HARTFORD FINANCIAL SERVICES GROUP (THE), INC. (Dollar amounts in millions, except for per share data, unless otherwise stated) TheHartford provides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company's future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the cautionary statements set forth on pages 4 and 5 of this Form 10-K. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in the following discussion and in Part I, Item 1A, Risk Factors, and those identified from time to time in our other filings with theSecurities and Exchange Commission . TheHartford undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. OnMay 23, 2019 , the Company completed the previously announced acquisition ofNavigators Group , a global specialty underwriter, for$70 a share, or$2.137 billion in cash, including transaction expenses. Immediately after closing on the acquisition ofNavigators Group , effectiveMay 23, 2019 , the Company purchased an aggregate excess of loss reinsurance agreement covering adverse development ("Navigators ADC") fromNational Indemnity Company ("NICO") on behalf ofNavigators Insurance Company and certain of its affiliates (collectively, the "Navigators Insurers"). For further information regarding the Navigators ADC, refer to Insurance Risk in the Enterprise Risk Management section.Navigators Group revenue and earnings since the acquisition date are included in the operating results of the Company's Commercial Lines reporting segment. For discussion of this transaction, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements OnMay 31, 2018 ,Hartford Holdings, Inc. , a wholly owned subsidiary of the Company, completed the sale of the issued and outstanding equity ofHartford Life, Inc. ("HLI"), a holding company, and its life and annuity operating subsidiaries. For discussion of this transaction, see Note 21 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements. OnFebruary 16, 2018 , TheHartford entered into a renewal rights agreement with the Farmers Exchanges, of theFarmers Insurance Group of Companies , to acquire its Foremost-branded small commercial business sold through independent agents. Written premium from this agreement began in the third quarter of 2018. Certain reclassifications have been made to historical financial information presented in the MD&A to conform to the current period presentation. Restricted cash has been reclassified out of cash to a separate line on the Consolidated Balance Sheet. TheHartford defines increases or decreases greater than or equal to 200% as "NM" or not meaningful. For discussion of the earliest of the three years included in the financial statements of the current filing, please refer to Part 2, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in TheHartford's 2018 Form 10-K Annual Report. Index Description Page Key Performance Measures and Ratios 35 TheHartford's Operations 40 Consolidated Results of Operations 43 Investment Results 46 Critical Accounting Estimates 47 Commercial Lines 68 Personal Lines 72 Property & Casualty Other Operations 76 Group Benefits 77 Hartford Funds 79 Corporate 81 Enterprise Risk Management 82 Capital Resources and Liquidity 100 Impact of New Accounting Standards 108 KEY PERFORMANCE MEASURES AND RATIOS The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these ratios and measures are useful in understanding the underlying trends in TheHartford's businesses. However, these key performance indicators should only be used in conjunction with, and not in lieu of, the results presented in the segment discussions that follow in this MD&A. These ratios and measures may not be comparable to other performance measures used by the Company's competitors. 35 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Definitions of Non-GAAP and Other Measures and Ratios
Assets Under Management ("AUM")- include mutual fund and ETP assets. AUM is a
measure used by the Company's Hartford Funds segment because a significant
portion of the Company's mutual fund and ETP revenues are based upon asset
values. These revenues increase or decrease with a rise or fall in AUM whether
caused by changes in the market or through net flows.
Book Value per Diluted Share (excluding AOCI)- This is a non-GAAP per share
measure that is calculated by dividing (a) common stockholders' equity,
excluding AOCI, after tax, by (b) 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 that excluding AOCI
from the numerator 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 measure.
Combined Ratio- the sum of the loss and loss adjustment expense ratio, the
expense ratio and the policyholder dividend ratio. This ratio is a relative
measurement that describes the related cost of losses and expenses for every
$100 of earned premiums. A combined ratio below 100 demonstrates underwriting
profit; a combined ratio above 100 demonstrates underwriting losses.
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 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 items. Therefore, the following items are excluded from core
earnings:
• Certain realized capital gains and losses - 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 that tend to be highly variable
from period to period based on capital market conditions. The
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.
• Integration and transaction costs in connection with an acquired business -
As transaction costs are incurred upon acquisition of a business and
integration costs are completed within a short period after an acquisition,
they do not represent ongoing costs of the business.
• Loss on extinguishment of debt - Largely consisting of make-whole payments or
tender premiums upon paying debt off before maturity, these losses are not a
recurring operating expense of the business.
• Gains and losses on reinsurance transactions - Gains or losses on
reinsurance, such as those entered into upon sale of a business or to
reinsure loss reserves, are not a recurring operating expense of the
business.
• Change in loss reserves upon acquisition of a business - These changes in
loss reserves are excluded from core earnings because such changes could
obscure the ability to compare results in periods after the acquisition to
results of periods prior to the acquisition.
• Income tax benefit from reduction in deferred income tax valuation allowance
- Valuation allowances, including the establishment and/or release of an
allowance, against tax attributes like capital loss and net operating loss
carryovers are infrequent.
• Results of discontinued operations - These results are excluded from core
earnings for businesses sold or held for sale because such results could
obscure the ability to compare period over period results for our ongoing
businesses.
• Deferred gain resulting from retroactive reinsurance and subsequent changes
in the deferred gain - Retroactive reinsurance agreements economically
transfer risk to the reinsurers and including the full benefit from
retroactive reinsurance in core earnings provides greater insight into the
economics of the business.
In addition to the above components of net income available to common stockholders that are excluded from core earnings, preferred stock dividends declared, which are excluded from net income available to common stockholders, are included in the determination of core earnings. Preferred stock dividends are a cost of financing more akin to interest expense on debt and are expected to be a recurring expense as long as the preferred stock is outstanding. Net income (loss), net income (loss) available to common stockholders and income from continuing operations, net of tax, available to common stockholders (during periods when the Company reports significant discontinued operations) are the most directly comparableU.S. GAAP measures to core earnings. Income from continuing operations, net of tax, available to common stockholders is net income available to common stockholders, excluding the income (loss) from discontinued operations, net of tax. Core earnings should not be considered as a substitute for net income (loss), net income (loss) available to common stockholders or income (loss) from continuing operations, net of tax, available to common stockholders and does not reflect the overall profitability of the Company's business. Therefore, TheHartford believes that it is useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, income (loss) from continuing operations, net of tax, available to common stockholders and core earnings when reviewing the Company's performance. 36 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income to Core Earnings
For the years ended December 31,
2019 2018 2017
Net income (loss) $ 2,085 $ 1,807 $ (3,131 )
Preferred stock dividends 21 6 -
Net income (loss) available to common stockholders 2,064 $ 1,801 $ (3,131 )
Adjustments to reconcile net income available to common
stockholders to core earnings:
Net realized capital losses (gains) excluded from core
earnings, before tax (389 ) 118 (160 )
Loss on extinguishment of debt, before tax 90 6 -
Loss on reinsurance transactions, before tax 91 - -
Pension settlement, before tax - - 750 Integration and transaction costs associated with acquired business, before tax
91 47 17
Change in loss reserves upon acquisition of a business, 97 - -
before tax
Change in deferred gain on retroactive reinsurance, before 16 - -
tax
Income tax expense (benefit) [1] 2 (75 ) 669 Loss (income) from discontinued operations, net of tax - (322 ) 2,869 Core earnings$ 2,062 $ 1,575 $ 1,014
[1] Includes income tax benefit on items not included in core earnings and other
federal income tax benefits and charges, including an
primarily due to a reduction in net deferred tax assets as a result of the
decrease in the Federal income tax rate from 35% to 21%.
Core Earnings Margin- TheHartford 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 comparableU.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) as well as other items excluded in the calculation of core earnings. 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 to core earnings margin is set forth in the Group Benefits Operating Summary. Current Accident Year Catastrophe Ratio- a component of the loss and loss adjustment expense ratio, represents the ratio of catastrophe losses incurred in the current accident year (net of reinsurance) to earned premiums. ForU.S. events, a catastrophe is an event that causes$25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers, as defined by the Property Claim Services office ofVerisk . For international events, the Company's approach is similar, informed, in part, by howLloyd's of London defines catastrophes.Lloyd's of London is an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The current accident year catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums. Expense Ratio- for the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses less fee income, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs ("DAC") and insurance operating costs and expenses, including certain centralized services costs and bad debt expense. DAC include commissions, taxes, licenses and fees and other incremental direct underwriting expenses and are amortized over the policy term. The expense ratio for Group Benefits is expressed as the ratio of insurance operating costs and other expenses including amortization of intangibles and amortization of DAC, to premiums and other considerations, excluding buyout premiums. The expense ratio for Commercial Lines, Personal Lines and Group Benefits does not include integration and other transaction costs associated with an acquired business. Fee Income- is largely driven from amounts earned as a result of contractually defined percentages of assets under management in our Hartford Funds business. These fees are generally earned on a daily basis. Therefore, the growth in assets under management either through positive net flows or favorable market performance will have a favorable impact on fee income. Conversely, either negative net flows or unfavorable market performance will reduce fee income. Loss and Loss Adjustment Expense Ratio- a measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses and loss adjustment expenses incurred for both the current and prior accident years. Among other factors, the loss and loss adjustment expense ratio needed for the Company to achieve its targeted ROE fluctuates from year to year based on changes in the expected investment yield over the claim settlement period, the 37 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
timing of expected claim settlements and the targeted returns set by management based on the competitive environment. The loss and loss adjustment expense ratio is affected by claim frequency and claim severity, particularly for shorter-tail property lines of business, where the emergence of claim frequency and severity is credible and likely indicative of ultimate losses. Claim frequency represents the percentage change in the average number of reported claims per unit of exposure in the current accident year compared to that of the previous accident year. Claim severity represents the percentage change in the estimated average cost per claim in the current accident year compared to that of the previous accident year. As one of the factors used to determine pricing, the Company's practice is to first make an overall assumption about claim frequency and severity for a given line of business and then, as part of the rate-making process, adjust the assumption as appropriate for the particular state, product or coverage. Loss and Loss Adjustment Expense Ratio before Catastrophes and PriorAccident Year Development - a measure of the cost of non-catastrophe loss and loss adjustment expenses incurred in the current accident year divided by earned premiums. Management believes that the current accident year loss and loss adjustment expense ratio before catastrophes is a performance measure that is useful to investors as it removes the impact of volatile and unpredictable catastrophe losses and prior accident year development. Loss Ratio, excluding Buyouts- utilized for the Group Benefits segment and is expressed as a ratio of benefits, losses and loss adjustment expenses to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the profitability of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts.Mutual Fund and Exchange-Traded Product Assets- are owned by the shareholders of those products and not by the Company and, therefore, are not reflected in the Company's Consolidated Financial Statements except in instances where the Company seeds new investment products and holds an investment in the fund for a period of time. Mutual fund and ETP assets are a measure used by the Company primarily because a significant portion of the Company's Hartford Funds segment revenues are based upon asset values. These revenues increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows. New Business Written Premium- represents the amount of premiums charged for policies issued to customers who were not insured with the Company in the previous policy term. New business written premium plus renewal policy written premium equals total written premium. Policies in Force- represents the number of policies with coverage in effect as of the end of the period. The number of policies in force is a growth measure used for Personal Lines and standard commercial lines (small commercial and middle market lines within middle & large commercial) within Commercial Lines and is affected by both new business growth and policy count retention. Premium Retention- represents renewal premium written in the current period divided by total premium written in the prior period. Policy Count Retention- represents the ratio of the number of policies renewed during the period divided by the number of policies available to renew. The number of policies available to renew represents the number of policies, net of any cancellations, written in the previous policy term. Policy count retention is affected by a number of factors, including the percentage of renewal policy quotes accepted and decisions by the Company to non-renew policies because of specific policy underwriting concerns or because of a decision to reduce premium writings in certain classes of business or states. Policy count retention is also affected by advertising and rate actions taken by competitors. Policyholder Dividend Ratio- the ratio of policyholder dividends to earned premium. Prior Accident Year Loss and Loss Adjustment Expense Ratio- represents the increase (decrease) in the estimated cost of settling catastrophe and non-catastrophe claims incurred in prior accident years as recorded in the current calendar year divided by earned premiums. Reinstatement Premiums- represents additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of the Company ceding losses to reinsurers. Renewal Earned Price Increase (Decrease)- Written premiums are earned over the policy term, which is six months for certain Personal Lines automobile business and twelve months for substantially all of the remainder of the Company's Property and Casualty business. Since the Company earns premiums over the six to twelve month term of the policies, renewal earned price increases (decreases) lag renewal written price increases (decreases) by six to twelve months. Renewal Written Price Increase (Decrease)- for Commercial Lines, represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure on standard commercial lines policies that renewed. For Personal Lines, renewal written price increases represent the total change in premium per policy since the prior year on those policies that renewed and includes the combined effect of rate changes, amount of insurance and other changes in exposure. For Personal Lines, other changes in exposure include, but are not limited to, the effect of changes in number of drivers, vehicles and incidents, as well as changes in customer policy elections, such as deductibles and limits. The rate component represents the change in rate filed with and approved by state regulators during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for automobiles, building replacement costs for property and wage inflation for workers' compensation. A number of factors affect renewal written price increases (decreases) including expected loss costs as projected by the Company's pricing actuaries, rate filings approved by state regulators, risk selection decisions made by the Company's underwriters and marketplace competition. Renewal written price changes reflect the property and casualty insurance market cycle. Prices tend to increase for a particular line of business 38 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
when insurance carriers have incurred significant losses in that line of
business in the recent past or the industry as a whole commits less of its
capital to writing exposures in that line of business. Prices tend to decrease
when recent loss experience has been favorable or when competition among
insurance carriers increases. Renewal written price statistics are subject to
change from period to period, based on a number of factors, including changes in
actuarial estimates and the effect of subsequent cancellations and non-renewals,
and modifications made to better reflect ultimate pricing achieved.
Return on Assets ("ROA"), Core Earnings- The Company uses this non-GAAP
financial measure to evaluate, and believes is an important measure of, the
Hartford Funds segment's operating performance. ROA, core earnings is calculated
by dividing annualized core earnings by a daily average AUM. ROA is the most
directly comparable U.S. GAAP measure. The Company believes that ROA, core
earnings, provides investors with a valuable measure of the performance of the
Hartford Funds segment because it reveals trends in our business that may be
obscured by the effect of items excluded in the calculation of core earnings.
ROA, core earnings, should not be considered as a substitute for ROA and does
not reflect the overall profitability of our Hartford Funds business. Therefore,
the Company believes it is important for investors to evaluate both ROA, and
ROA, core earnings when reviewing the Hartford Funds segment performance. A
reconciliation of ROA to ROA, core earnings is set forth in the Results of
Operations section within MD&A - Hartford Funds.
Underlying Combined Ratio-This non-GAAP financial measure of underwriting
results represents the combined ratio before catastrophes, prior accident year
development and current accident year change in loss reserves upon acquisition
of a business. Combined ratio is the most directly comparable GAAP measure. The
underlying combined ratio represents the
combined ratio for the current accident year, excluding the impact of current
accident year catastrophes and current accident year change in loss reserves
upon acquisition of a business. 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 development. The changes to loss reserves upon
acquisition of a business are excluded from underlying combined ratio because
such changes could obscure the ability to compare results in periods after the
acquisition to results of periods prior to the acquisition as such trends are
valuable to our investors' ability to assess the Company's financial
performance. A reconciliation of combined ratio to underlying combined ratio is
set forth in the Commercial Lines and Personal Lines Operating Summaries.
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 non-GAAP
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.
39
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income to Underwriting Gain (Loss)
For the
years ended
2019 2018 2017
Commercial Lines
Net income $ 1,192 $ 1,212 $ 865
Adjustments to reconcile net income to underwriting gain
(loss):
Net servicing income (2 ) (2 ) (1 )
Net investment income (1,129 ) (997 ) (949 )
Net realized capital losses (gains) (271 ) 43 (103 )
Other expense (income) 38 2 (1 )
Loss on reinsurance transaction 91 - -
Income tax expense 270 267 377
Underwriting gain $ 189 $ 525 $ 188
Personal Lines
Net income (loss) $ 318 $ (32 ) $ (9 )
Adjustments to reconcile net income to underwriting gain
(loss):
Net servicing income (13 ) (16 ) (16 )
Net investment income (179 ) (155 ) (141 )
Net realized capital losses (gains) (43 ) 7 (15 )
Other expense (income) 1 1 (1 )
Income tax expense (benefit) 76 (19 ) 26
Underwriting gain (loss) $ 160 $ (214 ) $ (156 )
Written and Earned Premiums- Written premium represents the amount of premiums
charged for policies issued, net of reinsurance, during a fiscal period.
Premiums are considered earned and are included in the financial results on a
pro rata basis over the policy period. Management believes that written premium
is a performance measure that is useful to investors as it reflects current
trends in the Company's sale of property and casualty insurance products.
Written and earned premium are recorded net of ceded reinsurance premium.
Traditional life and disability insurance type products, such as those sold by
Group Benefits, collect premiums from policyholders in exchange for financial
protection for the policyholder from a specified insurable loss, such as death
or disability. These premiums, together with net investment income earned, are
used to pay the contractual obligations under these insurance contracts. Two
major factors, new sales and persistency, impact premium growth. Sales can
increase or decrease in a given year based on a number of factors including, but
not limited to, customer demand for the Company's product offerings, pricing
competition, distribution channels and the Company's reputation and ratings.
Persistency refers to the percentage of premium remaining in-force from
year-to-year.
THE HARTFORD'S OPERATIONS
Overview
The Hartford conducts business principally in five reporting segments including
Commercial Lines, Personal Lines, Property &
Casualty Other Operations, Group Benefits and Hartford Funds, as well as a
Corporate category. The Company includes in the Corporate category discontinued
operations related to the life and annuity business sold in May 2018 , reserves
for run-off structured settlement and terminal funding agreement liabilities,
capital raising activities (including equity financing, debt financing and
related interest expense), transaction expenses incurred in connection with an
acquisition, purchase accounting adjustments related to goodwill and other
expenses not allocated to the reporting segments. Corporate also includes
investment management fees and expenses related to managing third party
business, including management of the invested assets of Talcott Resolution
Life, Inc. and its subsidiaries ("Talcott Resolution"). Talcott Resolution is
the holding company of the life and annuity business that we sold in May 2018 .
In addition, Corporate includes a 9.7% ownership interest in the legal entity
that acquired the life and annuity business sold.
The Company derives its revenues principally from: (a) premiums earned for
insurance coverage provided to insureds; (b) management fees on mutual fund and
ETP assets; (c) net investment income; (d) fees earned for services provided to
third parties; and (e) net realized capital gains and losses. Premiums charged
for insurance coverage are earned principally on a pro rata basis over the terms
of the related policies in-force.
The profitability of the Company's property and casualty insurance businesses
over time is greatly influenced by the Company's underwriting discipline, which
seeks to manage exposure to loss through favorable risk selection and
diversification, its management of claims, its use of reinsurance, the size of
its in force block, actual mortality and morbidity experience, and its ability
to manage its expense ratio which it
40
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
accomplishes through economies of scale and its management of acquisition costs
and other underwriting expenses. Pricing adequacy depends on a number of
factors, including the ability to obtain regulatory approval for rate changes,
proper evaluation of underwriting risks, the ability to project future loss cost
frequency and severity based on historical loss experience adjusted for known
trends, the Company's response to rate actions taken by competitors, its expense
levels and expectations about regulatory and legal developments. The Company
seeks to price its insurance policies such that insurance premiums and future
net investment income earned on premiums received will cover underwriting
expenses and the ultimate cost of paying claims reported on the policies and
provide for a profit margin. For many of its insurance products, the Company is
required to obtain approval for its premium rates from state insurance
departments and the Lloyd's Syndicate's ability to write business is subject to
Lloyd's approval for its premium capacity each year.
Similar to Property & Casualty, profitability of the Group Benefits business
depends, in large part, on the ability to evaluate and price risks appropriately
and make reliable estimates of mortality, morbidity, disability and longevity.
To manage the pricing risk, Group Benefits generally offers term insurance
policies, allowing for the adjustment of rates or policy terms in order to
minimize the adverse effect of market trends, loss costs, declining interest
rates and other factors. However, as policies are typically sold with rate
guarantees of up to three years, pricing for the Company's products could prove
to be inadequate if loss and expense trends emerge adversely during the rate
guarantee period or if investment returns are lower than expected at the time
the products were sold. For some of its products, the Company is required to
obtain approval for its premium rates from state insurance departments. New and
renewal business for group benefits business, particularly for long-term
disability, are priced using an assumption about expected investment yields over
time. While the Company employs asset-liability duration matching strategies to
mitigate risk and may use interest-rate sensitive derivatives to hedge its
exposure in the Group Benefits investment portfolio, cash flow patterns related
to the payment of benefits and claims are uncertain and actual investment yields
could differ significantly from expected investment yields, affecting
profitability of the business. In addition to appropriately
evaluating and pricing risks, the profitability of the Group Benefits business
depends on other factors, including the Company's response to pricing decisions
and other actions taken by competitors, its ability to offer voluntary products
and self-service capabilities, the persistency of its sold business and its
ability to manage its expenses which it seeks to achieve through economies of
scale and operating efficiencies.
The financial results of the Company's mutual fund and ETP businesses depend
largely on the amount of assets under management and the level of fees charged
based, in part, on asset share class and product type. Changes in assets under
management are driven by two main factors, net flows, and the market return of
the funds, which are heavily influenced by the return realized in the equity and
bond markets. Net flows are comprised of new sales less redemptions by mutual
fund and ETP shareholders. Financial results are highly correlated to the growth
in assets under management since these products generally earn fee income on a
daily basis.
The investment return, or yield, on invested assets is an important element of
the Company's earnings since insurance products are priced with the assumption
that premiums received can be invested for a period of time before benefits,
losses and loss adjustment expenses are paid. Due to the need to maintain
sufficient liquidity to satisfy claim obligations, the majority of the Company's
invested assets have been held in available-for-sale securities, including,
among other asset classes, corporate bonds, municipal bonds, government debt,
short-term debt, mortgage-backed securities, asset-backed securities and
collateralized loan obligations.
The primary investment objective for the Company is to maximize economic value,
consistent with acceptable risk parameters, including the management of credit
risk and interest rate sensitivity of invested assets, while generating
sufficient net of tax income to meet policyholder and corporate obligations.
Investment strategies are developed based on a variety of factors including
business needs, regulatory requirements and tax considerations.
For further information on the Company's reporting segments, refer to Part I,
Item 1, Business - Reporting Segments.
41
--------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
2019 Financial Highlights
Net Income Available to
Net Income Available to Common Stockholders per
Common Stockholders Diluted Share Book Value per Diluted Share
[[Image Removed: chart-92839953ed81e90fb1c.jpg]]
[[Image Removed: chart-6904980ff07ed739662.jpg]]
[[Image Removed: chart-5701fa5ab521d8d72d3.jpg]]
Ý Increased $263 or 15% Ý Increased $0.71 or 14% Ý Increased $8.79 or 25%
+ Higher net investment + Increase in net income + Increase in common
income and net realized stockholders' equity
capital gains in 2019 resulting primarily from
an increase in AOCI,
- Marginal increase in largely driven by the
dilutive shares from the impact of lower interest
prior year rates and tighter credit
spreads on unrealized
+ Lower current accident capital gains (losses)
year catastrophe losses
in Personal Lines
+ Lower group disability
loss ratio
- Lower discontinued + Net income in excess of
operations income stockholder dividends
- Lower non-catastrophe
current accident year P&C
underwriting results - Marginal increase in
dilutive shares from the
prior year
- Loss on reinsurance and
reserve increases due to
Navigators Group
acquisition and higher
loss on debt
extinguishment and
integration costs
Property & Casualty Group Benefits Net Income
Investment Yield, After Tax Combined Ratio Margin
[[Image Removed: chart-1f3152c678236f32850.jpg]][[Image Removed: chart-d51e5c4c43e95a71c30.jpg]][[Image Removed: chart-d250cd446ecffc390d1.jpg]]
Ý Increased 10 bps Þ Improved 0.6 points Ý Increased 3.2 points
+ Higher returns on equity - Lower current accident + Lower group disability
fund investments year catastrophes loss ratio
+ Change to net realized
+ Greater returns on + Higher expense ratio capital gains in 2019
limited partnerships and
other alternative + Lower level of net - Higher commission rates
investments favorable prior accident on voluntary products
year development
+ Higher mortgage loan
prepayment penalties + Higher Navigators Group - Greater operating
loss ratio, higher expenses due to
non-catastrophe property investments in technology
- Lower reinvestment rates losses and a higher and claims operations
workers' compensation
loss ratio, partially
offset by a lower
Personal Lines auto loss
ratio
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS
The Consolidated Results of Operations should be read in conjunction with the
Company's Consolidated Financial Statements and the related Notes beginning on
page F-1 as well as with the segment operating results sections of the MD&A.
Consolidated Results of OperationsIncrease (Decrease) Increase (Decrease)
2019 2018 2017 From 2018 to 2019 From 2017 to 2018
Earned premiums $ 16,923 $ 15,869 $ 14,141 $ 1,054 $ 1,728
Fee income 1,301 1,313 1,168 (12 ) 145
Net investment income 1,951 1,780 1,603 171 177
Net realized capital gains (losses) 395 (112 ) 165 507 (277 )
Other revenues 170 105 85 65 20
Total revenues 20,740 18,955 17,162 1,785 1,793
Benefits, losses and loss adjustment
expenses 11,472 11,165 10,174 307 991
Amortization of deferred policy
acquisition costs 1,622 1,384 1,372 238 12
Insurance operating costs and other
expenses 4,580 4,281 4,563 299 (282 )
Loss on extinguishment of debt 90 6 - 84 6
Loss on reinsurance transactions 91 - - 91 -
Interest expense 259 298 316 (39 ) (18 )
Amortization of other intangible assets 66 68 14
(2 ) 54
Total benefits, losses and expenses 18,180 17,202 16,439
978 763
Income from continuing operations,
before tax 2,560 1,753 723 807 1,030
Income tax expense 475 268 985 207 (717 )
Income (loss) from continuing
operations, net of tax 2,085 1,485 (262 ) 600 1,747
Income (loss) from discontinued
operations, net of tax - 322 (2,869 ) (322 ) 3,191
Net income (loss) 2,085 1,807 (3,131 ) 278 4,938
Preferred stock dividends 21 6 - 15 6
Net income (loss) available to common
stockholders $ 2,064 $ 1,801 $ (3,131 ) $ 263 $ 4,932
Year endedDecember 31, 2019 compared to year endedDecember 31, 2018 Net income available to common stockholders increased by$263 driven by an increase in income from continuing operations, partially offset by a reduction in income from discontinued operations due to the sale inMay 2018 of the life and annuity business. Income from continuing operations, net of tax, increased by$600 primarily due to a change to net realized capital gains in 2019 compared to net realized capital losses in 2018, lower current accident year catastrophe losses in P&C, higher net investment income, and a lower disability loss ratio in Group Benefits, partially offset by a loss on reinsurance and reserve increases upon the acquisition ofNavigators Group , lower current accident year P&C underwriting results before catastrophes, a higher loss on extinguishment of debt in 2019 and higher integration costs. 43 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Revenue
Earned Premiums
[[Image Removed: chart-03fa6f0e9677691e65f.jpg]]
[1] For 2019, the total includes
Year ended
Lines, including the effect of the
offset by a 6% decline in Personal Lines.
• Group Benefits was relatively flat as the increase in group disability and
the higher premium from voluntary products was largely offset by a decrease
in group life.
For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries. Fee income decreased due to: • Lower fee income in Hartford Funds largely due to a shift to lower fee funds.
• Partially offset by higher fee income in Corporate resulting from fees earned
on the management of the investment portfolio of the life and annuity
business sold in
an increase related to the leave management product and higher persistency.
Net Investment Income
[[Image Removed: chart-ff4eb7b68e4acc1bae9.jpg]]
Year ended
• Higher income from limited partnerships and other alternative investments,
higher returns on equity fund investments, and greater income from
pre-payment penalties on mortgage loans.
For further discussion of investment results, see MD&A - Investment Results, Net Investment Income. Net realized capital gains improved compared to net realized capital losses in 2018, with gains in 2019 primarily driven by: • Appreciation in the value of equity securities due to higher equity market
levels.
• Higher net gains on sales in 2019 of fixed maturity securities driven by
duration and credit management trades.
For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains.
44
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Benefits, losses and expenses
Losses and LAE Incurred for P&C and GB
[[Image Removed: chart-e57f0167fb826fc59ff.jpg]]
[1] Prior accident year development in 2019 included reserve increases of
legacy
Year ended
increase in Commercial Lines, partially offset by a decrease in Personal
Lines, and was driven by:
- An increase in Property & Casualty current accident year ("CAY") loss and
loss adjustment expenses before catastrophes due to the effect of higher
earned premium in Commercial Lines, including the impact of the Navigators
Group acquisition, and higher non-catastrophe property losses, partially
offset by a lower personal auto liability loss ratio and the effect of
lower earned premium in Personal Lines.
- A decrease in favorable net prior accident year reserve development of
$102 , before tax. Prior accident year development in 2019 primarilyincluded reserve decreases for workers' compensation, small commercial
package business, catastrophes, personal lines automobile liability, and
uncollectible reinsurance, partially offset by increases in general
liability and professional liability, including increases in Navigators
Group reserves upon acquisition of the business, and commercial lines
automobile liability. Prior accident year development in 2018 primarily
included a decrease in reserves for workers' compensation and a decrease
in catastrophe reserves for the 2017 hurricanes. For further discussion,
see MD&A - Critical Accounting Estimates,
Product Reserves, Net of Reinsurance.
