NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS,
PROXY STATEMENT AND 2018 ANNUAL REPORT
NOTICE OF 2019 ANNUAL MEETING
OF SHAREHOLDERS
Date and Time
Wednesday, May 15, 2019
12:30 p.m. EDT
Location
One Hartford Plaza
Hartford, CT 06155
On behalf of the Board of Directors, I am pleased to invite you to attend the
Annual Meeting of Shareholders of The Hartford Financial Services Group, Inc.
to be held in the Wallace Stevens Theater at our Home Office at 12:30 p.m. EDT.
Voting Items
Shareholders will vote of the following items of business:
Board
Recommendation
Page
Reference
1. Elect a Board of Directors for the coming year;
FOR
2. Ratify the appointment of Deloitte & Touche LLP
as our independent registered public accounting
firm for the fiscal year ending December 31,
2019;
3. Consider and approve, on a non-binding, advisory
basis, the compensation of our named executive
officers as disclosed in this proxy statement; and
4. Act upon any other business that may properly
come before the Annual Meeting or any
adjournment thereof.
FOR
FOR
11
33
35
Record Date
You may vote if you were a shareholder of record at the close of business on
March 18, 2019. The Hartford’s proxy materials are available via the internet,
which allows us to reduce printing and delivery costs and lessen adverse
environmental impacts.
We hope that you will participate in the Annual Meeting, either by attending and
voting in person or by voting through other means. For instructions on voting,
please refer to page 68 under “How do I vote my shares?”
We urge you to review the proxy statement carefully and exercise your right to
vote.
Dated: April 4, 2019
By order of the Board of Directors
Donald C. Hunt
Vice President and Corporate Secretary
VOTING
By internet
www.proxyvote.com
By toll-free telephone
1-800-690-6903
By mail
Follow instructions on your
proxy card
In person
At the Annual Meeting
IMPORTANT INFORMATION IF YOU
PLAN TO ATTEND THE MEETING IN
PERSON:
Please remember to bring your ticket and
government issued ID! Shareholders can
obtain an admission ticket and directions
to the meeting by contacting our Investor
Relations Department:
Email:
InvestorRelations@TheHartford.com
Telephone: (860) 547-2537
Mail: The Hartford
Attn: Investor Relations
One Hartford Plaza (TA1-1)
Hartford, CT 06155
If you hold your shares of The Hartford
through a brokerage account (in “street
name”), your request for an admission
ticket must include a copy of a brokerage
statement reflecting stock ownership as
of the record date of March 18, 2019.
You can also join our meeting webcast at
http://ir.thehartford.com.
2019 Proxy Statement
1
LETTER FROM OUR CHAIRMAN &
CEO AND LEAD DIRECTOR
Dear fellow shareholders:
2018 was a year of many significant accomplishments and excellent financial results for The Hartford, despite elevated catastrophe
losses. During the year, the Board oversaw the continued integration of the Aetna U.S. group life and disability business; the
agreement to acquire The Navigators Group, Inc.; the company’s continued investments in people, processes, and technology; and
the separation of Talcott Resolution. As the 2019 Annual Meeting of Shareholders approaches, it is our privilege as Chairman and
Lead Director to share details on the Board’s progress in 2018.
Strategy and Culture
Overseeing strategy is a core responsibility of the Board, and throughout the year, the Board remained highly engaged in the
company's strategy of expanding its products and services; becoming an easier company to do business with; and attracting,
retaining and developing top talent. In 2018, discussions of strategy, profitability and growth occurred at every Board meeting,
remaining an intense focus of the enterprise. Equally important, and part of the ongoing dialogue, were discussions on how The
Hartford does business. As The Hartford moves forward in its third century, the company believes that having a diverse and
inclusive culture and clear expectations for ethical conduct and exceptional performance are integral to maintaining a thriving and
sustainable enterprise.
We are proud to have fellow directors who are engaged with employees and committed to supporting the company's culture.
Examples that demonstrate the Board's dedication include:
•
•
•
•
Leadership Accountability. The Compensation and Management Development Committee considers talent management,
commitment to ethics and compliance, employee survey results, and success in fostering diversity and inclusion in senior
leaders’ performance reviews and compensation decisions.
Engagement with Employees. The Board routinely interacts with employees who have been identified as potential future
leaders and directors participate in company events throughout the year, providing opportunities to engage directly with
the people driving the company’s results. Board members participated in many events in 2018, including a Professional
Women’s Network discussion, an Ethics and Compliance week panel, employee Town Halls, and a dinner for employees
who are working on key projects or who participate in the company's nine Employee Resource Groups.
Ethics and Conduct. Employees are encouraged to speak up when they identify an issue or have a concern. The Chief
Ethics and Compliance Officer provides the Audit Committee with comprehensive reports of issues and concerns received
through various reporting channels, each of which is investigated, and the outcomes of all substantiated issues or
concerns.
Acquisitions and Integration. The Board discusses culture during the due diligence and integration phases of any
acquisition, recognizing that it is a critical success factor, and strives to be respectful of the acquired business' culture
while incorporating beneficial aspects of The Hartford’s culture.
Risk Oversight
Risk oversight is another core Board function and it is particularly relevant in the insurance industry, where risk management is an
essential part of the business. The Hartford has understood risk for more than 200 years. In 2018, the Board reviewed and affirmed
a revised enterprise risk appetite framework to reflect the changes to the company over the last few years, including from
dispositions and acquisitions. This framework, along with a robust Enterprise Risk Management function to assess and model risks,
enables management and the Board to make informed judgments on risk and manage the company’s aggregate exposure. Two areas
of risk that have been a particular focus for the Board, along with its ongoing assessment of capital markets and the implications on
financial risk, are catastrophe risk and cyber-related risks.
As a property and casualty insurer, catastrophe risk oversight is a significant area of focus for the Board. Although The Hartford
achieved excellent full-year results, 2018 represented the second consecutive year of severe catastrophe losses above plan. The
Board closely oversees management’s continued efforts to evolve The Hartford’s catastrophe risk management strategies based on
recent years’ loss events, with increased focus on exposure to wildfires and tornadoes/hail. This oversight includes reviewing
management’s loss model refinement, exposure limits, underwriting guidelines and risk transfer arrangements in light of recent and
long-term catastrophe experience. The Board is also paying close attention to how climate change may be affecting weather
patterns, and devoted time in 2018 to discuss the company’s annual assessment of prevailing science on climate change, and how
the company has calibrated its processes to recognize experience and expectations regarding the impact of climate change. While
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the Board and management believe the company’s overall book of business and risk management program performed well given the
catastrophe events of 2018, substantial time and resources will continue to be devoted to this aspect of risk management.
