core earnings was due to Commercial Lines underwriting
results, including favorable PYD, higher Group Benefits core earnings
due to the contribution from the fourth quarter 2017 acquisition and
favorable disability results, and higher Mutual Funds assets under
management.

"Consistent execution and sharp focus on achieving our strategic and
financial goals led to another strong quarter for The Hartford," said
The Hartford's Chairman and CEO Christopher Swift. "Higher income before
income taxes from Commercial Lines, Group Benefits and Mutual Funds, as
well as the benefit of a lower U.S. corporate tax rate, drove core
earnings per diluted share of $1.13 up 40% from last year, while book
value per diluted share, excluding AOCI, rose 8% since Dec. 31, 2017.
Looking across all the businesses, I am very pleased with our financial
performance and our progress on strategic product, distribution and
technology initiatives, and the Group Benefits integration that
continues to go very well and remains on schedule. Supported by our
improved financial flexibility and financial results, we announced a 20%
increase in our common dividend last week."

The Hartford's President Doug Elliot said, "P&C and Group Benefits
results reflect our disciplined approach to pricing and underwriting in
markets that remain competitive. I'm pleased with our pricing progress
across Commercial Lines, with a 70 basis point sequential quarter
increase in renewal written pricing. While catastrophe losses were
higher this quarter than a year ago, P&C net income increased 27% over
second quarter 2017, including improved underlying margins in both
Commercial Lines and Personal Lines. Group Benefits net income grew 39%,
including the benefit of the acquisition, higher sales and strong
persistency, as well as lower loss and expense ratios and tax rates."

 

FINANCIAL RESULTS SUMMARY

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

Jun 30
2018

   

Jun 30
2017

    Change¹
Net income (loss) by segment:        
Commercial Lines $372 $258 44%
Personal Lines 6 24 (75%)
P&C Other Operations     5     20     (75%)
Property & Casualty     383     302     27%
Group Benefits     96     69     39%
Mutual Funds     37     24     54%
Sub-total     516     395     31%
Corporate     66     (435)     NM
Net income (loss)     $582     $(40)     NM
Less: Income from discontinued operations, after tax     148     112     32%
Income (loss) from continuing operations, after tax     $434     $(152)     NM
Less: Net realized capital gains (losses), excluded from core
earnings, before tax
50 53 (6%)
Less: Loss on extinguishment of debt, before tax (6) (100)%
Less: Pension settlement, before tax (750) 100%
Less: Integration and transaction costs associated with acquired
business, before tax
(11) (100)%
Less: Income tax benefit (expense), including amounts related to
before tax items excluded from core earnings
    (11)     242     NM
Core earnings     $412     $303     36%
Weighted average diluted common shares outstanding 364.2 372.3 (2%)
Income (loss) from continuing operations per diluted share2 3 $1.19 $(0.42) NM
Net income (loss) per diluted share2 3 $1.60 $(0.11) NM
Core earnings per diluted share2 3     $1.13     $0.81     40%
Select financial measures:
Common shares outstanding and dilutive potential common shares 364.3 369.1 (1%)
Book value per diluted share $34.44 $46.84 (26%)
Book value per diluted share (excluding AOCI)     $38.15     $45.50     (16%)
Net income (loss) ROE4 (15.4)% 3.9% (19.3)
Core earnings ROE*4     8.4%     6.9%     1.5
Select operating data:
Net investment income $428 $395 8%
Annualized investment yield, before tax, excluding limited
partnerships and other alternative investments (LPs)*
3.7% 3.8% (0.1)
Annualized LP yield, before tax     9.5%     10.1%     (0.6)
P&C net investment income $301 $302 —%
P&C annualized investment yield, before tax, excluding LPs* 3.8% 3.8%
Group Benefits net investment income $115 $88 31%
Group Benefits annualized investment yield, before tax, excluding
LPs*
    3.9%     4.3%     (0.4)
 

[1] 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

[2] Includes
dilutive potential common shares

[3] For the three
months ended Jun. 30, 2017, weighted average shares outstanding used in
calculating net loss per share excludes the effect of dilutive
securities of 6.3 million shares. The calculation of core earnings per
share includes the effect of dilutive securities in all periods
presented. In periods where a net loss before discontinued operations or
a core loss is recognized, inclusion of incremental dilution is
antidilutive

[4] Return on equity (ROE) calculated
based on last 12-months net income and core earnings, respectively; for
net income ROE, the denominator is stockholders' equity including
accumulated other comprehensive income (AOCI); for core earnings ROE,
the denominator is stockholders' equity excluding AOCI

Net income was $582 million in second quarter 2018 compared with a net
loss of $40 million in second quarter 2017, which included the pension
settlement charge. Excluding the pension settlement charge, the $134
million growth in net income was due to a $98 million increase in income
from continuing operations, after tax, and a $36 million increase in
income from discontinued operations, after tax. Income from discontinued
operations of $148 million in second quarter 2018 was principally due to
an increase in the net operating loss carryover and other tax benefits
retained, which reduced the loss on sale of Talcott Resolution, which
closed on May 31, 2018. Second quarter 2018 net income per diluted share
of $1.60 compared with a net loss per diluted share of $0.11 in second
quarter 2017.