- A decline in current accident year catastrophe losses of
Catastrophe losses in 2019 were
primarily from tornado, wind and hail events in the South, Midwest and Mountain West and winter storms across the country as well as from hurricanes and tropical storms in the Southeast. Catastrophe losses in 2018 were primarily from wildfires inCalifornia , hurricanes Florence and Michael in the Southeast, wind and hail storms inColorado , and various wind storms and winter storms across the country and are net of an estimated reinsurance recoverable of$82 under the 2018 Property Aggregate reinsurance treaty. For additional information, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance. • Partially offsetting the increase in Property & Casualty was a decrease in
Group Benefits driven by a lower group disability loss ratio and more
favorable prior incurral year development.
Amortization of deferred policy acquisition costs was up from the prior year
period primarily due to:
• An increase in Commercial Lines, including the impact from the Navigators
Group acquisition and the effect of higher commissions, and an increase in
Group Benefits, partially offset by a decrease in Personal Lines.
Insurance operating costs and other expenses increased due to: • Higher commissions in Commercial Lines and, to a lesser extent, Group
Benefits.
• Higher information technology and operations costs across Commercial Lines,
Personal Lines, and Group Benefits.
• Transaction costs, integration costs and operating costs incurred in the
current year due to the Navigators Group acquisition.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
• An increase in direct marketing expenses in Personal Lines to generate new
business growth.
• Partially offset by a decrease in Hartford Funds due to lower variable costs.
Income tax expense increased primarily due to: • An increase in income from continuing operations before tax.
For further discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements.
INVESTMENT RESULTS
Composition of Invested Assets
December 31, 2019 December 31, 2018
Amount Percent Amount Percent
Fixed maturities, available-for-sale ("AFS"), at
fair value $ 42,148 79.5 % $ 35,652 76.2 %
Fixed maturities, at fair value using the fair
value option ("FVO") 11 - % 22 - %
Equity securities, at fair value 1,657 3.1 % 1,214 2.6 %
Mortgage loans 4,215 8.0 % 3,704 7.9 %
Limited partnerships and other alternative
investments 1,758 3.3 % 1,723 3.7 %
Other investments [1] 320 0.6 % 192 0.4 %
Short-term investments 2,921 5.5 % 4,283 9.2 %
Total investments $ 53,030 100.0 % $ 46,790 100.0 %
[1] Primarily consists of investments of consolidated investment funds and
derivative instruments which are carried at fair value.
Year ended
Short-term investments decreased due to the funding ofNavigators Group acquisition slightly offset by tax receipts related to the refund of AMT tax credits. Net Investment Income For the years ended December 31, 2019 2018 2017 (Before tax) Amount Yield [1] Amount Yield [1] Amount Yield [1] Fixed maturities [2]$ 1,559 3.8 %$ 1,459 3.9 %$ 1,303 3.9 % Equity securities 46 3.4 % 32 3.1 % 24 2.8 % Mortgage loans 165 4.4 % 141 4.1 % 124 4.1 % Limited partnerships and other alternative investments 232 14.4 % 205 13.2 % 174 12.0 % Other [3] 32 20 49 Investment expense (83 ) (77 ) (71 ) Total net investment income$ 1,951 4.1 %$ 1,780 4.0 %$ 1,603 4.0 % Total net investment income excluding limited partnerships and other alternative investments$ 1,719 3.7 %$ 1,575
3.7 %
[1] Yields calculated using annualized net investment income divided by the
monthly average invested assets at amortized cost as applicable, excluding
repurchase agreement and securities lending collateral, if any, and
derivatives book value.
[2] Includes net investment income on short-term investments.
[3] Primarily includes income from derivatives that qualify for hedge accounting
and hedge fixed maturities.
Year ended
other alternative investments, and higher mortgage loan income due to higher
asset levels and prepayment penalties.
Annualized net investment income yield, excluding limited partnerships and other
alternative investments, was flat due to higher returns on equity fund
investments and
46
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
prepayment penalties on mortgage loans, offset by lower reinvestment rates. Average reinvestment rate, on fixed maturities and mortgage loans, excluding certainU.S. Treasury securities and cash equivalent securities, for the year-endedDecember 31, 2019 , was 3.4% which was below the average yield of sales and maturities of 4.0% due to repositioning into slightly higher quality credits at lower interest rates and calls on higher yielding tax-exempt municipals and corporates as well as due to sales and paydowns on higher yielding securities. The average reinvestment rate for the year-endedDecember 31, 2018 was 4.0% which was higher than the average yield of sales and maturities of 3.7%, due to higher interest rates. We expect the annualized net investment income yield for the 2020 calendar year, excluding limited partnerships and other alternative investments, to be lower than the portfolio yield earned in 2019 due to lower reinvestment rates. The estimated impact on net investment income yield is subject to change as the composition of the portfolio changes through portfolio management and changes in market conditions. Net Realized Capital Gains (Losses) For the years ended December 31, (Before tax) 2019 2018 2017 Gross gains on sales$ 234 $ 114 $ 275 Gross losses on sales (56 ) (172 ) (113 ) Equity securities [1] 254 (48 ) - Net other-than-temporary impairment ("OTTI") losses recognized in earnings [2] (3 ) (1 ) (8 ) Valuation allowances on mortgage loans 1 - (1 ) Other, net [3] (35 ) (5 ) 12 Net realized capital gains (losses)$ 395 $
(112 )
[1] The net unrealized gain (loss) on equity securities included in net realized
capital gains (losses) related to equity securities still held as of
unrealized gain (loss) on equity securities included in net realized capital
gains (losses) related to equity securities still held as of
2018, were
2018, changes in net unrealized gains (losses) on equity securities were
included in AOCI.
[2] See Other-Than-Temporary Impairments within the Investment Portfolio Risks
and Risk Management section of the MD&A.
[3] Primarily consists of changes in value of non-qualifying derivatives,
including credit derivatives, interest rate derivatives used to manage
duration and equity derivatives. Also includes transactional foreign currency
revaluation.
Year ended December 31, 2019
Gross gains and losses on sales were primarily driven by issuer-specific selling
of corporate securities, continued reduction of tax-exempt municipal bonds and
sales of U.S. treasuries for duration management.
Equity securities net gains were primarily driven by appreciation of equity
securities due to higher equity market levels.
Other, net losses includes losses on interest rate derivatives of $34 due to
higher rates, losses on equity derivatives of $17 due to an increase in domestic
equity markets, and losses of $9 due to foreign currency revaluation. These
losses were partially offset by gains on credit derivatives of $27 due to credit
spread tightening.
Year ended December 31, 2018
Gross gains and losses on sales were primarily the result of sector
repositioning and duration, liquidity and credit management within corporate
securities, U.S. treasury securities, and tax-exempt municipal bonds.
Equity securities net losses were driven by depreciation of equity securities
due to lower equity market levels, partially offset by gains on sales due to
tactical repositioning.
Other, net losses included losses of $11 related to credit derivatives due to
credit spread widening, partially offset by gains of $3 on foreign currency
derivatives.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ, and in the
past have differed, from those estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability:
• property and casualty insurance product reserves, net of reinsurance;
• group benefit LTD reserves, net of reinsurance;
• evaluation of goodwill for impairment;
• valuation of investments and derivative instruments including evaluation of
other-than-temporary impairments on available-for-sale securities and
valuation allowances on mortgage loans;
• valuation allowance on deferred tax assets; and
47--------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
• contingencies relating to corporate litigation and regulatory matters.
Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Consolidated Financial Statements. In developing these estimates management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements.
Property & Casualty Insurance Product Reserves P&C Loss and Loss Adjustment Expense Reserves, Net of Reinsurance, by Segment as
of December 31, 2019
[[Image Removed: chart-cb74514f33b752ba837.jpg]]
Loss and LAE Reserves, Net of Reinsurance as of December 31, 2019
Property & Total Property &
Casualty Casualty % Total
Commercial Lines Personal Lines Other Operations Insurance Reserves-netWorkers' compensation $ 10,418 $ - $ -$ 10,418 45.3% General liability 3,494 - - 3,494 15.2% Marine 279 - - 279 1.2% Package business [1] 1,742 - - 1,742 7.6% Commercial property 461 - - 461 2.0% Automobile liability 992 1,560 - 2,552 11.1% Automobile physical damage 15 33 - 48 0.2% Professional liability 1,050 - - 1,050 4.6% Bond 337 - - 337 1.5% Homeowners - 527 - 527 2.3% Asbestos and environmental 143 10 994 1,147 5.0% Assumed reinsurance 190 - 112 302 1.3% All other 212 3 414 629 2.7% Total reserves-net 19,333 2,133 1,520 22,986 100.0% Reinsurance and other recoverables 4,030 68 1,177 5,275 Total reserves-gross $ 23,363 $ 2,201 $ 2,697$ 28,261
[1] Commercial Lines policy packages that include property and general liability
coverages are generally referred to as the package line of business.
For descriptions of the coverages provided under the lines of business shown
above, see Part I - Item1, Business.
Overview of Reserving for Property and Casualty Insurance Claims
It typically takes many months or years to pay claims incurred under a property
and casualty insurance product; accordingly, the
Company must establish reserves at the time the loss is incurred. Most of the
Company's policies provide for occurrence-based coverage where the loss is
incurred when a claim event happens like an automobile accident, house or
building fire or injury to an employee under a workers' compensation policy.
Some of the Company's policies, mostly for directors and officers insurance and
errors and omissions insurance, are claims-made policies
48
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
where the loss is incurred in the period the claim event is reported to the
Company even if the loss event itself occurred in an earlier period.
Loss and loss adjustment expense reserves provide for the estimated ultimate
costs of paying claims under insurance policies written by the Company, less
amounts paid to date. These reserves include estimates for both claims that have
been reported and those that have not yet been reported, and include estimates
of all expenses associated with processing and settling these claims. Case
reserves are established by a claims handler on each individual claim and are
adjusted as new information becomes known during the course of handling the
claim. Incurred but not reported ("IBNR") reserves represent the difference
between the estimated ultimate cost of all claims and the actual loss and loss
adjustment expenses reported to the Company by claimants ("reported losses").
Reported losses represent cumulative loss and loss adjustment expenses paid plus
case reserves for outstanding reported claims. For most lines, Company actuaries
evaluate the total reserves (IBNR and case reserves) on an accident year basis.
An accident year is the calendar year in which a loss is incurred, or, in the
case of claims-made policies, the calendar year in which a loss is reported. For
lines acquired from the Navigators Group book of business, total reserves are
evaluated on a policy year basis and then converted to accident year. A policy
year is the calendar year in which a policy incepts.
Factors that Change Reserve Estimates- Reserve estimates can change over time
because of unexpected changes in the external environment. Inflation in claim
costs, such as with medical care, hospital care, automobile parts, wages and
home and building repair, would cause claims to settle for more than they are
initially reserved. Changes in the economy can cause an increase or decrease in
the number of reported claims (claim frequency). For example, an improving
economy could result in more automobile miles driven and a higher number of
automobile reported claims, or a change in economic conditions can lead to more
or less workers' compensation reported claims. An increase in the number or
percentage of claims litigated can increase the average settlement amount per
claim (claim severity). Changes in the judicial environment can affect
interpretations of damages and how policy coverage applies which could increase
or decrease claim severity. Over time, judges or juries in certain jurisdictions
may be more inclined to determine liability and award damages. New legislation
can also change how damages are defined or change the statutes of limitations
for the filing of civil suits, resulting in greater claim frequency or severity.
In addition, new types of injuries may arise from exposures not contemplated
when the policies were written. Past examples include pharmaceutical products,
silica, lead paint, molestation or abuse and construction defects.
Reserve estimates can also change over time because of changes in internal
Company operations. A delay or acceleration in handling claims may signal a need
to increase or reduce reserves from what was initially estimated. Changes in
claim patterns may arise through integration of Navigators Group claims
practices. New lines of business may have loss development patterns that are not
well established. Changes in the geographic mix of business, changes in the mix
of business by industry and changes in the mix of business by policy limit or
deductible can increase the risk that losses will ultimately develop differently
than the loss development patterns assumed in our reserving. In addition,
changes in the quality of risk selection in underwriting and changes in
interpretations of policy language could increase or decrease ultimate losses
from what was assumed in establishing the reserves.
In the case of assumed reinsurance, all of the above risks apply. The Company
assumes property and casualty risks from other insurance companies as part of
its Global Re business acquired from Navigators Group and from certain pools and
associations. Global Re, which is a part of the global specialty business,
mostly assumes property, casualty, surety, agriculture, marine and accident and
health insurance risks. Changes in the case reserving and reporting patterns of
insurance companies ceding to The Hartford can create additional uncertainty in
estimating the reserves. Due to the inherent complexity of the assumptions used,
final claim settlements may vary significantly from the present estimates of
direct and assumed reserves, particularly when those settlements may not occur
until well into the future.
Reinsurance Recoverables- Through both facultative and treaty reinsurance
agreements, the Company cedes a share of the risks it has underwritten to other
insurance companies. The Company records reinsurance recoverables for loss and
loss adjustment expenses ceded to its reinsurers representing the anticipated
recovery from reinsurers of unpaid claims, including IBNR.
The Company estimates the portion of losses and loss adjustment expenses to be
ceded based on the terms of any applicable facultative and treaty reinsurance,
including an estimate of IBNR for losses that will ultimately be ceded.
The Company provides an allowance for uncollectible reinsurance, reflecting
management's best estimate of reinsurance cessions that may be uncollectible in
the future due to reinsurers' unwillingness or inability to pay. The estimated
allowance considers the credit quality of the Company's reinsurers, recent
outcomes in arbitration and litigation in disputes between reinsurers and
cedants and recent communication activity between reinsurers and cedants that
may signal how the Company's own reinsurance claims may settle. Where its
reinsurance contracts permit, the Company secures funding of future claim
obligations with various forms of collateral, including irrevocable letters of
credit, secured trusts, funds held accounts and group-wide offsets. The
allowance for uncollectible reinsurance was $114 as of December 31, 2019 ,
comprised of $42 related to Commercial Lines, $1 related to Personal Lines and
$71 related to Property & Casualty Other Operations.
The Company's estimate of reinsurance recoverables, net of an allowance for
uncollectible reinsurance, is subject to similar risks and uncertainties as the
estimate of the gross reserve for unpaid losses and loss adjustment expenses for
direct and assumed exposures.
Review of Reserve Adequacy- The Hartford regularly reviews the appropriateness
of reserve levels at the line of business or more detailed level, taking into
consideration the variety of trends that impact the ultimate settlement of
claims. For Property & Casualty Other Operations, asbestos and environmental
("Run-off A&E") reserves are reviewed by type of event rather than by line of
business.
Reserve adjustments, which may be material, are reflected in the operating
results of the period in which the adjustment is
49
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
determined to be necessary. In the judgment of management, information currently available has been properly considered in establishing the reserves for unpaid losses and loss adjustment expenses and in recording the reinsurance recoverables for ceded unpaid losses. Reserving Methodology The following is a discussion of the reserving methods used for the Company's property and casualty lines of business other than asbestos and environmental. Reserves are set by line of business within the operating segments. A single line of business may be written in more than one segment. Lines of business for which reported losses emerge over a long period of time are referred to as long-tail lines of business. Lines of business for which reported losses emerge more quickly are referred to as short-tail lines of business. The Company's shortest-tail lines of business are homeowners, commercial property, marine and automobile physical damage. The longest tail lines of business include workers' compensation, general liability, professional liability and assumed reinsurance. For short-tail lines of business, emergence of paid loss and case reserves is credible and likely indicative of ultimate losses. For long-tail lines of business, emergence of paid losses and case reserves is less credible in the early periods after a given accident year and, accordingly, may not be indicative of ultimate losses. Use of Actuarial Methods and Judgments-The Company's reserving actuaries regularly review reserves for both current and prior accident years using the most current claim data. A variety of actuarial methods and judgments are used for most lines of business to arrive at selections of estimated ultimate losses and loss adjustment expenses. New methods may be added for specific lines over time to inform these selections where appropriate. The reserve selections incorporate input, as appropriate, from claims personnel, pricing actuaries and operating management about reported loss cost trends and other factors that could affect the reserve estimates. Most reserves are reviewed fully each quarter, including loss and loss adjustment expense reserves for homeowners, commercial property, marine, automobile physical damage, automobile liability, package property business, and workers' compensation. Other reserves, including most general liability and professional liability lines, are reviewed semi-annually. Certain additional reserves are also reviewed semi-annually or annually, including reserves for losses incurred in accident years older than twelve years for Personal Lines and older than twenty years for Commercial Lines, as well as reserves for bond, assumed reinsurance, latent exposures such as construction defects, and unallocated loss adjustment expenses. For reserves that are reviewed semi-annually or annually, management monitors the emergence of paid and reported losses in the intervening quarters and, if necessary, performs a reserve review to determine whether the reserve estimate should change. An expected loss ratio is used in initially recording the reserves for both short-tail and long-tail lines of business. This expected loss ratio is determined by starting with the average loss ratio of recent prior accident years and adjusting that ratio for the effect of expected changes to earned pricing, loss frequency and severity, mix of business, ceded reinsurance and other factors. For short-tail lines, IBNR for the current accident year is initially recorded as the product of the expected loss ratio for the period, earned premium for the period and the proportion of losses expected to be reported in future calendar periods for the current accident period. For long-tailed lines, IBNR reserves for the current accident year are initially recorded as the product of the expected loss ratio for the period and the earned premium for the period, less reported losses for the period. As losses emerge or develop in periods subsequent to a given accident year, reserving actuaries use other methods to estimate ultimate unpaid losses in addition to the expected loss ratio method. These primarily include paid and reported loss development methods, frequency/severity techniques and the Bornhuetter-Ferguson method (a combination of the expected loss ratio and paid development or reported development method). Within any one line of business, the methods that are given more influence vary based primarily on the maturity of the accident year, the mix of business and the particular internal and external influences impacting the claims experience or the methods. The output of the reserve reviews are reserve estimates that are referred to herein as the "actuarial indication". Reserve Discounting- Most of the Company's property and casualty insurance product reserves are not discounted. However, the Company has discounted liabilities funded through structured settlements and has discounted a portion of workers' compensation reserves that have a fixed and determinable payment stream. For further discussion of these discounted liabilities, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements. Differences Between GAAP and Statutory Basis Reserves- As ofDecember 31, 2019 and 2018,U.S. property and casualty insurance product reserves for losses and loss adjustment expenses, net of reinsurance recoverables, reported underU.S. GAAP were approximately equal to net reserves reported on a statutory basis. The primary difference between the statutory and GAAP reserve amounts is due to reinsurance recoverables on two ceded retroactive reinsurance agreements that are recorded as a reduction of other liabilities under statutory accounting. One of the retroactive reinsurance agreements covers substantially all adverse development on asbestos and environmental reserves subsequent to 2016 and the other covers adverse development on Navigators Insurers' existing net loss and allocated loss adjustment reserves as ofDecember 31, 2018 . Under both agreements, the Company cedes to NICO, a subsidiary of Berkshire Hathaway Inc. ("Berkshire"). Reserving Methods by Line of Business- Apart from Run-off A&E which is discussed in the following section on Property & Casualty Other Operations, below is a general discussion of which reserving methods are preferred by line of business. Because the actuarial estimates are generated at a much finer level of detail than line of business (e.g., by distribution channel, coverage, accident period), other methods than those described for the line of business may also be employed for a coverage and accident year within a line of business. Also, as circumstances change, the methods that are given more influence will change. 50 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Preferred Reserving Methods by Line of Business
Commercial These short-tailed lines are fast-developing and paid and
property, reported development techniques are used as these methods use
homeowners and historical data to develop paid and reported loss development
automobile patterns, which are then applied to cumulative paid and reported
physical losses by accident period to estimate ultimate losses. In
damage addition to paid and reported development methods, for the most
immature accident months, the Company uses frequency and severity
techniques and the initial expected loss ratio. The advantage of
frequency/severity techniques is that frequency estimates are
generally easier to predict and external information can be used
to supplement internal data in estimating average severity.Personal For personal automobile liability, and bodily injury in automobile particular, in addition to traditional paid and reported liability development methods, the Company relies on frequency/severity
techniques and Berquist-Sherman techniques. Because the paid
development technique is affected by changes in claim closure
patterns and the reported development method is affected by
changes in case reserving practices, the Company uses
Berquist-Sherman techniques which adjust these patterns to
reflect current settlement rates and case reserving practices.
The Company generally uses the reported development method for
older accident years and a combination of reported development,
frequency/severity and Berquist-Sherman methods for more recent
accident years. For older accident periods, reported losses are a
good indicator of ultimate losses given the high percentage of
ultimate losses reported to date. For more recent periods, the
frequency/severity techniques are not affected as much by changes
in case reserve practices and changing disposal rates and the
Berquist-Sherman techniques specifically adjust for these
changes.
Commercial The Company performs a variety of techniques, including the paid
automobile and reported development methods and frequency/severity
liability techniques. For older, more mature accident years, the Company
primarily uses reported development techniques. For more recent
accident years, the Company relies on several methods that
incorporate expected loss ratios, reported loss development, paid
loss development, frequency/severity, case reserve adequacy, and
claim settlement rates.
Professional Reported and paid loss development patterns for this line tend to
liability be volatile. Therefore, the Company typically relies on frequency
and severity techniques.
General For these long-tailed lines of business, the Company generally
liability, relies on the expected loss ratio and reported development
bond and large techniques. The Company generally weights these techniques
deductible together, relying more heavily on the expected loss ratio method
workers' at early ages of development and more on the reported development
compensation method as an accident year matures.
Workers' Workers' compensation is the Company's single largest reserve
compensation line of business and a wide range of methods are used. Methods
include paid and reported development techniques, the expected
loss ratio and Bornhuetter-Ferguson methods, with adjustments
based on analysis of larger states. We have seen an acceleration
of paid losses relative to historical patterns that began in
2011. This acceleration is due to an increase in lump sum
settlements to claimants across multiple accident years and we
have adjusted our expected loss development patterns accordingly.
Adjusting for the effect of an acceleration in payments compared
to historical patterns, paid loss development techniques are
generally preferred for the workers' compensation line,
particularly for more mature accident years. For less mature
accident years, the Company places greater reliance on expected
loss ratio methods.
Marine For marine liability, the Company generally relies on the
expected loss ratio, Berquist-Sherman, and reported development
techniques. The Company generally weights these techniques
together, relying more heavily on the expected loss ratio method
at early ages of development and then shifts towards
Berquist-Sherman and then more towards the reported development
method as a policy year matures. Policy year loss reserve
estimates are then converted to an accident year basis. For
marine property segments, the Company relies on a
Berquist-Sherman method for early development ages then shifts to
reported development techniques.
Assumed Standard methods, such as expected loss ratio, Berquist-Sherman
reinsurance and reported development techniques are applied. These methods
and all other and analyses are informed by underlying treaty by treaty analyses
supporting the ELRs, and cedant data will often inform the loss
development patterns. In some instances, reserve indications may
also be influenced by information gained from claims and
underwriting audits. For the A&H business where thereporting is
quick and treaties are not written evenly throughout the year,
policy quarter analyses are performed to avoid potential
distortions. Policy quarter and policy year loss reserve
estimates are then converted to an accident year basis.
Allocated loss For some lines of business (e.g., professional liability, assumed
adjustment reinsurance, and the acquired Navigators Group book of business),
expenses ALAE and losses are analyzed together. For most lines of
(ALAE) business, however, ALAE is analyzed separately, using paid
development techniques and a ratio of paid ALAE to paid loss is
applied to loss reserves to estimate unpaid ALAE.Unallocated ULAE is analyzed separately from loss and ALAE. For most lines of loss
business, future ULAE costs to be paid are projected based on an
adjustment expected claim handling cost per claim year, the anticipated
expenses claim closure pattern and the ratio of paid ULAE to paid loss is
(ULAE) applied to estimated unpaid losses. For some lines, a simplified
paid-to-paid approach is used.
In the final step of the reserve review process, senior reserving actuaries and
senior management apply their judgment to determine the appropriate level of
reserves considering the actuarial indications and other factors not
contemplated in the actuarial indications. Those factors include, but are not
limited to, the assessed reliability of key loss trends and assumptions used in
the current actuarial indications, the maturity of the accident year, pertinent
trends observed over the recent past, the level of volatility within a
particular line of business, and the improvement or deterioration of actuarial
indications in the current period as compared to the prior periods. The Company
51
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
also considers the magnitude of the difference between the actuarial indication and the recorded reserves. Based on the results of the quarterly reserve review process, the Company determines the appropriate reserve adjustments, if any, to record. In general, adjustments are made more quickly to more mature accident years and less volatile lines of business. Such adjustments of reserves are referred to as "prior accident year development". Increases in previous estimates of ultimate loss costs are referred to as either an increase in prior accident year reserves or as unfavorable reserve development. Decreases in previous estimates of ultimate loss costs are referred to as either a decrease in prior accident year reserves or as favorable reserve development. Reserve development can influence the comparability of year over year underwriting results. For a discussion of changes to reserve estimates recorded in 2019, see theTotal P&C Insurance Product Reserve Development section below. Current Trends Contributing to Reserve Uncertainty TheHartford is a multi-line company in the property and casualty insurance business. TheHartford is therefore subject to reserve uncertainty stemming from changes in loss trends and other conditions which could become material at any point in time. As market conditions and loss trends develop, management must assess whether those conditions constitute a long-term trend that should result in a reserving action (i.e., increasing or decreasing the reserve). General liability- Within Commercial Lines, including the acquiredNavigators Group book of business, and Property & Casualty Other Operations, the Company has exposure to general liability claims, including from bodily injury, property damage and product liability. Reserves for these exposures can be particularly difficult to estimate due to the long development pattern and uncertainty about how cases will settle. In particular, the Company has exposure to bodily injury claims that is the result of long-term or continuous exposure to harmful products or substances. Examples include, but are not limited to, pharmaceutical products, silica, talcum powder, head injuries and lead paint. The Company also has exposure to claims from construction defects, where property damage or bodily injury from negligent construction is alleged. In addition, the Company has exposure to claims asserted against religious institutions and other organizations relating to molestation or abuse. Such exposures may involve potentially long latency periods and may implicate coverage in multiple policy periods. These factors make reserves for such claims more uncertain than other bodily injury or property damage claims. With regard to these exposures, the Company monitors trends in litigation, the external environment including legislation, the similarities to other mass torts and the potential impact on the Company's reserves. Additionally, uncertainty in estimated claim severity causes reserve variability, particularly with respect to changes in internal claim handling and case reserving practices. Workers' compensation- Included in both Small Commercial and in Middle & Large Commercial, workers' compensation is the Company's single biggest line of business and the property and casualty line of business with the longest pattern of loss emergence. To the extent that patterns in the frequency of settlement payments deviate from historical patterns, loss reserve estimates would be less reliable. Medical costs make up approximately 50% of workers' compensation payments. As such, reserve estimates for workers' compensation are particularly sensitive to changes in medical inflation, the changing use of medical care procedures and changes in state legislative and regulatory environments. In addition, a deteriorating economic environment can reduce the ability of an injured worker to return to work and lengthen the time a worker receives disability benefits. In National Accounts, reserves for large deductible workers' compensation insurance require estimating losses attributable to the deductible amount that will be paid by the insured; if such losses are not paid by the insured due to financial difficulties, the Company is contractually liable. Commercial Lines automobile- Uncertainty in estimated claim severity causes reserve variability for commercial automobile losses including reserve variability due to changes in internal claim handling and case reserving practices as well as due to changes in the external environment. Directors' and officers' insurance- Uncertainty regarding the number and severity of class action suits can result in reserve volatility for both directors' and officers' insurance claims. Additionally, the Company's exposure to losses under directors' and officers' insurance policies, both domestically and internationally, is primarily in excess layers, making estimates of loss more complex. Personal Lines automobile- While claims emerge over relatively shorter periods, estimates can still vary due to a number of factors, including uncertain estimates of frequency and severity trends. Severity trends are affected by changes in internal claim handling and case reserving practices as well as by changes in the external environment. Changes in claim practices increase the uncertainty in the interpretation of case reserve data, which increases the uncertainty in recorded reserve levels. Severity trends have increased in recent accident years, in part driven by more expensive parts associated with new automobile technology, causing additional uncertainty about the reliability of past patterns. In addition, the introduction of new products and class plans has led to a different mix of business by type of insured than the Company experienced in the past. Such changes in mix increase the uncertainty of the reserve projections, since historical data and reporting patterns may not be applicable to the new business. Assumed reinsurance- While the pricing and reserving processes can be challenging and idiosyncratic for insurance companies, the inherent uncertainties of setting prices and estimating such reserves are even greater for the reinsurer. This is primarily due to the longer time between the date of an occurrence and the reporting of claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing pricing and reserving practices among ceding companies. In addition, trends that have affected development of liabilities in the past may not necessarily occur or impact liability development in the same manner or to the same degree in the future. As a result, actual losses and LAE may deviate, perhaps substantially, from the expected estimates. International business- In addition to several of the line-specific trends listed above, the International business acquired 52 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
through theNavigators Group book of business may have additional uncertainty due to geopolitical, foreign currency, and other risks. For example, uncertainty with the resolution of Brexit can affect the reserve estimates for international business. Impact of Key Assumptions on Reserves As stated above, the Company's practice is to estimate reserves using a variety of methods, assumptions and data elements within its reserve estimation process. The Company does not consistently use statistical loss distributions or confidence levels around its reserve estimate and, as a result, does not disclose reserve ranges. Across most lines of business, the most important reserve assumptions are future loss development factors applied to paid or reported losses to date. The trend in loss cost frequency and severity is also a key assumption, particularly in the most recent accident years, where loss development factors are less credible. The following discussion discloses possible variation from current estimates of loss reserves due to a change in certain key indicators of potential losses. For automobile liability lines in both Personal Lines and Commercial Lines, the key indicator is the annual loss cost trend, particularly the severity trend component of loss costs. For workers' compensation and general liability, loss development patterns are a key indicator, particularly for more mature accident years. For workers' compensation, paid loss development patterns have been impacted by medical cost inflation and other changes in loss cost trends. For general liability, incurred loss development patterns have been impacted by, among other things, emergence of new types of claims (e.g., construction defect claims) and a shift in the mixture between smaller, more routine claims and larger, more complex claims. Each of the impacts described below is estimated individually, without consideration for any correlation among key indicators or among lines of business. Therefore, it would be inappropriate to take each of the amounts described below and add them together in an attempt to estimate volatility for the Company's reserves in total. For any one reserving line of business, the estimated variation in reserves due to changes in key indicators is a reasonable estimate of possible variation that may occur in the future, likely over a period of several calendar years. The variation discussed is not meant to be a worst-case scenario, and, therefore, it is possible that future variation may be more than the amounts discussed below. Reserves, Net of Estimated Range Possible Change in Reinsurance December of Variation in Key Indicator 31, 2018 Reserves Personal Automobile +/- 2.5. points to$1.6 billion +/-$80 Liability the annual assumed change in loss cost severity for the two most recent accident years Commercial Automobile +/- 2.5 points to$1.0 billion +/-$30 Liability the annual assumed change in loss cost severity for the two most recent accident years Workers' Compensation 2% change in paid$10.4 billion +/-$400 loss development patterns General Liability 8% change in$3.5 billion +/-$450 reported loss development patterns Reserving for Asbestos and Environmental Claims How A&E Reserves are Set- The process for establishing reserves for asbestos and environmental claims first involves estimating the required reserves gross of ceded reinsurance and then estimating reinsurance recoverables. In establishing reserves for gross asbestos claims, the Company evaluates its insureds' estimated liabilities for such claims by examining exposures for individual insureds and assessing how coverage applies. The Company considers a variety of factors, including the jurisdictions where underlying claims have been brought, past, pending and anticipated future claim activity, the level of plaintiff demands, disease mix, past settlement values of similar claims, dismissal rates, allocated loss adjustment expense, and potential impact of other defendants being in bankruptcy. Similarly, the Company reviews exposures to establish gross environmental reserves. The Company considers several factors in estimating environmental liabilities, including historical values of similar claims, the number of sites involved, the insureds' alleged activities at each site, the alleged environmental damage, the respective shares of liability of potentially responsible parties, the appropriateness and cost of remediation, the nature of governmental enforcement activities or mandated remediation efforts and potential impact of other defendants being in bankruptcy. After evaluating its insureds' probable liabilities for asbestos and/or environmental claims, the Company evaluates the insurance coverage in place for such claims. The Company considers its insureds' total available insurance coverage, including the coverage issued by the Company. The Company also considers relevant judicial interpretations of policy language, the nature of how policy limits are enforced on multi-year policies and applicable coverage defenses or determinations, if any. 53 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The estimated liabilities of insureds and the Company's exposure to the insureds
depends heavily on an analysis of the relevant legal issues and litigation
environment. This analysis is conducted by the Company's lawyers and is subject
to applicable privileges.
