HARTFORD FINANCIAL SERVICES GROUP (THE), INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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-Q. 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; Part I, Item 1A, Risk Factors in TheHartford's 2020 Form 10-K Annual Report; and 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. OnSeptember 30, 2020 , the Company entered into a definitive agreement to sell all of the issued and outstanding equity ofNavigators Holdings (Europe) N.V. , aBelgium holding company, and its subsidiaries,Bracht, Deckers & Mackelbert N.V. ("BDM") andAssurances Contintales Contintale Verzekeringen N.V. ("ASCO"), (collectively referred to as "Continental Europe Operations"). For discussion of this transaction, see Note 16 - Business Disposition of Notes to Condensed Consolidated Financial Statements. Certain reclassifications have been made to historical financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to conform to the current period presentation. TheHartford defines increases or decreases greater than or equal to 200% as "NM" or not meaningful. INDEX Description Page Key Performance Measures and Ratios 49 The Hartford's Operations 54 Consolidated Results of Operations 59 Investment Results 62 Critical Accounting Estimates 64 Commercial Lines 70 Personal Lines 74 Property & Casualty Other Operations 78 Group Benefits 79 Hartford Funds 81 Corporate 83 Enterprise Risk Management 84 Capital Resources and Liquidity 94 Impact of New Accounting Standards 101 Throughout the MD&A, we use certain terms and abbreviations, the more commonly used are summarized in the Acronyms section. 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.
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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.
•Restructuring and other costs - Costs incurred as part of a restructuring plan
are not a recurring operating expense 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.
•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.
•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.
•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.
•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.
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 U.S. GAAP measures to core earnings. Core earnings
should not be considered as a substitute for net income (loss) or net income
(loss) available to common stockholders and does not reflect the overall
profitability of the Company's business. Therefore, The Hartford believes that
it is useful for investors to evaluate net income (loss), net income (loss)
available to common stockholders, and core earnings when reviewing the Company's
performance.
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Reconciliation of Net Income to Core Earnings
Three Months Ended
2021 2020
Net income $ 249 $ 273
Preferred stock dividends 5 5
Net income available to common stockholders 244 268
Adjustments to reconcile net income available to common stockholders to core
earnings:
Net realized capital losses (gains) excluded from core earnings, before tax (77) 232
Restructuring and other costs, before tax 11 -
Integration and transaction costs associated with acquired business, before tax
9 13
Change in deferred gain on retroactive reinsurance, before tax 6 29
Income tax expense (benefit) 10 (57)
Core earnings $ 203 $ 485
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.
Gross New Business Premium- Represents the amount of premiums charged, before
ceded reinsurance, for policies issued to customers who were not insured with
the Company in the previous policy term. Gross new business premium plus gross
renewal written premium less ceded reinsurance equals total written premium.
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 ("ROE") 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
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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, 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. Net New Business Premium- Represents the amount of premiums charged, after ceded reinsurance, for policies issued to customers who were not insured with the Company in the previous policy term. Net new business premium plus renewal 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. 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 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
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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. 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)- TheHartford'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 TheHartford's pricing. Underwriting profitability over time is also greatly influenced by TheHartford'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. TheHartford 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.
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Reconciliation of Net Income to Underwriting Gain (Loss)
Three Months Ended March
31,
2021 2020
Commercial Lines
Net income
(2) (1)
Net investment income (327) (277)
Net realized capital losses (gains) (44) 143
Other expense 4 6
Income tax expense 24 28
Underwriting gain (loss) $ (216) $ 20
Personal Lines
Net income
(4) (2)
Net investment income (35) (41)
Net realized capital losses (gains) (7) 23
Other expense - -
Income tax expense 35 25
Underwriting gain $ 124 $ 103
P&C Other Ops
Net income (loss)
(16) (16)
Net realized capital losses (gains) (2) 7
Income tax expense (benefit) (4) 1
Underwriting loss $ (35) $ (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 HARTFORD'S OPERATIONS
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 reserves for run-off structured settlement
and terminal funding agreement liabilities, restructuring costs, 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 was 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 sale of Talcott Resolution to a new
group of investors is expected to close by