Second quarter 2018 consolidated net investment income increased 8% to
$428 million, before tax, from $395 million, before tax, in second
quarter 2017 primarily as a result of a higher level of invested assets
due to the fourth quarter 2017 Group Benefits acquisition. Investment
income from LPs in second quarter 2018 was $39 million, before tax, flat
with second quarter 2017, but higher by $5 million, after tax, due to
the reduction in the U.S. corporate tax rate. Annualized investment
yield on LPs of 9.5% in second quarter 2018 compared with 10.1% in
second quarter 2017. Reflecting a generally benign credit environment,
there were no impairment losses in the quarter.

The annualized investment yield, before tax, excluding LPs, was 3.7%, in
second quarter 2018, down from 3.8% in second quarter 2017 primarily due
to the impact of the acquired investment portfolio in Group Benefits.
P&C investment yield, before tax, excluding LPs, was 3.8% in second
quarter 2018, flat with second quarter 2017.

Book value per diluted share of $34.44 on June 30, 2018 decreased 7%
from $37.11 as of Dec. 31, 2017. The decrease resulted principally from
the sale of Talcott Resolution, which reduced AOCI by approximately $758
million, or $2.08 per diluted share. In addition to the sale, the
decrease in stockholders' equity reflects higher interest rates and
wider credit spreads since Dec. 31, 2017. Book value per diluted share
(excluding AOCI) of $38.15 as of June 30, 2018 increased 8% from $35.29
at Dec. 31, 2017 due to a $1,068 million increase in stockholders'
equity, excluding AOCI, from net income in excess of common stock
dividends.

Return on equity (ROE), which is calculated on a 12-month trailing
basis, was a net loss ROE of 15.4% in second quarter 2018 compared with
net income ROE of 3.9% in second quarter 2017. The second quarter 2018
ROE calculation includes the fourth quarter 2017 loss on sale of Talcott
Resolution and the fourth quarter 2017 charge related to U.S. corporate
tax reform, while second quarter 2017 ROE includes the fourth quarter
2016 charge for the asbestos and environmental loss reserve development
cover and the second quarter 2017 pension settlement charge.

Core earnings ROE was 8.4% in second quarter 2018, up 1.5 points from
6.9% in second quarter 2017 due to higher core earnings and lower
average stockholders' equity, excluding AOCI.

   

SECOND QUARTER 2018 SEGMENT FINANCIAL RESULTS SUMMARY

 
Three Months Ended
($ in millions)    

Jun 30
2018

   

Jun 30
2017

    Change¹
Core earnings (losses)        
P&C segments:
Commercial Lines $341 $238 43%
Personal Lines 2 20 (90)%
P&C Other Operations     3     18     (83)%
Property & Casualty     346     276     25%
Group Benefits     104     61     70%
Mutual Funds     38     24     58%
Sub-total     488     361     35%
Corporate     (76)     (58)     (31)%
Total     $412     $303     36%
Select operating data:
Commercial Lines
Combined ratio 90.1 94.6 (4.5)
Impact of catastrophes and PYD on combined ratio 3.7 (3.7)
Underlying combined ratio 90.0 90.9 (0.9)
Personal Lines
Combined ratio 104.9 101.4 3.5
Impact of catastrophes and PYD on combined ratio 14.5 8.8 5.7
Underlying combined ratio 90.4 92.6 (2.2)
Group Benefits
Loss ratio 75.5% 76.1% (0.6)
Expense ratio 23.9% 24.5% (0.6)
Net income margin 6.3% 7.5% (1.2)
Core earnings margin* 6.9% 6.7% 0.2
Mutual Funds
Mutual fund and exchange-traded products (ETP) net flows $473 $1,347 (65)%
Total Mutual Funds segment assets under management     $117,041     $107,679     9%
 

Commercial Lines

  • Commercial Lines net income of $372 million increased from $258
    million in second quarter 2017, and core earnings of $341 million
    increased from $238 million in second quarter 2017 primarily due to an
    $80 million improvement in the underwriting gain*, before tax, and
    lower income taxes as a result of U.S. corporate tax reform
  • The underwriting gain of $173 million rose from $93 million in second
    quarter 2017, and the combined ratio of 90.1 improved 4.5 points from
    94.6 in second quarter 2017, primarily due to a 4.2 point net
    favorable change in PYD and a 0.9 point improvement in the underlying
    combined ratio, partially offset by current accident year catastrophe
    losses that were higher by 0.5 point
    • Net favorable PYD was $73 million, before tax, (4.2 points on the
      combined ratio) compared with no net PYD in second quarter 2017
      due to favorable workers' compensation loss cost trends in recent
      accident years and favorable PYD on catastrophe loss estimates,
      principally for 2017 hurricanes
    • Current accident year catastrophe losses were $74 million, before
      tax, (4.2 points on the combined ratio), up from $63 million,
      before tax, (3.7 points on the combined ratio) in second quarter
      2017
  • Excluding current accident year catastrophe losses and PYD, the
    underwriting gain of $174 million improved 12% from second quarter
    2017 and the underlying combined ratio of 90.0 was 0.9 point better
    than in second quarter 2017 principally due to lower non-catastrophe
    property losses, partially offset by a higher expense ratio and margin
    deterioration in Middle Market workers' compensation
    • Small Commercial improved 1.6 points to 85.6 primarily due to
      lower non-catastrophe property, general liability and auto losses,
      partially offset by a higher expense ratio
    • Middle Market improved 0.8 point to 94.1 due to lower
      non-catastrophe property losses, partially offset by margin
      deterioration in workers' compensation and a higher expense ratio
    • Specialty Commercial rose 2.6 points to 98.5 primarily due to
      higher expenses compared with second quarter 2017
  • Commercial Lines written premiums of $1.7 billion were up 2% from
    second quarter 2017 due to strong Middle Market and Specialty
    Commercial premium growth
    • Middle Market grew 4% over second quarter 2017 due to a 29%
      increase in new business premium and a 2 point improvement in
      policy count retention. New business growth was principally driven
      by workers' compensation
    • Specialty Commercial written premiums grew 9% over second quarter
      2017 due to growth in Bond and Financial Products
    • Small Commercial written premiums declined 1% from second quarter
      2017 as 5% growth in new business was offset by lower renewal
      premium in workers' compensation and auto