For both asbestos and environmental reserves, the Company also analyzes its
historical paid and reported losses and expenses year by year, to assess any
emerging trends, fluctuations or characteristics suggested by the aggregate paid
and reported activity. The historical losses and expenses are analyzed on both a
direct basis and net of reinsurance.
Once the gross ultimate exposure for indemnity and allocated loss adjustment
expense is determined for its insureds by each policy year, the Company
calculates its ceded reinsurance projection based on any applicable facultative
and treaty reinsurance and the Company's experience with reinsurance
collections. See the section that follows entitled A&E Adverse Development Cover
that discusses the impact the reinsurance agreement with NICO may have on future
adverse development of asbestos and environmental reserves, if any.
Uncertainties Regarding Adequacy of A&E Reserves- A number of factors affect the
variability of estimates for gross asbestos and environmental reserves including
assumptions with respect to the frequency of claims, the average severity of
those claims settled with payment, the dismissal rate of claims with no payment,
resolution of coverage disputes with our policyholders and the expense to
indemnity ratio. Reserve estimates for gross asbestos and environmental reserves
are subject to greater variability than reserve estimates for more traditional
exposures.
The process of estimating asbestos and environmental reserves remains subject to
a wide variety of uncertainties, which are
detailed in Note 14 - Commitments and Contingencies of Notes to Consolidated
Financial Statements. The Company believes that its current asbestos and
environmental reserves are appropriate. Future developments could cause the
Company to change its estimates of its gross asbestos and environmental reserves
and if cumulative ceded losses under the adverse development cover ("A&E ADC")
with NICO exceed the ceded premium paid of $650 , there could be significant
variability in net income due to timing differences between when gross reserves
are increased and when reinsurance recoveries are recognized. Consistent with
past practice, the Company will continue to monitor its reserves in Property &
Casualty Other Operations regularly, including its annual reviews of asbestos
liabilities, reinsurance recoverables, the allowance for uncollectible
reinsurance, and environmental liabilities. Where future developments indicate,
we will make appropriate adjustments to the reserves at that time.
Total P&C Insurance Product Reserves Development
In the opinion of management, based upon the known facts and current law, the
reserves recorded for the Company's property and casualty insurance products at
December 31, 2019 represent the Company's best estimate of its ultimate
liability for losses and loss adjustment expenses related to losses covered by
policies written by the Company. However, because of the significant
uncertainties surrounding reserves, it is possible that management's estimate of
the ultimate liabilities for these claims may change in the future and that the
required adjustment to currently recorded reserves could be material to the
Company's results of operations and liquidity.
54
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid
Losses and LAE for the Year Ended December 31, 2019
Personal Property & Casualty Total Property &
Commercial Lines Lines Other Operations Casualty Insurance
Beginning liabilities for unpaid
losses and loss adjustment expenses,
gross $ 19,455 $ 2,456 $ 2,673 $ 24,584
Reinsurance and other recoverables 3,137 108 987 4,232
Beginning liabilities for unpaid
losses and loss adjustment expenses,
net 16,318 2,348 1,686 20,352
Navigators Group acquisition 2,001 - - 2,001
Provision for unpaid losses and loss
adjustment expenses
Current accident year before
catastrophes 4,913 2,087 - 7,000
Current accident year ("CAY")
catastrophes 323 140 - 463
Prior accident year development
("PYD") [1] (44 ) (42 ) 21 (65 )
Total provision for unpaid losses and
loss adjustment expenses 5,192 2,185 21 7,398
Change in deferred gain on retroactive
reinsurance included in other
liabilities [1] (16 ) - - (16 )
Payments (4,161 ) (2,400 ) (187 ) (6,748 )
Foreign currency adjustment (1 ) - - (1 )
Ending liabilities for unpaid losses
and loss adjustment expenses, net 19,333 2,133 1,520 22,986
Reinsurance and other recoverables 4,030 68 1,177 5,275
Ending liabilities for unpaid losses
and loss adjustment expenses, gross $ 23,363 $ 2,201 $
2,697
50.0 74.2
Loss and loss expense incurred ratio 62.6 68.3
Prior accident year development (pts)
[3] (0.5 ) (1.3 )
[1] Prior accident year development does not include the benefit of a portion of
losses ceded under the Navigators ADC which, under retroactive reinsurance
accounting, is deferred and recognized over the period the ceded losses are
recovered in cash from NICO. For additional information regarding the
Navigators ADC agreement, please refer to Note 11 - Reserve for Unpaid Losses
and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[2] The "loss and loss expense paid ratio" represents the ratio of paid losses
and loss adjustment expenses to earned premiums.
[3] "Prior accident year development (pts)" represents the ratio of prior
accident year development to earned premiums.
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2019 , Net of
Reinsurance
Commercial Personal
Lines Lines Total
Wind and hail $ 157 $ 102 $ 259
Winter storms 54 18 72
Tropical Storms 18 5 23
Hurricanes 20 4 24
Wildfires 4 4 8
Tornadoes 53 7 60
Typhoons 16 - 16
Other 1 - 1
Total catastrophe losses $ 323 $ 140 $ 463
In December, 2019, the judge overseeing the bankruptcy of PG&E Corporation and
Pacific Gas and Electric Company (together, "PG&E") approved an
2017Northern California wildfires and 2018 Camp wildfire. The settlement is subject to the confirmation by the bankruptcy court of a chapter 11 plan of reorganization (a "Plan") which implements the terms of the settlement. If a Plan is approved, certain of the Company's insurance subsidiaries would be entitled 55 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
to settlement payments. Based on reserve estimates submitted with the subrogation request, the amount our subsidiaries could collect from PG&E, if any, would be approximately$300 to$325 but could be more or less than that amount depending on how the Company's ultimate paid claims subject to subrogation compare to other insurers' ultimate paid claims subject to subrogation. Approval of the Plan and amount of the Company's ultimate subrogation recoveries from PG&E are subject to uncertainty. Given the uncertainty about whether the Plan will be approved, the Company has not recognized a benefit from potential subrogation from PG&E and will evaluate in future periods when more information becomes known. In connection with the 2018 Camp wildfire, the Company has recognized a$12 reinsurance recoverable for losses incurred in excess of a$350 per occurrence retention. Under its 2018 property aggregate catastrophe treaty, the Company has recognized a reinsurance recoverable for aggregate catastrophe losses in excess of an$825 retention, with the recoverable currently estimated at$45 . As such, the first$57 of subrogation recoveries would be offset by a$57 reduction in these reinsurance recoverables resulting in no net benefit to income.
Unfavorable (Favorable) Prior
Property &
Personal Casualty Other Total Property &
Commercial Lines Lines Operations Casualty Insurance
Workers' compensation $ (120 ) $ - $ - $ (120 )
Workers' compensation discount
accretion 33 - - 33
General liability 61 - - 61
Marine 8 - - 8
Package business (47 ) - - (47 )
Commercial property (11 ) - - (11 )
Professional liability 29 - - 29
Bond (3 ) - - (3 )
Assumed Reinsurance 3 - - 3
Automobile liability 27 (38 ) - (11 )
Homeowners - 3 - 3
Net asbestos reserves - - - -
Net environmental reserves - - - -
Catastrophes (40 ) (2 ) - (42 )
Uncollectible reinsurance (5 ) - (25 ) (30 )
Other reserve re-estimates, net 5 (5 ) 46 46
Total prior accident year development,
including full benefit for the ADC
cession (60 ) (42 ) 21 (81 )
Change in deferred gain on retroactive
reinsurance included in other
liabilities 16 - - 16
Total prior accident year development $ (44 ) $ (42 ) $ 21 $ (65 )
56--------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid
Losses and LAE for the Year Ended December 31, 2018
Personal Property & Casualty Total Property &
Commercial Lines Lines Other Operations Casualty Insurance
Beginning liabilities for unpaid
losses and loss adjustment expenses,
gross $ 18,893 $ 2,294 $ 2,588 $ 23,775
Reinsurance and other recoverables 3,147 71 739 3,957
Beginning liabilities for unpaid
losses and loss adjustment expenses,
net 15,746 2,223 1,849 19,818
Provision for unpaid losses and loss
adjustment expenses
Current accident year before
catastrophes 4,037 2,249 - 6,286
Current accident year catastrophes 275 546 - 821
Prior accident year development (200 ) (32 ) 65 (167 )
Total provision for unpaid losses and
loss adjustment expenses 4,112 2,763 65 6,940
Payments (3,540 ) (2,638 ) (228 ) (6,406 )
Ending liabilities for unpaid losses
and loss adjustment expenses, net 16,318 2,348 1,686 20,352
Reinsurance and other recoverables 3,137 108 987 4,232
Ending liabilities for unpaid losses
and loss adjustment expenses, gross $ 19,455 $ 2,456 $
2,673
50.0 76.7
Loss and loss expense incurred ratio 58.4 81.3
Prior accident year development (pts)
[2] (2.8 ) (0.9 )
[1] The "loss and loss expense paid ratio" represents the ratio of paid losses
and loss adjustment expenses to earned premiums and fee income.
[2] "Prior accident year development (pts)" represents the ratio of prior
accident year development to earned premiums.
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2018 , Net of
Reinsurance
Commercial Personal
Lines Lines Total
Wind and hail $ 124 $ 164 $ 288
Winter storms 50 25 75
Flooding 1 1 2
Volcanic eruption - 2 2
Wildfire 56 384 440
Hurricanes 71 23 94
Massachusetts gas explosion 1 - 1
Earthquake - 1 1
Total catastrophe losses 303 600 903
Less: reinsurance recoverable under the
property aggregate treaty [1] (28 ) (54 ) (82 )
Net catastrophe losses $ 275 $ 546 $ 821
[1]Refers to reinsurance recoverable under the Company's Property Aggregate treaty. For further information on the treaty, refer to Part II, Item 7, MD&A - Enterprise Risk Management - Insurance Risk.
57
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unfavorable (Favorable) Prior
Property &
Personal Casualty Other Total Property &
Commercial Lines Lines Operations Casualty Insurance
Workers' compensation $ (164 ) $ - $ - $ (164 )
Workers' compensation discount
accretion 40 - - 40
General liability 52 - - 52
Package business (26 ) - - (26 )
Commercial property (12 ) - - (12 )
Professional liability (12 ) - - (12 )
Bond 2 - - 2
Automobile liability (15 ) (18 ) - (33 )
Homeowners - (25 ) - (25 )
Net asbestos reserves - - - -
Net environmental reserves - - - -
Catastrophes (67 ) 18 - (49 )
Uncollectible reinsurance - - 22 22
Other reserve re-estimates, net 2 (7 ) 43 38
Total prior accident year development $ (200 )
65 $ (167 )
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid
Losses and LAE for the Year Ended December 31, 2017
Personal Property & Casualty Total Property &
Commercial Lines Lines Other Operations Casualty Insurance
Beginning liabilities for unpaid
losses and loss adjustment expenses,
gross $ 17,950 $ 2,094 $ 2,501 $ 22,545
Reinsurance and other recoverables 3,037 25 426 3,488
Beginning liabilities for unpaid
losses and loss adjustment expenses,
net 14,913 2,069 2,075 19,057
Provision for unpaid losses and loss
adjustment expenses
Current accident year before
catastrophes 3,961 2,584 - 6,545
Current accident year catastrophes 383 453 - 836
Prior accident year development (22 ) (37 ) 18 (41 )
Total provision for unpaid losses and
loss adjustment expenses 4,322 3,000 18 7,340
Payments (3,489 ) (2,846 ) (244 ) (6,579 )
Less: net reserves transferred to
liabilities held for sale [1] - - - -
Ending liabilities for unpaid losses
and loss adjustment expenses, net 15,746 2,223 1,849 19,818
Reinsurance and other recoverables 3,147 71 739 3,957
Ending liabilities for unpaid losses
and loss adjustment expenses, gross $ 18,893 $ 2,294 $
2,588
50.6 76.2
Loss and loss expense incurred ratio 63.0 81.3
Prior accident year development (pts)
[2] (0.3 ) (1.0 )
[1] The "loss and loss expense paid ratio" represents the ratio of paid losses
and loss adjustment expenses to earned premiums and fee income.
[2] "Prior accident year development (pts)" represents the ratio of prior
accident year development to earned premiums.
58--------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2017 , Net of
Reinsurance
Commercial Personal
Lines Lines Total
Wind and hail $ 138 $ 176 $ 314
Hurricanes [1] 236 68 304
Wildfires 51 253 304
Winter storms 1 3 4
Total catastrophe losses 426 500 926
Less: reinsurance recoverable under the
property aggregate treaty [2] (43 ) (47 ) (90 )
Net catastrophe losses $ 383 $ 453 $ 836
[1]Includes catastrophe losses from Hurricane Harvey and Hurricane Irma of $170
and $121 , respectively.
[2]Refers to reinsurance recoverable under the Company's Property Aggregate
treaty. For further information on the treaty, refer to Part II, Item 7, MD&A -
Enterprise Risk Management - Insurance Risk.
Unfavorable (Favorable) Prior
Property &
Personal Casualty Other Total Property &
Commercial Lines Lines Operations Casualty Insurance
Workers' compensation $ (79 ) $ - $ - $ (79 )
Workers' compensation discount
accretion 28 - - 28
General liability 11 - - 11
Package business (25 ) - - (25 )
Commercial property (8 ) - - (8 )
Professional liability 1 - - 1
Bond 32 - - 32
Automobile liability 17 - - 17
Homeowners - (14 ) - (14 )
Net asbestos reserves - - - -
Net environmental reserves - - - -
Catastrophes - (16 ) - (16 )
Uncollectible reinsurance (15 ) - - (15 )
Other reserve re-estimates, net 16 (7 ) 18 27
Total prior accident year development $ (22 )
18 $ (41 )
For discussion of the factors contributing to unfavorable (favorable) prior
accident year reserve development, please refer to Note 11 - Reserve for Unpaid
Losses and Loss Adjustment Expenses of Notes to Consolidated Financial
Statements.
Property & Casualty Other Operations
Net reserves and reserve activity in Property & Casualty Other Operations are
categorized and reported as asbestos, environmental, and "all other". The "all
other" category of reserves covers a wide range of insurance and assumed
reinsurance coverages, including, but not limited to, potential liability for
construction defects, lead paint, silica, pharmaceutical products, head
injuries, molestation and other long-tail liabilities. In addition to various
insurance and assumed reinsurance exposures, "all other" includes unallocated
loss adjustment expense reserves. "All other" also includes the Company's
allowance for uncollectible reinsurance. When the Company commutes a ceded
reinsurance contract or settles a ceded
reinsurance dispute, net reserves for the related cause of loss (including asbestos, environmental or all other) are increased for the portion of the allowance for uncollectible reinsurance attributable to that commutation or settlement.
59
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
P&C Other Operations
Total Reserves, Net of Reinsurance
[[Image Removed: chart-f7f1f35a578d597cb98.jpg]]
Asbestos and Environmental Reserves
The vast majority of the Company's exposure to A&E relates to policy coverages
provided prior to 1986, reported within the P&C Other Operations segment
("Run-off A&E"). In addition, since 1986, the Company has written asbestos and
environmental exposures under general liability policies and pollution liability
under homeowners policies, which are reported in the Commercial Lines and
Personal Lines segments.
Run-off A&E Summary as of December 31, 2019
Asbestos Environmental Total A&E
Gross
Direct $ 1,315 $ 353 $ 1,668
Assumed Reinsurance 477 62 539
Total 1,792 415 2,207
Ceded- other than NICO (484 ) (69 ) (553 )Ceded - NICO A&E ADC "Run-off"[1] (434 ) (226 ) (660 ) Net
$ 874 $ 120 $ 994
[1] Including
losses for Commercial Lines and Personal Lines, cumulative net incurred
losses of
reinsurance agreement. See the section that follows entitled A&E Adverse
Development Cover for additional information.
Rollforward of Run-off A&E Losses and LAE
Asbestos Environmental
2019
Beginning liability - net $ 984 $ 151
Losses and loss adjustment expenses incurred -
-
Losses and loss adjustment expenses paid (111 ) (32 ) Reclassification of allowance for uncollectible insurance [1] 1 1 Ending liability - net $ 874 $ 120 2018 Beginning liability - net $ 1,143 $ 182 Losses and loss adjustment expenses incurred -
-
Losses and loss adjustment expenses paid (159 ) (31 ) Reclassification of allowance for uncollectible insurance [1] - - Ending liability - net $ 984 $ 151 2017 Beginning liability - net $ 1,282 $ 234 Losses and loss adjustment expenses incurred -
-
Losses and loss adjustment expenses paid (140 ) (52 ) Reclassification of allowance for uncollectible insurance [1] 1 - Ending liability - net $ 1,143 $ 182 [1] Related to the reclassification of an allowance for uncollectible reinsurance from the "all other" category of P&C Other Operations reserves. A&E Adverse Development Cover EffectiveDecember 31, 2016 , the Company entered into an A&E ADC reinsurance agreement with NICO, a subsidiary of Berkshire, to reduce uncertainty about potential adverse development. Under the A&E ADC, the Company paid a reinsurance premium of$650 for NICO to assume adverse net loss and allocated loss adjustment expense reserve development up to$1.5 billion above the Company's existing net A&E reserves as ofDecember 31, 2016 of approximately$1.7 billion , including both Run-off A&E and A&E reserves in Commercial Lines and Personal Lines. The$650 reinsurance premium was placed in a collateral trust account as security for NICO's claim payment obligations to the Company. The Company has retained the risk of collection on amounts due from other third-party reinsurers and continues to be responsible for claims handling and other administrative services, subject to certain conditions. The A&E ADC covers substantially all the Company's A&E reserve development up to the reinsurance limit. Under retroactive reinsurance accounting, net adverse A&E reserve development afterDecember 31, 2016 will result in an offsetting reinsurance recoverable up to the$1.5 billion limit. Cumulative ceded losses up to the$650 reinsurance premium paid are recognized as a dollar-for-dollar offset to net losses incurred before ceding to the A&E ADC. Cumulative ceded losses exceeding the$650 reinsurance premium paid result in a deferred gain. The deferred gain will be recognized over the claim 60 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of A&E claims afterDecember 31, 2016 in excess of$650 may result in significant charges against earnings. As ofDecember 31, 2019 , the Company has incurred a cumulative$640 in adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, including$660 for Run-off A&E reserves and ($20 ) for A&E reserves in Commercial Lines and Personal Lines. As such,$860 of coverage is available for future adverse net reserve development, if any. Net and Gross Survival Ratios Net and gross survival ratios are a measure of the quotient of the carried reserves divided by average annual payments (net of reinsurance and on a gross basis) and is an indication of the number of years that carried reserves would last (i.e. survive) if future annual payments were consistent with the calculated historical average. SinceDecember 31, 2016 , asbestos and environmental net reserves have been declining since all adverse development has been ceded to NICO, up to a limit of$1.5 billion . Recoveries from NICO will not be collected until the Company has cumulative loss payments of more than the$1.7 billion carrying value of net reserves as ofDecember 31, 2016 . Accordingly, with no net incurred losses, the payment of losses without any current collection of recoveries from NICO has reduced the Company's net loss reserves which decreases the net survival ratios such that, unadjusted, the net survival ratios would not be representative of the true number of years of average loss payments covered by the reserves. Therefore, the net survival ratios presented in the table below are calculated before considering the effect of the A&E ADC reinsurance agreement but net of other reinsurance in place. Net and Gross Survival Ratios Asbestos Environmental
One year net survival ratio [1] 11.7 10.8 Three year net survival ratio [1] 9.5
9.0
One year gross survival ratio 13.6 10.7 Three year gross survival ratio 10.1
8.4
[1] As of December 31, 2019 , the one year net survival ratios after considering
the ADC were 7.8 and 3.8 for asbestos and environmental, respectively. As of
December 31, 2019 , the three year net survival ratios after considering the ADC
were 6.4 and 3.1, respectively.
Run-off A&E Paid and Incurred Losses and LAE Development
Asbestos Environmental
Paid Losses & LAE Incurred Losses & LAE Paid Losses & LAE Incurred Losses & LAE
2019
Gross $ 131 $ 115 $ 39 $ 95
Ceded- other than NICO (20 ) (39 ) (7 ) (39 )
Ceded - NICO A&E ADC - (76 ) - (56 )
Net $ 111 $ - $ 32 $ -
2018
Gross $ 213 $ 249 $ 47 $ 83
Ceded- other than NICO (54 ) (85 ) (16 ) (12 )
Ceded - NICO A&E ADC - (164 ) (71 )
Net $ 159 $ - $ 31 $ -
2017
Gross $ 190 $ 317 $ 63 $ 123
Ceded- other than NICO (50 ) (123 ) (11 ) (24 )
Ceded - NICO A&E ADC - (194 ) - (99 )
Net $ 140 $ - $ 52 $ -
Annual Reserve Reviews
Review of Asbestos and Environmental Reserves
The Company performs its regular comprehensive annual review of asbestos and
environmental reserves in the fourth quarter, including both Run-off A&E (P&C
Other Operations) and asbestos and environmental reserves included in Commercial
Lines and Personal Lines. As part of the evaluation of asbestos reserves in the
fourth quarter of 2019, the Company reviewed all of its open direct domestic
insurance accounts exposed to asbestos liability, as well as assumed reinsurance
accounts. As part of its evaluation of environmental reserves in the fourth
quarter of 2019, the Company reviewed all of its open direct domestic insurance
accounts exposed to environmental liability, as well as assumed reinsurance
accounts.
2019 comprehensive annual reviews
During the 2019 fourth quarter review, the Company increased estimated asbestos
reserves before NICO reinsurance in P&C Other Operations by $76 , primarily due
to an increase in average settlement values, most notably from mesothelioma
claims, driven by elevated plaintiff demands. In addition, cost-sharing
agreements and settlements with certain insureds reduced the uncertainty of the
Company's asbestos liability but resulted in a reserve increase. Partially
offsetting the adverse development was a decrease in the number of claim
filings, most notably from mesothelioma claims.
As a result of the 2019 fourth quarter review, the Company increased estimated
environmental reserves before NICO reinsurance in P&C Other Operations by $56 ,
primarily due to
61
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
regulatory remediation requirements that changed in 2019 for certain sites polluted by coal ash and resulted in more costly and extensive remediation plans, a higher than anticipated number of claims associated with per & polyfluoroalkyl substances (PFAS), and increased defense and cleanup costs associated with Superfund sites. The total$132 increase in asbestos and environmental reserves in P&C Other Operations was offset by a$132 reinsurance recoverable under the NICO treaty. Including a reduction of asbestos and environmental reserves in Commercial Lines and Personal Lines, the net increase in A&E reserves in 2019 was$117 offset by a$117 increase in reinsurance recoverables under the NICO treaty. 2018 comprehensive annual reviews During the 2018 fourth quarter review of asbestos reserves, the Company increased estimated reserves before NICO reinsurance in P&C Other Operations by$164 , primarily due to an increase in average mesothelioma settlement values driven by elevated plaintiff demands and defendant bankruptcies. The rise in plaintiff demands also resulted in higher than anticipated defense costs for a small subset of peripheral defendants with a high concentration of asbestos filings in specific, adverse jurisdictions. In addition, the Company observed unfavorable developments in the application of coverage that resulted in increased liability shares on certain insureds. An increase in reserves from umbrella and excess policies in the 1981-1985 policy years contributed to the adverse development. As a result of the 2018 fourth quarter review of environmental reserves, the Company increased estimated reserves before NICO reinsurance by$71 due to increased defense and clean-up costs associated with increasingly complex remediation plans at Superfund sites, intensifying regulatory scrutiny by state agencies (particularly in thePacific Northwest ), and increased liability shares due to unavailability of other responsible parties. The total$235 increase in asbestos and environmental reserves in P&C Other Operations was offset by a$235 reinsurance recoverable under the NICO treaty. Including an increase in asbestos and environmental reserves in Commercial Lines and Personal Lines, the net increase in A&E reserves in 2018 was$238 offset by a$238 increase in reinsurance recoverables under the NICO treaty For information regarding the 2017 comprehensive annual review, please refer to Part 2, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations in TheHartford's 2018 Form 10-K Annual Report. Major Categories of Asbestos Accounts Direct asbestos exposures include both Known and Unallocated Direct Accounts. • Known Direct Accounts- includes both Major Asbestos Defendants and Non-Major
Accounts, and represent approximately 73% of the Company's total Direct gross
asbestos reserves as of
70" accounts in Tillinghast's published Tiers 1 and 2 and
accounts, while Non-Major accounts are comprised of all other direct asbestos
accounts and largely represent smaller and more peripheral defendants. Major
Asbestos Defendants have the fewest number of asbestos accounts. • Unallocated Direct Accounts- includes an estimate of the reserves necessary
for asbestos claims related to direct insureds that have not previously
tendered asbestos claims to the Company and exposures related to liability
claims that may not be subject to an aggregate limit under the applicable
policies. These exposures represent approximately 27% of the Company's Direct
gross asbestos reserves as of
as of
Review of "All Other" Reserves in Property & Casualty Other Operations In the fourth quarters of 2019, 2018 and 2017, the Company completed evaluations of certain of its non-asbestos and non-environmental reserves in Property & Casualty Other Operations, including unallocated loss adjustment expense reserves and the allowance for uncollectible reinsurance. Overall prior year development on all other reserves resulted in increases of$21 ,$65 and$18 , respectively for calendar years 2019, 2018 and 2017. Included in the 2019 adverse reserve development was a$37 increase in reserves for unallocated loss adjustment expenses, primarily due to an increase in expected aggregate claim handling costs associated with asbestos and environmental claims, as well as higher than anticipated ULAE costs in recent years, prompting an increase in the projected ULAE run rate. The Company provides an allowance for uncollectible reinsurance, reflecting management's best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers' unwillingness or inability to pay. During the fourth quarters of 2019, 2018 and 2017, the Company completed its annual evaluations of the collectibility of the reinsurance recoverables and the adequacy of the allowance for uncollectible reinsurance associated with older, long-term casualty liabilities reported in Property & Casualty Other Operations. In conducting these evaluations, the company used its most recent detailed evaluations of ceded liabilities reported in the segment. The Company analyzed the overall credit quality of the Company's reinsurers, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers, and recent developments in commutation activity between reinsurers and cedants. As ofDecember 31, 2019 , 2018, and 2017 the allowance for uncollectible reinsurance for Property & Casualty Other Operations totaled$71 ,$105 and$86 , respectively. Due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables become due, particularly for older, long-term casualty liabilities, it is possible that future adjustments to the Company's reinsurance recoverables, net of the allowance, could be required. Impact of Re-estimates on Property and Casualty Insurance Product Reserves Estimating property and casualty insurance product reserves uses a variety of methods, assumptions and data elements. Ultimate losses may vary materially from the current estimates. Many factors can contribute to these variations and the need to change the previous estimate of required reserve levels. Prior accident year reserve development is generally due to the emergence of additional facts that were not known or anticipated 62 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
at the time of the prior reserve estimate and/or due to changes in interpretations of information and trends. The table below shows the range of annual reserve re-estimates experienced by TheHartford over the past ten years. The amount of prior accident year development (as shown in the reserve rollforward) for a given calendar year is expressed as a percent of the beginning calendar year reserves, net of reinsurance. The ranges presented are significantly influenced by the facts and circumstances of each particular year and by the fact that only the last ten years are included in the range. Accordingly, these percentages are not intended to be a prediction of the range of possible future variability. For further discussion of the potential for variability in recorded loss reserves, see Preferred Reserving Methods by Line of Business and Impact of Key Assumptions on Reserves sections. Range of PriorAccident Year Unfavorable (Favorable) Development for the Ten Years Ended December 31, 2019 Property & Casualty Total Personal Other Property & Commercial Lines Lines Operations Casualty [1] Annual range of prior accident year unfavorable (favorable) development for the ten years (1.1%) - ended December 31, 2019 (2.9%) - 1.0% (6.9%) - 8.3% 0.9% - 9.8% 2.4%
[1] Excluding the reserve increases for asbestos and environmental reserves, over
the past ten years, reserve re-estimates for total property and casualty
insurance ranged from (2.5%) to 1.0%.