In today’s environment, cybersecurity is a concern for all companies. The Hartford’s activities, policies and procedures to prevent,
detect and respond to cyber incidents are routinely discussed by the Board. The results of the company’s annual penetration
testing, where a third party is hired to play an adversarial role in order to validate the company’s cyber defenses under a number of
attack scenarios, both from outside the company and from within, were recently discussed with the Board and management. These
tests are invaluable in highlighting what is working well and where there are potential vulnerabilities that can be addressed. The
Board also regularly considers cyber risk through the lens of the company’s insurance products. The Board has reviewed how those
products would respond to different cyber events and potential exposure to the company. This is a rapidly evolving area, and the
Board recognizes the need for expertise, discipline and constant vigilance.
Board Effectiveness
Many of the Board’s strengths - its composition, heightened strategic focus, increased use of competitor data and market analytics,
and enhanced communication - are the direct result of its annual self-evaluation process. Like many companies, Board self-
evaluation at The Hartford has evolved over the past decade. Several years ago, the Board embarked on a multi-year effort to add
rigor to the process, with profound results. For example, in 2016, the Board added individual director interviews to promote more
direct, fulsome and candid feedback. The Lead Director meets with each board member between February and May, identifies
themes in the feedback received, and leads a discussion on those topics with the full Board in May. This results in feedback for
management regarding things like the length and content of Board presentations and Board meeting logistics, as well as formal
written goals for the coming Board year.
Last July, the Board took the next step in further improving its evaluation process by adopting triennial third-party Board
evaluations beginning in 2019. After considering shareholder feedback and reviewing corporate governance best practices, the
Board determined that third-party facilitated evaluations could result in even greater candor, provide a neutral perspective, and
allow the Board to benchmark the its practices against other high-performing boards and companies. We hope these steps
demonstrate the Board's commitment to continuous improvement.
As always, we are proud to work closely with management and our fellow directors to ensure that The Hartford is a well-governed,
shareholder-focused company with an exceptionally strong culture that is positioned to deliver sustainable, long-term growth and
profitability. Thank you for your continued support.
Sincerely,
Christopher J. Swift
Chairman and Chief Executive Officer
Trevor Fetter
Lead Director
2019 Proxy Statement
3
TABLE OF CONTENTS
PROXY SUMMARY
BOARD AND GOVERNANCE MATTERS
Item 1: Election of Directors
Governance Practices and Framework
Board Composition and Refreshment
Committees of the Board
The Board's Role and Responsibilities
Director Compensation
Certain Relationships and Related Party Transactions
Communicating with the Board
Director Nominees
AUDIT MATTERS
Item 2: Ratification of Independent Registered Public Accounting Firm
Fees of the Independent Registered Public Accounting Firm
Audit Committee Pre-Approval Policies and Procedures
Report of the Audit Committee
COMPENSATION MATTERS
Item 3: Advisory Vote to Approve Executive Compensation
Compensation Discussion and Analysis
Executive Summary
Components of the Compensation Program
Process for Determining Senior Executive Compensation (Including NEOs)
Pay for Performance
Compensation Policies and Practices
Effect of Tax and Accounting Considerations on Compensation Design
Compensation and Management Development Committee Interlocks and Insider Participation
Report of the Compensation and Management Development Committee
Executive Compensation Tables
CEO Pay Ratio
INFORMATION ON STOCK OWNERSHIP
Directors and Executive Officers
Certain Shareholders
Section 16(a) Beneficial Ownership Reporting Compliance
INFORMATION ABOUT THE HARTFORD’S ANNUAL MEETING OF SHAREHOLDERS
Householding of Proxy Materials
Frequently Asked Questions
Other Information
APPENDIX A: RECONCILIATION OF GAAP TO NON-GAAP FINANCIAL MEASURES
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11
11
11
14
17
15
22
25
25
26
33
33
33
34
34
35
35
36
36
40
44
46
49
51
51
51
52
64
65
65
66
66
67
67
67
71
72
PROXY SUMMARY
This summary highlights information contained elsewhere in this proxy statement. It does not contain all the information you should consider
and you should read the entire proxy statement carefully before voting.
BOARD AND GOVERNANCE HIGHLIGHTS
ITEM 1
ELECTION OF DIRECTORS
Each director nominee has an established record of accomplishment in areas relevant to overseeing our businesses and possesses
qualifications and characteristics that are essential to a well-functioning and deliberative governing body.
✓ The Board recommends a vote "FOR" each director nominee
Director Nominee, Age(1)
and Present or Most Recent Experience
Robert B. Allardice III, 72
Former regional CEO,
Deutsche Bank Americas
Carlos Dominguez, 60
President,
Sprinklr
Trevor Fetter,(3) 59
Senior Lecturer,
Harvard Business School
Stephen P. McGill, 61
Retired Group President, Aon Plc; Retired Chairman
and CEO, Aon Risk Solutions and Aon Benfield
Kathryn A. Mikells, 53
Chief Financial Officer
Diageo plc
Michael G. Morris, 72
Former Chairman, President and CEO,
American Electric Power Company
Julie G. Richardson, 55
Former Partner,
Providence Equity Partners
Teresa W. Roseborough, 60
Executive Vice President, General Counsel and
Corporate Secretary, The Home Depot
Virginia P. Ruesterholz, 57
Former Executive Vice President,
Verizon Communications
Christopher J. Swift, 58
Chairman and CEO,
The Hartford
Greig Woodring, 67
Retired President and CEO,
Reinsurance Group of America
Independent
✓
✓
✓
✓
✓
✓
✓
✓
✓
Director
since
Current
Committees(2)
Other Current
Public Company Boards
• Ellington Residential
Mortgage REIT
• GasLog Partners
• Medidata Solutions
2008
• Audit
• FIRMCo*
2018
• FIRMCo
• NCG
2007
• Comp
• FIRMCo
2017
• Comp
• FIRMCo
2010
• Audit
• FIRMCo
• Diageo plc
2004
2014
2015
2013
• Audit
• FIRMCo
• NCG*
• Audit*
• FIRMCo
• Comp
• FIRMCo
• NCG
• Comp*
• FIRMCo
• NCG
2014
• FIRMCo
• Alcoa
• L Brands
• UBS
• VEREIT
• Yext
• Bed Bath & Beyond
• Frontier
Communications
✓
2017
• Audit
• FIRMCo
* Denotes committee chair
(1) As of April 4, 2019
(2) Full committee names are as follows: Audit – Audit Committee; Comp – Compensation and Management Development Committee; FIRMCo –
Finance, Investment and Risk Management Committee; NCG – Nominating and Corporate Governance Committee
(3) Mr. Fetter serves as the Lead Director. For more details on the Lead Director’s role, see page 12
2019 Proxy Statement
5
PROXY SUMMARY
Nominee Tenure*
Nominee Diversity
0-5 years: 5
>10 years: 3
5-10 years: 3
Female: 4
Male: 7
*Average independent nominee tenure as of April 4, 2019: 6.4 years
GOVERNANCE BEST PRACTICES
The Board and management regularly review best practices in corporate governance and modify our governance policies and
practices as warranted. Our current best practices are highlighted below.