Personal Lines

  • Personal Lines net income of $6 million decreased from $24 million in
    second quarter 2017, and core earnings of $2 million were down from
    $20 million in second quarter 2017 as an improved underlying auto
    underwriting margin and better non-catastrophe property losses in
    homeowners were more than offset by higher current accident year
    catastrophe losses, a change to net unfavorable PYD, higher expenses
    and lower earned premium
  • Underwriting loss of $42 million compared with a loss of $13 million
    in second quarter 2017 and the combined ratio of 104.9 deteriorated
    3.5 points from 101.4 in second quarter 2017 primarily due to a 3.4
    point increase in current accident year catastrophe losses, a 2.3
    point unfavorable change in PYD and a 2.9 point increase in the
    expense ratio, partially offset by a 5.0 point improvement in the
    current accident year loss ratio before catastrophes
    • Current accident year catastrophe losses totaled $114 million,
      before tax (13.3 points on the combined ratio), up from $92
      million, before tax (9.9 points on the combined ratio), in second
      quarter 2017
    • PYD was an unfavorable $10 million, before tax (1.2 points on the
      combined ratio), a reversal from net favorable PYD of $10 million,
      before tax (1.1 points on the combined ratio), in second quarter
      2017. Although second quarter 2018 had favorable PYD on 2017
      catastrophe losses, this was more than offset by a reduction in
      the previously-recorded expected recovery under the company's 2017
      property catastrophe aggregate reinsurance treaty, resulting in
      net unfavorable PYD in the period. The company no longer expects
      to recover losses under the 2017 treaty as aggregate ultimate
      losses for 2017 catastrophe events are now projected to be less
      than the attachment point of $850 million
  • Excluding catastrophe losses and PYD, the underwriting gain improved
    19% to $82 million primarily due to stronger underlying auto
    underwriting results. The underlying combined ratio of 90.4 was 2.2
    points better than second quarter 2017 due to a 5.0 point reduction in
    the current accident year loss ratio before catastrophes, principally
    due to earned pricing increases in both auto and homeowners and lower
    non-catastrophe weather homeowners losses. The improvement in the
    current accident year loss ratio before catastrophes was partially
    offset by a 2.9 point increase in the expense ratio largely due to
    higher marketing spending as a result of the company's initiatives to
    generate new business, as well as lower earned premium than in second
    quarter 2017
  • The auto combined ratio improved 1.1 points to 99.7 from 100.8 in
    second quarter 2017 due to a lower current accident year loss ratio
    before catastrophes, partially offset by a higher expense ratio and
    higher current accident year catastrophe losses. The auto underlying
    combined ratio of 96.5 was 2.6 points better than in second quarter
    2017 due to earned pricing increases in excess of loss costs,
    partially offset by higher marketing expenses
  • The homeowners combined ratio deteriorated to 117.8 from 103.4 in
    second quarter 2017 due to higher current accident year catastrophe
    losses and a change to net unfavorable PYD largely related to the
    reversal of the recovery on the 2017 treaty. The underlying combined
    ratio was 76.4, a 1.2 point improvement over second quarter 2017 due
    to lower non-catastrophe weather losses
  • Personal Lines written premiums of $857 million declined 7% from
    second quarter 2017 largely due to the effect of pricing actions on
    policy count retention over the period. In second quarter 2018, new
    business premium increased by $3 million, or 6%, over second quarter
    2017
    • Auto new business premium of $42 million was up 11% from $38
      million in second quarter 2017; Homeowners new business premium of
      $11 million was down 8% from $12 million in second quarter 2017
    • Auto and homeowners policy count retention of 82% and 84%,
      respectively, both increased by 1 point from second quarter 2017
      and by 2 points from first quarter 2018