The potential variability of the Company's property and casualty insurance product reserves would normally be expected to vary by segment and the types of loss exposures insured by those segments. Illustrative factors influencing the potential reserve variability for each of the segments are discussed under Critical Accounting Estimates for Property & Casualty Insurance Product Reserves and Asbestos and Environmental Reserves. See the section entitled Property & Casualty Other Operations, Annual Reserve Reviews about the impact that the A&E ADC retroactive reinsurance agreement with NICO may have on net reserve changes of asbestos and environmental reserves going forward. The following table summarizes the effect of reserve re-estimates, net of reinsurance, on calendar year operations for the ten-year period endedDecember 31, 2019 . The total of each column details the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. The amounts in the total column on the far right represent the cumulative reserve re-estimates during the ten year period endedDecember 31, 2019 for the indicated accident year in each row. This table does not includeNavigators Group reserve re-estimates for periods prior to the acquisition of the business onMay 23, 2019 . Effect of Net Reserve Re-estimates on Calendar Year Operations Calendar Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total By Accident Year 2009 & Prior$ (196 ) $ 122 $ (43 ) $ (36 ) $ 352 $ 334 $ 301 $ 71 $ (38 ) $ 50 $ 917 2010 245 3 61 (22 ) 16 15 16 1 (12 ) 323 2011 36 148 (4 ) 12 (6 ) 6 11 (19 ) 184 2012 19 - (55 ) (35 ) (12 ) (15 ) (15 ) (113 ) 2013 (98 ) (43 ) (29 ) (33 ) (2 ) (26 ) (231 ) 2014 (14 ) 20 (19 ) (54 ) (29 ) (96 ) 2015 191 (41 ) (93 ) 19 76 2016 (29 ) 14 (11 ) (26 ) 2017 9 (116 ) (107 ) 2018 78 78 Increase (decrease) in net reserves [1] [2]$ (196 ) $ 367 $ (4 ) $ 192 $ 228 $ 250
[1] For the 2019 calendar year, net favorable prior accident year development
recognized in the consolidated statement of operations was
retroactive reinsurance. See Note 2 - Business Acquisitions of Notes to
Consolidated Financial Statements.
[2] For calendar years before 2017, the 2009 and prior accident year development
includes adverse development for A&E reserves. Beginning with the 2017
calendar year, A&E reserve development has been ceded to NICO.
The commentary below explains, by accident year, the total prior accident year development recognized over the past 10 years. Accident years 2009 and Prior The net increases in estimates of ultimate losses for accident years 2009 and prior are driven mostly by increased reserves for asbestos and environmental reserves, and also by increased
estimates for customs bonds and other mass torts claims. Partially offsetting these reserve increases was favorable development in general liability and workers' compensation. Additionally, reserves for professional liability were reduced due to a lower estimate of claim severity in both directors' and officers' and errors and omissions insurance claims. Reserves for
63
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
personal automobile liability claims were reduced largely due to improvement in emerged claim severity. Accident years 2010 and 2011 Unfavorable changes in estimates of ultimate losses on accident years 2010 and 2011 were primarily related to workers' compensation and commercial automobile liability. Workers' compensation loss cost trends were higher than initially expected as an increase in frequency outpaced a moderation of severity trends. Unfavorable commercial automobile liability reserve re-estimates were driven by higher frequency of large loss bodily injury claims. Accident years 2012 and 2013 Estimates of ultimate losses were decreased for accident years 2012 and 2013 due to favorable frequency and/or medical severity trends for workers' compensation and favorable professional liability claim emergence. Favorable emergence of property lines of business, including catastrophes, for the 2013 accident year, is partially offset by increased reserves in automobile liability due to increased severity of large claims. Accident years 2014 and 2015 Changes in estimates of ultimate losses for accident years 2014 and 2015 were largely driven by unfavorable frequency and severity trends for personal and commercial automobile liability, increased severity of liability claims on package business and increased estimated severity on the acquiredNavigators Group book of business related toU.S construction, premises liability, products liability and excess casualty offset by favorable frequency and medical severity trends for workers' compensation. Accident year 2016 Estimates of ultimate losses were decreased for the 2016 accident year largely due to reserve decreases on short-tail lines of business, where results emerge more quickly, and workers' compensation due to lower estimated claim severity, somewhat offset by unfavorable reserve estimates for higher hazard general liability exposures due to increased frequency and severity trends, higher estimated severity in middle & large commercial and on the acquiredNavigators Group book of business related toU.S construction, premises liability, products liability and excess casualty Accident year 2017 Ultimate loss estimates were decreased for the 2017 accident year mainly due to favorable reserve estimates in personal auto liability due to emergence of lower estimated severity, workers' compensation related to lower than previously estimated claim severity and release of reserves related to catastrophes, somewhat offset by increases in estimates of ultimate losses in general liability and bond. Partially offsetting was an increase to general liability reserves that was related to higher hazard exposures which experienced increased frequency and severity trends. In addition, unfavorable bond reserve re-estimates were driven by large claims. Accident year 2018 Ultimate loss estimates were increased for the 2018 accident year mainly due to commercial auto liability, and professional liability. Commercial auto liability was related to higher estimated severity on national accounts. On the Navigators Group book of business, reserve increases for professional liability was related to large loss activity and increased estimated severity on directors and officers reserves. Group Benefit LTD Reserves, Net of ReinsuranceThe Company establishes reserves for group life and accident & health contracts, including long-term disability coverage, for both outstanding reported claims and claims related to insured events that the Company estimates have been incurred but have not yet been reported. These reserve estimates can change over time based on facts and interpretations of circumstances, and consideration of various internal factors including TheHartford's experience with similar cases, claim payment patterns, loss control programs and mix of business. In addition, the reserve estimates are influenced by various external factors including court decisions and economic conditions. The effects of inflation are implicitly considered in the reserving process. Long-tail claim liabilities are discounted because the payment pattern and the ultimate costs are reasonably fixed and determinable on an individual claim basis. The majority of Group Benefits' reserves are for LTD claimants who are known to be disabled and are currently receiving benefits. The Company held$6,616 and$6,767 of LTD unpaid losses and loss adjustment expenses, net of reinsurance, as ofDecember 31, 2019 and 2018, respectively. Reserving Methodology How Reserves are Set - A Disabled Life Reserve ("DLR") is calculated for each LTD claim. The DLR for each claim is the expected present value of all future benefit payments starting with the known monthly gross benefit which is reduced for estimates of the expected claim recovery due to return to work or claimant death, offsets from other income including offsets fromSocial Security benefits, and discounting where the discount rate is tied to expected investment yield at the time the claim is incurred. Estimated future benefit payments represent the monthly income benefit that is paid until recovery, death or expiration of benefits. Claim recoveries are estimated based on claim characteristics such as age and diagnosis and represent an estimate of benefits that will terminate, generally as a result of the claimant returning to work or being deemed able to return to work. For claims recently closed due to recovery, a portion of the DLR is retained for the possibility that the claim reopens upon further evidence of disability. In addition, a reserve for estimated unpaid claim expenses is included in the DLR. The DLR also includes a liability for potential payments to pending claimants beyond the elimination period who have not yet been approved for LTD. In these cases, the present value of future benefits is reduced for the likelihood of claim denial based on Company experience. Estimates for incurred but not reported ("IBNR") claims are made by applying completion factors to expected emerged experience by line of business. Included within IBNR are bulk reserves for claims reported but still within the waiting period until benefits are paid, typically 3 or 6 months depending on the contract. Completion factors are derived from standard actuarial techniques using triangles that display historical claim count emergence by incurral month. These estimates are reviewed for reasonableness and are adjusted for current trends and other factors expected to cause a change in claim emergence. The 64 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
reserves include an estimate of unpaid claim expenses, including a provision for the cost of initial set-up of the claim once reported. For all products, including LTD, there is a period generally ranging from two to twelve months, depending on the product and line of business, where emerged claims for an incurral year are not yet credible enough to be a basis for estimating reserves. In these cases, the ultimate loss is estimated using earned premium multiplied by an expected loss ratio based on pricing assumptions of claim incidence, claim severity, and earned pricing. Current Trends Contributing to Reserve Uncertainty In group insurance, LTD has the longest pattern of loss emergence and the highest reserve amount. One significant risk to the reserve would be a slowdown in recoveries. In particular, the economic environment can affect the ability of a disabled employee to return-to-work and the length of time an employee receives disability benefits. Another significant risk is a change in benefit offsets. Often the Company pays a reduced benefit due to offsets from other income sources such as pensions orSocial Security Disability Insurance ("SSDI"). Possible changes to the frequency, timing, or amount of offsets, such as a change in SSDI approval standards or benefit offerings, create a risk that the amount to settle open claims will exceed initial estimates. Since the monthly income benefit for a claimant is established based on the individual's salary at the time of disability and the level of coverages and benefits provided, inflation is not considered a significant risk to the reserve estimate. Few of the Company's LTD policies provide for cost of living adjustments to the monthly income benefit. Impact of Key Assumptions on Reserves The key assumptions affecting our group life and accident & health reserves including disability include: Discount Rate - The discount rate is the interest rate at which expected future claim cash flows are discounted to determine the present value. A higher selected discount rate results in a lower reserve. If the discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to cover the discount accretion on our claim reserves which would negatively affect our profits. For each incurral year, the discount rates are estimated based on investment yields expected to be earned net of investment expenses. The incurral year is the year in which the claim is incurred and the estimated settlement pattern is determined. Once established, discount rates for each incurral year are unchanged except that LTD reserves assumed from the acquisition ofAetna 'sU.S. group life and disability business are all discounted using current rates as of theNovember 1, 2017 acquisition date. The weighted average discount rate on LTD reserves was 3.4% in 2019 and 2018. Had the discount rate for each incurral year been 10 basis points lower at the time they were established, our LTD unpaid loss and loss adjustment expense reserves would be higher by$30 , pretax, as ofDecember 31, 2019 . Claim Termination Rates (inclusive of mortality, recoveries, and expiration of benefits) - Claim termination rates are an estimate of the rate at which claimants will cease receiving benefits during a given calendar year. Terminations result from a number of factors, including death, recoveries and expiration of benefits. The probability that benefits will terminate in each future month for each claim is estimated using a predictive model that uses past Company experience, contract provisions, job characteristics and other claimant-specific characteristics such as diagnosis, time since disability began, and age. Actual claim termination experience will vary from period to period. Over the past 8 years, claim termination rates for a single incurral year have generally increased and have ranged from 5% below to 6% above current assumptions over that time period. For a single recent incurral year (such as 2019), a one percent decrease in our assumption for LTD claim termination rates would increase our reserves by$9 . For all incurral years combined, as ofDecember 31, 2019 , a one percent decrease in our assumption for our LTD claim termination rates would increase our Group Benefits unpaid losses and loss adjustment expense reserves by$22 . Evaluation ofGoodwill for Impairment Current Evaluation for Goodwill ImpairmentGoodwill balances are reviewed for impairment at least annually, or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. The goodwill impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit's goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess, not to exceed the goodwill carrying value. The estimated fair value of each reporting unit incorporates multiple inputs into discounted cash flow calculations including assumptions that market participants would make in valuing the reporting unit. Assumptions include levels of economic capital, future business growth, earnings projections, assets under management for Hartford Funds, and the weighted average cost of capital used for purposes of discounting. Decreases in business growth, decreases in earnings projections and increases in the weighted average cost of capital will all cause a reporting unit's fair value to decrease, increasing the possibility of impairment. A reporting unit is defined as an operating segment or one level below an operating segment. The Company's reporting units, for which goodwill has been allocated consist of Commercial Lines, Personal Lines, Group Benefits, and Hartford Funds. The carrying value of goodwill is$1,913 as ofDecember 31, 2019 and is comprised of$661 for Commercial Lines,$119 for Personal Lines,$861 for Group Benefits, and$272 for Hartford Funds. The annual goodwill assessment for the reporting units was completed as ofOctober 31, 2019 , and resulted in no write-downs of goodwill for the year endedDecember 31, 2019 . All reporting units passed the first step of the annual impairment test with a significant margin. For information regarding the 2018 and 65 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2017 impairment tests see Note 10 -Goodwill & Other Intangible Assets of Notes to Consolidated Financial Statements. Future Accounting Change Contributing to Uncertainty for Goodwill Impairment EffectiveJanuary 1, 2020 , the Company will adopt updated accounting guidance on recognition and measurement of goodwill impairment, as required. The updated guidance requires recognition and measurement of goodwill impairment based on the excess of the carrying value of the reporting unit over its estimated fair value, up to the amount of the reporting unit's goodwill. Since the estimated fair value of the reporting unit will no longer be allocated to the assets and liabilities of the reporting unit to determine an implied goodwill value, under the updated guidance, changes in market-based factors are more likely to result in a goodwill impairment, whether a reporting unit's fair value is estimated using an income approach or a market approach. For example, changes in the weighted average cost of capital that is used to discount expected cash flows under the income approach or changes in market-based factors such as peer company price to earnings multiples or price to book multiples under a market approach can significantly affect changes to the estimated fair value of each reporting unit and such changes could result in impairments that have a material effect on our results of operations and financial condition. Valuation of Investments and Derivative Instruments Fixed Maturities,Equity Securities , Short-term Investments and DerivativesThe Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources which are listed in priority order: quoted prices, prices from third-party pricing services, internal matrix pricing, and independent broker quotes. The fair value of derivative instruments are determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded transactions and transactions cleared through central clearing houses ("OTC-cleared") may be used and in other cases independent broker quotes may be used. For further discussion, see the Fixed Maturities,Equity Securities , Short-term Investments and Derivatives section in Note 5 - Fair Value Measurements of Notes to Consolidated Financial Statements. Evaluation of OTTI onAvailable-for-sale Securities and Valuation Allowances on Mortgage Loans Each quarter, a committee of investment and accounting professionals evaluates investments to determine if an other-than-temporary impairment ("impairment") is present for AFS securities or a valuation allowance is required for mortgage loans. This evaluation is a quantitative and qualitative process, which is subject to risks and uncertainties. For further discussion of the accounting policies, see the Significant Investment Accounting Policies Section in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements. For a discussion of impairments recorded, see the Other-than-temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A. Valuation Allowance on Deferred Tax Assets Deferred tax assets represent the tax benefit of future deductible temporary differences and certain tax carryforwards. Deferred tax assets are measured using the enacted tax rates expected to be in effect when such benefits are realized if there is no change in tax law. UnderU.S. GAAP, we test the value of deferred tax assets for impairment on a quarterly basis at the entity level within each tax jurisdiction, consistent with our filed tax returns. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion, or all, of the deferred tax assets will not be realized. The determination of the valuation allowance for our deferred tax assets requires management to make certain judgments and assumptions. In evaluating the ability to recover deferred tax assets, we have considered all available evidence as ofDecember 31, 2019 , including past operating results, forecasted earnings, future taxable income, and prudent and feasible tax planning strategies. In the event we determine it is more likely than not that we will not be able to realize all or part of our deferred tax assets in the future, an increase to the valuation allowance would be charged to earnings in the period such determination is made. Likewise, if it is later determined that it is more likely than not that those deferred tax assets would be realized, the previously provided valuation allowance would be reversed. Our judgments and assumptions are subject to change given the inherent uncertainty in predicting future performance and specific industry and investment market conditions. As ofDecember 31, 2019 , the Company has recorded a valuation allowance of$4 against foreign deferred tax assets for foreign NOLs. As ofDecember 31, 2018 , the Company had no valuation allowance onU.S. NOL's. TheU.S. NOL carryovers, if unused, would expire between 2028 and 2036. The foreign NOLs do not expire. As ofDecember 31, 2019 , the Company projects there will be sufficient future taxable income to fully recover the remainder of the NOL carryover for which benefits have been recognized, though the Company's estimate of the likely realization may change over time. As ofDecember 31, 2019 the Company had remaining AMT credit carryovers of$410 which are reflected as a current income tax receivable within other assets in the accompanying Condensed Consolidated Balance Sheets. AMT credits may be used to offset a regular tax liability for any taxable year beginning afterDecember 31, 2017 , and are refundable at an amount equal to 50 percent of the excess of the minimum tax credit for the taxable year over the amount of credit allowable for the year against regular tax liability. Any remaining credits not used against regular tax liability are refundable in the 2021 tax year to be realized in 2022. For additional information about Tax Reform, see Note - 16, Income Taxes of Notes to Consolidated Financial Statements. 66 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In assessing the need for a valuation allowance, management considered future
taxable temporary difference reversals, future taxable income exclusive of
reversing temporary differences and carryovers, taxable income in open carry
back years and other tax planning strategies. From time to time, tax planning
strategies could include holding a portion of debt securities with market value
losses until recovery, altering the level of tax exempt securities held, making
investments which have specific tax characteristics, and business considerations
such as asset-liability matching. Management views such tax planning strategies
as prudent and feasible, and would implement them, if necessary, to realize the
deferred tax assets.
Contingencies Relating to Corporate Litigation and Regulatory Matters
Management evaluates each contingent matter separately. A loss is recorded if
probable and reasonably estimable. Management establishes reserves for these
contingencies at its "best estimate," or, if no one number within the range of
possible losses is more probable than any other, the Company records an
estimated reserve at the low end of the range of losses.
The Company has a quarterly monitoring process involving legal and accounting
professionals. Legal personnel first identify outstanding corporate litigation
and regulatory matters posing a reasonable possibility of loss. These matters
are then jointly reviewed by accounting and legal personnel to evaluate the
facts and changes since the last review in order to determine if a provision for
loss should be recorded or adjusted, the amount that should be recorded, and the
appropriate disclosure. The outcomes of certain contingencies currently being
evaluated by the Company, which relate to corporate litigation and regulatory
matters, are inherently difficult to predict, and the reserves that have been
established for the estimated settlement amounts are subject to significant
changes. Management expects that the ultimate liability, if any, with respect to
such lawsuits, after consideration of provisions made for estimated losses, will
not be material to the consolidated financial condition of the Company. In view
of the uncertainties regarding the outcome of these matters, as well as the
tax-deductibility of payments, it is possible that the ultimate cost to the
Company of these matters could exceed the reserve by an amount that would have a
material adverse effect on the Company's consolidated results of operations and
liquidity in a particular quarterly or annual period.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
SEGMENT OPERATING SUMMARIES
COMMERCIAL LINES
Results of Operations
Underwriting Summary
2019 2018 2017
Written premiums $ 8,452 $ 7,136 $ 6,956
Change in unearned premium reserve 162 89 91
Earned premiums 8,290 7,047 6,865
Fee income 35 34 37
Losses and loss adjustment expenses Current accident year before catastrophes 4,913 4,037 3,961 Current accident year catastrophes [1] 323 275 383 Prior accident year development [1]
(44 ) (200 ) (22 )
Total losses and loss adjustment expenses 5,192 4,112 4,322 Amortization of DAC
1,296 1,048 1,009
Underwriting expenses 1,600 1,369 1,347
Amortization of other intangible assets 18 4 1 Dividends to policyholders
30 23 35
Underwriting gain 189 525 188
Net servicing income 2 2 1
Net investment income [2] 1,129 997 949
Net realized capital gains (losses) [2] 271 (43 ) 103 Loss on reinsurance transaction
(91 ) - -
Other income (expenses) (38 ) (2 ) 1
Income before income taxes 1,462 1,479 1,242
Income tax expense [3] 270 267 377
Net income $ 1,192 $ 1,212 $ 865 [1] For discussion of current accident year catastrophes and prior accident year
development, see MD&A - Critical Accounting Estimates, Property and Casualty
[2] For discussion of consolidated investment results, see MD&A - Investment
Results.
[3] For discussion of income taxes, see Note 16 - Income Taxes of Notes to
Consolidated Financial Statements.
Premium Measures
2019 2018 2017
Small commercial new business premium $ 646 $ 600 $ 552
Middle market new business premium 584 540 466
Small commercial policy count retention 83 % 82 % 84 %
Middle market policy count retention [1] 80 % 78 % 78 %
Standard commercial lines renewal written price
increases [1] [2] 2.7 % 2.4 % 3.3 %
Standard commercial lines renewal earned price
increases [1] [2] 2.3 % 3.0 % 2.8 %
Small commercial premium retention 85 % 84 % 88 %
Middle market premium retention [1] 84 % 83 % 82 %
Small commercial policies in-force as of end of
period (in thousands) 1,291 1,271 1,266
Middle market policies in-force as of end of
period (in thousands) [1] 62 64 66
[1] Excludes certain risk classes of higher hazard general liability in middle
market.
[2] Small commercial and middle market lines within middle & large commercial are
generally referred to as standard commercial lines.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Underwriting Ratios
2019 2018 2017
Loss and loss adjustment expense ratio
Current accident year before catastrophes 59.3 57.3 57.7
Current accident year catastrophes 3.9 3.9
5.6
Prior accident year development (0.5 ) (2.8 ) (0.3 ) Total loss and loss adjustment expense ratio 62.6 58.4 63.0 Expense ratio 34.7 33.9 33.8 Policyholder dividend ratio 0.4 0.3 0.5 Combined ratio 97.7 92.6 97.3 Current accident year catastrophes and prior year development 3.4 1.1
5.3
Current accident year change in loss reserves upon acquisition of a business [1] 0.3 - - Underlying combined ratio 94.0 91.5 92.0
[1] Upon acquisition of
reserves, the year ended
year reserve increases and
which were excluded for the purposes of the underlying combined ratio
calculation.
2020 Outlook The Company expects higher Commercial Lines written premiums in 2020, largely driven by the inclusion of a full year of written premium from theNavigators Group acquisition. Apart from theNavigators Group acquisition, the Company expects both new business and premium renewal retention to be relatively flat compared with 2019 as a modest increase in new and renewal premium for middle and large commercial, driven in part by continued growth in industry verticals, is expected to offset a modest decrease in small commercial new business. Management expects positive renewal written pricing in all lines of business except workers' compensation, which is expected to be flat to slightly positive in middle market and down in small commercial. In addition to the impact of pricing trends, written premium growth in 2019 will depend on economic conditions as economic growth is expected to moderate in 2020 while the interest rate environment will also put pressure on pricing. Pricing varies significantly by product line with mid-single digit pricing increases expected in property and general liability and high single to low double digit written pricing increases expected in commercial automobile. In workers' compensation, given favorable profitability trends, rates are expected to continue to decline in 2020, particularly in small commercial. Additionally, 2020 rates are expected to remain firm in global specialty where increases are expected in international, wholesale and financial lines. The Company expects the Commercial Lines combined ratio will be between approximately 95.5 and 97.5 for 2020, compared to 97.7 in 2019, primarily due to lower current accident year catastrophe losses expected in 2020, partially offset by less favorable prior year development. The underlying combined ratio is expected to be flat to slightly lower as earned pricing increases in excess of moderate increases in loss costs in most lines will be largely offset by continued margin compression in workers' compensation, while the expense ratio is expected to be down slightly. Current accident year catastrophes are assumed to be 2.9 points of the combined ratio in 2020 compared to 3.9 points in 2019. Net Income [[Image Removed: chart-2f47b3bec26d5347b9f.jpg]] Year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Net income decreased slightly in 2019 due to$91 before tax of ADC ceded premium and a lower underwriting gain, largely offset by a shift from net realized capital losses in 2018 to net realized capital gains in 2019 and higher net investment income. Contributing to the increase in net investment income was income on invested assets acquired fromNavigators Group and higher income from limited partnerships and alternative investments. For further discussion of investment results, see MD&A - Investment Results. 69 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Underwriting Gain
[[Image Removed: chart-b41a6841ede55b6486c.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Underwriting gain decreased in 2019, primarily due to a decrease in net
favorable prior year development, including $97 before tax of increases to
Navigators Group reserves upon acquisition of the business, higher expenses, a
higher current accident year loss and loss adjustment expense ratio before
catastrophes, and higher catastrophe losses, partially offset by the effect of
higher earned premium, excluding Navigators Group . Higher commissions
contributed to the increase in amortization of DAC. Contributing to the increase
in underwriting expenses was the effect of higher information technology and
operations costs in middle market as well as higher operations and other costs
in small commercial associated with the 2018 renewal rights agreement with
Farmers Group to acquire its Foremost-branded small commercial business.
Additionally, the acquisition of Navigators Group contributed to the increase in
earned premiums with a corresponding increase to losses and loss adjustment
expenses, amortization of DAC and underwriting expenses. Apart from the effect
of the Navigators Group acquisition, earned premiums increased in all commercial
lines of business.
Earned Premiums
[[Image Removed: chart-d13d0ec1db5c596eb4d.jpg]]
[1] Other of
included in the total.
Year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Earned premiums increased in 2019 reflecting written premium growth over the preceding twelve months. Written premiums increased in 2019 with growth across small commercial, middle & large commercial, and global specialty, including growth from the acquisition ofNavigators Group . In standard commercial lines, renewal written pricing increased in 2019, mostly attributable to higher written pricing in property and general liability lines, partially offset by larger rate decreases in small commercial workers' compensation. New business premium in small commercial and middle market increased over the prior year, with increases in package business and workers' compensation in small commercial and property and industry verticals in middle market. • Small commercial written premium increased primarily driven by having a full
year's premium from the business acquired under a 2018 renewal rights
agreement with
business, offset by lower renewal premium in workers' compensation.
• Middle & large commercial written premium growth was primarily due to new
business growth, the acquisition of
premium in core middle market lines, as well as growth in certain industry
verticals, including construction and energy. The increase in renewal
70--------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
premium was due to renewal written price increases across most lines and higher audit premium. • Global specialty written premium increased in 2019 driven by the acquisition ofNavigators Group as well as growth in financial products and bond. Current Accident Year Loss and LAE Ratio before Catastrophes [[Image Removed: chart-ff86a219796c524a9a9.jpg]] Year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Current Accident Year Loss and LAE ratio before catastrophes increased in 2019 primarily due to a higher loss and loss adjustment expense ratio on the acquiredNavigators Group business and higher non-catastrophe property losses in small commercial package business and middle market inland marine as well as a higher loss and loss adjustment expense ratio in workers' compensation due to rate decreases. Included in current accident year loss and loss adjustment expenses before catastrophes for 2019 was a$29 increase in current accident yearNavigators Group reserves upon acquisition of the business inMay 2019 , which was driven primarily by increased loss estimates for general liability, international professional liability and assumed reinsurance accident and health business.
Catastrophes and Unfavorable (Favorable) Prior
[[Image Removed: chart-fe1eddafca105161b36.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Current accident year catastrophe losses for 2019 were primarily from tornado,
wind and hail events in various areas of the Midwest, Mountain West and
Southeast and, to a lesser extent, winter storms in the northern plains, Midwest
and Northeast. Current accident year catastrophe losses in 2018 were primarily
from hurricanes Florence and Michael in the Southeast, wildfires in California ,
wind and hail storms in Colorado , and various wind storms and winter storms
across the country. Catastrophe losses in 2018 are net of an estimated
reinsurance recoverable of $28 under the 2018 Property Aggregate reinsurance
treaty that was allocated to Commercial Lines. Due to reductions in 2018
catastrophe loss estimates in 2019, the reinsurance recoverable under the
Property Aggregate treaty allocated to Commercial Lines was reduced to $15 as of
December 31, 2019 .
Prior accident year development was less favorable in 2019 than in 2018. Net
reserve decreases for 2019 were primarily related to lower loss reserve
estimates for workers' compensation claims, package business reserves and
catastrophes, partially offset by a $68 before tax increase to Navigators Group
reserves upon acquisition of the business and increases in reserves for auto
liability and general liability. The increase in Navigators Group reserves upon
acquisition of the business principally related to higher reserve estimates for
general liability, professional liability and marine. Net reserve decreases for
2018 were primarily related to decreases for workers' compensation, catastrophes
and unallocated loss adjustment expense reserves, partially offset by an
increase in general liability reserves.
71
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PERSONAL LINES
Results of Operations
Underwriting Summary
2019 2018 2017
Written premiums $ 3,131 $ 3,276 $ 3,561
Change in unearned premium reserve (67 ) (123 ) (129 )
Earned premiums 3,198 3,399 3,690
Fee income 37 40 44
Losses and loss adjustment expenses Current accident year before catastrophes 2,087 2,249 2,584 Current accident year catastrophes [1] 140 546 453 Prior accident year development [1]
(42 ) (32 ) (37 )
Total losses and loss adjustment expenses 2,185 2,763 3,000 Amortization of DAC
259 275 309
Underwriting expenses 625 611 577
Amortization of other intangible assets 6 4 4 Underwriting gain (loss)
160 (214 ) (156 )
Net servicing income [2] 13 16 16
Net investment income [3] 179 155 141
Net realized capital gains (losses) [3] 43 (7 ) 15 Other income (expenses)
(1 ) (1 ) 1
Income (loss) before income taxes 394 (51 ) 17
Income tax expense (benefit) [4] 76 (19 ) 26
Net income (loss) $ 318 $ (32 ) $ (9 ) [1] For discussion of current accident year catastrophes and prior accident year
development, see MD&A - Critical Accounting Estimates, Property and Casualty
Insurance Product Reserves, Net of Reinsurance.