Independent
Oversight
Engaged
Board /
Shareholder
Rights
Good
Governance
Commitment to
Sustainability
✓ Other than CEO, all directors are independent
✓ Independent key committees (Audit, Compensation, Nominating)
✓ Empowered and engaged independent Lead Director
✓ All directors elected annually
✓ Majority vote standard (with plurality carve-out for contested elections)
✓ Proxy access right
✓ Director resignation policy
✓ Over-boarding policy limits total public company boards, including The Hartford, to five for non-CEOs and
two for sitting CEOs
✓ Rigorous Board and committee self-evaluation conducted annually; third party Board evaluations
conducted triennially
✓ Meaningful Board education and training on recent and emerging governance and industry trends
✓ Annual shareholder engagement focused on governance, compensation and sustainability issues
✓ Board diversity of experience, tenure, age and gender
✓ Mandatory retirement age of 75 and 15-year term limit promote regular Board refreshment
✓ Annual review of CEO succession plan by the independent directors with the CEO
✓ Annual Board review of senior management long-term and emergency succession plans
✓ Stock-ownership guidelines of 6x salary for CEO and 4x salary for other named executive officers
✓ Annual Nominating Committee review of The Hartford's political and lobbying policies and expenditures
✓ Board oversight of sustainability matters; Nominating Committee oversight of sustainability governance
framework
✓ Sustainability Governance Committee comprised of senior management charged with overseeing a
comprehensive sustainability strategy and ensuring the full Board is briefed at least annually
SHAREHOLDER ENGAGEMENT
We engage with shareholders and solicit feedback in a number of different ways throughout the year. Management and our investor
relations team routinely speak with analysts and investors at investor conferences and other formal events, as well as group and
one-on-one meetings. In September 2018, we invited a panel of institutional investors to engage with directors at a Board meeting
session, a practice we began in 2011. In addition, since 2011 we have maintained an annual shareholder engagement program
focused on governance and compensation issues and, more recently, sustainability. In the fall of 2018, management contacted
shareholders representing over 50% of shares outstanding and had discussions with shareholders representing approximately 17%
of shares outstanding, as many shareholders opted not to participate in calls, noting that they had no material concerns. As a result
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PROXY SUMMARY
of shareholder feedback received in 2018 and prior years, and an analysis of governance trends and best practices, the Board and
management took several important actions in 2018 to enhance the company's corporate governance practices.
What we heard from shareholders
Actions taken
Periodic third-party board evaluations can lead to more
candid conversations, provide a neutral perspective and help
boards benchmark their corporate governance practices.
Diversity enhances board performance and is critical to
effective corporate governance.
Pay equity is an area of increasing concern and companies
that pay women and people of color fairly are at a
competitive advantage in attracting and retaining top talent.
Adopted third-party facilitated evaluations every three years
commencing in 2019.
Formalized existing company practice by amending our
Corporate Governance Guidelines to ensure that diverse
candidates are included in the pool from which board candidates
are selected.
Instituted annual pay equity reporting to the Compensation
Committee and committed to enhanced pay equity practices
disclosure beginning with the company's 2018 Sustainability
Report (expected to be published in summer 2019).
AUDIT HIGHLIGHTS
ITEM 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
As a matter of good corporate governance, the Board is asking shareholders to ratify the selection of Deloitte & Touche LLP as
our independent registered public accounting firm for 2019.
✓ The Board recommends a vote "FOR" this item
2019 Proxy Statement
7
PROXY SUMMARY
COMPENSATION HIGHLIGHTS
ITEM 3
ADVISORY VOTE TO APPROVE EXECUTIVE
COMPENSATION
The Board is asking shareholders to approve, on an advisory basis, the compensation of our named executive officers as disclosed
in this proxy statement. Our executive compensation program is designed to promote long-term shareholder value creation and
support our strategy by (1) encouraging profitable growth consistent with prudent risk management, (2) attracting and retaining
key talent, and (3) appropriately aligning pay with short- and long-term performance.
✓ The Board recommends a vote "FOR" this item
2018 FINANCIAL RESULTS
Our 2018 financial results were excellent, despite elevated catastrophe losses for the second consecutive year. Full year net income
available to common stockholders was $1,801 million, core earnings* were $1,575 million, and our net income and core earnings
return on equity ("ROE)*† were 13.7% and 11.6%, respectively, well in excess of our cost of capital. 2018 was also a year of several
significant accomplishments, including:
•
•
•
The continued integration of Aetna's U.S. group life and disability business,
The announcement of our agreement to acquire The Navigators Group, Inc. ("Navigators"), a global specialty insurance
company, and
The close of the sale of Talcott Resolution.