Group Benefits

  • Group Benefits net income of $96 million increased from $69 million in
    second quarter 2017 as a result of several factors, including: higher
    earned premiums and net investment income from the fourth quarter 2017
    acquisition; premium growth in 2018 due to strong sales and
    persistency; a decrease in the total loss and expense ratios; and the
    lower U.S. corporate tax rate, offset slightly by integration costs in
    second quarter 2018. The net income margin declined to 6.3% from 7.5%
    in second quarter 2017 in large part due to integration costs of $9
    million, after tax, which did not occur in 2017, as well as a decrease
    in net realized capital gains
  • Core earnings, which do not include integration costs but do include
    $16 million, before tax, of amortization of intangible assets related
    to the acquisition, were $104 million, up 70% from $61 million in
    second quarter 2017 due to the contribution from the acquisition,
    favorable disability results, and a lower U.S. corporate tax rate. The
    core earnings margin of 6.9% was up slightly from 6.7% in second
    quarter 2017
  • Fully insured ongoing premiums, excluding buyouts, of $1,352 million
    increased 69% from $802 million in second quarter 2017 primarily due
    to the acquisition, but also due to strong sales and persistency in
    2018. Fully insured ongoing sales, excluding buyouts, of $85 million
    increased 27% from $67 million in second quarter 2017
  • The total loss ratio of 75.5% decreased 0.6 point from second quarter
    2017 as a lower group disability loss ratio was largely offset by a
    higher group life loss ratio
    • The 4.6 point improvement in the group disability loss ratio was
      due to better incidence trends and continued strong recoveries
    • The 3.2 point increase in the group life loss ratio primarily
      reflects the higher loss ratio of the acquired book due to its
      greater proportion of national accounts business, as well as
      higher mortality compared with second quarter 2017, though
      significantly improved compared with first quarter 2018

Mutual Funds

  • Mutual Funds net income of $37 million increased from $24 million in
    second quarter 2017 primarily due to a $20 million, before tax,
    increase in investment management fee income due to growth in Mutual
    Funds segment assets under management (AUM) and the lower U.S.
    corporate tax rate.
  • Core earnings of $38 million increased from $24 million in second
    quarter 2017 for the same reasons as the growth in net income
  • Mutual Funds segment AUM rose 9% compared with second quarter 2017 to
    $117 billion due to market appreciation and positive net flows over
    the last twelve months
  • Mutual fund and ETP net flows totaled $0.5 billion in second quarter
    2018, including $0.2 billion of ETP net flows, down from $1.3 billion
    in second quarter 2017. Over the past four quarters, mutual fund and
    ETP net flows totaled $1.9 billion, contributing to the growth in AUM

Corporate

  • Corporate net income was $66 million compared with a net loss of $435
    million in second quarter 2017, which included the $488 million, after
    tax, pension settlement charge; results for both periods included
    income from discontinued operations
  • Income from discontinued operations included in Corporate net income
    was $148 million, after tax, compared with $112 million, after tax, in
    second quarter 2017. Income from discontinued operations in second
    quarter 2018 was principally attributable to an increase in retained
    net tax benefits from Talcott Resolution due to a higher estimated tax
    basis of the sold business
  • Core losses, which do not include income from discontinued operations,
    were $76 million compared with core losses of $58 million in second
    quarter 2017 primarily due to a lower tax benefit as a result of the
    reduction in the U.S. corporate tax rate in 2018, partially offset by
    higher net investment and fee income compared with second quarter 2017
    • Net investment income of $11 million, before tax, more than
      doubled from $5 million, before tax in second quarter 2017 as a
      result of higher average invested assets at the holding company
      due to proceeds from the sale of Talcott Resolution as well as
      higher short-term interest rates
    • Beginning in June 2018, Corporate core losses include fee income
      from managing the investments of Talcott Resolution. These fees,
      which totaled $4 million, before tax, for the one month period in
      second quarter 2018, were mostly offset by associated expenses
    • In second quarter 2018, Corporate core losses included $11
      million, before tax, of expenses formerly allocated to Talcott
      Resolution compared with $13 million, before tax, of such expenses
      in second quarter 2017. The company continues to expect that these
      costs will be eliminated over the next 12-18 months
  • On June 15, 2018, The Hartford called at par $500 million of 8.125%
    junior subordinated debt due 2068, as previously announced, which will
    reduce future interest expense

CONFERENCE CALL

The Hartford will discuss its second quarter 2018 financial results on a
webcast at 9 a.m. EDT on Friday, July 27, 2018. The call can be accessed
via a live listen-only webcast or as a replay through the Investor
Relations section of The Hartford's website at https://ir.thehartford.com.
The replay will be accessible approximately one hour after the
conclusion of the call and be available along with a transcript of the
event for at least one year.

More detailed financial information can be found in The Hartford's
Investor Financial Supplement for June 30, 2018, and the Second Quarter
2018 Financial Results Presentation, both of which are available at https://ir.thehartford.com.

ABOUT THE HARTFORD

The Hartford is a leader in property and casualty insurance, group
benefits and mutual funds. With more than 200 years of expertise, The
Hartford is widely recognized for its service excellence, sustainability
practices, trust and integrity. More information on the company and its
financial performance is available at https://www.thehartford.com.
Follow us on Twitter at www.twitter.com/TheHartford_PR.

The Hartford Financial Services Group, Inc., (NYSE:HIG) operates
through its subsidiaries under the brand name, The Hartford, and is
headquartered in Hartford, Conn. For additional details, please read The
Hartford's legal notice at https://www.thehartford.com/legal-notice.

HIG-F

From time to time, The Hartford may use its website to disseminate
material company information. Financial and other important information
regarding The Hartford is routinely accessible through and posted on our
website at https://ir.thehartford.com.
In addition, you may automatically receive email alerts and other
information about The Hartford when you enroll your email address by
visiting the "Email Alerts" section at https://ir.thehartford.com.