[2] Includes servicing revenues of
respectively and includes servicing expenses of
2018, and 2017, respectively.
[3] For discussion of consolidated investment results, see MD&A - Investment
Results.
[4] For discussion of income taxes, see Note 16 - Income Taxes of Notes to
Consolidated Financial Statements.
Written and Earned Premiums
Written Premiums 2019 2018 2017
Product Line
Automobile $ 2,176 $ 2,273 $ 2,497
Homeowners 955 1,003 1,064
Total $ 3,131 $ 3,276 $ 3,561
Earned Premiums
Product Line
Automobile $ 2,221 $ 2,369 $ 2,584
Homeowners 977 1,030 1,106
Total $ 3,198 $ 3,399 $ 3,690
72
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Premium Measures
2019 2018 2017
Policies in-force end of period (in thousands)
Automobile 1,422 1,510 1,702
Homeowners 877 927 1,038
New business written premium
Automobile $ 220 $ 169 $ 152
Homeowners $ 73 $ 46 $ 44
Policy count retention
Automobile 85 % 82 % 81 %
Homeowners 85 % 83 % 83 %
Renewal written price increase
Automobile 4.6 % 7.2 % 10.9 %
Homeowners 6.5 % 9.7 % 8.9 %
Renewal earned price increase
Automobile 5.5 % 9.6 % 9.6 %
Homeowners 8.4 % 9.3 % 8.5 %
Premium retention
Automobile 87 % 85 % 88 %
Homeowners 89 % 90 % 89 %
Underwriting Ratios
2019 2018 2017
Loss and loss adjustment expense ratio
Current accident year before catastrophes 65.3 66.2 70.0
Current accident year catastrophes 4.4 16.1
12.3
Prior accident year development (1.3 ) (0.9 ) (1.0 ) Total loss and loss adjustment expense ratio 68.3 81.3 81.3 Expense ratio 26.7 25.0 22.9 Combined ratio 95.0 106.3 104.2
Current accident year catastrophes and prior year development 3.1 15.2
11.3
Underlying combined ratio 91.9 91.2 93.0
Product Combined Ratios
2019 2018 2017
Automobile
Combined ratio 96.6 98.6 101.6
Underlying combined ratio 97.9 98.2 99.7
Homeowners
Combined ratio 91.7 124.3 110.4
Underlying combined ratio 78.3 75.1 77.1
2020 Outlook
Written premium is expected to decline in 2020 as non-renewal of premium more
than offsets new business growth, with a larger percentage decrease expected in
the agency channel. The Company expects to increase new business in 2020, with
most of the growth in the direct channel, driven by investments in product
enhancements and targeted marketing initiatives. In 2020, the Company expects
written pricing increases in 2020 to be in the
low to mid-single digits for automobile and mid-single digits for homeowners.
The Company expects the combined ratio for Personal Lines will be between
approximately 98.5 and 100.5 for 2020 compared to 95.0 in 2019, primarily due to
higher current accident year catastrophes, less favorable prior year
development, and a higher expense ratio, partially offset by a modestly lower
current accident year loss and loss adjustment expense ratio before
73
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
catastrophes. The expected increase in the expense ratio is driven by lower
earned premium and investments to support growth and strategic initiatives. The
underlying combined ratio for Personal Lines is expected to be slightly higher,
largely due to a higher expense ratio, partially offset by an improved current
accident year loss and loss adjustment expense ratio in automobile. Current
accident year catastrophes are assumed to be 7.1 points of the combined ratio in
2020 compared with 4.4 points in 2019. For automobile, we expect the underlying
combined ratio to improve slightly as further improvement in the loss ratio
before catastrophes, driven by earned pricing increases in excess of modestly
higher loss costs, will be partially offset by a higher expense ratio. The
underlying combined ratio for homeowners is expected to increase in 2020,
primarily driven by a return to a higher, more normal, level of non-catastrophe
weather and non-weather loss experience and a higher expense ratio, partially
offset by the effect of earned pricing increases.
Net Income (Loss)
[[Image Removed: chart-9f3ede3ef1bb5baebf2.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Net income in 2019 improved from a net loss in 2018, primarily due to lower
current accident year catastrophe losses. A change from net realized capital
losses in 2018 to net realized capital gains in 2019 and higher net investment
income were largely offset by a decrease in underlying underwriting results.
Underwriting Gain (Loss)
[[Image Removed: chart-1a7a8e7d70c3562abc8.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Underwriting gain in 2019 improved from an underwriting loss in 2018, primarily
due to lower current accident year catastrophes and, to a lesser extent, a lower
current accident year loss ratio before catastrophes in auto partially offset by
the effect of lower earned premium and an increase in underwriting expenses. The
increase in underwriting expenses was largely driven by investments in
information technology, and an increase in direct marketing spending, selling
expenses, and operational costs to generate new business, partially offset by a
reduction in state taxes and assessments. The decrease in amortization of DAC
was commensurate with the reduction in earned premium.
Earned Premiums
[[Image Removed: chart-224445e32b4d50e283c.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Earned premiums decreased in 2019, reflecting a decline in written premium over
the prior six to twelve months in both Agency channels and in AARP Direct.
Written premiums decreased in 2019 in AARP Direct and both Agency channels.
Despite an increase in new business and higher policy count retention in both
auto and homeowners, written premium declined, primarily due to not generating
enough new business to offset the loss of non-renewed premium.
Renewal written pricing increases in 2019 were lower in both auto and homeowners
in response to moderating loss cost trends.
Policy count retention increased in both automobile and homeowners, in part
driven by moderating renewal written price increases.
Policies in-force decreased in 2019 in both automobile and homeowners, driven by
not generating enough new business to offset the loss of non-renewed policies.
74
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Current Accident Year Loss and Loss Adjustment Expense Ratio before Catastrophes
[[Image Removed: chart-92a490c5ddff5948bdc.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Current accident year loss and LAE ratio before catastrophes decreased in 2019.
For auto, a decrease in the loss and loss adjustment expense ratio was due to
the effect of earned pricing increases and a slight decrease in average claim
frequency, partially offset by a modest increase in average claim severity. For
home, the increase in the current accident year loss and loss adjustment expense
ratio before catastrophes was driven by an increase in the loss adjustment
expense and moderately higher severity partially offset by earned pricing
increases and a decrease in frequency.
Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident
Year Development [[Image Removed: chart-ec170b0ff70e5dab9fe.jpg]] Year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Current accident year catastrophe losses for 2019 primarily included winter storms across the country and tornado, wind and hail events in the South, Midwest, and Mountain West. Catastrophe losses for 2018 were primarily from wildfires inCalifornia , wind and hail storms inColorado , hurricanes Florence and Michael in the Southeast and various wind storms and winter storms across the country. Catastrophe losses in 2018 were net of an estimated reinsurance recoverable of$54 under the 2018 Property Aggregate reinsurance treaty that was allocated to Personal Lines. Due to reductions in 2018 catastrophe loss estimates in 2019, the reinsurance recoverable under the Property Aggregate treaty allocated to Personal Lines was reduced to$30 as ofDecember 31 2019 . Prior accident year development was favorable in 2019 primarily due to a decrease in auto liability reserves for the 2017 accident year. Favorable development in 2018 was primarily in automobile liability and homeowners, partially offset by an increase in net catastrophe loss reserves. 75 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
PROPERTY & CASUALTY OTHER OPERATIONS
Results of Operations
Underwriting Summary
2019 2018 2017
Written Premiums $ - $ (4 ) $ -Change in unearned premium reserve (2 ) (4 ) -
Earned premiums 2 - -
Losses and loss adjustment expenses Prior accident year development [1] 21 65 18 Total losses and loss adjustment expenses 21 65 18 Underwriting expenses
12 12 14
Underwriting loss (31 ) (77 ) (32 )
Net investment income [2] 84 90 106
Net realized capital gains (losses) [2] 20 (4 ) 14 Other income (expenses)
- (1 ) 5
Income before income taxes 73 8 93
Income tax expense (benefit) [3] 12 (7 ) 24
Net income $ 61 $ 15 $ 69 [1] For discussion of prior accident year development, see MD&A - Critical
Accounting Estimates, Property and Casualty Insurance Product Reserves, Net
of Reinsurance.
[2] For discussion of consolidated investment results, see MD&A - Investment
Results.
[3] For discussion of income taxes, see Note 16 - Income Taxes of Notes to
Consolidated Financial Statements.
Net Income
[[Image Removed: chart-145484549c4853388a7.jpg]]
Year ended
net realized capital gains. The decrease in prior accident year development was principally due to a change from reserve increases for uncollectible reinsurance in 2018 to reserve decreases for uncollectible reinsurance in 2019. Asbestos Reserves reflected no net incurred losses and allocated loss adjustment expenses in 2019 as a$76 increase in estimated reserves before NICO reinsurance was offset by$76 of losses recoverable under the NICO treaty. The increase before NICO reinsurance was primarily due to an increase in average mesothelioma settlement values driven by elevated plaintiff demands and defendant bankruptcies and, to a lesser extent, unfavorable developments in the application of coverage that resulted in increased liability shares on certain insureds. An increase in reserves from umbrella and excess policies in the 1981 - 1985 policy years contributed to the adverse development. Partially offsetting the unfavorable development was the effect of a decrease in the number of mesothelioma claim filings and a projection that trend will continue. Environmental Reserves reflected no net incurred losses and allocated loss adjustment expenses in 2019 as a$56 increase in estimated reserves before NICO reinsurance was offset by$56 of loss recoverable under the NICO treaty. The increase in reserves before NICO reinsurance was primarily due to an increase in the estimated costs to remediate sites polluted by coal ash and polyfluoroalkyl chemicals and due to increased defense and clean-up costs associated with Superfund sites and intensifying regulatory scrutiny by state agencies for more extensive remediation. 76 -------------------------------------------------------------------------------- Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations GROUP BENEFITS Results of Operations Operating Summary 2019 2018 2017 Premiums and other considerations$ 5,603 $ 5,598 $ 3,677 Net investment income [1] 486 474 381 Net realized capital gains (losses) [1] 34 (47 ) 34 Total revenues 6,123 6,025 4,092
Benefits, losses and loss adjustment expenses 4,055 4,214 2,803 Amortization of DAC
54 45 33
Insurance operating costs and other expenses 1,311 1,282 915 Amortization of other intangible assets
41 60 9
Total benefits, losses and expenses 5,461 5,601 3,760
Income before income taxes 662 424 332
Income tax expense [2] 126 84 38
Net income $ 536 $ 340 $ 294 [1] For discussion of consolidated investment results, see MD&A - Investment
Results.
[2] For discussion of income taxes, see Note 16 - Income Taxes of Notes to the
Consolidated Financial Statements.
Premiums and Other Considerations
2019 2018 2017
Fully insured - ongoing premiums $ 5,416 $ 5,418 $ 3,571
Buyout premiums 7 5 15
Fee income 180 175 91
Total premiums and other considerations
Ratios, Excluding Buyouts
2019 2018 2017
Group disability loss ratio 67.3 % 73.1 % 76.5 %
Group life loss ratio 79.5 % 78.4 % 76.7 %
Total loss ratio 72.3 % 75.3 % 76.1 %
Expense ratio [1] 24.5 % 24.0 % 25.7 %
[1] Integration and transaction costs related to the acquisition of
Margin
2019 2018 2017
Net income margin 8.8 % 5.6 % 7.2 %
Adjustments to reconcile net income margin to core
earnings margin:
Net realized capital losses (gains) excluded from
core earnings, before tax (0.5 )% 0.9 % (0.7 )%
Integration and transaction costs associated with
acquired business, before tax 0.6 % 0.8 % 0.4 %
Income tax benefit - % (0.3 )% (1.1 )%
Core earnings margin 8.9 % 7.0 % 5.8 %
2020 Outlook
The Company expects Group Benefits fully insured ongoing premiums to increase
modestly in 2020, with increases in both sales and renewal premium. In 2020, the
segment's net income
margin is expected to be between 6.25% and 7.25%, compared to a net income
margin of 8.8% in 2019. The expected decrease largely reflects the expectation
of less favorable claim incidence and recoveries on long-term disability claims,
lower expected investment yield driven, in part, by strong investment returns
77
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
from limited partnerships in 2019 that are not assumed to repeat in 2020, and a
level of net realized capital gains in 2019 not expected to recur in 2020.
Management expects that the 2020 core earnings margin, which does not include
the effect of net realized capital gains (losses) or integration costs
associated with the acquired business, will be in the range of 6.5% to 7.5%,
down from a 2019 core earnings margin of 8.9%, primarily due to the expectation
of less favorable claim incidence and recoveries on long-term disability claims
and lower expected investment income.
Net Income
[[Image Removed: chart-fea1ac62f0225d699d4.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Net income increased in 2019 compared to 2018, primarily due to a lower group
disability loss ratio and a change from net realized capital losses in 2018 to
net realized capital gains in 2019. Lower amortization of other intangibles,
higher net investment income and lower integration costs were largely offset by
higher insurance operating costs and other expenses.
Insurance operating costs and other expenses increased in 2019 compared to 2018
due to higher commissions on our voluntary product offerings and investments in
technology and claims operations, partially offset by achievements of expense
synergies and lower state taxes and assessments.
Fully Insured Ongoing Premiums
[[Image Removed: chart-ad810767ba62536aa74.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Fully insured ongoing premiums were relatively flat in 2019 compared to 2018 as
a decrease in group life was offset by an increase in group disability and
higher premiums from voluntary products.
Fully insured ongoing sales, excluding buyouts decreased in 2019 compared to
2018 with decreases in group disability and group life, partially offset by an
increase in sales of voluntary products. Part of the decrease in fully insured
ongoing sales was due to first year sales of the New York Paid Family Leave
product in 2018.
Ratios
[[Image Removed: chart-f85361c06fa252709ae.jpg]]
78
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Total loss ratio decreased 3.0 points from 2018 to 2019 as a decrease in the group disability loss ratio was partially offset by an increase in the group life loss ratio. The group disability loss ratio decreased 5.8 points driven by continued favorable incidence trends and strong claim recoveries on prior incurral year reserves, including the impact of updating our claim recovery probabilities to more recent experience and an experience refund related to the New York Paid Family Leave product. The group life loss ratio increased 1.1 points, largely due to higher severity. Expense ratio increased 0.5 points from 2018 to 2019, due to higher commissions on our voluntary product offerings, investments in technology and claims, and higher amortization of DAC, partially offset by achievements of expense synergies and lower state taxes and assessments.HARTFORD FUNDS Results of Operations Operating Summary 2019 2018 2017 Fee income and other revenue$ 999 $ 1,032 $ 992 Net investment income 7 5 3 Net realized capital gains (losses) 5 (4 ) - Total revenues 1,011 1,033 995 Amortization of DAC 12 16 21 Operating costs and other expenses 813 831
805
Total benefits, losses and expenses 825 847 826 Income before income taxes 186 186 169 Income tax expense [1] 37 38 63 Net income$ 149 $ 148 $ 106 Daily average total Hartford Funds segment AUM$ 117,914 $ 116,876 $ 107,593 Return on Assets ("ROA") [2] 12.5 12.6
9.9
Adjustments to reconcile ROA to ROA, core earnings: Effect of net realized capital (gains) losses, excluded from core earnings, before tax
(0.3 ) 0.4 -
Effect of income tax benefit (expense) - (0.1 ) 0.3
Return on Assets ("ROA"), core earnings [2] 12.2 12.9 10.2
[1] For discussion of income taxes, see Note 16 - Income Taxes of Notes to
Consolidated Financial Statements.
[2] Represents annualized earnings divided by a daily average of assets under
management, as measured in basis points.
Hartford Funds Segment AUM
2019 2018 2017
Mutual Fund and ETP AUM - beginning of period$ 91,557 $ 99,090 $ 81,507 Sales - mutual fund 22,479 22,198 23,654 Redemptions - mutual fund (23,624 ) (23,888 ) (20,409 ) Net flows - ETP 1,332 1,404 157 Net Flows - mutual fund and ETP 187 (286 ) 3,402 Change in market value and other 20,789
(7,247 ) 14,181
Mutual Fund and ETP AUM - end of period 112,533 91,557 99,090 Talcott Resolution life and annuity separate account AUM [1] 14,425 13,283 16,260 Hartford Funds AUM - end of period$ 126,958 $
104,840
[1] Represents AUM of the life and annuity business sold in
still managed by the Company's Hartford Funds segment.
79--------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Mutual Fund AUM by Asset Class
2019 2018 2017
Equity $ 71,629 $ 56,986 $ 63,740
Fixed Income 16,130 14,467 14,401
Multi-Strategy Investments [1] 21,332 18,233 20,469 Exchange-traded products
3,442 1,871 480
[1] Includes balanced, allocation, and alternative investment products.
2020 Outlook
Assuming continued growth in equity markets in 2020 and an expectation of
positive net flows, the Company expects net income for Hartford Funds to
increase from 2019 to 2020. The Company expects to increase net sales in 2020
from a diversified lineup of mutual funds and ETPs, though net flows are more
uncertain given the increased volatility in the markets. Assuming the Company
can generate positive net flows and fund performance is strong, assets under
management are expected to increase modestly despite the expected continued
decline of the Talcott Resolution AUM.
Net Income
[[Image Removed: chart-e8077234e8625d6d857.jpg]]
Year ended December 31, 2019 compared to the year ended December 31, 2018
Net income increased slightly in 2019 as a change from net realized capital
losses in 2018 to net realized capital gains in 2019 was largely offset by the
effect of lower investment management fee revenues, an increase in contingent
consideration payable associated with the acquisition of Lattice Strategies LLC
("Lattice") and lower state income tax expense in 2018. The decrease in
investment management fees was driven by fee reductions and a shift to lower fee
funds, partially offset by the effect of slightly higher average daily AUM. See
Note 5 - Fair Value Measurements of Notes to Consolidated Financial Statements
for additional information on the Lattice consideration.
Hartford Funds AUM
[[Image Removed: chart-b1b29ea0323959e19a8.jpg]]
December 31, 2019 compared to December 31, 2018
Hartford Funds AUM increased from December 31, 2018 to December 31, 2019 due to
market appreciation in 2019 across equity, fixed income and multi-strategy funds
and exchange traded products. Net flows were slightly positive in 2019 compared
to slightly negative net flows in 2018 with net inflows in exchange traded
products and fixed income funds offset by net outflows in equity and
multi-strategy funds.
80
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CORPORATE
Results of Operations
Operating Summary
2019 2018 2017
Fee income $ 50 $ 32 $ 4
Other revenue 96 21 -
Net investment income 66 59 23
Net realized capital gains (losses) 22 (7 ) (1 )
Total revenues 234 105 26
Benefits, losses and loss adjustment expenses [1] 19 11
31
Insurance operating costs and other expenses 83 83
59
Pension settlement - -
750
Loss on extinguishment of debt [2] 90 6
-
Interest expense [2] 259 298
316
Total benefits, losses and expenses 451 398
1,156
Loss before income taxes (217 ) (293 ) (1,130 ) Income tax expense (benefit) [3] (46 ) (95 )
457
Loss from continuing operations, net of tax (171 ) (198 ) (1,587 ) Income (loss) from discontinued operations,net of tax - 322 (2,869 ) Net income (loss)$ (171 ) $ 124 $ (4,456 ) Preferred stock dividends 21 6 -
Net income (loss) available to common stockholders
[1] Represents benefits expense on life and annuity business previously
underwritten by the Company.
[2] For discussion of debt, see Note 13 - Debt of Notes to Consolidated Financial
Statements.
[3] For discussion of income taxes, see Note 16 - Income Taxes of Notes to
Consolidated Financial Statements.
Net Income (Loss)
[[Image Removed: chart-e6c5dc03672d509e804.jpg]]
Year ended
equity interest in the legal entity that acquired the life and annuity business sold in 2018, lower interest expense, a change to net realized capital gains in 2019 from net realized capital losses in 2018, and greater fee revenue from managing the invested assets of Talcott Resolution post-sale, partially offset by an increase in loss on extinguishment of debt and transaction costs incurred in 2019 related to theNavigators Group acquisition. Interest Expense [[Image Removed: chart-8c8d0540cd8a5e788bc.jpg]] 81 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 Interest expense decreased primarily due to the maturity of senior notes payable inJanuary 2019 and the redemption of junior subordinated debentures inJune 2018 , partially offset by the issuance of senior notes inAugust 2019 in excess of the amount of proceeds used to redeem other outstanding senior notes. OnJune 15, 2018 , TheHartford redeemed$500 aggregate principal amount of its 8.125% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068. OnJanuary 15, 2019 , the Company repaid at maturity the$413 principal amount of its 6.0% senior notes. In third quarter 2019, after receiving net proceeds of$1.38 billion from the issuance of the 2.8% senior notes dueAugust 19, 2029 and 3.6% senior notes dueAugust 19, 2049 , TheHartford repaid$265 of 5.75% senior notes due 2023 that had been assumed in theNavigators Group acquisition and$800 of 5.125% senior notes due 2022 ofThe Hartford Financial Services Group, Inc. , and recognized a loss on extinguishment of debt of$90 . For additional information, see Note 13 - Debt of Notes to the Consolidated Financial Statements. ENTERPRISE RISK MANAGEMENT The Company's Board of Directors has ultimate responsibility for risk oversight, as described more fully in our Proxy Statement, while management is tasked with the day-to-day management of the Company's risks. The Company manages and monitors risk through risk policies, controls and limits. At the senior management level, anEnterprise Risk and Capital Committee ("ERCC") oversees the risk profile and risk management practices of the Company. As illustrated below, a number of functional committees sit underneath the ERCC, providing oversight of specific risk areas and recommending risk mitigation strategies to the ERCC. ERCC Members CEO (Chair) President Chief Financial Officer Chief Investment OfficerChief Risk Officer General Counsel
Others as deemed necessary by the Committee Chair
ERCC
Asset Underwriting Emerging Risk Operational Economic Model
Liability Risk Steering Risk Capital Oversight
Committee Committee Committee Committee Executive Committee
Committee
The Company's enterprise risk management ("ERM") function supports the ERCC and functional committees, and is tasked with, among other things: • risk identification and assessment;
• the development of risk appetites, tolerances, and limits;
• risk monitoring; and
• internal and external risk reporting.
The Company categorizes its main risks as insurance risk, operational risk and financial risk, each of which is described in more detail below. InsuranceRisk Insurance risk is the risk of losses of both a catastrophic and non-catastrophic nature on the P&C and Group Benefits products the Company has sold. Catastrophe insurance risk is the exposure arising from both natural (e.g., weather, earthquakes, wildfires, pandemics) and man-made catastrophes (e.g., terrorism, cyber- attacks) that create a concentration or aggregation of loss across the Company's insurance or asset portfolios. Sources of Insurance Risk Non-catastrophe insurance risks exist within each of the Company's segments except Hartford Funds and include: • Property- Risk of loss to personal or commercial property from automobile
related accidents, weather, explosions, smoke, shaking, fire, theft,
vandalism, inadequate installation, faulty equipment, collisions and falling
objects, and/or machinery mechanical breakdown resulting in physical damage
and other covered perils.
• Liability- Risk of loss from automobile related accidents, uninsured and
underinsured drivers, lawsuits from accidents, defective products, breach of
warranty, negligent acts by professional practitioners, environmental claims,
latent exposures, fraud, coercion, forgery, failure to fulfill obligations
per contract surety, liability from errors and omissions, losses from
political and credit coverages, losses
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
from derivative lawsuits, and other securities actions and covered perils. • Mortality- Risk of loss from unexpected trends in insured deaths impacting
timing of payouts from group life insurance, personal or commercial
automobile related accidents, and death of employees or executives during the
course of employment, while on disability, or while collecting workers
compensation benefits.
• Morbidity- Risk of loss to an insured from illness incurred during the course
of employment or illness from other covered perils.
• Disability- Risk of loss incurred from personal or commercial automobile
related losses, accidents arising outside of the workplace, injuries or
accidents incurred during the course of employment, or from equipment, with
each loss resulting in short term or long-term disability payments.
• Longevity- Risk of loss from increased life expectancy trends among
policyholders receiving long-term benefit payments.
•
interruption from various types of cyber-attacks.
Catastrophe risk primarily arises in the property, automobile, workers' compensation, casualty, group life, and group disability lines of business. Impact Non-catastrophe insurance risk can arise from unexpected loss experience, underpriced business and/or underestimation of loss reserves and can have significant effects
on the Company's earnings. Catastrophe insurance risk can arise from various unpredictable events and can have significant effects on the Company's earnings and may result in losses that could constrain its liquidity. ManagementThe Company's policies and procedures for managing these risks include disciplined underwriting protocols, exposure controls, sophisticated risk-based pricing, risk modeling, risk transfer, and capital management strategies. The Company has established underwriting guidelines for both individual risks, including individual policy limits, and risks in the aggregate, including aggregate exposure limits by geographic zone and peril. The Company uses both internal and third-party models to estimate the potential loss resulting from various catastrophe events and the potential financial impact those events would have on the Company's financial position and results of operations across its businesses. In addition, certain insurance products offered by TheHartford provide coverage for losses incurred due to cyber events and the Company has assessed and modeled how those products would respond to different events in order to manage its aggregate exposure to losses incurred under the insurance policies we sell.
The
Company models numerous deterministic scenarios including losses caused by
malware, data breach, distributed denial of service attacks, intrusions of cloud
environments and attacks of power grids.
Among specific risk tolerances set by the Company, risk limits are set for
natural catastrophes, terrorism risk and pandemic risk.
83
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Risk Definition Details and Company
Limits
Natural Exposure arising from The Company generally limits its estimated pre-tax catastrophe natural phenomena (e.g., loss as a result of natural catastrophes for
earthquakes, wildfires, property & casualty exposures from a single
etc.) that create a 250-year event to less than 30% of the projected
concentration or total available capital at year end of the
aggregation of loss property and casualty insurancesubsidiaries prior
across the Company's to reinsurance and to less than 15% of the
insurance or asset projected total available capital at year end of
portfolios and the the property and casualty insurance subsidiaries
inherent volatility of after reinsurance. From time to time the estimated
weather or climate loss to natural catastrophes from a single
pattern changes. 250-year event prior to reinsurance may fluctuate
above or below these limits due to changes in
modeled loss estimates, exposures or statutory
surplus. [2]
- The estimated 250 year pre-tax probable
maximum loss from earthquake events is
estimated to be $1.1 billion before
reinsurance and $408 million net of
reinsurance. [1]
- The estimated 250 year pre-tax probable
maximum losses from hurricane events are
estimated to be $1.8 billion before
reinsurance and $906 net ofreinsurance. [1] Terrorism The risk of losses from Enterprise limits for terrorism apply to
terrorist attacks, aggregations of risk across property-casualty,
including losses caused group benefits and specific asset portfolios and
by single-site and are defined based on a deterministic, single-site
multi-site conventional conventional terrorism attackscenario. The
attacks, as well as the Company manages its potentialestimated loss from
potential for attacks a conventional terrorism loss
scenario, up to
using nuclear, billion net of reinsurance and $2.5 billion gross
biological, chemical or of reinsurance, before coverage under the
radiological weapons Terrorism Risk Insurance Program established under
("NBCR"). "TRIPRA". In addition, the Company monitors
exposures monthly and employs both internally
developed and vendor-licensed loss modeling tools
as part of its risk management discipline. Our
modeled exposures to conventional terrorist
attacks around landmark locations may fluctuate
above and below our stated limits.Pandemic The exposure to loss The Company generally limits its estimated pre-tax
arising from widespread loss from a single 250 year pandemic event to less
influenza or other than 18% of the aggregate projected total
pathogens or bacterial available capital at year end of the property and
infections that create an casualty and group benefits insurance
aggregation of loss subsidiaries. In evaluating these scenarios, the
across the Company's Company assesses the impact on group life,
insurance or asset short-term disability, long-term disability and
portfolios. property & casualty claims. While ERM has a
process to track and manage these limits, from
time to time, the estimated loss for pandemics may
fluctuate above or below these limits due to
changes in modeled loss estimates, exposures, or
statutory surplus. In addition, the Company
assesses losses in the investment portfolio
associated with market declines in the event of a
widespread pandemic. [2]
[1] The loss estimates represent total property losses for hurricane events and
property and workers compensation losses for earthquake events resulting from
a single event. The estimates provided are based on 250-year return period
loss estimates that have a 0.4% likelihood of being exceeded in any single
year. The net loss estimates provided assume that the Company is able to
recover all losses ceded to reinsurers under its reinsurance programs. The
Company also manages natural catastrophe risk for group life and group
disability, which in combination with property and workers compensation loss
estimates are subject to separate enterprise risk management net aggregate
loss limits as a percent of enterprise surplus.
[2] For
available capital is equal to actual statutory capital and surplus. For
Navigators Insurers, including in
available capital is equal to
certain assets such as goodwill, intangible assets, deferred taxes and other
adjustments, including discounting.