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June 30, 2021 . The Company will receive 9.7% of the proceeds and any pre-closing dividends. 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 1221's ("Lloyd's Syndicate") ability to write business is subject to Lloyd's approval for its premium capacity each year. Most of Personal Lines written premium is associated with our exclusive licensing agreement withAARP . This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand. In 2020, the Company extended this agreement throughDecember 31, 2032 . 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 the two main factors of 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. Impact of COVID-19 on our financial condition, results of operations and liquidity Impact to revenues Written and Earned premiums While we are beginning to emerge from the pandemic with economic stimulus measures being passed in theU.S. and other jurisdictions and progress being made to vaccinate the public from the COVID-19 virus, the COVID-19 pandemic continues to cause significant disruption to the economy of theU.S. and other countries in which we operate. As one of the largest providers of small business insurance in theU.S. , we were negatively affected by economic effects of the pandemic on small businesses beginning in March of 2020. In 2021, economic conditions have improved and in the first quarter of 2021, we experienced a 4% year over year increase in our small commercial written premium. Our middle and large commercial business was also negatively affected by COVID-19 and written premium in that line has been slower to rebound with written premium in middle & large commercial down 3% year over year in the first quarter. Overall,
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first quarter 2021 Commercial Lines written premium increased$95 , or 4%, as growth in small commercial package business and excess and surplus lines as well as growth inU.S. wholesale, global reinsurance,U.S. financial lines and international lines of business was partially offset by a decline in workers' compensation. Contributing to a year over year decline in workers' compensation written premium in first quarter 2021 was the effect of lower payrolls as a result of the continued economic effects of COVID-19, resulting in lower average premium per policy. Personal Lines written premium declined 4% in first quarter 2021 compared to first quarter 2020, largely attributable to the effect of increased shopping behaviors and lower new business levels arising out of the competitive marketplace. In Group Benefits, fully insured ongoing premium increased 4% in the first quarter of 2021 compared to first quarter of 2020, primarily due to higher in-force employer group disability premiums and higher supplemental health product premiums, though the book of business continues to be negatively impacted by lower insured exposure on in-force policies. Net investment income and realized capital gains (losses) Total net investment income increased in the first quarter of 2021 primarily due to greater income from limited partnerships and other alternative investments, a higher return on equity fund investments and a higher level of invested assets, partially offset by a lower yield on fixed maturity investments resulting from lower reinvestment rates and a lower yield on floating rate investments. While longer term interest rates have risen year to date in 2021, a prolonged period of low 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. Net realized capital gains (losses) on equity securities for the three months endedMarch 31, 2021 totaled$43 before tax, largely due to an increase in equity market levels since year end 2020. However, we may incur net realized capital losses on equity securities in future periods if we experience declines in equity market levels. In addition, if the economy does not recover as expected, we could experience elevated credit losses on fixed maturity securities, particularly related to highly leveraged companies, resulting in net realized capital losses. Impact to direct benefits, losses and loss adjustment expenses from COVID-19 claims The Company continued to incur direct COVID-19 incurred losses and excess mortality claims in first quarter 2021, compared to a small impact in first quarter 2020. For the three months ended March 31, 2021 2020 Excess mortality claims on group life $ 185 $ -
COVID-19 short-term disability claims and benefits
under
13 16
Workers' compensation COVID-19 claims 20 -
Global specialty financial lines and other 4 -
Total direct COVID-19 and excess mortality claims $ 222 $ 16
While COVID-19 property claims in P&C were incurred in the second quarter of
2020, there were no COVID-19 P&C property losses incurred in the three months
ended March 31, 2021 or 2020. Nearly all of our property insurance policies
require direct physical loss or damage to property and contain standard
exclusions that we believe preclude coverage for COVID-19 related claims, and
the vast majority of such policies contain exclusions for virus-related losses.
Within Property & Casualty, we incur COVID-19 workers' compensation losses when
it is determined that workers were exposed to COVID-19 out of and in the course
of their employment and in other cases where states have passed laws providing
for the presumption of coverage for certain industry classes, including health
care and other essential workers.
Within Group Benefits, the Company experienced excess mortality in its group
life business, including those claims where COVID-19 is specifically listed as
the cause of death.
Other impacts from COVID-19
In Personal Lines automobile, miles driven have begun to increase again as we
emerge from the pandemic which we expect will increase loss costs in 2021. In
addition, as the effects of favorable claim frequency from lower miles driven
during the pandemic are factored into rates, we expect lower earned pricing
increases resulting in a higher expected automobile loss ratio in 2021 than in
2020. Refer to Personal Lines Results of Operations for discussion of pricing
and loss cost trends in first quarter 2021.
Aided by some improvement in the economy and the effect of the government's
economic stimulus payments to our customers, in first quarter 2021, we recorded
a $8 decrease in the ACL on premiums receivable, reflecting a lower expectation
of credit losses, though there remains an elevated risk of uncollectible
premiums receivable relative to historical trends if economic conditions do not
improve further.
As we emerge from the pandemic, we expect travel costs and certain employee
benefits costs will increase relative to the lower level of those costs we
incurred when shelter-in-place orders were more broadly in effect.
For information about resources the Company has to manage capital and liquidity,
refer to the Capital Resources & Liquidity section of MD&A.