 
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATING
INCOME STATEMENTS

Three Months Ended June 30, 2018
($
in millions)
 
     

Commercial
Lines

 

Personal
Lines

  P&C
Other Ops
 

Group
Benefits

 

Mutual
Funds

  Corporate   Consolidated
Earned premiums     $1,745   $856   $—   $1,357   $—   $— $3,958
Fee income 8 10 44 261 4 327
Net investment income 242 37 22 115 1 11 428
Other revenues (1 ) 23 2 24
Net realized capital gains (losses)     42     5     3     2     (1 )   1     52  
Total revenues 2,036 931 25 1,518 261 18 4,789
Benefits, losses, and loss adjustment expenses 978 681 16 1,059 4 2,738
Amortization of DAC 259 70 11 4 344
Insurance operating costs and other expenses 343 174 3 317 211 19 1,067
Loss on extinguishment of debt 6 6
Interest expense 79 79
Amortization of other intangible assets     1     1         16             18  
Total benefits and expenses 1,581 926 19 1,403 215 108 4,252
Income (loss) before income taxes 455 5 6 115 46 (90 ) 537
Income tax expense (benefit)     83     (1 )   1     19     9     (8 )   103  
Income (loss) from continuing operations, after-tax 372 6 5 96 37 (82 ) 434
Income from discontinued operations, after-tax                         148     148  
Net income (loss) 372 6 5 96 37 66 582
Less: Net realized capital gains (losses), excluded from core
earnings, before tax
40 6 3 (1 ) 2 50
Less: Integration and transaction costs associated with acquired
business, before tax
(11 ) (11 )
Less: Loss on extinguishment of debt, before tax (6 ) (6 )
Less: Income tax benefit (expense) (9 ) (2 ) (1 ) 3 (2 ) (11 )
Less: Income from discontinued operations, after-tax                         148     148  
Core earnings (losses)     $341     $2     $3     $104     $38     $(76 )   $412  
 
 

THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATING
INCOME STATEMENTS

Three Months Ended June 30, 2017
($
in millions)

 
     

Commercial
Lines

 

Personal
Lines

 

P&C
Other Ops

 

Group
Benefits

 

Mutual
Funds

  Corporate   Consolidated
Earned premiums     $1,720   $930   $—   $805   $—   $— $3,455
Fee income 9 11 19 247 286
Net investment income 240 35 27 88 5 395
Other revenues 23 23
Net realized capital gains (losses)     32     5     5     13             55  
Total revenues 2,001 1,004 32 925 247 5 4,214
Benefits, losses, and loss adjustment expenses 1,057 734 628 1 2,420
Amortization of DAC 252 79 8 5 1 345
Insurance operating costs and other expenses 326 160 3 193 204 764 1,650
Interest expense 79 79
Amortization of other intangible assets 1 1
Loss on extinguishment of debt                              
Total benefits and expenses 1,635 974 3 829 209 845 4,495
Income (loss) before income taxes 366 30 29 96 38 (840 ) (281 )
Income tax expense (benefit)     108     6     9     27     14     (293 )   (129 )
Income (loss) from continuing operations, after-tax 258 24 20 69 24 (547 ) (152 )
Income from discontinued operations, after-tax                         112     112  
Net income (loss) 258 24 20 69 24 (435 ) (40 )
Less: Net realized capital gains (losses), excluded from core
earnings, before tax
32 5 4 13 (1 ) 53
Less: Pension settlement, before tax (750 ) (750 )
Less: Income tax benefit (expense) (12 ) (1 ) (2 ) (5 ) 262 242
Less: Income from discontinued operations, after-tax                         112     112  
Core earnings (losses)     $238     $20     $18     $61     $24     $(58 )   $303  
 

DISCUSSION OF NON-GAAP FINANCIAL MEASURES

The Hartford uses non-GAAP financial measures in this press release to
assist investors in analyzing the company's operating performance for
the periods presented herein. Because The Hartford's calculation of
these measures may differ from similar measures used by other companies,
investors should be careful when comparing The Hartford's non-GAAP
financial measures to those of other companies. Definitions and
calculations of other financial measures used in this press release can
be found below and in The Hartford's Investor Financial Supplement for
second quarter 2018, which is available on The Hartford's website, https://ir.thehartford.com.

Annualized investment yield, excluding limited
partnerships and other alternative investments
is the
annualized net investment income on a Consolidated, P&C or Group
Benefits level excluding limited partnerships and other alternative
investments divided by such monthly average invested assets at amortized
cost, excluding repurchase agreement and securities lending collateral,
derivatives book value, and limited partnerships and other alternative
investments. The company believes that annualized net investment income,
excluding limited partnerships, provides investors with an important
measure of the trend in investment earnings because it excludes the
impact of the volatility in returns related to limited partnerships.