Reinsurance as a Risk Management Strategy In addition to the policies and procedures outlined above, the Company uses reinsurance to transfer certain risks to reinsurance companies based on specific geographic or risk concentrations. A variety of traditional reinsurance products are used as part of the Company's risk management strategy, including excess of loss occurrence-based products that reinsure property and workers' compensation exposures, and individual risk (including facultative reinsurance) or quota share arrangements, that reinsure losses from specific classes or lines of business. The Company has no significant finite risk contracts in place and the statutory surplus benefit from all such prior year contracts is immaterial. TheHartford also participates in governmentally administered reinsurance facilities such as theFlorida Hurricane Catastrophe Fund ("FHCF"), the Terrorism Risk Insurance Program ("TRIPRA") and other reinsurance programs relating to particular risks or specific lines of business. Reinsurance for Catastrophes-The Company utilizes various reinsurance programs to mitigate catastrophe losses including excess of loss occurrence-based treaties covering property and workers' compensation, and an aggregate property catastrophe treaty as well as individual risk agreements (including facultative reinsurance) that reinsure losses from specific classes or lines of business. The aggregate property catastrophe treaty covers the aggregate of catastrophe events designated by the Property Claim Services office ofVerisk and, for international business, net losses arising from two or more risks involved in the same loss occurrence totaling at least$500 thousand . 84 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Primary Catastrophe Treaty Reinsurance Coverages as of
Portion of Portion of
losses losses retained
reinsured by The Hartford
Per Occurrence Property Catastrophe Treaty from
1/1/2020 to 12/31/2020 [1] [2]
Losses of $0 to $150 None 100% retained
Losses of$150 to$350 for named storms and earthquakes None 100%
retained
Losses of
excess of $150 co-participation
Losses of
excess of $350 co-participation
Losses of
excess $500 co-participation
Aggregate Property Catastrophe Treaty for1/1/2020 to 12/31/2020 [4]$0 to$700 of aggregate losses None 100%
retained
$700 to$900 of aggregate losses 100% None Workers' Compensation Catastrophe Treaty for1/1/2020 to 12/31/2020 Losses of$0 to$100 from one event None 100%
retained
80% of $350 in 20%
Losses of
[1] As of
Corporate Property Catastrophe treaties. These treaties do not cover the
assumed reinsurance business which purchases its own retrocessional coverage.
[2] In addition to the Property Occurrence Treaty, for
writing company with the largest coverage under FHCF is
Company of the Midwest, with coverage for approximately
losses in excess of a
[3] Portions of this layer of coverage extend beyond a traditional one year term.
[4] The aggregate treaty is not limited to a single event; rather, it is designed
to provide reinsurance protection for the aggregate of all catastrophe events
(up to
office of
or more risks involved in the same loss occurrence totaling at least $500
thousand. All catastrophe losses apply toward satisfying the $700 attachment
point under the aggregate treaty.
[5] In addition to the limits shown, the workers' compensation reinsurance
includes a non-catastrophe, industrial accident layer, providing coverage for
80% of $30 in per event losses in excess of a $20 retention.
In addition to the property catastrophe reinsurance coverage described in the above table, the Company has other reinsurance agreements that cover property catastrophe losses. The Per Occurrence Property Catastrophe Treaty, and Workers' Compensation Catastrophe Treaty include a provision to reinstate one limit in the event that a catastrophe loss exhausts limits on one or more layers under the treaties. Reinsurance for Terrorism- For the risk of terrorism, private sector catastrophe reinsurance capacity is generally limited and largely unavailable for terrorism losses caused by nuclear, biological, chemical or radiological attacks. As such, the Company's principal reinsurance protection against large-scale terrorist attacks is the coverage currently provided through TRIPRA to the end of 2027. TRIPRA provides a backstop for insurance-related losses resulting from any "act of terrorism", which is certified by the Secretary of theTreasury , in consultation with the Secretary of Homeland Security and the Attorney General, for losses that exceed a threshold of industry losses of $200 billion. Under the program, in any one calendar year, the federal government will pay a percentage of losses incurred from a certified act of terrorism after an insurer's losses exceed 20% of the Company's eligible direct commercial earned premiums of the prior calendar year up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. The percentage of losses paid by the federal government is 80% . The Company's estimated deductible under the program is $1.5 billion for 2020. If an act of terrorism or acts of terrorism result in covered losses exceeding the $100 billion annual industry aggregate limit,Congress would be responsible for determining how additional losses in excess of $100 billion will be paid. Reinsurance for A&E and Navigators Group Reserve Development - The Company has two adverse development cover ("ADC") reinsurance agreements in place, both of which are accounted for as retroactive reinsurance. One agreement covers substantially all A&E reserve development for 2016 and prior accident years (the "A&E ADC") and the other covers substantially all reserve development ofNavigators Insurance Company and certain of its affiliates for 2018 and prior accident years ("Navigators ADC"). For more information on the A&E ADC and the Navigators ADC, see Note 1, Basis of Presentation and Significant Accounting Policies, and Note 11, Reserve for Unpaid Losses and Loss Adjustment Expenses. Reinsurance Recoverables Property and casualty insurance product reinsurance recoverables represent loss and loss adjustment expense recoverables from a number of entities, including reinsurers and pools. 85 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Property & Casualty Reinsurance Recoverables
As of December 31,
2019 2018
Paid loss and loss adjustment expenses $ 249 $ 127 Unpaid loss and loss adjustment expenses 4,819 3,773 Gross reinsurance recoverables
5,068 3,900
Allowance for uncollectible reinsurance (114 ) (126 ) Net reinsurance recoverables
$ 4,954 $ 3,774
As shown in the following table, a portion of the total gross reinsurance
recoverables relates to the Company's mandatory participation in various
involuntary assigned risk pools and the value of annuity contracts held under
structured settlement agreements. Reinsurance recoverables due from mandatory
pools are backed by the financial strength of the property and casualty
insurance industry. Annuities purchased from third-party life insurers under
structured settlements are recognized as reinsurance recoverables in cases where
the Company has not obtained a release from the claimant. Of the remaining gross
reinsurance recoverables, the portion of recoverables due from companies rated
by A.M. Best is as follows:
Distribution of Gross Reinsurance Recoverables
As of December 31,
2019 2018
Gross reinsurance recoverables $ 5,068 $ 3,900
Mandatory (assigned risk) pools
and structured settlements (1,186 ) (1,220 )
Gross reinsurance recoverables
excluding mandatory pools and
structured settlements $ 3,882 $ 2,680
% of Total % of Total
Rated A- (excellent) or better by
A.M. Best [1] $ 3,261 84.0 % $ 2,194 81.8 %
Other rated by A.M. Best - 1 0.1 %
Total rated companies 3,261 84.0 % 2,195 81.9 %
Voluntary pools 30 0.8 % 35 1.3 %
Captives 325 8.3 % 302 11.3 %
Other not rated companies 266 6.9 % 148 5.5 %
Total $ 3,882 100.0 % $ 2,680 100.0 %
[1] Based on
To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational quality of each potential reinsurer. In placing reinsurance, the Company considers the nature of the risk reinsured, including the expected liability payout duration, and establishes limits tiered by reinsurer credit rating. Where its contracts permit, the Company secures future claim obligations with various forms of collateral, including irrevocable letters of credit, secured trusts, funds held accounts and group wide offsets. As part of its reinsurance recoverable review, the Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers and the overall credit quality of the Company's reinsurers. As indicated in the above table, excluding mandatory pools and structured settlements, 84.0% of the gross reinsurance recoverables due from reinsurers rated byA.M. Best were rated A- (excellent) or better as of December 31, 2019. Annually, the Company completes evaluations of the reinsurance recoverable asset associated with older, long-term casualty liabilities reported in the Property & Casualty Other Operations reporting segment, and the allowance for uncollectible reinsurance reported in the Commercial Lines reporting segment. For a discussion regarding the results of these evaluations, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of Reinsurance. Group Benefits reinsurance recoverables represent reserve for future policy benefits and unpaid loss and loss adjustment expenses and other policyholder funds and benefits payable that are recoverable from a number of reinsurers. Group Benefits Reinsurance Recoverables As of December 31, 2019 2018 Paid loss and loss adjustment expenses $ 6 $ 12 Unpaid loss and loss adjustment expenses 247 239 Gross reinsurance recoverables 253 251 Allowance for uncollectible reinsurance [1] - - Net reinsurance recoverables $ 253 $ 251
[1] No allowance for uncollectible reinsurance was required as of December 31,
2019 and 2018.
Guaranty Funds and Other Insurance-related Assessments As part of its risk management strategy, the Company regularly monitors the financial strength of other insurers and, in particular, activity by insurance regulators and various state guaranty associations in theU.S. relating to troubled insurers. In all states, insurers licensed to transact certain classes of insurance are required to become members of a guaranty fund. Operational Risk Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems, human error, or from external events. Sources of Operational Risk Operational risk is inherent in the Company's business and functional areas. Operational risks include: compliance with laws and regulation, cybersecurity, business disruption, technology failure, inadequate execution or process management, reliance on model and data analytics, internal fraud, external fraud, third party dependency and attraction and retention of talent. 86 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Impact Operational risk can result in financial loss, disruption of our business, regulatory actions or damage to our reputation. Management Responsibility for day-to-day management of operational risk lies within each business unit and functional area. ERM provides an enterprise-wide view of the Company's operational risk on an aggregate basis. ERM is responsible for establishing, maintaining and communicating the framework, principles and guidelines of the Company's operational risk management program. Operational risk mitigation strategies include the following: • Establishing policies and monitoring risk tolerances and exceptions;
• Conducting business risk assessments and implementing action plans where
necessary;
• Validating existing crisis management protocols;
• Identifying and monitoring emerging risks; and
• Purchasing insurance coverage.
Cybersecurity Risk TheHartford has implemented an information protection program with established governance routines that promote an adaptive approach for assessing and managing risks. TheHartford employs a 'defense-in-depth' strategy that uses multiple security measures to protect the integrity of the Company's information assets. This 'defense-in-depth' strategy aligns to theNational Institute of Standards and Technology ("NIST") Cyber Security Framework and provides preventative, detective and responsive measures that collectively protects the Company. Various cyber assurance methods, including security metrics, third party security assessments, external penetration testing, red team exercises, and cyber war game exercises are used to test the effectiveness of the overall cybersecurity control environment. TheHartford , like many other large financial services companies, blocks attempted cyber intrusions on a daily basis. In the event of a cyber intrusion, the Company invokes its Cyber Incident Response Program (the "Program") commensurate with the nature of the intrusion. While the actual methods employed differ based on the event, our approach uses internal teams and outside advisors with specialized skills to support the response and recovery efforts and requires elevation of issues, as necessary, to senior management. In addition, we have procedures to ensure timely notification of critical cybersecurity incidents pursuant to the Program to help identify employees who may have material non-public information and to implement blackout restrictions on trading the Company's securities during the investigation and assessment of such cybersecurity incidents. From a governance perspective, senior members of our Enterprise Risk Management, Information Protection and Internal Audit functions provide detailed, regular reports on cybersecurity matters to the Board, including the Finance, Investment, and Risk Management Committee (FIRMCo), a committee comprised of all directors, which has principal responsibility for oversight of cybersecurity risk, and/or the Audit Committee, which oversees controls for the Company's major risk exposures. The topics covered by these updates include the Company's activities, policies and procedures to prevent, detect and respond to cybersecurity incidents, as well as lessons learned from cybersecurity incidents and internal and external testing of our cyber defenses. Financial Risk Financial risks include direct and indirect risks to the Company's financial objectives from events that impact financial market conditions and the value of financial assets. Some events may cause correlated movement in multiple risk factors. The primary sources of financial risks are the Company's invested assets. Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss on aU.S. GAAP, statutory, and economic basis. Exposures are actively monitored and managed, with risks mitigated where appropriate. The Company uses various risk management strategies, including limiting aggregation of risk, portfolio re-balancing and hedging with over-the-counter and exchange-traded derivatives with counterparties meeting the appropriate regulatory and due diligence requirements. Derivatives are utilized to achieve one of four Company-approved objectives: hedging risk arising from interest rate, equity market, commodity market, credit spread and issuer default, price or currency exchange rate risk or volatility; managing liquidity; controlling transaction costs; or entering into synthetic replication transactions. Derivative activities are monitored and evaluated by the Company's compliance and risk management teams and reviewed by senior management. The Company identifies different categories of financial risk, including liquidity, credit, interest rate, equity and foreign currency exchange. Liquidity Risk Liquidity risk is the risk to current or prospective earnings or capital arising from the Company's inability or perceived inability to meet its contractual funding obligations as they come due. Sources of Liquidity Risk Sources of liquidity risk include funding risk, company-specific liquidity risk and market liquidity risk resulting from differences in the amount and timing of sources and uses of cash as well as company-specific and general market conditions. Stressed market conditions may impact the ability to sell assets or otherwise transact business and may result in a significant loss in value. Impact Inadequate capital resources and liquidity could negatively affect the Company's overall financial strength and its ability to generate cash flows from its businesses, borrow funds at competitive rates, and raise new capital to meet operating and growth needs. Management The Company has defined ongoing monitoring and reporting requirements to assess liquidity across the enterprise under both current and stressed market conditions. The Company measures and manages liquidity risk exposures and funding needs within prescribed limits across legal entities, taking into account legal, regulatory and operational limitations to the transferability liquidity. The Company also monitors internal and external conditions, and identifies material risk changes and emerging risks that may impact operating cash flows or liquid assets. The liquidity requirements of the Holding Company have been and will continue to be met by the Holding Company's fixed maturities, short-term investments and cash, and dividends from its subsidiaries, principally its insurance operations, as well as the issuance of common stock, debt or 87 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
other capital securities and borrowings from its credit facilities as needed. The Company maintains multiple sources of contingent liquidity including a revolving credit facility, a commercial paper program, an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates, and access to collateralized advances from theFederal Home Loan Bank of Boston ("FHLBB") for certain affiliates. The Company's CFO has primary responsibility for liquidity risk. For further discussion on liquidity see the section on Capital Resources and Liquidity. Credit Risk and Counterparty Risk Credit risk is the risk to earnings or capital due to uncertainty of an obligor's or counterparty's ability or willingness to meet its obligations in accordance with contractually agreed upon terms. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value due to changes in credit spreads. Sources of Credit Risk The majority of the Company's credit risk is concentrated in its investment holdings and use of derivatives, but it is also present in the Company's ceded reinsurance activities and various insurance products. Impact A decline in creditworthiness is typically reflected as an increase in an investment's credit spread and associated decline in value, potentially resulting in an increase in other-than-temporary impairment, and an increased probability of a realized loss upon sale. In certain instances, counterparties may default on their obligations and the Company may realize a loss on default. Premiums receivable, reinsurance recoverable and deductible losses recoverable are also subject to credit risk based on the counterparty's unwillingness or inability to pay. Management The objective of the Company's enterprise credit risk management strategy is to identify, quantify, and manage credit risk in aggregate and to limit potential losses in accordance with the Company's credit risk management policy. The Company manages its credit risk by managing aggregations of risk, holding a diversified mix of issuers and counterparties across its investment, reinsurance, and insurance portfolios and limiting exposure to any specific reinsurer or counterparty. Potential credit losses can be mitigated through diversification (e.g., geographic regions, asset types, industry sectors), hedging and the use of collateral to reduce net credit exposure. The Company manages credit risk through the use of various analyses and governance processes. The investment, derivatives and reinsurance areas have formal policies and procedures for counterparty approvals and authorizations, which establish criteria defining minimum levels of creditworthiness and financial stability for eligible counterparties. Credits considered for investment are subject to underwriting reviews and private securities are subject to management approval. Mitigation strategies vary across the three sources of credit risk, but may include: • Investing in a portfolio of high-quality and diverse securities;
• Selling investments subject to credit risk;
• Hedging through use of credit default swaps;
• Clearing transactions through central clearing houses that require daily
variation margin;
• Entering into contracts only with strong creditworthy institutions
• Requiring collateral; and
• Non-renewing policies/contracts or reinsurance treaties.
The Company has developed credit exposure thresholds which are based upon counterparty ratings. Aggregate counterparty credit quality and exposure are monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis and aggregated by ultimate parent of the counterparty across investments, reinsurance receivables, insurance products with credit risk, and derivatives. As of December 31, 2019, the Company had no investment exposure to any credit concentration risk of a single issuer or counterparty greater than 10% of the Company's stockholders' equity, other than theU.S. government and certainU.S. government agencies. For further discussion of concentration of credit risk in the investment portfolio, see the Concentration of Credit Risk section in Note 6 - Investments of Notes to Consolidated Financial Statements. Assets and Liabilities Subject to Credit Risk Investments Essentially all of the Company's invested assets are subject to credit risk. Credit related impairments on investments were $3 and $1, in 2019 and 2018, respectively. (See the Enterprise Risk Management section of the MD&A under "Other-Than-Temporary Impairments.")
Reinsurance recoverables Reinsurance recoverables, net of an allowance for uncollectible reinsurance, were $5,527 and $4,357, as of December 31, 2019 and 2018, respectively. (See the Enterprise Risk Management section of the MD&A under "Reinsurance as a Risk Management Strategy.")
Premiums receivable and agents' balances Premiums receivable and agents'
balances, net of an allowance for doubtful accounts, were $4,384 and $3,995, as
of December 31, 2019 and 2018, respectively. (For a discussion regarding
collectibility of these balances, see Note 1 - Basis of Presentation and
Significant Accounting Policies of Notes to Consolidated Financial Statements
under the section labeled "Revenue Recognition.")
Credit Risk of Derivatives
The Company uses various derivative counterparties in executing its derivative
transactions. The use of counterparties creates credit risk that the
counterparty may not perform in accordance with the terms of the derivative
transaction.
Downgrades to the credit ratings of the Company's insurance operating companies
may have adverse implications for its use of derivatives. In some cases,
downgrades may give derivative
88
--------------------------------------------------------------------------------
counterparties for OTC derivatives and clearing brokers for OTC-cleared
derivatives the right to cancel and settle outstanding derivative trades or
require additional collateral to be posted. In addition, downgrades may result
in counterparties and clearing brokers becoming unwilling to engage in or clear
additional derivatives or may require additional collateralization before
entering into any new trades.
Managing the Credit Risk of Counterparties to Derivative Instruments
The Company also has derivative counterparty exposure policies which limit the
Company's exposure to credit risk. The Company monitors counterparty exposure on
a monthly basis to ensure compliance with Company policies and statutory
limitations. The Company's policies with respect to derivative counterparty
exposure establishes market-based credit limits, favors long-term financial
stability and creditworthiness of the counterparty and typically requires credit
enhancement/credit risk reducing agreements, which are monitored and evaluated
by the Company's risk management team and reviewed by senior management.
The Company minimizes the credit risk of derivative instruments by entering into
transactions with high quality counterparties primarily rated A or better. The
Company also generally requires that OTC derivative contracts be governed by an
International Swaps and Derivatives Association ("ISDA") Master Agreement, which
is structured by legal entity and by counterparty and permits right of offset.
The Company enters into credit support annexes in conjunction with the ISDA
agreements, which require daily collateral settlement based upon agreed upon
thresholds.
The Company also has derivative counterparty exposure policies which limit the
Company's exposure to credit risk. Credit exposures are generally quantified
based on the prior business day's net fair value, including income accruals, of
all derivative positions transacted with a single counterparty for each separate
legal entity. The notional amount of derivative contracts represents the basis
upon which pay or receive amounts are calculated and are not reflective of
credit risk. The Company enters into collateral arrangements in connection with
its derivatives positions and collateral is pledged to or held by, or on behalf
of, the Company to the extent the exposure is greater than zero, subject to
minimum transfer thresholds or negotiated thresholds. In accordance with
industry standards and the contractual requirements, collateral is typically
settled on the same business day. For the year ended December 31, 2019, the
Company incurred no losses on derivative instruments due to counterparty
default. For further discussion, see the Derivative Commitments section of Note
14 - Commitments and Contingencies of Notes to Consolidated Financial
Statements.
Use of Credit Derivatives
The Company may also use credit default swaps to manage credit exposure or to
assume credit risk to enhance yield.
Credit Risk Reduced Through Credit Derivatives
The Company uses credit derivatives to purchase credit protection with respect
to a single entity or referenced index. The Company purchases credit protection
through credit default swaps to economically hedge and manage credit risk of
certain fixed maturity investments across multiple sectors of the investment
portfolio. As of December 31, 2019 and 2018, the notional amount related to
credit derivatives that purchase credit
protection was $124 and $6, respectively, while the fair value was $(3) and $0,
respectively. These amounts do not include positions that are in offsetting
relationships.
Credit Risk Assumed Through Credit Derivatives
The Company also enters into credit default swaps that assume credit risk as
part of replication transactions. Replication transactions are used as an
economical means to synthetically replicate the characteristics and performance
of assets that are permissible investments under the Company's investment
policies. These swaps reference investment grade single corporate issuers and
indexes. As of December 31, 2019 and 2018, the notional amount related to credit
derivatives that assume credit risk was $500 and $1.1 billion, respectively,
while the fair value was $13 and $3, respectively. These amounts do not include
positions that are in offsetting relationships.
For further information on credit derivatives, see Note 7 - Derivatives of Notes
to Consolidated Financial Statements.
Credit Risk of Business Operations
A portion of the company's commercial business is written with large deductible
policies or retrospectively-rated plans. Under some commercial insurance
contracts with deductible features, the Company is obligated to pay the claimant
the full amount of the claim. The Company is subsequently reimbursed by the
contract holder for the deductible amount, and is subject to credit risk until
such reimbursement is made. Additionally, retrospectively rated policies are
utilized primarily for workers compensation coverage, whereby the ultimate
premium is determined based on actual loss activity. Although the
retrospectively rated feature of the policy substantially reduces insurance risk
for the Company, it does introduce credit risk to the Company. The Company's
results of operations could be adversely affected if a significant portion of
such contract holders failed to reimburse the Company for the deductible amount
or the retrospectively rated policyholders failed to pay additional premiums
owed. While the Company attempts to manage the risks discussed above through
underwriting, credit analysis, collateral requirements, provision for bad debt,
and other oversight mechanisms, the Company's efforts may not be successful.
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the
value of assets and liabilities arising from movements in interest rates.
Interest rate risk encompasses exposures with respect to changes in the level of
interest rates, the shape of the term structure of rates and the volatility of
interest rates. Interest rate risk does not include exposure to changes in
credit spreads.
Sources of Interest Rate Risk The Company has exposure to interest rate risk
arising from its fixed maturity investments, commercial mortgage loans, capital
securities issued by the Company and discount rate assumptions associated with
the Company's claim reserves and pension and other post retirement benefit
obligations as well as from assets that support the Company's pension and other
post-retirement benefit plans.
Impact Changes in interest rates from current levels can have both favorable and
unfavorable effects for the Company.
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Change in
Interest
Rates Favorable Effects Unfavorable Effects
Additional net investment income Decrease in the fair value of the
due to reinvesting at higher fixed income investment portfolio
Ý yields
Higher interest expense on
variable rate debt obligations
Increase in the fair value of the Lower net investment income due
fixed income investment portfolio to reinvesting at lower
investment yields
Þ Acceleration in paydowns and
prepayments or calls of certain
mortgage-backed and municipal
securities
Management The Company manages its exposure to interest rate risk by
constructing investment portfolios that seek to protect the firm from the
economic impact associated with changes in interest rates by setting portfolio
duration targets that are aligned with the duration of the liabilities that they
support. The Company analyzes interest rate risk using various models including
parametric models and cash flow simulation under various market scenarios of the
liabilities and their supporting investment portfolios. Key metrics that the
Company uses to quantify its exposure to interest rate risk inherent in its
invested assets and the associated liabilities include duration, convexity and
key rate duration.
The Company utilizes a variety of derivative instruments to mitigate interest
rate risk associated with its investment portfolio or to hedge liabilities.
Interest rate caps, floors, swaps, swaptions, and futures may be used to manage
portfolio duration. Interest rate swaps are primarily used to convert interest
receipts or payments to a fixed or variable rate. The use of such swaps enables
the Company to customize contract terms and conditions to desired objectives and
manage the duration profile within established tolerances. Interest rate swaps
are also used to hedge the variability in the cash flows of a forecasted
purchase or sale of fixed rate securities due to changes in interest rates. As
of December 31, 2019 and 2018, notional amounts pertaining to derivatives
utilized to manage interest rate risk, including offsetting positions, totaled
$11.4 billion and $10.5 billion, respectively primarily related to investments.
The fair value of these derivatives was $(59) and $(61) as of December 31, 2019
and 2018, respectively.
Assets and Liabilities Subject to Interest Rate Risk
Fixed income investments The fair value of fixed income investments, which
include fixed maturities, commercial mortgage loans, and short-term investments,
was $49.3 billion and $43.7 billion at December 31, 2019 and 2018, respectively.
The weighted average duration of the portfolio, including derivative
instruments, was approximately 5.0 years and 4.7 years as of December 31, 2019
and 2018, respectively. Changes in the fair value of fixed maturities due to
changes in interest rates are reflected as a component of AOCI.
Long-term debt obligations The Company's variable rate debt obligations will
generally result in increased interest expense as a result of higher interest
rates; the inverse is true during a declining interest rate environment. Changes
in the value of long-term debt as a result of changes in interest rates will
impact the fair value of these instruments but not the carrying value in the
Company's Consolidated Balance Sheets.
Group life and disability product liabilities The cash outflows associated with
contracts issued by the Company's Group Benefits segment, primarily group life
and short and long-term disability policy liabilities, are not interest rate
sensitive but vary based on timing. Though the aggregate cash flow payment
streams are relatively predictable, these products rely upon actuarial pricing
assumptions (including mortality and morbidity) and have an element of cash flow
uncertainty. As of December 31, 2019 and 2018, the Company had $8,256 and
$8,445, respectively of reserves for group life and disability contracts.
Changes in the value of the liabilities as a result of changes in interest rates
will impact the fair value of these instruments but not the carrying value in
the Company's Consolidated Balance Sheets.
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Pension and other post-retirement benefit obligations The Company's pension and other post-retirement benefit obligations are exposed to interest rate risk based upon the sensitivity of present value obligations to changes in liability discount rates as well as the sensitivity of the fair value of investments in the plan portfolios to changes in interest rates. The discount rate assumption is based upon an interest rate yield curve that reflects high-quality fixed income investments consistent with the maturity profile of the expected liability cash flows. The Company is exposed to the risk of having to make additional plan contributions if the plans' investment returns, including from investments in fixed maturities, are lower than expected. (For further discussion of discounting pension and other postretirement benefit obligations, refer to Note 18 - Employee Benefit Plans of Notes to Consolidated Financial Statements.) As of December 31, 2019 and 2018, the Company had $732 and $791, respectively, of unfunded liabilities for pension and post-retirement benefit obligations recorded within Other Liabilities in the accompanying Balance Sheets. Interest Rate Sensitivity Group Life and Disability Reserves and Invested Assets Supporting Them Included in the following table is the before tax change in the net economic value of contracts issued by the Company's Group Benefits segment, primarily group life and disability, for which fixed valuation discount rate assumptions are established based upon investment returns assumed in pricing, along with the corresponding invested assets. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge its exposure to interest rate risk in the investment portfolios supporting these contracts. This analysis does not include the assets and corresponding liabilities of other insurance products such as automobile, property, workers' compensation and general liability insurance. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis as the interest rate sensitivity of these investments is generally lower and less predictable than fixed income investments. The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and downward parallel shift in the yield curve. The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated below due to the nature of the estimates and assumptions used in the analysis. The Company's sensitivity analysis calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the current relationship between short-term and long-term interest rates will remain constant over time. As a result, these calculations may not fully capture the impact of portfolio re-allocations, significant product sales or non-parallel changes in interest rates.
Interest Rate Sensitivity of Group Benefits Short and Long-term Disability
Reserves and Invested Assets Supporting Them
Change in Net Economic Value as of December 31,
2019 2018
Basis point shift -100 +100 -100 +100
Increase (decrease) in economic
value, before tax $ 83 $ (101 ) $ 47 $ (68 )
The carrying value of assets supporting the liabilities related to the
businesses included in the table above was $10.6 billion and $10.0 billion, as
of December 31, 2019 and 2018, respectively, and included fixed maturities,
commercial mortgage loans and short-term investments. The assets supporting the
liabilities are monitored and managed within set duration guidelines and are
evaluated on a daily basis, as well as annually, using scenario simulation
techniques in compliance with regulatory requirements.
Invested Assets not Supporting Group Life and Disability Reserves
The following table provides an analysis showing the estimated before tax change
in the fair value of the Company's investments and related derivatives,
excluding assets supporting group life and disability reserves which are
included in the table above, assuming 100 basis point upward and downward
parallel shifts in the yield curve as of December 31, 2019 and 2018. Certain
financial instruments, such as limited partnerships and other alternative
investments, have been omitted from the analysis as the interest rate
sensitivity of these investments is generally lower and less predictable than
fixed income investments.
Interest Rate Sensitivity of Invested Assets Not Supporting Group Benefits Short
and Long-term Disability Reserves
Change in Fair Value as of December 31,
2019 2018
Basis point shift -100 +100 -100 +100
Increase (decrease) in fair
value, before tax $ 2,165 $ (1,853 ) $ 1,761 $ (1,511 )
The carrying value of fixed maturities, commercial mortgage loans and short-term
investments related to the businesses included in the table above was $38.7
billion and $33.7 billion as of December 31, 2019 and 2018, respectively.
Long-term Debt
A 100 basis point parallel decrease in the yield curve would result in an
increase in the fair value of long-term debt by $607 and $331 as of December 31,
2019 and 2018, respectively. A 100 basis point parallel increase in the yield
curve would result in a decrease in the fair value of long-term debt by $499 and
$279 as of December 31, 2019 and 2018, respectively. Changes in the value of
long-term debt as a result of changes in interest rates will not impact the
carrying value in the Company's Consolidated Balance Sheets.
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Pension and Other Post-Retirement Plan Obligations A 100 basis point parallel decrease in the yield curve would impact both the value of the underlying pension assets and the value of the liability, resulting in an increase in the unfunded liabilities for pension and other post-retirement plan obligations of $185 and $178 as of December 31, 2019 and 2018, respectively. A 100 basis point parallel increase in the yield curve would have the inverse effect and result in a decrease in the unfunded liabilities for pension and other post-retirement plan obligations of $138 and $134 as of December 31, 2019 and 2018, respectively. Gains or losses due to changes in interest rates on the pension and post-retirement plan obligations are recorded within AOCI and are amortized into the actuarial loss component of net periodic benefit cost when they exceed a threshold. Discontinuation of LIBOR The Company continues to monitor the potential impacts of the discontinuation of LIBOR which is used as a benchmark or reference rate for certain investments and derivatives the Company owns and floating rate debt the Company has issued. The Company has identified three principal types of outstanding contracts that may be affected by the discontinuation of or transition from LIBOR to an alternative reference rate, including floating rate fixed maturity investments the Company holds in its investment portfolio; derivative instruments that hedge interest rate risk; and two classes of junior subordinated debentures that the Company has issued and are currently outstanding. • Using our best estimate of expected future cash flows including prepayments
and maturities, the book value of LIBOR referenced floating rate fixed
maturities that the Company owns as of December 31, 2019 and that the Company
expects to be outstanding at the end of 2021, is approximately $2.7 billion.
