HARTFORD FINANCIAL SERVICES GROUP (THE), INC. (Dollar amounts in millions except for per share data, unless otherwise stated)
The
INDEX
Description Page
Key Performance Measures and Ratios 52
The Hartford's Operations 57 Consolidated Results of Operations 62 Investment Results 65 Critical Accounting Estimates 66 Commercial Lines 73 Personal Lines 77
Property & Casualty Other Operations 82
Group Benefits 83 Hartford Funds 85 Corporate 87 Enterprise Risk Management 88 Capital Resources and Liquidity 100 Impact of New Accounting Standards 107
KEY PERFORMANCE MEASURES AND RATIOS
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Part I - Item 2. 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 exchange-traded
products ("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 accumulated other comprehensive income
("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 Hartford
believes, however, that some realized capital gains and losses are integrally
related to our insurance operations, so core earnings includes net realized
gains and losses such as net periodic settlements on credit derivatives.
These net realized gains and losses are directly related to an offsetting
item included in the income statement such as net investment income.
• 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.
• Change in valuation allowance on deferred taxes related to non-core
components of pre-tax income - These changes in valuation allowances are
excluded from core earnings because they relate to non-core components of
pre-tax income, such as tax attributes like capital loss carryforwards.
• 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) and net income (loss) available to common stockholders are the
most directly comparable
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Reconciliation of Net Income to Core Earnings
Three Months Ended March 31,
2020 2019
Net income $ 273 $ 630
Preferred stock dividends 5 5
Net income available to common stockholders 268 625
Adjustments to reconcile net income available to common stockholders to core earnings: Net realized capital losses (gains) excluded from core earnings, before tax
232 (160 )
Integration and transaction costs associated with acquired business, before tax
13 10
Change in deferred gain on retroactive reinsurance, before
tax 29 -
Income tax expense (benefit) (57 ) 32
Core earnings $ 485 $ 507
Core Earnings Margin- The Hartford uses the non-GAAP measure core earnings
margin to evaluate, and believes it is an important measure of, the Group
Benefits segment's operating performance. Core earnings margin is calculated by
dividing core earnings by revenues, excluding buyouts and realized gains
(losses). Net income margin, calculated by dividing net income by revenues, is
the most directly comparable U.S. GAAP measure. The Company believes that core
earnings margin provides investors with a valuable measure of the performance of
Group Benefits because it reveals trends in the business that may be obscured by
the effect of buyouts and realized gains (losses) 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 margin to core
earnings margin is set forth in the Results of Operations section within MD&A -
Group Benefits.
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. For U.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 Service office of
Verisk . For international events, the Company's approach is similar, informed,
in part, by how Lloyd'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 return on equity fluctuates from year to year
based on changes in the expected investment yield over the claim settlement
period, the 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.
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, excluding those related to buyout premiums, 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 Condensed 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 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 comparableU.S. GAAP measure. 55
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 Results of Operations section within MD&A - Commercial Lines
and Personal Lines.
Underwriting Gain (Loss)- The
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income to Underwriting Gain (Loss)
For the three months ended
March 31,
2020 2019
Commercial Lines
Net income $ 121 $ 363 Adjustments to reconcile net income to underwriting gain (loss): Net servicing income
(1 ) 1
Net investment income (277 ) (259 )
Net realized capital losses (gains) 143 (115 )
Other expense 6 1
Loss on reinsurance transaction - -
Income tax expense 28 79
Underwriting gain $ 20 $ 70
Personal Lines
Net income (loss) $ 98 $ 96 Adjustments to reconcile net income to underwriting gain (loss): Net servicing income
(2 ) (3 )
Net investment income (41 ) (42 )
Net realized capital losses (gains) 23 (19 )
Other expense (income) - (1 )
Income tax expense 25 23
Underwriting gain $ 103 $ 54
P&C Other Ops
Net Income $ 5 $ 23 Adjustments to reconcile net income to underwriting gain (loss): Net investment income
(16 ) (22 )
Net realized capital losses (gains) 7 (9 )
Income tax expense 1 5
Underwriting loss (3 ) (3 )
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
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 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 and 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.