   
Three Months Ended

Jun 30
2018

 

Jun 30
2017

 

Jun 30
2018

 

Jun 30
2017

 

Jun 30
2018

 

Jun 30
2017

      Consolidated   P&C   Group Benefits
Annualized investment yield 3.9 %   4.1 %   4.0 %   4.1 %   4.1 %   4.5 %

Less: Impact on annualized investment yield on limited
partnerships and other alternative investments

(0.2 )% (0.3 )% (0.2 )% (0.3 )% (0.2 )% (0.2 )%

Annualized investment yield excluding limited partnerships and
other alternative investments

    3.7 %   3.8 %   3.8 %   3.8 %   3.9 %   4.3 %
 

Book value per diluted share (excluding AOCI):
Book value per diluted share (excluding AOCI) is calculated based upon
non-GAAP financial measures. It is calculated by dividing (a) total
stockholders' equity, excluding AOCI, after tax, by (b) common shares
outstanding or common shares outstanding and dilutive potential common
shares. The Company provides this measure to enable investors to analyze
the amount of the Company's net worth that is primarily attributable to
the Company's business operations. The Company believes it is useful to
investors because it eliminates the effect of items that can fluctuate
significantly from period to period, primarily based on changes in
interest rates. Book value per diluted share is the most directly
comparable U.S. GAAP measures. A reconciliation of book value per
diluted share, including AOCI to book value per diluted share (excluding
AOCI) is set forth below.

   
As of
      Jun 30 2018   Dec 31 2017   Change
Book value per diluted share $34.44   $37.11   (7%)
Less: Per diluted share impact of AOCI     $(3.71)   $1.82   NM
Book value per diluted share (excluding AOCI)     $38.15   $35.29   8%
 

Core Earnings: The Hartford uses the
non-GAAP measure core earnings as an important measure of the company's
operating performance. The Hartford believes that the measure core
earnings provides investors with a valuable measure of the performance
of the company's ongoing businesses because it reveals trends in our
insurance and financial services businesses that may be obscured by
including the net effect of certain realized capital gains and losses,
certain restructuring and other costs, integration and transaction costs
in connection with an acquired business, pension settlements, loss on
extinguishment of debt, gains and losses on reinsurance transactions,
income tax benefit from reduction in deferred income tax valuation
allowance, impact of tax reform on net deferred tax assets, and results
of discontinued operations. Some realized capital gains and losses are
primarily driven by investment decisions and external economic
developments, the nature and timing of which are unrelated to the
insurance and underwriting aspects of our business.

Accordingly, core earnings excludes the effect of all realized gains and
losses (net of tax and the effects of DAC) that tend to be highly
variable from period to period based on capital market conditions.

The Hartford believes, however, that some realized capital gains and
losses are integrally related to our insurance operations, so core
earnings includes net realized gains and losses such as net periodic
settlements on credit derivatives. These net realized gains and losses
are directly related to an offsetting item included in the income
statement such as net investment income. Results from discontinued
operations are excluded from core earnings for businesses held for sale
because such results could obscure trends in our ongoing businesses that
are valuable to our investors' ability to assess the company's financial
performance.

Net income (loss) and income from continuing operations (during periods
when the company reports significant discontinued operations) are the
most directly comparable U.S. GAAP measures to core earnings. Income
from continuing operations is net income, excluding the income (loss)
from discontinued operations. Core earnings should not be considered as
a substitute for net income (loss) or income (loss) from continuing
operations and does not reflect the overall profitability of the
company's business. Therefore, The Hartford believes that it is useful
for investors to evaluate net income (loss), income (loss) from
continuing operations and core earnings when reviewing the company's
performance.

A reconciliation of net income (loss) to income from continuing
operations to core earnings for the quarterly periods ended June 30,
2018 and 2017, is included in this press release. A reconciliation of
net income (loss) to core earnings for individual reporting segments can
be found in this press release under the heading "The Hartford Financial
Services Group, Inc. Consolidating Income Statements" and in The
Hartford's Investor Financial Supplement for the quarter ended June 30,
2018.

Core earnings margin: The Hartford uses the
non-GAAP measure core earnings margin to evaluate, and believes it is an
important measure of, the Group Benefits segment's operating
performance. Core earnings margin is calculated by dividing core
earnings by revenues, excluding buyouts and realized gains (losses). Net
income margin is the most directly comparable U.S. GAAP measure. The
company believes that core earnings margin provides investors with a
valuable measure of the performance of Group Benefits because it reveals
trends in the business that may be obscured by the effect of buyouts and
realized gains (losses). Core earnings margin should not be considered
as a substitute for net income margin and does not reflect the overall
profitability of Group Benefits. Therefore, the company believes it is
important for investors to evaluate both core earnings margin and net
income margin when reviewing performance. A reconciliation of net income
margin to core earnings margin for the quarterly periods ended June 30,
2018 and 2017, is set forth below.

   
Three Months Ended
Margin    

Jun 30
2018

 

Jun 30
2017

  Change
Net income margin 6.3%   7.5%   (1.2)
Less: Net realized capital gains (losses) excluded from core
earnings, after tax
(0.1)% 0.8% (0.9)
Less: Effect of integration and transaction costs, net of tax, on
after tax margin
(0.5)% —% (0.5)
Core earnings margin     6.9%   6.7%   0.2
 

Core earnings per diluted share: Core
earnings per diluted share is calculated based on the non-GAAP financial
measure core earnings. It is calculated by dividing (a) core earnings,
by (b) diluted common shares outstanding. The Hartford believes that the
measure core earnings per diluted share provides investors with a
valuable measure of the company's operating performance for the same
reasons applicable to its underlying measure, core earnings. Net income
(loss) per diluted common share is the most directly comparable GAAP
measure. Core earnings per diluted share should not be considered as a
substitute for net income (loss) per diluted share and does not reflect
the overall profitability of the company's business.