We also made notable progress on our innovation agenda, including the launch of our Small Business Innovation Lab to design and
test new products and business models to meet the changing needs of our small business customers, and the purchase of Y-Risk, a
company specializing in the sharing and on-demand economy. During the year we also continued to make investments in our people,
processes, data, and technology. As we enter 2019, our strategic priorities remain consistent and we are focused on realizing the full
potential of the recent acquisitions. Expanding product capabilities and risk appetite are key pillars of our strategy; with the Group
Benefits and Navigators acquisitions, the near-term focus is on successfully integrating the acquisitions and maximizing our
combined potential, including deepening our distribution relationships and meeting a broader array of customer needs.
Highlighted below are year-over-year comparisons of our net income and core earnings performance and our three-year ROE and
core earnings ROE results. Core earnings is the primary determinant of our annual incentive plan funding, as described on page 40,
and average annual Core Earnings ROE over a three-year performance period is the metric used for 50% of performance shares
granted to Senior Executives, as described on page 41 (in each case, as adjusted for compensation purposes).
YEAR-OVER-YEAR PERFORMANCE
THREE-YEAR PERFORMANCE
Net Income (Loss)
Available to Common
Stockholders
$1,801
)
s
n
o
i
l
l
i
M
(
$
$(3,131)
2017 2018
Core Earnings
ROE
Core Earnings ROE
$1,575
5.2%
13.7%
11.6%
6.7%
5.2%
$1,014
)
s
n
o
i
l
l
i
M
(
$
2017 2018
2016 2017 2018
2016 2017 2018
(20.6)%
* Denotes a non-GAAP financial measure. For definitions and reconciliations to the most directly comparable GAAP measure, see Appendix A.
† Net income ROE represents net income (loss) available to common stockholders ROE.
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Total Shareholder Returns
The following chart shows The Hartford's total shareholder return ("TSR") relative to the S&P 500, S&P 500 Insurance Composite
and S&P P&C indices. On both a one- and three-year basis, The Hartford's TSR has lagged the broader market and peers. This result
has had a direct impact on compensation for our Senior Executives, including both to their personal stock holdings and with no
payout on the TSR component of 2016-2018 performance shares, as described on page 49.
PROXY SUMMARY
50
40
30
20
10
0
-10
-20
-30
30%
21%
35%
9%
(4)%
(11)%
(5)%
(19)%
1-YEAR (2018)
3-YEAR (2016-2018)
The Hartford (HIG)
S&P 500
S&P 500 Insurance Composite
S&P 500 Property and Casualty
COMPENSATION DECISIONS
The table below reflects the 2018 compensation package (base salary, annual incentive plan ("AIP") award and long-term incentive
(“LTI”) award) for each named executive officer ("NEO"). Although this table is not a substitute for the Summary Compensation Table
information beginning on page 52, we believe it provides a simple and concise picture of 2018 compensation decisions.
Compensation Component
C. Swift
B. Costello
D. Elliot
B. Johnson
W. Bloom
Base Salary Rate
2018 AIP Award
2018 LTI Award
$ 1,150,000 $
725,000 $ 950,000 $ 575,000 $
575,000
$ 4,800,000 $ 1,925,000 $ 3,050,000 $ 2,250,000 $ 1,550,000
$ 8,000,000 $ 1,775,000 $ 5,000,000 $ 1,600,000 $ 1,100,000
Total 2018 Compensation Package
$13,950,000 $ 4,425,000 $ 9,000,000 $ 4,425,000 $ 3,225,000
2018 Compensation Decision
Rationale
The Compensation Committee
approved an AIP funding level of
160% of target.
Performance against pre-established Compensation Core Earnings targets produced a
formulaic AIP funding level capped at 200% of target. The Compensation Committee
reduced this funding level to 160% following its qualitative review, taking into
consideration a second consecutive year of elevated catastrophe losses. (pages 46-47)
The Compensation Committee
certified a 2016-2018 performance
share award payout at 100% of target.
The company's average annual Compensation Core ROE during the performance period
was 10.0%, resulting in a payout of 200% of target for the ROE component (50% of the
award). Because the company's TSR during the performance period was below threshold,
there was no payout for the TSR component (50% of the award). (page 49)
2019 Proxy Statement
9
PROXY SUMMARY
COMPONENTS OF COMPENSATION AND PAY MIX
Compensation Component Description
Base Salary
• Fixed level of cash compensation based on market data, internal pay equity, responsibility,
expertise and performance.
Annual Incentive Plan
• Variable cash award based primarily on annual company operating performance against a
predetermined financial target and achievement of individual performance objectives.
Long-Term Incentive Plan
• Variable awards granted based on individual performance, potential and market data.
• Designed to drive long-term performance, encourage share ownership among senior
executives, and foster retention.
• Award mix (50% performance shares and 50% stock options) reflects actual stock price
performance, peer-relative stock price and dividend performance and actual operating
performance.
Approximately 91% of CEO target annual compensation and approximately 84% of other NEO target annual compensation are
variable based on performance, including stock price performance:
Pay Mix — CEO
Salary
9%
Annual Incentive
25%
Long-Term Incentive
66%
Variable with Performance: 91%
Pay Mix — Other NEOs
Salary
16%
Annual Incentive
30%
Long-Term Incentive
54%
Variable with Performance: 84%
COMPENSATION BEST PRACTICES
Our current compensation best practices include the following:
WHAT WE DO
✓ Compensation heavily weighted towards variable pay
✓ Senior Executives generally receive the same benefits as full-time employees
✓ Double trigger requirement for cash severance and equity vesting upon a change of control*
✓ Cash severance upon a change of control limited to 2x base salary + bonus
✓ Independent compensation consultant
✓ Risk mitigation in plan design and annual review of compensation plans, policies and practices
✓ Prohibition on hedging, monetization, derivative and similar transactions with company securities
✓ Prohibition on Senior Executives pledging company securities
✓ Stock ownership guidelines for directors and Senior Executives
✓ Periodic review of compensation peer groups
✓ Competitive burn rate and dilution for equity program
* In the case of equity, so long as the awards are assumed or replaced with substantially equivalent awards
WHAT WE DON'T DO
û No tax gross-ups
û No individual employment agreements
û No granting of stock options with an exercise price less than the fair market value of our common stock on the date of grant
û No re-pricing of stock options
û No buy-outs of underwater stock options
û No reload provisions in any stock option grant
û No payment of dividends on unvested performance shares
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BOARD AND GOVERNANCE MATTERS
ITEM 1
ELECTION OF DIRECTORS
The Nominating Committee believes the director nominees possess qualifications, skills and experience that are consistent with
the standards for the selection of nominees for election to the Board set forth in our Corporate Governance Guidelines described
on pages 14-16 and have demonstrated the ability to effectively oversee The Hartford’s corporate, investment and business
operations. Biographical information for each director nominee is described beginning on page 26, including the principal
occupation and other public company directorships (if any) held in the past five years and a description of the specific experience
and expertise that qualifies each nominee to serve as a director of The Hartford.