Expected impact of COVID-19 on our financial condition, results of operations
and liquidity
Expected impact to revenues
Earned premiums
The novel strain of coronavirus, specifically identified as the Coronavirus
Disease 2019 ("COVID-19") pandemic, has caused significant disruption to the
economy of the U.S. and other countries in which we operate. Due to government
restrictions that have temporarily prevented many businesses from offering goods
and services to their customers or that have otherwise severely reduced business
activity, many of our customers, especially small businesses, have had to
shutter their operations or have found they are unable to meet cash flow needs,
causing some to lay off workers. As one of the largest providers of small
business insurance in the U.S. , in 2020, we expect our written premium to
decline in our small commercial business unit and in our Commercial Lines
segment in total, as a result of the COVID-19 pandemic. In addition to an
expected decline in small commercial earned premium, other business lines in
Commercial Lines will likely be negatively affected due to business closures and
reduced consumer demand as consumers have less
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
disposable income to spend on the products and services that our commercial lines policyholders sell. Workers' compensation premium is expected to continue to decline, partly due to declining payrolls as a result of the economic effects of COVID-19. We expect the impact of the COVID-19 pandemic on Personal Lines written premium to be less than the effect in Commercial Lines. In Personal Lines, we expect reduced consumer demand for Personal Lines insurance products as people typically buy fewer new vehicles and homes and do fewer home improvements in an economic downturn. In addition, as further discussed below, TheHartford offered a 15 percent refund on policyholders' April and May personal auto insurance premiums which will reduce written and earned premiums by approximately$52 in second quarter 2020. Because of the economic stress caused by COVID-19, we also expect a higher amount of uncollectible premiums receivable. As a result we increased our allowance for credit losses ("ACL") on premiums receivable to reflect our higher expectation of credit losses. In Group Benefits, we expect fully insured ongoing premium will decline modestly due to the economic downturn causing lower sales of new policies, declining payrolls reducing premiums on existing accounts and the potential that some employers may cancel coverage. Fee revenues Since our Hartford Funds segment revenues are based on average daily assets under management, the significant decline in equity markets has reduced assets under management and, therefore, we expect net income from our Hartford Funds segment to decrease in 2020 compared to 2019. Net investment income and realized capital gains (losses) We expect lower net investment income in 2020 than in 2019. In an effort to stimulate the economy, central banks have reduced benchmark interest rates to near zero, impacting our yields on floating rate securities and reinvestment rates. The Company has been reinvesting receipts of interest and proceeds from maturing fixed maturity investments in liquid, short-term investments sinceMarch 1, 2020 . When the Company resumes investing in fixed maturities, lower interest rates could result in lower investment yields though, since the economic downturn began, credit spreads have widened and, if that persists, wider credit spreads would increase yields on reinvested funds. Income or losses on investments in limited partnerships and other alternative investments are recognized on a lag as results from private equity investments and other funds are generally reported on a three-month delay. Accordingly, our limited partnership and alternative investments are likely to report losses due to lower valuations in second quarter 2020 due to the decline in equity markets in the first quarter. A prolonged period of lower interest rates could depress the Company's net investment income such that to earn the same level of return on equity we may have to charge higher premiums for the insurance products we sell unless loss costs similarly lessen. Increasing premiums may be challenging during an economic downturn particularly as the insurance industry competes to retain a smaller industry premium base. We recognized$231 of net realized capital losses before tax in first quarter 2020 primarily driven by a total of$311 before tax of unrealized mark-to-market losses on equity securities held and realized losses on equity securities sold, net of realized gains on equity derivative hedges. If equity markets decline further, we would incur more net realized capital losses in future periods. In addition, if it takes a prolonged period for the economy to recover or if the impacts of the recession are deeper than anticipated, we could experience an increase in invested asset impairments, particularly with highly leveraged companies and issuers in the energy, commercial real estate, and travel and leisure sectors, resulting in further net realized capital losses. Expected impact to incurred losses and expenses Benefits, losses and loss adjustment expenses With COVID-19, we expect higher loss costs in some lines and lower loss costs in others. Within our Group Benefits segment, COVID-19 will likely increase the number of death claims we incur on our group life business and result in increased short-term disability claims. Within Property & Casualty, we may incur loss costs under workers' compensation policies if it is determined that workers were exposed to COVID-19 out of and in the course of their employment, such as in the health care industry. Conversely, as noted above, lower payrolls will reduce workers' compensation premium which will also reduce exposure to loss. Although, in general, property insurance policies require direct physical loss or damage to property and many such policies contain exclusions for virus-related losses, given the significant business disruptions that have occurred, the Company is experiencing increased property claims, which may