The Company has performed a review of the LIBOR replacement language on these
assets and believes that greater than 80% have language that supports a
transition to a new standard benchmark rate. The Company will continue to
assess the remaining holdings and work with counterparties, as appropriate,
to determine LIBOR replacement language or manage the assets in other ways,
such as through asset sales.
• The notional amount of derivative instruments as of December, 31, 2019 with a
floating rate component that references LIBOR that the Company expects to be
outstanding at the end of 2021, considering maturities, is $10.3 billion,
with $10.1 billion being cleared through an exchange or clearinghouse. The
Company anticipates that substantially all existing derivatives referencing
LIBOR, whether or not cleared through an exchange or clearing house, will
transition from LIBOR to SOFR or other market alternative rates in line with
new market standards currently being developed.
• The Company has issued $1.1 billion of junior subordinated debentures that
mature after 2021 with LIBOR referenced floating interest rates. The Company
is assessing options to manage the risk associated with the transition away
from LIBOR related to these outstanding securities.
The uncertainty regarding the continued use and reliability of LIBOR, including the timing of such transition, could reduce the value of some of our floating rate fixed maturity investments and increase the interest the Company pays on the junior subordinated debentures. There is also a risk that certain derivatives may no longer qualify for hedge accounting if reference rates change on derivative contracts but the reference interest rate of the instruments being hedged do not change in a substantially similar manner, particularly for cash flow hedges of floating rate investments the Company owns and junior subordinated debentures the Company has issued. The loss of hedge accounting could result in the recognition of gains or losses on derivatives in the income statement rather than in accumulated other comprehensive income. The FASB has proposed guidance that would allow companies to continue to apply hedge accounting in these instances for one year after year end 2021 when theU.K. Financial Conduct Authority is expected to stop requiring financial institutions to publish LIBOR rates. Beyond the one year period ending 2022, there is uncertainty whether certain outstanding derivative contracts will continue to qualify for hedge accounting either because the replacement rate of the financial instrument being hedged is not sufficiently matched to the reference rate of the derivative contract or because replacement rate language for the hedged instrument has not been determined. Equity Risk Equity risk is the risk of financial loss due to changes in the value of global equities or equity indices. Sources of Equity Risk The Company has exposure to equity risk from invested assets, assets that support the Company's pension and other post-retirement benefit plans, and fee income derived from Hartford Funds assets under management. In addition, the Company has equity exposure through its 9.7% ownership interest in the limited partnership, Hopmeadow Holdings LP, that owns the life and annuity business sold in 2018. For further information, see Note 21 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements. Impact The investment portfolio is exposed to losses from market declines affecting equity securities and derivatives, alternative assets and limited partnerships which could negatively impact the Company's reported earnings. For assets supporting pension and other post-retirement benefit plans, the Company may be required to make additional plan contributions if equity investments in the plan portfolios decline in value. Hartford Funds earnings are also significantly influenced by theU.S. and other equity markets. Generally, declines in equity markets will reduce the value of assets under management and the amount of fee income generated from those assets. Increases in equity markets will generally have the inverse impact. Management The Company uses various approaches in managing its equity exposure, including limits on the proportion of assets invested in equities, diversification of the equity portfolio, and hedging of changes in equity indices. For assets supporting pension and other post-retirement benefit plans, the asset allocation mix is reviewed on a periodic basis. In order to minimize risk, the pension plans maintain a listing of permissible and prohibited investments and impose concentration limits and investment quality requirements on permissible investment options. 92 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Assets and Liabilities Subject to Equity Risk
Investment portfolio The investment portfolio is exposed to losses from market
declines affecting equity securities and derivatives, and certain alternative
assets and limited partnerships. Generally, declines in equity markets will
reduce the value of these types of investments and could negatively impact the
Company's earnings while increases in equity will have the inverse impact. For
equity securities, the changes in fair value are reported in net realized
capital gains and losses. For alternative assets and limited partnerships, the
Company's share of earnings for the period is recorded in net investment income,
though typically on a delay based on the availability of the underlying
financial statements. For a discussion of equity sensitivity, see below.
Assets supporting pension and other post-retirement benefit plans The Company
may be required to make additional plan contributions if equity investments in
the plan portfolios decline in value. For a discussion of equity sensitivity,
see below.
Declines in value are recognized as unrealized losses in AOCI. Increases in
equity markets are recognized as unrealized gains in AOCI. Unrealized gains and
losses in AOCI are amortized into the actuarial loss component of net periodic
benefit cost when they exceed a threshold. For further discussion of equity risk
associated with the pension plans, see Note 18 - Employee Benefit Plans of Notes
to
Consolidated Financial Statements.
Assets under management Assets under management in Hartford Funds may decrease in value during equity market declines, which would result in lower earnings because fee income is earned based upon the value of assets under management. Equity Sensitivity Investment portfolio and the assets supporting pension and other post-retirement benefit plans Included in the following tables are the estimated before tax change in the economic value of the Company's invested assets and assets supporting pension and other post-retirement benefit plans with sensitivity to equity risk. The calculation of the hypothetical change in economic value below assumes a 20% upward and downward shock to theStandard & Poor's 500 Composite Price Index ("S&P 500"). For limited partnerships and other alternative investments, the movement in economic value is calculated using a beta analysis largely derived from historical experience relative to the S&P 500. The selection of the 20% shock to the S&P 500 was made only as an illustration to the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated below due to the nature of the estimates and assumptions used in the analysis. These calculations do not capture the impact of portfolio re-allocations. Equity Sensitivity [1] As of December 31, 2019 As of December 31, 2018 Shock to S&P 500 Shock to S&P 500 (Before tax) Fair Value +20% -20% Fair Value +20% -20% Investment Portfolio $ 3,295 $ 440 $ (407 ) $ 3,045 $ 419 $ (418 ) Assets supporting pension and other post-retirement benefit plans $ 1,372 $ 230 $ (230 ) $ 1,226 $ 209 $ (209 )
[1] Table excludes the Company's investment in Hopmeadow Holdings LP which is
reported in other assets on the Company's Consolidated Balance Sheets.
Hartford Funds assets under management Hartford Funds earnings are significantly influenced by theU.S. and other equity markets. If equity markets were to hypothetically decline 20% and remain depressed for one year, the estimated before tax impact on reported earnings for that one year period is $(50) as of December 31, 2019. The selection of the 20% shock to the S&P 500 was made only as an illustration to the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis. 93 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Foreign Currency Exchange Risk Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies. Sources of Currency Risk The Company has foreign currency exchange risk in non-U.S. dollar denominated cash, fixed maturities, equities, and derivative instruments. In addition, the Company has non-U.S. subsidiaries, some with functional currencies other thanU.S. dollar, and which transact business in multiple currencies resulting in assets and liabilities denominated in foreign currencies. Impact Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains and losses on changes in the value of assets and liabilities. The impact on the fair value of fixed maturities, AFS due to changes in foreign currency exchange rates, in relation to functional currency, is reported in unrealized gains or losses as part of other comprehensive income. The realization of gains or losses resulting from investment sales or resulting from changes in investments that record fair value through the income statement due to changes in foreign currency exchange rates is reflected through net realized capital gains and losses. In regards to insurance and reinsurance contracts that the Company enters into for which we are obligated to pay losses in a foreign currency, the impact of changes in foreign currency exchange rates on assets and liabilities related to these contracts is reflected through net realized capital gains and losses. These assets or liabilities include, but are not limited to, cash and cash equivalents, premiums receivable, reinsurance recoverables, and unpaid losses and loss adjustment expenses. Additionally, the Company translates the assets, liabilities, and income of non-U.S. dollar functional currency legal entities intoU.S. dollar. This translation amount is reported as a component of other comprehensive income. Management The Company manages its foreign currency exchange risk primarily through asset-liability matching and through the use of derivative instruments. However, legal entity capital is invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations. The foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using foreign currency swaps and forwards. Assets and Liabilities Subject to Foreign Currency Exchange Risk Investment portfolio The Company is exposed to foreign exchange risk affecting non-U.S. dollar denominated cash, fixed maturities, equities and derivative instruments. Changes in relative values between currencies can positively or negatively impact net realized capital gains and losses or unrealized gains (losses) as part of other comprehensive income. Assets supporting pension plan Changes in relative values between currencies can positively or negatively impact unrealized gains and losses in AOCI. Unrealized gains and losses in AOCI are amortized into the actuarial loss component of net periodic benefit cost when they exceed a threshold. As of December 31, 2019 and 2018, the Company had pension plan assets of $83 and $68, respectively, of non-U.S. dollar investments in multiple currencies. These amounts are excluded from the sensitivity analysis below. Insurance contract related assets and liabilities The Company has non-U.S. dollar denominated insurance contracts and associated premiums receivable, reinsurance recoverables and unpaid losses and loss adjustment expenses, that are exposed to foreign exchange risk. For contracts that are withinU.S , dollar functional currency legal entities, changes in foreign currency exchange rates can positively or negatively impact net realized capital gains and losses. For contracts within non-U.S. dollar functional currency legal entities, changes in foreign currency exchange rates can positively or negatively impact other comprehensive income. Foreign Currency Sensitivity For the Company's primary currencies that create foreign exchange risk, the following table provides the estimated impact of a hypothetical 10% unfavorable change in exchange rates. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis. The amounts presented are inU.S. dollars and before-tax. Foreign Currency Sensitivity [1] GBP CAD 10% Unfavorable Change December 31, 2019 Net assets (liabilities) $ 336 $ 173 $ (46 ) December 31, 2018 Net assets (liabilities) $ - $ 89 $ (8 )
[1] Amount excludes currencies where the value of net assets in
equivalent is less than 1% of total net assets of the Company.
Financial Risk on Statutory Capital
Statutory surplus amounts and RBC ratios may increase or decrease in any period
depending upon a variety of factors and
may be compounded in extreme scenarios or if multiple factors occur at the same
time. In general, as equity market levels and interest rates decline, the amount
and volatility of either our
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actual or potential obligation, as well as the related statutory surplus and capital margin can be materially negatively affected, sometimes at a greater than linear rate. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. Factors include: • A decrease in the value of certain fixed-income and equity securities in our
investment portfolio, due in part to credit spreads widening or a decline in
equity market levels, may result in a decrease in statutory surplus and RBC
ratios.
• Decreases in the value of certain derivative instruments that do not get
hedge accounting, may reduce statutory surplus and RBC ratios.
• Non-market factors can also impact the amount and volatility of either our
actual or potential obligation, as well as the related statutory surplus and
capital margin.
Most of these factors are outside of the Company's control. The Company's
financial strength and credit ratings are significantly influenced by the
statutory surplus amounts and RBC ratios of our insurance company subsidiaries.
In addition, rating agencies may implement changes to their internal models that
have the effect of increasing or decreasing the amount of statutory capital we
must hold in order to maintain our current ratings.
Investment Portfolio Risk
The following table presents the Company's fixed maturities, AFS, by credit
quality. The credit ratings referenced throughout this section are based on
availability and are generally the midpoint of the available ratings among
Moody's, S&P, and Fitch. If no rating is available from a rating agency, then an
internally developed rating is used.
Fixed Maturities by Credit Quality
December 31, 2019 December 31, 2018
Percent of Percent of
Total Fair Total Fair
Amortized Cost Fair Value Value Amortized Cost Fair Value Value
United States
Government/Government agencies $ 5,478 $ 5,644 13.4 % $ 4,446 $ 4,430 12.4 %
AAA 6,412 6,617 15.7 % 6,366 6,440 18.1 %
AA 7,746 8,146 19.3 % 6,861 6,985 19.6 %
A 10,144 10,843 25.7 % 8,314 8,370 23.5 %
BBB 8,963 9,530 22.6 % 8,335 8,163 22.9 %
BB & below 1,335 1,368 3.3 % 1,281 1,264 3.5 %
Total fixed maturities, AFS $ 40,078 $ 42,148 100.0 % $ 35,603 $ 35,652 100.0 %
The fair value of fixed maturities, AFS increased as compared to December 31,
2018, primarily due to the transfer in of assets related to the acquisition of
Navigators Group as well as an increase in valuations due to lower interest
rates and tighter
credit spreads. Fixed Maturities, FVO, are not included in the preceding table.
For further discussion on FVO securities, see Note 5 - Fair Value Measurements
of Notes to Consolidated Financial Statements.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Securities by Type
December 31, 2019 December 31, 2018
Percent Percent
Cost or Gross Unrealized Gross Unrealized of Total Fair Cost or Gross Unrealized Gross Unrealized of Total Fair
Amortized Cost Gains Losses Fair Value Value Amortized Cost Gains Losses Fair Value Value
Asset-backed
securities ("ABS")
Consumer loans $ 1,350 $ 16 $ (3 ) $ 1,363 3.2 % $ 1,159 $ 5 $ (1 ) $ 1,163 3.3 %
Other 111 2 - 113 0.3 % 113 - - 113 0.3 %
Collateralized loan
obligations ("CLOs") 2,186 5 (8 ) 2,183 5.2 % 1,455 2 (20 ) 1,437 4.0 %
CMBS
Agency [1] 1,878 43 (7 ) 1,914 4.5 % 1,447 13 (33 ) 1,427 4.0 %
Bonds 2,108 86 (4 ) 2,190 5.2 % 1,845 13 (29 ) 1,829 5.1 %
Interest only 224 12 (2 ) 234 0.6 % 289 9 (2 ) 296 0.8 %
Corporate
Basic industry 539 31 (1 ) 569 1.4 % 604 8 (21 ) 591 1.7 %
Capital goods 1,495 72 (9 ) 1,558 3.7 % 1,132 8 (31 ) 1,109 3.1 %
Consumer cyclical 991 57 (1 ) 1,047 2.5 % 943 9 (29 ) 923 2.6 %
Consumer non-cyclical 2,372 137 (3 ) 2,506 5.9 % 1,936 11 (71 ) 1,876 5.3 %
Energy 1,550 96 (3 ) 1,643 3.9 % 1,156 14 (43 ) 1,127 3.1 %
Financial services 3,977 192 (4 ) 4,165 9.9 % 3,368 17 (99 ) 3,286 9.2 %
Tech./comm. 2,360 208 - 2,568 6.1 % 1,720 34 (54 ) 1,700 4.8 %
Transportation 743 44 - 787 1.9 % 548 4 (18 ) 534 1.5 %
Utilities 2,019 132 (4 ) 2,147 5.1 % 2,017 43 (69 ) 1,991 5.6 %
Other 389 17 - 406 1.0 % 272 - (11 ) 261 0.7 %
Foreign govt./govt.
agencies 1,057 66 - 1,123 2.7 % 866 7 (26 ) 847 2.4 %
Municipal bonds
Taxable 815 45 (1 ) 859 2.0 % 629 14 (17 ) 626 1.8 %
Tax-exempt 7,948 692 (1 ) 8,639 20.5 % 9,343 407 (30 ) 9,720 27.3 %
RMBS
Agency 2,409 57 (1 ) 2,465 5.8 % 1,508 7 (29 ) 1,486 4.2 %
Non-agency 1,786 17 (2 ) 1,801 4.2 % 933 5 (6 ) 932 2.6 %
Alt-A 40 3 - 43 0.1 % 43 4 - 47 0.1 %
Sub-prime 540 20 - 560 1.3 % 786 28 - 814 2.3 %
U.S. Treasuries 1,191 75 (1 ) 1,265 3.0 % 1,491 41 (15 ) 1,517 4.2 %
Total fixed maturities, AFS $ 40,078 $ 2,125 $ (55 ) $ 42,148 100.0 % $ 35,603 $
703 $ (654 ) $ 35,652 100.0 %
Fixed maturities, FVO $ 11 $ 22
Equity securities, at
fair value $ 1,657 $ 1,214
[1] Includes securities with pools of loans issued by the Small Business
Administration which are backed by the full faith and credit of the
government.
The fair value of AFS securities increased as compared with December 31, 2018, primarily due to the transfer in of assets related to the acquisition of Navigators Group as well as an increase in valuations due to lower interest rates and tighter credit spreads. European Exposure While the European economy is showing signs of stabilization, structural challenges including elevated sovereign debt levels and demographic headwinds are expected to suppress economic growth in the region. Political risk will likely remain elevated inEurope during 2020 due to uncertainty surrounding Brexit, increasing pressure on centrist governments inFrance andGermany and ongoing concern over Italian fiscal policy. The Company manages the credit risk associated with its European securities within the investment portfolio on an on-going basis using several processes which are supported by macroeconomic analysis and issuer credit analysis. For additional details regarding the Company's management of credit risk, see the Credit Risk section of this MD&A. 96 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
As of December 31, 2019, the Company's European investment exposure had an amortized cost of $3.0 billion and a fair value of $3.1 billion, or 6% of total invested assets; as of December 31, 2018, both the amortized cost and fair value totaled $2.5 billion. The investment exposure largely relates to corporate entities which are domiciled in or generate a significant portion of their revenue within theUnited Kingdom ,Germany ,Switzerland ,Netherlands , andSweden . As of both December 31, 2019 and 2018, the weighted average credit quality of European investments was A-. Entities domiciled in theUnited Kingdom comprise the Company's largest European exposure; as of December 31, 2019 and 2018, theU.K. exposure totals less than 3% of total invested assets and largely relates to the industrial, sovereign, and financial services sectors and has an average credit rating of A-. The majority of the European investments areU.S. dollar-denominated. For a discussion of foreign currency risks, see the Foreign Currency Exchange Risk section of this MD&A. Commercial & Residential Real Estate The following table presents the Company's exposure to CMBS and RMBS by current credit quality included in the preceding Securities by Type table. Exposure to CMBS and RMBS as of December 31, 2019AAA AA A BBB BB and Below Total Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value CMBS Agency [1] $ 1,878 $ 1,914 $ - $ - $ - $ - $ - $ - $ - $ - $ 1,878 $ 1,914 Bonds 1,013 1,055 561 576 416 438 118 121 - - 2,108 2,190 Interest Only 150 158 67 70 - - 5 5 2 1 224 234 Total CMBS 3,041 3,127 628 646 416 438 123 126 2 1 4,210 4,338 RMBS Agency 2,386 2,441 23 24 - - - - - - 2,409 2,465 Non-Agency 1,215 1,226 300 304 257 257 13 13 1 1 1,786 1,801 Alt-A - - 8 8 4 4 8 9 20 22 40 43 Sub-Prime 9 9 56 57 167 173 164 171 144 150 540 560 Total RMBS 3,610 3,676 387 393 428 434 185 193 165 173 4,775 4,869 Total CMBS & RMBS $ 6,651 $ 6,803 $ 1,015 $ 1,039 $ 844 $ 872 $ 308 $ 319 $ 167 $ 174 $ 8,985 $ 9,207 Exposure to CMBS and RMBS as of December 31, 2018AAA AA A BBB BB and Below Total Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value CMBS Agency [1] $ 1,447 $ 1,427 $ - $ - $ - $ - $ - $ - $ - $ - $ 1,447 $ 1,427 Bonds 983 973 444 436 368 370 50 50 - - 1,845 1,829 Interest Only 204 210 77 79 1 1 5 4 2 2 289 296 Total CMBS 2,634 2,610 521 515 369 371 55 54 2 2 3,581 3,552 RMBS Agency 1,508 1,486 - - - - - - - - 1,508 1,486 Non-Agency 611 610 167 167 111 109 33 33 11 13 933 932 Alt-A - - 10 10 4 5 9 9 20 23 43 47 Sub-Prime 31 32 72 73 211 217 179 186 293 306 786 814 Total RMBS 2,150 2,128 249 250 326 331 221 228 324 342 3,270 3,279 Total CMBS & RMBS $ 4,784 $ 4,738 $ 770 $ 765 $ 695 $ 702 $ 276 $ 282 $ 326 $ 344 $ 6,851 $ 6,831 [1]Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of theU.S. government. The Company also has exposure to commercial mortgage loans. These loans are collateralized by real estate properties that are diversified both geographically throughoutthe United States and by property type. These commercial loans are originated by the Company as high quality whole loans, and the Company may sell participation interests in one or more loans to third parties. A loan participation interest represents a pro-rata share in interest and principal payments generated by the participated loan, and the relationship between the Company as loan originator, lead participant and servicer and the third party as a participant are 97 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
governed by a participation agreement.
As of December 31, 2019, commercial mortgage loans had an amortized cost of $4.2
billion and carrying value of $4.2 billion, with no valuation allowance. As of
December 31, 2018, commercial mortgage loans had an amortized cost of $3.7
billion and carrying value of $3.7 billion with a valuation allowance of $1.
The Company funded $840 of commercial mortgage loans with a weighted average
loan-to-value ("LTV") ratio of 59% and a weighted average yield of 3.6% during
the twelve months ended December 31, 2019. The Company continues to originate
commercial loans within primary markets, such as office, industrial and
multi-family, focusing on loans with strong LTV ratios and high quality property
collateral. There were no mortgage loans held for sale as of December 31, 2019
or December 31, 2018.
Municipal Bonds
The following table presents the Company's exposure to municipal bonds by type
and weighted average credit quality included in the preceding Securities by Type
table.
Available For Sale Investments in Municipal Bonds
December 31, 2019 December 31, 2018
Weighted Weighted
Average Average
Credit Credit
Amortized Cost Fair Value Quality Amortized Cost Fair Value Quality
General Obligation $ 1,157 $ 1,268 AA $ 1,222 $ 1,275 AA
Pre-refunded [1] 936 985 AAA 1,845 1,904 AAA
Revenue
Transportation 1,509 1,675 A+ 1,449 1,537 A+
Health Care 1,360 1,454 A+ 1,270 1,304 AA-
Education 784 853 AA 941 953 AA
Leasing [2] 781 842 AA- 772 799 AA-
Water & Sewer 660 700 AA 816 847 AA
Sales Tax 456 517 AA 507 541 AA
Power 339 374 A 308 328 A+
Housing 114 117 AA+ 33 35 A+
Other 667 713 AA- 809 823 AA-
Total Revenue 6,670 7,245 AA- 6,905 7,167 AA-
Total Municipal $ 8,763 $ 9,498 AA- $ 9,972 $ 10,346 AA
[1] Pre-Refunded bonds are bonds for which an irrevocable trust containing
sufficient
fund the remaining payments of principal and interest.
[2] Leasing revenue bonds are generally the obligations of a financing authority
established by the municipality that leases facilities back to a
municipality. The notes are typically secured by lease payments made by the
municipality that is leasing the facilities financed by the issue. Lease
payments may be subject to annual appropriation by the municipality or the
municipality may be obligated to appropriate general tax revenues to make
lease payments.
As of both December 31, 2019 and December 31, 2018, the largest issuer concentrations were the New York Dormitory Authority, theNew York City Transitional Finance Authority , and theCommonwealth of Massachusetts , which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation and revenue bonds. In total, municipal bonds make up 18% of the fair value of the Company's investment portfolio. In light of changes in corporate income tax rates that began in 2018, the Company has reduced its exposure to municipal bonds through maturities, asset sales and principal repayments. Limited Partnerships and Other Alternative Investments The following table presents the Company's investments in limited partnerships and other alternative investments which include hedge funds, real estate funds and private equity funds. Real estate funds consist of investments primarily in real estate joint ventures and, to a lesser extent, equity funds. Private equity funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential as well as limited exposure to public markets. 98 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Limited Partnerships and Other Alternative Investments - Net Investment Income
Year Ended December 31,
2019 2018 2017
Amount Yield Amount Yield Amount Yield
Hedge funds $ 5 7.2 % $ 4 9.3 % $ 3 23.6 %
Real estate funds 70 17.0 % 58 12.0 % 43 9.1 %
Private equity funds 126 16.6 % 144 22.5 % 122 20.7 %
Other alternative investments [1] 31 8.2 % (1 ) (0.2 )% 6 1.6 %
Total $ 232 14.4 % $ 205 13.2 % $ 174 12.0 %
Investments in Limited Partnerships and Other Alternative Investments
December 31, 2019 December 31, 2018
Amount Percent Amount Percent
Hedge funds $ 94 5.3 % $ 51 3.0 %
Real estate funds 407 23.2 % 499 29.0 %
Private equity and other funds 851 48.4 % 788 45.7 %
Other alternative investments [1] 406 23.1 % 385 22.3 %
Total $ 1,758 100.0 % $ 1,723 100.0 %
[1] Consists of an insurer-owned life insurance policy which is invested in hedge
funds and other investments.
Available-for-sale Securities - Unrealized Loss Aging
The total gross unrealized losses were $55 as of December 31, 2019, and have
decreased $599 from December 31, 2018, primarily due to lower interest rates and
tighter credit spreads. As of December 31, 2019, $50 of the gross unrealized
losses were associated with securities depressed less than 20% of cost or
amortized cost. The remaining $5 of gross unrealized losses were associated with
securities depressed greater than 20%. The securities depressed more than 20%
are primarily related to commercial real estate securities that were purchased
at tighter credit spreads.
As part of the Company's ongoing security monitoring process, the Company has
reviewed its AFS securities in an unrealized loss
position and concluded that these securities are temporarily depressed and are
expected to recover in value as the securities approach maturity or as market
spreads tighten. For these securities in an unrealized loss position where a
credit impairment has not been recorded, the Company's best estimate of expected
future cash flows are sufficient to recover the amortized cost basis of the
security. Furthermore, the Company neither has an intention to sell nor does it
expect to be required to sell these securities. For further information
regarding the Company's impairment analysis, see Other-Than-Temporary
Impairments in the Investment Portfolio Risks and Risk Management section of
this MD&A.
Unrealized Loss Aging for AFS Securities
December 31, 2019 December 31, 2018
Cost or Cost or
Consecutive Months Items Amortized Cost Fair Value Unrealized Loss Items Amortized Cost Fair Value Unrealized Loss
Three months or less 347 $ 2,529 $ 2,514 $ (15 ) 468 $ 3,191 $ 3,153 $ (38 )
Greater than three to six
months 114 712 704 (8 ) 359 2,530 2,487 (43 )
Greater than six to nine
months 50 190 188 (2 ) 347 2,243 2,186 (57 )
Greater than nine to eleven
months 15 24 23 (1 ) 817 5,921 5,688 (233 )
Twelve months or more 345 1,440 1,411 (29 ) 969 5,272 4,989 (283 )
Total 871 $ 4,895 $ 4,840 $ (55 ) 2,960 $ 19,157 $ 18,503 $ (654 )
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unrealized Loss Aging for AFS Securities Continuously Depressed Over 20%
December 31, 2019 December 31, 2018
Cost or Amortized Cost or Amortized
Consecutive Months Items Cost Fair Value Unrealized Loss Items Cost Fair Value Unrealized Loss
Three months or less - $ - $ - $ - 13 $ 59 $ 43 $ (16 )
Greater than three to six
months 5 2 1 (1 ) - - - -
Greater than six to nine
months - - - - 3 3 2 (1 )
Greater than nine to eleven
months - - - - 2 2 1 (1 )
Twelve months or more 32 10 6 (4 ) 36 13 8 (5 )
Total 37 $ 12 $ 7 $ (5 ) 54 $ 77 $ 54 $ (23 )
Other-than-temporary Impairments Recognized in Earnings by Security Type
For the years ended December 31,
2019 2018 2017
Credit Impairments
CMBS - 1 2
Corporate 3 - -
Equity Impairments - - 6
Total $ 3 $ 1 $ 8
Year ended December 31, 2019
For the year ended December 31, 2019, impairments recognized in earnings were
comprised of credit impairments of $3 related to two corporate securities
experiencing issuer-specific financial difficulties.
The Company incorporates its best estimate of future performance using internal
assumptions and judgments that are informed by economic and industry specific
trends, as well as our expectations with respect to security specific
developments.
Non-credit impairments recognized in other comprehensive income were $3 for the
year-ended December 31, 2019.
Future impairments may develop as the result of changes in intent-to-sell
specific securities that are in an unrealized loss position or if modeling
assumptions, such as macroeconomic factors or security specific developments,
change unfavorably from our current modeling assumptions, resulting in lower
cash flow expectations.
Year ended December 31, 2018
For the year ended December 31, 2018, impairments recognized in earnings were
comprised of credit impairments of $1 related to CMBS interest-only securities
and were identified through security specific review of the expected future cash
flows.
CAPITAL RESOURCES AND LIQUIDITY
The following section discusses the overall financial strength of TheHartford and its insurance operations including their ability to generate cash flows from each of their business segments, borrow funds at competitive rates and raise new capital to meet operating and growth needs over the next twelve months. SUMMARY OF CAPITAL RESOURCES AND LIQUIDITY
Capital available to the holding company as of December 31, 2019: • $1.2 billion in fixed maturities, short-term investments, and cash at The
• A senior unsecured five-year revolving credit facility that provides for
borrowing capacity up to $750 of unsecured credit through March 29, 2023. No
borrowings were outstanding and $5 in letters of credit were issued as of
December 31, 2019.
• Borrowings available under a commercial paper program to a maximum of $750.
As of December 31, 2019, there was no commercial paper outstanding.
• An intercompany liquidity agreement that allows for short-term advances of
funds among HFSG Holding Company and certain affiliates of up to $2.0 billion
for liquidity and other general corporate purposes.
2020 expected dividends and other sources of capital: • P&C - The Company's property and casualty insurance subsidiaries have
dividend capacity of $1.6 billion for 2020, with $850 to $900 of net
dividends expected in 2020.