✓ The Board recommends a vote "FOR" each director nominee
GOVERNANCE PRACTICES AND FRAMEWORK
At The Hartford, we aspire to be an exceptional company celebrated for financial performance, character, and customer value. We
believe good governance practices and responsible corporate behavior are central to this vision and contribute to our long-term
performance. Accordingly, the Board and management regularly consider best practices in corporate governance and shareholder
feedback and modify our governance policies and practices as warranted. Our current best practices include:
Independent
Oversight
Engaged
Board /
Shareholder
Rights
✓ Other than CEO, all directors are independent
✓ Independent key committees (Audit, Compensation, Nominating)
✓ Empowered and engaged independent Lead Director
✓ All directors elected annually
✓ Majority vote standard (with plurality carve-out for contested elections)
✓ Proxy access right
✓ Director resignation policy
✓ Over-boarding policy limits total public company boards, including The Hartford, to five for non-CEOs
and two for sitting CEOs
✓ Rigorous Board and committee self-evaluation conducted annually; third party Board evaluations
conducted triennially
✓ Meaningful Board education and training on recent and emerging governance and industry trends
✓ Annual shareholder engagement focused on governance, compensation and sustainability issues
✓ Board diversity of experience, tenure, age and gender
✓ Mandatory retirement age of 75 and 15-year term limit promote regular Board refreshment
✓ Annual review of CEO succession plan by the independent directors with the CEO
✓ Annual Board review of senior management long-term and emergency succession plans
✓ Stock-ownership guidelines of 6x salary for CEO and 4x salary for other named executive officers
✓ Annual Nominating Committee review of The Hartford's political and lobbying policies and
expenditures
Good
Governance
Commitment to
Sustainability
✓ Board oversight of sustainability matters; Nominating Committee oversight of sustainability
governance framework
✓ Sustainability Governance Committee comprised of senior management charged with overseeing a
comprehensive sustainability strategy and ensuring the full Board is briefed at least annually
The fundamental responsibility of our directors is to exercise their business judgment to act in what they reasonably believe to be
the best interests of The Hartford and its shareholders. The Board fulfills this responsibility within the general governance
framework provided by the following documents:
•
•
•
Articles of Incorporation
By-laws
Corporate Governance Guidelines (compliant with the listing standards of the New York Stock Exchange ("NYSE") and
including guidelines for determining director independence and qualifications)
2019 Proxy Statement
11
BOARD AND GOVERNANCE MATTERS
•
•
•
Charters of the Board’s four standing committees (the Audit Committee; the Compensation and Management
Development Committee ("Compensation Committee"); the Finance, Investment and Risk Management Committee
("FIRMCo"); and the Nominating and Corporate Governance Committee ("Nominating Committee"))
Code of Ethics and Business Conduct
Code of Ethics and Business Conduct for Members of the Board of Directors
Copies of these documents are available on our investor relations website at http://ir.thehartford.com or upon request sent to our
Corporate Secretary (see page 70 for details).
DIRECTOR INDEPENDENCE
The Board annually reviews director independence under applicable law, the listing standards of the NYSE and our Corporate
Governance Guidelines. In addition, per our Corporate Governance Guidelines, in order to identify potential conflicts of interest
and to monitor and preserve the independence, any director who wishes to become a director of another for-profit entity must
obtain the pre-approval of the Nominating Committee.
The Board has affirmatively determined that all directors other than Mr. Swift are independent.
BOARD LEADERSHIP STRUCTURE
Board Chair
Independent Lead Director
The roles of CEO and Chairman of the Board (“Chairman”) are
held by Christopher Swift. Mr. Swift has served as CEO since
July 1, 2014, and was appointed Chairman on January 5, 2015.
In late 2014, before Mr. Swift assumed the role of Chairman,
the Board deliberated extensively on our board leadership
structure, seeking feedback from shareholders and considering
extensive corporate governance analysis. The Board concluded
then, and continues to believe, that our historical approach of
combining the roles of CEO and Chairman while maintaining
strong, independent board leadership is the optimal leadership
structure for the Board to carry out its oversight of our
strategy, business operations and risk management.
The Board believes other elements of our corporate
governance structure ensure independent directors can
perform their role as fiduciaries in the Board’s oversight of
management and our business, and minimize any potential
conflicts that may result from combining the roles of CEO and
Chairman. For example:
• All directors other than Mr. Swift are independent;
• An empowered and engaged Lead Director provides
independent Board leadership and oversight; and
• At each regularly scheduled Board meeting, the non-
management directors meet in in executive session
without the CEO and Chairman present (nine such
meetings in 2018).
As part of its evaluation process, the Board has committed to
undertaking an annual review of its leadership structure to
ensure it continues to serve the best interests of shareholders
and positions the company for future success.
Whenever the CEO and Chairman roles are combined, our
Corporate Governance Guidelines require the independent
directors to elect an independent Lead Director. Trevor Fetter
was elected our Lead Director in May 2017. The
responsibilities and authority of the Lead Director include the
following:
• Presiding at all meetings of the Board at which the
Chairman is not present, including executive sessions
of the independent directors;
• Serving as a liaison between the CEO and Chairman
and the non-management directors;
• Regularly conferring with the Chairman on matters of
importance that may require action or oversight by the
Board, ensuring the Board focuses on key issues and
tasks facing The Hartford;
• Approving information sent to the Board and meeting
agendas for the Board;
• Approving the Board meeting schedules to help ensure
that there is sufficient time for discussion of all agenda
items;
• Maintaining the authority to call meetings of the
independent non-management directors;
• Approving meeting agendas and information for the
independent non-management sessions and briefing, as
appropriate, the Chairman on any issues arising out of
these sessions;
• If requested by shareholders, ensuring that he or she is
available, when appropriate, for consultation and direct
communication; and
• Leading the Board’s evaluation process and discussion
on board refreshment and director tenure.