Therefore, The Hartford believes that it is useful for investors to
evaluate both net income (loss) per diluted share and core earnings per
diluted share when reviewing the company's performance. A reconciliation
of net income (loss) per diluted common share to core earnings per
diluted share for the quarterly periods ended June 30, 2018 and 2017 is
provided in the table below.

   
Three Months Ended
     

Jun 30
2018

 

Jun 30
2017

  Change
PER SHARE DATA    
Diluted earnings (losses) per common share:
Net income (loss) per share1 $1.60 $(0.11) NM
Less: income from discontinued operations, after tax 0.41 0.31 32%
Income from continuing operations $1.19 $(0.42) NM
Less: Net realized capital gains (losses), excluded from core
earnings, before tax
0.14 0.14 —%
Less: Loss on extinguishment of debt, before tax (0.02) - NM
Less: Pension settlement, before tax - (2.01) NM
Less: Integration and transaction costs associated with an acquired
business
(0.03) - NM
Less: Income tax (expense) benefit on items excluded from core
earnings
    (0.03)   0.64   NM
Core earnings per share1     $1.13   $0.81   40%
 

[1] Includes dilutive potential common shares

Net investment income, excluding limited
partnerships and other alternative investments:
is the
amount of net investment income, on a Consolidated, P&C or Group
Benefits level earned from such invested assets excluding the net
investment income related to limited partnerships and other alternative
investments. The company believes that net investment income, excluding
limited partnerships, provides investors with an important measure of
the trend in investment earnings because it excludes the impact of the
volatility in returns related to limited partnerships.

   
Three Months Ended

Jun 30
2018

 

Jun 30
2017

 

Jun 30
2018

 

Jun 30
2017

 

Jun 30
2018

 

Jun 30
2017

      Consolidated   P&C   Group Benefits
Total net investment income $428   $395   $301   $302   $115   $88
Less: Income from limited partnerships and other alternative assets     39   39   33   32   6   7

Net investment income excluding limited partnerships and other
alternative investments

    $389   $356   $268   $270   $109   $81
 

Core Earnings Return on Equity: The company
provides different measures of the return on stockholders' equity
("ROE"). Net income ROE is calculated by dividing (a) net income for the
prior four fiscal quarters by (b) average common stockholders' equity,
including AOCI. Core earnings ROE is calculated based on non-GAAP
financial measures. Core earnings ROE is calculated by dividing (a) core
earnings for the prior four fiscal quarters by (b) average common
stockholders' equity, excluding AOCI. Net income ROE is the most
directly comparable U.S. GAAP measure. The company excludes AOCI in the
calculation of Core earnings ROE to provide investors with a measure of
how effectively the company is investing the portion of the company's
net worth that is primarily attributable to the company's business
operations. The company provides to investors return-on-equity measures
based on its non-GAAP core earnings financial measures for the reasons
set forth in the related discussion above.

A reconciliation of Consolidated Net income ROE to Consolidated Core
earnings ROE is set forth below.

   
Last Twelve Months Ended
      Jun 30 2018   Jun 30 2017
Net income (loss) ROE (15.4)%   3.9%
Less: Net realized capital gains (losses) excluded from core
earnings, before tax
0.7 (0.2)
Less: Loss on reinsurance transactions, before tax (3.6)
Less: Pension settlement, before tax (4.2)
Less: Integration and transaction costs associated with an acquired
business
(0.3)
Less: Income tax (expense) benefit on items not included in core
earnings
(6.1) 3.5
Less: Income (loss) from discontinued operations, after tax (18.4) 1.8
Less: Impact of AOCI, excluded from core earnings ROE     0.3   (0.3)
Core earnings ROE     8.4%   6.9%
 

Underlying combined ratio: Represents the
combined ratio before catastrophes and prior accident year development
(PYD) and is a non-GAAP financial measure. Combined ratio is the most
directly comparable GAAP measure. The combined ratio is the sum of the
loss and loss adjustment expense ratio (also known as a loss ratio), the
expense ratio and the policyholder dividend ratio. This ratio measures
the cost of losses and expenses for every $100 of earned premiums. A
combined ratio below 100 demonstrates a positive underwriting result. A
combined ratio above 100 indicates a negative underwriting result. The
underlying combined ratio represents the combined ratio for the current
accident year, excluding the impact of current accident year
catastrophes. The company believes this ratio is an important measure of
the trend in profitability since it removes the impact of volatile and
unpredictable catastrophe losses and prior accident year loss and loss
adjustment expense reserve. A reconciliation of the combined ratio to
the underlying combined ratio for individual reporting segments can be
found in this press release under the heading "Second Quarter 2018
Segment Financial Results Summary."

Underwriting gain (loss): The Hartford's
management evaluates profitability of the Commercial and Personal Lines
segments primarily on the basis of underwriting gain or loss.
Underwriting gain (loss) is a before tax measure that represents earned
premiums less incurred losses, loss adjustment expenses and underwriting
expenses. Net income (loss) is the most directly comparable GAAP
measure. Underwriting gain (loss) is influenced significantly by earned
premium growth and the adequacy of The Hartford's pricing. Underwriting
profitability over time is also greatly influenced by The Hartford's
underwriting discipline, as management strives to manage exposure to
loss through favorable risk selection and diversification, effective
management of claims, use of reinsurance and its ability to manage its
expenses. The Hartford believes that the measure underwriting gain
(loss) provides investors with a valuable measure of profitability,
before tax, derived from underwriting activities, which are managed
separately from the company's investing activities. A reconciliation of
underwriting results to net income for the quarterly periods ended
June 30, 2018 and 2017, is set forth in the Investor Financial
Supplement for quarter ended June 30, 2018, which is available on The
Hartford's website, https://ir.thehartford.com.