• Group Benefits - HLA has dividend capacity of $534 in 2020 with $300 to $350
of dividends expected in 2020.
• Hartford Funds - HFSG Holding Company expects to receive $100 to $125 in
dividends from Hartford Funds in 2020.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
• Cash tax receipts of approximately $520 to $540, including realization of net
operating losses and AMT credits.
Expected liquidity requirements for the next twelve months as of December 31,
2019:
• $500 maturing debt payment in March of 2020.
• $235 of interest on debt.
• $21 dividends on preferred stock, subject to the discretion of the Board of
Directors.
• $465 of common stockholders' dividends, subject to the discretion of the
Board of Directors and before share repurchases.
Equity repurchase program:
Authorization for equity repurchases of up to $1.0 billion effective through
December 31, 2020. Under the program the company repurchased 3.4 million shares
during the period from January 1, 2019 to December 31, 2019 for $200 with $800
of authorization remaining as of December 31, 2019.
Liquidity Requirements and Sources of Capital
The Hartford Financial Services Group, Inc. ("HFSG Holding Company")
The liquidity requirements of the holding company of The Hartford Financial
Services Group, Inc. have been and will continue to be met by HFSG Holding
Company's fixed maturities; short-term investments and cash; dividends,
principally from its subsidiaries; and tax receipts, including realization of
net operating losses and refunds of prior period AMT credits available to the
HFSG Holding Company. In addition, HFSG Holding Company can meet its liquidity
requirements through the issuance of common stock, debt or other capital
securities and borrowings from its credit facilities, as needed.
During the second half of 2019, approximately $115 of capital was contributed by
HFSG Holding Company to its Lloyd's corporate member and an additional
contribution of approximately $30 is expected to be made in March 2020. It is
expected that the amount of letters of credit under the Lloyd's Letter of Credit
Facility permitted to support Lloyd's capital requirements will be reduced by
the end of 2020, which will require the Company to seek alternative means of
supporting its obligations at Lloyd's, including utilizing HFSG Holding Company
resources.
Debt
On January 15, 2019, The Hartford repaid at maturity the $413 principal amount
of its 6.0% senior notes.
In the Navigators Group acquisition, the Company assumed $265 par value 5.75%
senior notes due on October 15, 2023 with a fair value of $284 as of the
acquisition date.
On August 19, 2019, The Hartford issued $600 of 2.8% senior notes ("2.8% Notes")
due August 19, 2029 and $800 of 3.6% senior notes ("3.6% Notes") due August 19,
2049 for net proceeds of approximately $1.38 billion, after deducting
underwriting discounts and expenses. Under both senior note issuances, interest
is payable semi-annually in arrears on August 19 and February 19, commencing
February 19, 2020.
After receiving proceeds from the issuance of the 2.8% Notes and 3.6% Notes, in
third quarter 2019, The Hartford repaid $265 of 5.75% senior notes due 2023 that
had been assumed in the Navigators Group acquisition and $800 of 5.125% senior
notes due 2022 of The Hartford Financial Services Group, Inc. , and recognized a
loss on extinguishment of debt of $90 before tax. The balance of the proceeds
was used for general corporate purposes.
For additional information on Debt, see Note 13 - Debt of Notes to Consolidated
Financial Statements.
Equity
Under a $1.0 billion share repurchase authorization by the Board of Directors in
February, 2019, during the year ended December 31, 2019, the Company repurchased
3.4 million common shares for $200. During the period from January 1, 2020 to
February 19, 2020, the Company repurchased approximately 1.4 million common
shares for $82 under this authorization. Any repurchase of shares under the
equity repurchase program is dependent on market conditions and other factors.
For further information about equity repurchases, see Part II - Item 5. Market
for The Hartford's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
In 2018, the Company issued preferred stock and used the net proceeds from the
offering to help fund repayment of the Company's 6.000% Senior Notes due January
15, 2019.
For further information regarding Preferred Stock, see Note 15 - Equity of Notes
to Consolidated Financial Statements.
Dividends
The Hartford's Board of Directors declared the following quarterly dividends
since October 1, 2019:
Common Stock Dividends
Declared Record Payable Amount per share October 23, 2019 December 2, 2019 January 2, 2020 $
0.30
February 3, 2020 March 2, 2020 April 2, 2020 $ 0.325
Preferred Stock Dividends
Declared Record Payable Amount per share
October 23, 2019 February 1, 2020 February 18, 2020 $ 375.00
February 20, 2020 May 1, 2020 May 15, 2020 $ 375.00
There are no current restrictions on HFSG Holding Company's ability to pay
dividends to its stockholders.
For a discussion of restrictions on dividends to HFSG Holding Company from its
insurance subsidiaries, see "Dividends from Insurance Subsidiaries" below. For a
discussion of potential
101
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
limitations on the HFSG Holding Company's ability to pay dividends, see Part I, Item 1A, - Risk Factors for the risk factor "Our ability to declare and pay dividends is subject to limitations". Pension Plans and Other Postretirement Benefits While the Company has significant discretion in making voluntary contributions to the U. S. qualified defined benefit pension plan, minimum contributions are mandated in certain circumstances pursuant to the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006, the Worker, Retiree, and Employer Recovery Act of 2008, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21) and Internal Revenue Code regulations. The Company made contributions to the U. S. qualified defined benefit pension plan of approximately $70, $101 and $280 in 2019, 2018 and 2017, respectively. No contributions were made to the other postretirement plans in 2019, 2018 and 2017. The Company's 2019, 2018 and 2017 required minimum funding contributions were immaterial. The Company does not have a 2020 required minimum funding contribution for theU.S. qualified defined benefit pension plan and the funding requirements for all pension plans are expected to be immaterial. The Company has not determined whether, and to what extent, contributions may be made to the U. S. qualified defined benefit pension plan in 2020. The Company will monitor the funded status of theU.S. qualified defined benefit pension plan during 2020 to make this determination. Beginning in 2017, the Company began to use a full yield-curve approach in the estimation of the interest cost component of net periodic benefit costs for its qualified and non-qualified pension plans and the postretirement benefit plan. The full yield curve approach applies the specific spot rates along the yield curve that are used in its determination of the projected benefit obligation at the beginning of the year. The change was made to provide a better estimate of the interest cost component of net periodic benefit cost by better aligning projected benefit cash flows with corresponding spot rates on the yield curve rather than using a single weighted average discount rate derived from the yield curve as had been done historically. The Company accounted for this change as a change in estimate, and accordingly, recognized the effect prospectively beginning in 2017. For further discussion on full yield curve approach, see Part 2, Item 7, MD&A - Pension Plans and Other Postretirement in TheHartford's 2018 Form 10-K Annual Report. On June 30, 2017, the Company purchased a group annuity contract to transfer approximately $1.6 billion of the Company's outstanding pension benefit obligations related to certainU.S. retirees, terminated vested participants, and beneficiaries. As a result of this transaction, in the second quarter of 2017, the Company recognized a pre-tax settlement charge of $750 ($488 net of tax) and a reduction to stockholders' equity of $144. In connection with this transaction, the Company made a contribution of $280 in September 2017 to theU.S. qualified pension plan in order to maintain the plan's pre-transaction funded status. Dividends from Subsidiaries Dividends to HFSG Holding Company from its insurance subsidiaries are restricted by insurance regulation. Upon the acquisition of Navigators Group, the Company's principal insurance subsidiaries are domiciled inthe United States , theUnited Kingdom andBelgium . The payment of dividends byConnecticut -domiciled insurers is limited under the insurance holding company laws ofConnecticut . These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer's statutory policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting principles. In addition, if any dividend of aConnecticut -domiciled insurer exceeds the insurer's earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. Property casualty insurers domiciled inNew York , includingNavigators Insurance Company ("NIC") andNavigators Specialty Insurance Company ("NSIC"), generally may not, without notice to and approval by the state insurance commissioner, pay dividends out of earned surplus in any twelvemonth period that exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the most recent financial statement on file, or (ii) 100% of its adjusted net investment income, as defined, for the same twelve month period. As part of theNew York state insurance commissioner's approval of the Navigators Group acquisition, and as is common practice, any dividend from NIC and NSIC before May 2021 will require prior approval from the state insurance commissioner. The insurance holding company laws of the other jurisdictions in which TheHartford's insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances more restrictive) limitations on the payment of dividends. In addition to statutory limitations on paying dividends, the Company also takes other items into consideration when determining dividends from subsidiaries. These considerations include, but are not limited to, expected earnings and capitalization of the subsidiaries, regulatory capital requirements and liquidity requirements of the individual operating company. Corporate members of Lloyd's Syndicates may pay dividends to its parent to the extent of available profits that have been distributed from the syndicate in excess of the Funds at Lloyd's ("FAL") capital requirement. The FAL is determined based on the syndicate's solvency capital requirement under the E.U.'s Solvency II capital adequacy model, plus a Lloyd's specific economic capital assessment. Insurers domiciled in theUnited Kingdom may pay dividends to its parent out of its statutory profits subject to restrictions imposed under U.K. Company law and European Insurance regulation (Solvency II).Belgium domiciled insurers may only pay dividends if, at the end of its previous fiscal year, the total amount of its assets, as reduced by its provisions and debts, are in excess of certain minimum capital thresholds calculated under Belgian law. 102 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
In 2019, HFSG Holding Company received $300 of dividends from HLA, $116 from Hartford Funds and $3 from a run-off HFSG subsidiary. In addition, HFSG Holding Company received $50 of ordinary P&C dividends that were subsequently contributed to a run-off P&C subsidiary. Excluding the dividends that were subsequently contributed to a P&C subsidiary, there were no net dividends paid by P&C subsidiaries to HFSG Holding Company in 2019. Other Sources of Capital for the HFSG Holding Company TheHartford endeavors to maintain a capital structure that provides financial and operational flexibility to its insurance subsidiaries, ratings that support its competitive position in the financial services marketplace (see the "Ratings" section below for further discussion), and stockholder returns. As a result, the Company may from time to time raise capital from the issuance of debt, common equity, preferred stock, equity-related debt or other capital securities and is continuously evaluating strategic opportunities. The issuance of debt, common equity, equity-related debt or other capital securities could result in the dilution of stockholder interests or reduced net income due to additional interest expense. Shelf Registrations TheHartford filed an automatic shelf registration statement with the Securities and Exchange Commission ("theSEC ") on May 17, 2019 that permits it to offer and sell debt and equity securities during the three-year life of the registration statement. For further information regarding Shelf Registrations, see Note 13 - Debt of Notes to Consolidated Financial Statements. Revolving Credit Facilities The Company has a senior unsecured five-year revolving credit facility (the "Credit Facility") that provides up to $750 million of unsecured credit through March 29, 2023. As of December 31, 2019, no borrowings were outstanding and $5 in letters of credit were issued under the Credit Facility and the Company was in compliance with all financial covenants. Commercial Paper As of December 31, 2019, TheHartford's maximum borrowings available under its commercial paper program is $750 and there was no commercial paper outstanding. Intercompany Liquidity Agreements The Company has $2.0 billion available under an intercompany liquidity agreement that allows for short-term advances of funds among HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. The Connecticut Department of Insurance ("CTDOI") granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including HFSG Holding Company, as admitted assets for statutory accounting purposes. As of December 31, 2019, there were no amounts outstanding at HFSG Holding Company. Collateralized Advances withFederal Home Loan Bank of Boston The Company's subsidiaries,Hartford Fire Insurance Company ("Hartford Fire") and HLA, are members of theFederal Home Loan Bank of Boston ("FHLBB"). Membership allows these subsidiaries access to collateralized advances, which may be short- or long-term with fixed or variable rates. Advances may be used to support general corporate purposes, which would be presented as short- or long-term debt, or to earn incremental investment income, which would be presented in other liabilities consistent with other collateralized financing transactions. As of December 31, 2019, there were no advances outstanding. For further information regarding the Company's ability to access collateralized advances withFederal Home Loan Bank of Boston , see Note 13 - Debt of Notes to Consolidated Financial Statements. Lloyd's Letter of Credit Facilities As a result of the acquisition of Navigators Group, TheHartford has two letter of credit facility agreements: the Club Facility and the Bilateral Facility, which are used to provide a portion of the capital requirements at Lloyd's. As of December 31, 2019, uncollateralized letters of credit with an aggregate face amount of $165 and £60 million were outstanding under the Club Facility and £18 million was outstanding under the Bilateral Facility. As of December 31, 2019, the Bilateral Facility has unused capacity of $1 for issuance of additional letters of credit. Among other covenants, the Club Facility and Bilateral Facility contain financial covenants regarding tangible net worth and FAL. As of December 31, 2019, Navigators Group was in compliance with all financial covenants. In November of 2019, the Company issued £11 million of letters of credit under the Bilateral Facility. Derivative Commitments Certain of the Company's derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical agencies, of the individual legal entity that entered into the derivative agreement. If the legal entity's financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances enable the counterparties to terminate the agreements and demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity's ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of December 31, 2019 was $81. For this $81, the legal entities have posted collateral of $77, in the normal course of business. Based on derivative market values as of December 31, 2019, a downgrade of one level below the current financial strength ratings by either Moody's or S&P would not require additional assets to be posted as collateral. Based on derivative market values as of December 31, 2019, a downgrade of two levels below the current financial strength ratings by either Moody's or S&P would require an additional $5 of assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the additional collateral that we would post, if required, 103 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
would be primarily in the form ofU.S. Treasury bills,U.S. Treasury notes and government agency securities. As of December 31, 2019, no derivative positions would be subject to immediate termination in the event of a downgrade of one level below the current financial strength ratings. This could change as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. Insurance Operations While subject to variability period to period, underwriting and investment cash flows continue to be within historical norms and, therefore, the Company's insurance operations' current liquidity position is considered to be sufficient to meet anticipated demands over the next twelve months. For a discussion and tabular presentation of the Company's current contractual obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual Obligations within the Capital Resources and Liquidity section of the MD&A. The principal sources of operating funds are premiums, fees earned from assets under management and investment income, while investing cash flows primarily originate from maturities and sales of invested assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and other underwriting and insurance operating costs, to pay taxes, to purchase new investments and to make dividend payments to the HFSG Holding Company. The Company's insurance operations consist of property and casualty insurance products (collectively referred to as "Property & Casualty Operations") and Group Benefits. The Company's insurance operations hold fixed maturity securities including a significant short-term investment position (securities with maturities of one year or less at the time of purchase) to meet liquidity needs. Liquidity requirements that are unable to be funded by the Company's insurance operations' short-term investments would be satisfied with current operating funds, including premiums or investing cash flows, which includes proceeds received through the sale of invested assets. A sale of invested assets could result in significant realized capital losses. The following tables represent the fixed maturity holdings, including the aforementioned cash and short-term investments available to meet liquidity needs, for each of the Company's insurance operations. Property & Casualty As of December 31, 2019 Fixed maturities $ 31,302 Short-term investments 1,476 Cash 163 Less: Derivative collateral 68 Total $ 32,873 Group Benefits Operations As of December 31, 2019 Fixed maturities $ 10,313 Short-term investments 361 Cash 13 Less: Derivative collateral 25 Total $ 10,662 Off-balance Sheet Arrangements and Aggregate Contractual Obligations The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company, except for unfunded commitments to purchase investments in limited partnerships and other alternative investments, private placements, and mortgage loans as disclosed in Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements. 104 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Aggregate Contractual Obligations as of December 31, 2019
Payments due by period
Less than 1-3 3-5 More than
Total 1 year years years 5 years
Property and casualty obligations [1] $ 28,649 $ 6,953 $ 7,309 $ 3,441 $ 10,946
Group life and disability obligations
[2] 10,695 1,141 3,479 1,661 4,414
Operating lease obligations [3] 285 53 85 64 83
Long-term debt obligations [4] 10,497 736 444 444 8,873
Purchase obligations [5] 2,392 1,837 326 198 31
Other liabilities reflected on the
balance sheet [6] 617 617 - - -
Total $ 53,135 $ 11,337 $ 11,643 $ 5,808 $ 24,347
[1] The following points are significant to understanding the cash flows
estimated for obligations (gross of reinsurance) under property and casualty
contracts:
• Reserves for Property & Casualty unpaid losses and loss adjustment expenses
include IBNR and case reserves. While payments due on claim reserves are
considered contractual obligations because they relate to insurance policies
issued by the Company, the ultimate amount to be paid to settle both case
reserves and IBNR is an estimate, subject to significant uncertainty. The
actual amount to be paid is not finally determined until the Company reaches
a settlement with the claimant. Final claim settlements may vary
significantly from the present estimates, particularly since many claims will
not be settled until well into the future.
• In estimating the timing of future payments by year, the Company has assumed
that its historical payment patterns will continue. However, the actual
timing of future payments could vary materially from these estimates due to,
among other things, changes in claim reporting and payment patterns and large
unanticipated settlements. In particular, there is significant uncertainty
over the claim payment patterns of asbestos and environmental claims. In
addition, the table does not include future cash flows related to the receipt
of premiums that may be used, in part, to fund loss payments.
• Under
losses and loss adjustment expenses in cases where the payment pattern and
ultimate loss costs are fixed and determinable on an individual claim basis.
For the Company, these include claim settlements with permanently disabled
claimants. As of December 31, 2019, the total property and casualty reserves
in the above table are gross of a reserve discount of $388.
• Amounts shown do not consider $5.3 billion of reinsurance and other
recoverables the Company expects to collect related to property and casualty
obligations.
[2] Estimated group life and disability obligations are based on assumptions
comparable with the Company's historical experience, modified for recent
observed trends. Due to the significance of the assumptions used, the amounts
presented could materially differ from actual results. As of December 31,
2019, the total group life and disability obligations in the above table are
gross of a reserve discount of $1.4 billion.
[3] Includes undiscounted lease payments on operating lease agreements, including
leases that have not yet commenced. See Note 20 - Leases of Notes to
Consolidated Financial Statements for additional discussion on lease
commitments.
[4] Includes contractual principal and interest payments. See Note 13 - Debt of
Notes to Consolidated Financial Statements for additional discussion of
long-term debt obligations.
[5] Includes $1.3 billion in commitments to purchase investments including
approximately $852 of limited partnership and other alternative investments,
$191 of private debt and equity securities, and $215 of mortgage loans. Of
the $1.3 billion in commitments to purchase investments, $130 are related to
mortgage loan commitments which the Company can cancel unconditionally.
Outstanding commitments under these limited partnerships and mortgage loans
are included in payments due in less than 1 year since the timing of funding
these commitments cannot be reliably estimated. The remaining commitments to
purchase investments primarily represent payables for securities purchased
which are reflected on the Company's Consolidated Balance Sheets. Also
included in purchase obligations is $581 relating to contractual commitments
to purchase various goods and services such as maintenance, human resources,
and information technology in the normal course of business. Purchase
obligations exclude contracts that are cancelable without penalty or
contracts that do not specify minimum levels of goods or services to be
purchased.
[6] Includes cash collateral of $16 which the Company has accepted in connection
with the Company's derivative instruments. Since the timing of the return of
the collateral is uncertain, the return of the collateral has been included
in the payments due in less than 1 year.
Capitalization
Capital Structure
December 31, 2019 December 31, 2018 Change
Short-term debt (includes current maturities of
long-term debt) $ 500 $ 413 21 %
Long-term debt 4,348 4,265 2 %
Total debt 4,848 4,678 4 %
Common stockholders' equity, excluding AOCI, net
of tax 15,884 14,346 11 %
Preferred stock 334 334 - %
AOCI, net of tax 52 (1,579 ) (103 %)
Total stockholders' equity $ 16,270 $ 13,101 24 %
Total capitalization $ 21,118 $ 17,779 19 %
Debt to stockholders' equity 30 % 36 %
Debt to capitalization 23 % 26 %
Total capitalization increased $3,339, or 19%, as of December 31, 2019 compared with December 31, 2018 primarily due an increase in AOCI and net income in excess of stockholders dividends.
For additional information on AOCI, net of tax, including unrealized capital
gains from securities, see Note 17 - Changes in and Reclassifications From
Accumulated Other Comprehensive Income (Loss), and Note 6 - Investments. For
additional
105
--------------------------------------------------------------------------------Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
information on debt, see Note 13 - Debt of Notes to Consolidated Financial Statements. Cash Flow [1]
2019 2018 2017
Net cash provided by operating activities $ 3,489 $ 2,843 $ 2,186 Net cash used for investing activities $ (2,148 ) $ (1,962 ) $ (1,442 ) Net cash used for financing activities $ (1,191 ) $ (1,467 ) $ (979 ) Cash and restricted cash- end of year $ 262 $ 121 $ 180
[1] Cash activities in 2018 and 2017 include cash flows from Discontinued
Operations; see Note 21 - Business Dispositions and Discontinued Operations of
Notes to Consolidated Financial Statements for information on cash flows from
Discontinued Operations.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Net cash provided by operating activities increased in 2019 as compared to the
prior year period, primarily due to an increase in premiums received in excess
of losses and expenses paid, including the effect of the Navigators Group
acquisition, and an AMT refund of $421, partially offset by the fact that the
2018 period included operating cash flows of the life and annuity business sold
in 2018.
Net cash used for investing activities increased primarily due to a change from
net proceeds to net payments for fixed maturities in the 2019 period, as well as
cash paid for the acquisition of Navigators Group of $1.9 billion (net of cash
acquired), partially offset by net proceeds from short term investments, equity
securities at fair value and derivatives in 2019 as opposed to net payments in
the 2018 period. Further contributing to the increase in net cash used from
investing activities were proceeds in 2018 from the sale of the life and annuity
business.
Net cash used for financing activities decreased from the 2018 period primarily
due to a decrease in cash used for net securities loaned or sold under
agreements to repurchase and an increase in proceeds from issuance of debt,
partially offset by an increase in repayments of debt in 2019, an increase in
treasury stock acquired in 2019, and a decrease in net payments for deposits,
transfers and withdrawals for investments and universal life products due to the
sale of the life and annuity business in 2018.
Operating cash flows for the year ended December 31, 2019 have been adequate to
meet liquidity requirements.
Equity Markets
For a discussion of the potential impact of the equity markets on capital and
liquidity, see the Financial Risk on Statutory Capital and Liquidity Risk
section in this MD&A.
Ratings
Ratings are an important factor in establishing a competitive position in the
insurance marketplace and impact the Company's ability to access financing and
its cost of borrowing. There can be no assurance that the Company's ratings will
continue for any
given period of time, or that they will not be changed. In the event the
Company's ratings are downgraded, the Company's competitive position, ability to
access financing, and its cost of borrowing, may be adversely impacted.
On April 15, 2019, Standards & Poor's ("S&P") raised its issuer credit and
financial strength ratings on HLA to A+ from A. The upgrade of HLA's ratings
reflects S&P's improved view of the Company's group benefits business, which
they consider core to the Company, under their group rating methodology
criteria.
On August 30, 2019, AM Best raised its financial strength rating on Navigators
Insurance Company ("NIC") to A+ from A. The upgrade reflects the support
provided by The Hartford , as well as the importance it will play within the
overall Hartford organization, following its acquisition in May 2019.
Insurance Financial Strength Ratings as of February 19, 2020
A.M. Best Standard & Poor's Moody's
Hartford Fire Insurance Company A+ A+
A1
Hartford Life and Accident Insurance Company A A+
A2
Navigators Insurance Company A+ A Not Rated Other Ratings:The Hartford Financial Services Group, Inc. : Senior debt a- BBB+ Baa1 Commercial paper AMB-1 A-2 P-2 These ratings are not a recommendation to buy or hold any of TheHartford's securities and they may be revised or revoked at any time at the sole discretion of the rating organization. The agencies consider many factors in determining the final rating of an insurance company. One consideration is the relative level of statutory capital and surplus (referred to collectively as "statutory capital") necessary to support the business written and is reported in accordance with accounting practices prescribed by the applicable state insurance department. See Part I, Item 1A. Risk Factors - "Downgrades in our financial strength or credit ratings may make our products less attractive, increase our cost of capital and inhibit our ability to refinance our debt." 106 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Statutory Capital
U.S. Statutory Capital Rollforward for the Company's Insurance Subsidiaries
Property and Casualty
Insurance Subsidiaries [1] Group Benefits Insurance
[2] Subsidiary Total
U.S. statutory capital at
January 1, 2019 $ 8,440 $ 2,407 $ 10,847
Statutory income 1,391 513 1,904
Contributions from (dividends
to) parent 46 (300 ) (254 )
Other items 331 24 355
Net change to U.S. statutory
capital 1,768 237 2,005
U.S. statutory capital at
December 31, 2019 $ 10,208 $ 2,644 $ 12,852
[1] The statutory capital for property and casualty insurance subsidiaries in
this table does not include the value of an intercompany note owed by
the dividends that were subsequently contributed to a P&C subsidiary, there
were no net dividends paid by P&C subsidiaries to HFSG Holding Company in
2019.
[2] Excludes insurance operations in the
business was not acquired until May 23, 2019, this table includes statutory
capital and surplus of Navigators
January 1, 2019 and December 31, 2019.
Stat to GAAP Differences Significant differences betweenU.S. GAAP stockholders' equity and aggregate statutory capital prepared in accordance withU.S. STAT include the following: •U.S. STAT excludes equity of non-insurance and foreign insurance subsidiaries
not held by
• Costs incurred by the Company to acquire insurance policies are deferred
under
• Temporary differences between the book and tax basis of an asset or liability
which are recorded as deferred tax assets are evaluated for recoverability
under
tests under
• The assumptions used in the determination of Group Benefits reserves (i.e.
for Group Benefits contracts) are prescribed under
assumptions used under
• The difference between the amortized cost and fair value of fixed maturity
and other investments, net of tax, is recorded as an increase or decrease to
the carrying value of the related asset and to equity under
securities and certain lower rated bonds required by the NAIC to be recorded
at the lower of amortized cost or fair value.
•
for realized and unrealized losses due to default and equity risks associated
with certain invested assets (the Asset Valuation Reserve), while
does not. Also, for those realized gains and losses caused by changes in
interest rates,
the gains and losses, caused by changes in interest rates, into income over
the original life to maturity of the asset sold (the Interest Maintenance
Reserve) while
•
recoverability on an annual basis (or more frequently, as necessary) for
GAAP, while under
10 years and the amount of goodwill admitted as an asset is limited.
In addition, certain assets, including a portion of premiums receivable and fixed assets, are non-admitted (recorded at zero value and charged against surplus) underU.S. STAT.U.S. GAAP generally evaluates assets based on their recoverability. Risk-Based Capital The Company'sU.S. insurance companies' states of domicile impose RBC requirements. The requirements provide a means of measuring the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations based on its size and risk profile. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. All of the Company'sU.S. operating insurance subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations. Similar to the RBC ratios that are employed byU.S. insurance regulators, regulatory authorities in the international jurisdictions in which the Company operates generally establish minimum solvency requirements for insurance companies. All of the Company's international insurance subsidiaries have capital levels in excess of the minimum levels required by the applicable regulatory authorities. Sensitivity In any particular year, statutory capital amounts and RBC ratios may increase or decrease depending upon a variety of factors. The amount of change in the statutory capital or RBC ratios can vary based on individual factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. For further discussion on these factors, see MD&A - Enterprise Risk Management, Financial Risk on Statutory Capital. Statutory capital at the insurance subsidiaries has been 107 --------------------------------------------------------------------------------
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
maintained at capital levels commensurate with the Company's desired ratings from rating agencies. Statutory capital generated by the insurance subsidiaries in excess of the capital level required to meet desired ratings is available for use by the enterprise or for corporate purposes. The amount of statutory capital can increase or decrease depending on a number of factors affecting insurance results including, among other factors, the level of catastrophe claims incurred, the amount of reserve development, the effect of changes in interest rates on investment income and the discounting of loss reserves, and the effect of realized gains and losses on investments. Contingencies Legal Proceedings For a discussion regarding contingencies related to TheHartford's legal proceedings, please see the information contained under "Litigation" and "Asbestos and Environmental Claims," in Note 14 - Commitments and Contingencies of the Notes to Consolidated Financial Statements and Part I, Item 3 Legal Proceedings, which are incorporated herein by reference. Legislative and Regulatory Developments Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act") It is unclear whether the Administration,Congress or the courts will seek to reverse, amend or alter the ongoing operation of the Affordable Care Act ("ACA"). If such actions were to occur, they may have an impact on various aspects of our business, including our insurance businesses. It is unclear what an amended ACA would entail, and to what extent there may be a transition period for the phase out of the ACA. The impact to TheHartford as an employer would be consistent with other large employers. TheHartford's core business does not involve the issuance of health insurance, and we have not observed any material impacts on the Company's workers' compensation business or group benefits business from the enactment of the ACA. We will continue to monitor the impact of the ACA and any reforms on consumer, broker and medical provider behavior for leading indicators of changes in medical costs or loss payments primarily on the Company's workers' compensation and disability liabilities. Tax Reform At the end of 2017,Congress passed and the president signed, the Tax Cuts and Jobs Act of 2017 ("Tax Reform"), which enacted significant reforms to theU.S. tax code. The major areas of interest to the company included the reduction of the corporate tax rate from 35% to 21% and the repeal of the corporate alternative minimum tax (AMT) and the refunding of AMT credits. TheU.S. Treasury andIRS continue to develop guidance implementing Tax Reform, andCongress may consider additional technical corrections to the law. Tax proposals and regulatory initiatives which have been or are being considered byCongress and/or theU.S. Treasury Department could have a material effect on the Company and its insurance businesses. The nature and timing of any Congressional or regulatory action with respect to any such efforts is unclear. For additional information on risks to the Company related to Tax Reform, please see the risk factor entitled "Changes in federal or state tax laws could adversely affect our business, financial condition, results of operations and liquidity" under "Risk Factors" in Part I.
Guaranty Fund and Other Insurance-related Assessments For a discussion regarding Guaranty Fund and Other Insurance-related Assessments, see Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 - Basis of Presentation and
Significant Accounting Policies of Notes to Consolidated Financial Statements.
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