The Board believes that these duties and responsibilities
provide for strong independent Board leadership and oversight.
12 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
ANNUAL BOARD EVALUATION PROCESS
The Nominating Committee oversees the Board's multi-step evaluation process to ensure an ongoing, rigorous assessment of the
Board’s effectiveness, composition and priorities. In addition to the full Board evaluation process, the standing committees of the
Board undertake separate self-assessments on an annual basis.
In 2018, the Board further augmented its evaluation process with the adoption of third-party facilitated evaluations every three
years, commencing in 2019. This was the most recent action in a multi-year effort to enhance the Board’s evaluation process,
beginning with the adoption of individual director interviews in 2016. The Board sought and considered shareholder feedback on
the merits of third party board evaluation and ultimately concluded that periodic third party board evaluations would promote
more candid conversations, provide a neutral perspective, and help the Board benchmark its corporate governance practices.
Board Evaluation and
Development of Goals
(May)
The Lead Director, or third-party evaluator, leads a Board evaluation discussion in
executive session guided by the Board’s self-assessment questionnaire and key themes
identified through one-on-one discussions. The Board identifies successes and areas for
improvement from the prior Board year and establishes formal goals for the year ahead.
Annual Corporate
Governance Review /
Shareholder
Engagement Program
(October to December)
Interim Review of Goals
(December)
Board Self-Assessment
Questionnaires
(February)
One-on-One
Discussions
(February to May)
The Nominating Committee performs an annual review of The Hartford's corporate
governance policies and practices in light of best practices, recent developments and
trends. In addition, the Nominating Committee reviews feedback on governance issues
provided by shareholders during our annual shareholder engagement program.
The Lead Director leads an interim review of progress made against the goals established
during the Board evaluation discussion in May.
The governance review and shareholder feedback inform the development of written
questionnaires that the Board and its standing committees use to help guide self-
assessment. The Board’s questionnaire covers a wide range of topics, including the Board’s:
• Fulfillment of its responsibilities under the Corporate Governance Guidelines;
• Effectiveness in overseeing our business plan, strategy and risk management;
• Leadership structure and composition, including mix of experience, skills, diversity
and tenure;
• Relationship with management; and
• Processes to support the Board’s oversight function.
The Lead Director, or third-party evaluator, meets individually with each independent
director on Board effectiveness, dynamics and areas for improvement.
When the Lead Director led the Board evaluation session in May 2018, there was agreement that the Board was operating
effectively and a number of improvements directly resulting from the Board's 2017-2018 goals were noted. For example, strategy
and growth were discussed at every Board meeting, and a regular cadence was established for updates from the company's Chief
Strategy & Ventures Officer and business line leaders, as well as sessions devoted to market dynamics. In addition, the Board
engaged in more substantive talent management discussions to understand and assess the health of succession planning.
2019 Proxy Statement
13
BOARD AND GOVERNANCE MATTERS
BOARD COMPOSITION AND REFRESHMENT
DIRECTOR SUCCESSION PLANNING
The Nominating Committee is responsible for identifying and recommending to the Board candidates for Board membership.
Throughout the year, the Nominating Committee considers the Board’s composition, skills and attributes to determine whether
they are aligned with our long-term strategy and major risks. The succession planning process is informed by the results of the
Board and committee evaluation processes, as well as anticipated needs in light of The Hartford’s retirement and tenure policies
(described below). To assist the Nominating Committee in identifying prospective Board nominees when undertaking a search, the
company retains an outside search firm. The Nominating Committee also considers candidates suggested by its members, other
Board members, management and shareholders.
The Nominating Committee evaluates candidates against the standards and qualifications set forth in our Corporate Governance
Guidelines as well as other relevant factors, including the candidate's potential contribution to the diversity of the Board. In 2018
the Board amended our Corporate Governance Guidelines to ensure that diverse candidates are included in the pool from which
board candidates are selected.
The Nominating Committee's most recent director searches, which began in 2016 and culminated in the elections of Greig
Woodring and Stephen McGill in October 2017 and Carlos Dominguez in December 2017, illustrate our typical succession planning
process, which begins with an assessment the Board's current skills and attributes, and then identifies skills or attributes that are
needed, or may be needed in the future, in light of the company's strategy.
Indicative Director Search Process: 2016
Development of
Candidate
Specification
• Developed skills matrix
to identify desired skills
and attributes
• Targeted two areas of
expertise aligned with
our strategy: insurance
industry experience and
digital experience
• Prioritized diversity
DIRECTOR TENURE
Screening of
Candidates
Meeting With
Candidates
Decision and
Nomination
• Considered three
outside search firms and
selected one to lead
process
• Screened 97 candidates
for the insurance
specification
• Screened 195
candidates for the
digital specification
• Top candidates
interviewed by
Nominating Committee
members, other
directors, and
management
• Finalist candidates
underwent background
and conflicts checks
• Nominating Committee
recommendation of
candidates and committee
assignments to full Board
• Board consideration and
adoption of
recommendation
The Nominating Committee strives for a Board that includes a mix of varying perspectives and breadth of experience. Newer
directors bring fresh ideas and perspectives, while longer tenured directors bring extensive knowledge of our complex operations.
As part of its annual evaluation process, the Board assesses its overall composition, including director tenure, and does not believe
the independence of any director nominee is compromised due to Board tenure.
In order to promote thoughtful Board refreshment, the Board
has adopted the following in our Corporate Governance
Guidelines:
•
•
Retirement Age. With limited exceptions, an
independent director may not be nominated to stand
for election or reelection to the Board after his or her
75th birthday.
Tenure Policy. An independent director may not stand
for reelection after serving as a director for 15 years.
Nominee Tenure*
0-5 years: 5
5-10 years: 3
>10 years: 3
*Average independent nominee tenure as of 4/4/19: 6.4 years
14 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
The Board believes that these age and tenure policies provide discipline to the Board refreshment process, improve succession
planning and support Board independence. Moreover, the policies supplement and strengthen the Board evaluation process as
follows:
• During the annual Board self-assessment process following an independent director's eighth year of service, the Lead
Director (or the Chair of the Nominating Committee in the case of the Lead Director) will review with such independent
director his or her independence, outside commitments, future plans and other matters that may impact ongoing service
on the Board.