For additional information about the potential economic impacts to the Company
of the COVID-19 pandemic, see the risk factor "The pandemic caused by the spread
of COVID-19 has disrupted
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our operations and may have a material adverse impact on our business results, financial condition, results of operations and/or liquidity" in Item 1A of Part I of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 . Operational Transformation and Cost Reduction Plan In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, onJuly 30, 2020 , the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next. Through reduction of its headcount, IT investments to further enhance our capabilities, and other activities, relative to 2019, the Company expects to achieve a reduction in annual insurance operating costs and other expenses of approximately$540 by 2022 and$625 by 2023. The Hartford Next program will contribute to our goal of reducing the 2022 P&C expense ratio by about 2.0 to 2.5 points, reducing the 2022 Group Benefits expense ratio by about 1.5 to 2.0 points and reducing our 2022 claim expense ratio by approximately 0.5 point. To achieve those expected savings, we expect to incur approximately$410 over the course of the program, with$180 expensed cumulatively throughMarch 31, 2021 , and expected expenses of$75 over the last nine months of 2021,$77 in 2022 and$78 after 2022, with the expenses after 2022 consisting mostly of amortization of internal use software and capitalized real estate costs. Included in the estimated costs of$410 , we expect to incur restructuring costs of approximately$164 , including$73 of employee severance incurred in 2020, and approximately$91 of other costs, including consulting expenses and the cost to retire certain IT applications. Restructuring costs are reported as a charge to net income but not in core earnings. The following table presents Hartford Next program costs incurred, including restructuring costs, and expense savings realized in the three months endedMarch 31, 2021 and expected annual costs and expense savings for the full year in 2021 and 2022: Hartford Next Costs and Expense Savings Three months ended March 31, 2021 Estimate for 2021 Estimate for 2022 IT costs to retire applications $ 2 $ 11 $ 14 Professional fees and other expenses 9 24 11 Estimated restructuring costs 11 35 25 Non-capitalized IT costs 12 49 30 Other costs 4 17 14 Amortization of capitalized IT development costs - 1 6
[1]
Amortization of capitalized real estate [2] - - 2 Estimated costs within core earnings 16 67 52 Total Hartford Next program costs $ 27 $ 102 $ 77 Cumulative savings for the period relative to $ (90) $ (370) $ (540)
2019
Net expense (savings) before tax: $ (63) $ (268) $ (463) Net expense (savings) before tax: To be accounted for within core earnings $ (74) $ (303) $ (488) Restructuring costs recognized outside of core 11 35 25
earnings
Net expense (savings) before tax $ (63) $ (268) $ (463)
[1]Does not include approximately
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Results of Operations
Financial Highlights
Net Income Available to Net Income Available to Common Book Value per
Common Stockholders Stockholders per Diluted Share Diluted Share
[[Image Removed: hig-20210331_g2.jpg]] [[Image Removed: hig-20210331_g3.jpg]]
[[Image Removed: hig-20210331_g4.jpg]]
Þ Decreased $24 or 9% Þ Decreased $0.07 or 9% Þ Decreased $2.35 or 5%
- Greater net unfavorable prior - Decrease in net income - Decrease in common
accident year reserve available to common stockholders' equity largely
development, primarily due to stockholders. due to a decrease in AOCI,
increases in reserves for sexual primarily driven by a decrease
molestation and sexual abuse in in net unrealized capital
the 2021 period. gains on available for sale
securities.
- Higher mortality within group - Increase in dilutive shares - Increase in dilutive shares
life driven by the direct and under stock-based compensation outstanding from stock-based
indirect impacts of COVID-19. largely due to an increase in compensation awards.
the quarterly average stock
price.
- An increase in current accident + Share repurchase activity.
year catastrophes.
+ A change from net realized
capital losses in the 2020 period
to net realized capital gains in
the 2021 period.
+ An increase in net investment
income.
+ An improvement in the P&C
underlying combined ratio,
including a decrease in insurance
operating costs and other
expenses.
Property & Casualty GroupBenefits Net Income
Investment Yield, After Tax Combined Ratio
Margin
[[Image Removed: hig-20210331_g5.jpg]] [[Image Removed: hig-20210331_g6.jpg]]
[[Image Removed: hig-20210331_g7.jpg]]
Ý Increased 10 bps Ý Increased 8.2 points Þ Decreased 6.3 points
+ Greater returns on + Greater net unfavorable prior accident
- Higher mortality in group
limited partnerships year reserve development, primarily life, driven by the direct and
and other alternative due to increases in reserves for
indirect impacts of COVID-19.
investments. sexual molestation and sexual abuse in
the 2021 period.
+ Higher returns on + Higher current accident year + A change from net realized
equity fund catastrophe losses.' capital losses in the 2020
investments. period to net realized capital
+ A higher level of - Lower current accident year loss gains in 2021 period.
invested assets. ratio, due to lower personal
automobile claim frequency, and lower
current accident year loss ratios in
- Lower reinvestment middle market workers' compensation, + An increase in net investment
rates and lower yield U.S. wholesale, global reinsurance and income .
on floating rate U.S. financial lines.
investments.
+ A lower group disability loss
ratio primarily due to more
favorable prior incurral year
development driven by higher
- A lower expense ratio, driven by lower claim recoveries and continued
staffing and other costs as well as a improving claim incidence.
decrease in the ACL on uncollectible
premiums receivable in 2021 compared
to an increase in 2020.
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