result in increased loss costs, litigation activity and legal expenses to the Company. The Company could also experience loss costs due to COVID-19 under general liability policies if claimants can successfully assert that insureds were negligent from protecting employees, customers and others from exposure. Conversely, some lines of business within Property & Casualty may see a reduction in loss costs such as in personal and commercial auto due to the significant reduction in miles driven during the time that governments have closed businesses and restricted travel. Insurance operating costs and other expenses We expect a decline in insurance operating costs and other expenses due to lower acquisition-related and other variable costs associated with lower earned premium volumes. P&C combined ratios and Group Benefits margin In 2020, our combined ratio and underlying combined ratio for Commercial Lines and Personal Lines and our net income margin and core earnings margin for Group Benefits may be higher or lower than the outlook ranges we provided in our 2019 Form 10-K as a result of the impacts of the COVID-19 pandemic. As described above, while earned premiums are expected to decline and we expect to continue to incur losses on COVID-19 claims, we may experience lower incurred losses and benefits in a number of lines due to declining exposures. Expected impact to common stockholders' equity Apart from the impact of COVID-19 on net income, we could also experience a reduction in AOCI within common stockholders' equity. Due to a widening of credit spreads since the economic 59
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
downturn began, our portfolio of fixed maturities available for sale decreased in fair value by$1.9 billion fromDecember 31, 2019 toMarch 31, 2020 . If credit spreads widen further or if interest rates increase from the level they were at as ofMarch 31, 2020 , we would recognize an additional decline in the fair value of fixed maturities, AFS in future periods through a reduction of AOCI within common stockholders' equity. During first quarter 2020, the Company repurchased 2.7 million common shares for$150 under a$1.0 billion share repurchase authorization by the Board of Directors approved in February, 2019. Any repurchase of shares under the remaining equity repurchase authorization of$650 is dependent on market conditions and other factors including the extent to which COVID-19 impacts our business, results of operations, financial condition and liquidity. Other potential impacts of COVID-19 As a result of the effects of COVID-19 on our economy, we evaluated our goodwill and other intangible assets for impairment as ofMarch 31, 2020 and determined that no impairments are necessary. The estimated fair values of reporting units with goodwill and of certain intangible assets are based on expected cash flows assuming the economy does not begin to revive until the latter half of 2020. Also, as discussed in the Notes to Condensed Consolidated Financial Statements, during first quarter 2020, we also recognized increases in our allowance for credit losses ("ACL") and liability for credit losses ("LCL") reserves for credit losses due to the impacts of COVID-19 given higher expected probabilities of default or higher loss rates. The impacts of COVID 19 and resulting economic stress on individuals and businesses will likely increase defaults on amounts owed to the Company, including, among other balances, premiums receivable due from insureds including audit premiums
receivable, recoverables for paid losses under large deductible insurance
programs, retrospective premium adjustments receivable, and the principal amount
of various classes of financial instruments in the Company's investment
portfolio, including fixed maturities and mortgage loans.
Announced on
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Highlights
Net Income Available to
Net Income Available to Common Stockholders per
Common Stockholders Diluted Share Book Value per Diluted Share
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Þ Decreased $357 or 57% Þ Decreased $0.97 or 57% Þ Decreased $2.43 or 6%
- Net realized capital - Decrease in net income - Decrease in common
losses in 2020 versus stockholders' equity
net realized gains in largely due to a decrease
2019, lower net in AOCI, primarily driven
investment income, and + Decrease in dilutive by the impact of wider
lower income on the shares due, in part, to credit spreads on
retained interest in share repurchases unrealized capital gains
Talcott (losses)
- Unfavorable prior + Net income in excess of
accident year stockholder dividends
development in
Commercial Lines
- Higher insurance + Decrease in dilutive
operating costs and shares
other expenses
+ Lower overall Group
Benefits loss ratio
+ Higher earnings from
Hartford Funds
+ Lower current accident
year catastrophes
Property & Casualty Group Benefits Net Income
Investment Yield, After Tax Combined Ratio Margin
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Þ Decreased 40 bps Ý Increased 0.8 points Þ Decreased 0.8 points
- Lower returns on equity + Higher expense ratio, - A change to net realized
fund investments due to primarily in Commercial capital losses in 2020,
the decline in equity Lines lower net investment
market levels income, and lower premium
volume
- Lower reinvestment rates + A change to unfavorable
and lower yield on prior accident year
variable rate securities development in Commercial
due to the decline in Lines, partially offset
interest rates by improved prior
accident year development - Higher insurance
in Personal Lines operating costs and other
homeowners expenses
+ A lower group life loss
ratio, partially offset
by a higher group
- Lower current accident disability loss ratio
year loss ratio in that was driven by
Personal Lines, partially COVID-19 claims
offset by an increase in
Commercial lines,
primarily due to the
inclusion of Navigators
Group
- Lower current accident
year catastrophes
61--------------------------------------------------------------------------------
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
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