• During the annual Board self-assessment process following an independent director's twelfth year of service and each
year thereafter, discussions will also include the timing of the director’s retirement from the Board (i.e., after 15 years or
earlier).
DIRECTOR DIVERSITY
The Board believes a diverse membership with varying perspectives and breadth of experience is an important attribute of a well-
functioning board and contributes positively to robust discussion at meetings. The Nominating Committee considers diversity in the
context of the Board as a whole and takes into account considerations relating to race, gender, ethnicity and the range of
perspectives the directors bring to their Board work. As part of its consideration of prospective nominees, the Board and the
Nominating Committee monitor whether the directors as a group meet The Hartford’s criteria for the composition of the Board,
including diversity considerations. As part of our continuing efforts to bring diverse perspectives to the Board:
•
•
•
Since 2010 the Board has added four women, two people of color, and one director of non-U.S. origin;
In 2016, Julie Richardson became chair of the Audit Committee and Virginia Ruesterholz became chair of the
Compensation Committee, which increased female leadership on the Board; and
In 2018, the Board amended our Corporate Governance Guidelines to ensure that diverse candidates are included in the
pool from which board candidates are selected.
Nominee Diversity
According to the 2018 Spencer Stuart Board Index:
Female: 4
Male: 7
• Women constituted 24% of all S&P 500 directors, compared to
36% of The Hartford's nominees
• People of color* constituted 17% of directors in the top 200 S&P
500 companies, compared to 18% of The Hartford's nominees
• Directors of non-U.S. origin constituted 8% of directors in the top
200 S&P 500 companies, compared to 9% of The Hartford's
nominees
• The average tenure of independent directors on S&P 500 boards
is 8.1 years, compared to 6.4 years at The Hartford
• Women chaired 20% of audit committees and 19% of
compensation committees at S&P 500 companies; at The
Hartford, women chair both committees
* Defined as African-American, Hispanic/Latino and Asian directors.
DIRECTOR ONBOARDING AND ENGAGEMENT
All directors are expected to invest the time and energy required to gain an in-depth understanding of our business and strategy.
When new directors join the Board, they receive materials to familiarize them with The Hartford, its strategy, leadership, financial
performance and governance. In addition, new directors devote multiple days to orientation with senior management. Sessions vary
depending on experience and initial committee assignment, but generally include overviews of director responsibilities; each of the
company’s businesses; financial results; operations and technology; and enterprise risk management. At least one Board meeting
each year is devoted entirely to the company's strategy, and strategy-focused presentations are planned for each regularly
scheduled Board meeting.
Our Board members also participate in other company activities and engage directly with our employees at a variety of events
throughout the year. Recent examples include speaking at Professional Women’s Network and Ethics and Compliance Week events,
as well as attendance at an annual dinner with employees working on key strategic business priorities or engaged with our
employee resource groups.
2019 Proxy Statement
15
BOARD AND GOVERNANCE MATTERS
SHAREHOLDER PROPOSED NOMINEES
The Nominating Committee will consider director candidates recommended by shareholders using the same criteria described
above. Shareholders may also directly nominate someone at an annual meeting. Nominations for director candidates are closed for
2019. To nominate a candidate at our 2020 Annual Meeting, notice must be received by our Corporate Secretary at the address
below by February 14, 2020 and must include the information specified in our By-laws, including, but not limited to, the name of the
candidate, together with a brief biography, an indication of the candidate’s willingness to serve if elected, and evidence of the
nominating shareholder’s ownership of our Common Stock.
Pursuant to our proxy access By-law, a shareholder, or group of up to 20 shareholders, may nominate a director and have the
nominee included in our proxy statement. The shareholder, or group collectively, must have held at least 3% of our Common Stock
for three years in order to make a nomination, and may nominate as many as two directors, or a number of directors equal to 20% of
the board, whichever is greater, provided that the shareholder(s) and the nominee(s) satisfy the requirements in our By-laws. Notice
of proxy access director nominees for inclusion in our 2020 proxy statement must be received by our Corporate Secretary at the
address below no earlier than November 6, 2019 and no later than December 6, 2019.
In each case, submissions must be delivered or mailed to Donald C. Hunt, Vice President and Corporate Secretary, The Hartford
Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155.
16 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
COMMITTEES OF THE BOARD
The Board has four standing committees: the Audit Committee; the Compensation Committee; FIRMCo; and the Nominating
Committee. The Board has determined that all of the members of the Audit Committee, the Compensation Committee and the
Nominating Committee qualify as “independent” under applicable law, the listing standards of the NYSE and our Corporate
Governance Guidelines. The current members of the Board, the committees on which they serve and the primary functions of each
committee are identified below.
AUDIT COMMITTEE
CURRENT MEMBERS:*
R. Allardice
K. Mikells
M. Morris
J. Richardson (Chair)
G. Woodring
MEETINGS IN 2018: 9
* The Board has determined
that all members are
“financially literate” within
the meaning of the listing
standards of the NYSE and
“audit committee financial
experts” within the meaning
of the SEC’s regulations.
“In addition to its annual business and technology risk assessments and review of management’s loss reserve
estimates, the Audit Committee devoted substantial time to non-recurring items in 2018, overseeing the
accounting impacts resulting from Tax Reform and the final accounting of both the Talcott sale and the 2017
acquisition of Aetna’s U.S. group life and disability business.”
Julie G. Richardson, Committee Chair since 2016
ROLES AND RESPONSIBILITIES
• Oversees the integrity of the company's financial statements
• Oversees accounting, financial reporting and disclosure processes and the adequacy of
management’s systems of internal control over financial reporting
• Oversees the company's relationship with, and performance of, the independent registered
public accounting firm, including its qualifications and independence
• Oversees the performance of the internal audit function
• Oversees the company's compliance with legal and regulatory requirements and our Code of
Ethics and Business Conduct
• Discusses with management policies with respect to risk assessment and risk management
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
CURRENT MEMBERS:
T. Fetter
S. McGill
T. Renyi
T. Roseborough
V. Ruesterholz (Chair)
MEETINGS IN 2018: 6
“The Committee has taken an active role in support of the company’s commitment to fair pay, particularly
for women and people of color. In 2018, management provided the Committee with a comprehensive review
of the company’s process and practices, which include analyzing pay equity three times annually - before,
during, and after the annual compensation planning cycle - to identify unexplained pay disparities and
provide the opportunity to take appropriate actions if necessary. The Committee is pleased with the rigor of
the process and confident that management has and will continue to take steps to ensure pay equity for
women and people of color. The Committee will receive updates on an annual basis, with report-outs going
to the full Board.”