SAFE HARBOR STATEMENT

Some of the statements in this release should be considered
forward-looking statements as defined in the Private Securities
Litigation Reform Act of 1995. Forward-looking statements can be
identified by words such as "anticipates," "intends," "plans," "seeks,"
"believes," "estimates," "expects," "projects" and similar references to
the future. Examples of forward-looking statements include, but are not
limited to, statements the company makes regarding future results of
operations. The Hartford cautions investors that these forward-looking
statements are not guarantees of future performance, and actual results
may differ materially. Investors should consider the important risks and
uncertainties that may cause actual results to differ. These important
risks and uncertainties include the risks and uncertainties identified
below, as well as factors described in such forward-looking statements
or in The Hartford's 2017 Annual Report on Form 10-K, Quarterly Reports
on Form 10-Q and other filings The Hartford makes with the Securities
and Exchange Commission.

Risks Relating to Economic, Political and Global
Market Conditions
: challenges related to the company's current
operating environment, including global political, economic and market
conditions, and the effect of financial market disruptions, economic
downturns, changes in trade regulation including tariffs and other
barriers or other potentially adverse macroeconomic developments on the
demand for our products and returns in our investment portfolios;
financial risk related to the continued reinvestment of our investment
portfolios; market risks associated with our business, including changes
in credit spreads, equity prices, interest rates, inflation rate, market
volatility and foreign exchange rates; the impact on our investment
portfolio if our investment portfolio is concentrated in any particular
segment of the economy;

Insurance Industry and Product-Related Risks: the
possibility of unfavorable loss development including with respect to
long-tailed exposures; the possibility of a pandemic, earthquake, or
other natural or man-made disaster that may adversely affect our
businesses; weather and other natural physical events, including the
severity and frequency of storms, hail, winter storms, hurricanes and
tropical storms, as well as climate change and its potential impact on
weather patterns; the possible occurrence of terrorist attacks and the
company's inability to contain its exposure as a result of, among other
factors, the inability to exclude coverage for terrorist attacks from
workers' compensation policies and limitations on reinsurance coverage
from the federal government under applicable laws; the company's ability
to effectively price its property and casualty policies, including its
ability to obtain regulatory consents to pricing actions or to
non-renewal or withdrawal of certain product lines; actions by
competitors that may be larger or have greater financial resources than
we do; technological changes, such as usage-based methods of determining
premiums, advancements in automotive safety features, the development of
autonomous vehicles, and platforms that facilitate ride sharing, which
may alter demand for the company's products, impact the frequency or
severity of losses, and/or impact the way the company markets,
distributes and underwrites its products; the company's ability to
market, distribute and provide insurance products and investment
advisory services through current and future distribution channels and
advisory firms; the uncertain effects of emerging claim and coverage
issues;

Financial Strength, Credit and Counterparty Risks:
the impact on our statutory capital of various factors, including many
that are outside the company's control, which can in turn affect our
credit and financial strength ratings, cost of capital, regulatory
compliance and other aspects of our business and results; risks to our
business, financial position, prospects and results associated with
negative rating actions or downgrades in the company's financial
strength and credit ratings or negative rating actions or downgrades
relating to our investments; losses due to nonperformance or defaults by
others, including credit risk with counterparties associated with
investments, derivatives, premiums receivable, reinsurance recoverables
and indemnifications provided by third parties in connection with
previous dispositions; the potential for losses due to our reinsurers'
unwillingness or inability to meet their obligations under reinsurance
contracts and the availability, pricing and adequacy of reinsurance to
protect us against losses; regulatory limitations on the ability of the
company and certain of its subsidiaries to declare and pay dividends;

Risks Relating to Estimates, Assumptions and
Valuations:
risk associated with the use of analytical models in
making decisions in key areas such as underwriting, capital management,
hedging, reserving, and catastrophe risk management; the potential for
differing interpretations of the methodologies, estimations and
assumptions that underlie the company's fair value estimates for its
investments and the evaluation of other-than-temporary impairments on
available-for-sale securities; the significant uncertainties that limit
our ability to estimate the ultimate reserves necessary for asbestos and
environmental claims;

Strategic and Operational Risks: the
company's ability to maintain the availability of its systems and
safeguard the security of its data in the event of a disaster, cyber or
other information security incident or other unanticipated event; the
risks, challenges and uncertainties associated with capital management
plans, expense reduction initiatives and other actions, which may
include acquisitions, divestitures or restructurings; the potential for
difficulties arising from outsourcing and similar third-party
relationships; the company's ability to protect its intellectual
property and defend against claims of infringement;

Regulatory and Legal Risks: the cost and
other potential effects of increased regulatory and legislative
developments, including those that could adversely impact the demand for
the company's products, operating costs and required capital levels;
unfavorable judicial or other legal developments; regulatory
requirements that could delay, deter or prevent a takeover attempt that
shareholders might consider in their best interests; and the impact of
potential changes in accounting principles and related financial
reporting requirements;

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