ROLES AND RESPONSIBILITIES
Virginia Ruesterholz, Committee Chair since 2016
• Oversees executive compensation and assists in defining an executive total compensation
policy
• Works with management to develop a clear relationship between pay levels, performance and
returns to shareholders, and to align compensation structure with objectives
• Has sole authority to retain, compensate and terminate any consulting firm used to evaluate
and advise on executive compensation matters
• Considers independence standards required by the NYSE or applicable law prior to retaining
compensation consultants, accountants, legal counsel or other advisors
• Meets annually with a senior risk officer to discuss and evaluate whether incentive
compensation arrangements create material risks to the company
• Responsible for compensation actions and decisions with respect to certain senior executives,
as described in the Compensation Discussion and Analysis beginning on page 36
2019 Proxy Statement
17
R. Allardice (Chair)
C. Dominguez
T. Fetter
S. McGill
K. Mikells
M. Morris
T. Renyi
J. Richardson
T. Roseborough
V. Ruesterholz
C. Swift
G. Woodring
BOARD AND GOVERNANCE MATTERS
FINANCE, INVESTMENT AND RISK MANAGEMENT COMMITTEE
CURRENT MEMBERS:
“In 2018, FIRMCo continued to focus on the company’s underwriting discipline, the monitoring of
catastrophe risks and the management of the investment portfolio given the volatility in the capital markets.
In addition, in light of the company’s strategic transformation, the Committee reviewed the company’s
updated risk appetite framework.”
Robert B. Allardice III, Committee Chair since 2016
ROLES AND RESPONSIBILITIES
• Reviews and recommends changes to enterprise policies governing management activities
relating to major risk exposures such as market risk, liquidity and capital requirements,
insurance risks and cybersecurity
• Reviews the company's overall risk appetite framework, which includes an enterprise risk
appetite statement, risk preferences, risk tolerances, and an associated limit structure for
each of the company's major risks
• Reviews and recommends changes to financial, investment and risk management guidelines
• Provides a forum for discussion among management and the entire Board of key financial,
MEETINGS IN 2018: 5
investment, and risk management matters
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Current Members:
C. Dominguez
M. Morris (Chair)
T. Renyi
T. Roseborough
V. Ruesterholz
“In 2018, the Nominating Committee continued its focus on board composition and effectiveness. As a
result of Committee recommendations, the Board formalized its commitment to diversity by adopting a
policy to ensure that diverse candidates are considered in each director search; and further enhanced its
evaluation process by adopting third-party facilitated evaluations every three years, commencing in 2019.”
ROLES AND RESPONSIBILITIES
• Advises and makes recommendations to the Board on corporate governance matters
Michael G. Morris, Committee Chair since 2018
Meetings in 2018: 4
• Considers potential nominees to the Board
• Makes recommendations on the organization, size and composition of the Board and its
committees
• Considers the qualifications, compensation and retirement of directors
• Reviews policies and reports on political contributions
• Oversees the establishment, management and processes related to environmental, social and
governance activities
18 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
THE BOARD’S ROLE AND RESPONSIBILITIES
BOARD RISK OVERSIGHT
The Board as a whole has ultimate responsibility for risk oversight. We have a formal enterprise Risk Appetite Framework that is
reviewed by the Board at least annually. In light of the evolution of the company's business and risk profile, the 2018 review of the
Risk Appetite Framework included a revised enterprise risk appetite statement and revised risk preferences, tolerances, and limits.
The Board exercises its oversight function through its standing committees, each of which has primary risk oversight responsibility
for all matters within the scope of its charter. Annually, each committee reviews and reassesses the adequacy of its charter and the
Nominating Committee reviews all charters and recommends any changes to the Board for approval. The chart below provides
examples of each committee’s risk oversight responsibilities.
BOARD OF DIRECTORS
AUDIT COMMITTEE
• Financial reporting
• Legal and regulatory
compliance
• Operational risk
COMPENSATION AND
MANAGEMENT
DEVELOPMENT COMMITTEE
FINANCE, INVESTMENT AND
RISK MANAGEMENT
COMMITTEE
NOMINATING AND
CORPORATE GOVERNANCE
COMMITTEE
• Compensation programs
• Insurance risk
• Governance policies and
• Talent acquisition,
retention and
development
• Succession planning
• Market risk
• Liquidity and capital
requirements
• Cybersecurity
procedures
• Board organization and
membership
• Sustainability
governance
The Audit Committee discusses with management risk assessment and risk management policies. FIRMCo oversees the investment,
financial, and risk management activities of the company and has oversight of all risks that do not fall within the oversight
responsibility of any other standing committee. FIRMCo is also briefed on our risk profile and risk management activities.
With respect to cybersecurity risk oversight, senior members of our Enterprise Risk Management, Information Protection and
Internal Audit functions provide detailed, regular reports on cybersecurity matters (including assessments conducted by, or in
conjunction with, third parties) to the full Board; FIRMCo, 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 reports
include The Hartford'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.
For a detailed discussion of management's day-to-day management of risks, including sources, impact and management of specific
categories of risk, see Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in
our annual report on Form 10-K for the year ended December 31, 2018.
BOARD AND SHAREHOLDER MEETING ATTENDANCE
The Board met nine times during 2018 and each of the directors attended 75% or more of the aggregate number of meetings of the
Board and the committees on which he or she served. We encourage our directors to attend the Annual Meeting of Shareholders,
and all of our directors attended the Annual Meeting of Shareholders held on May 16, 2018.
SHAREHOLDER ENGAGEMENT
Our Board and management value shareholder views and believe engagement with shareholders promotes transparency,
accountability, and strong governance practices. We engage with shareholders and solicit feedback in a number of different ways
throughout the year. Management and our investor relations team routinely speak with analysts and investors at investor
conferences and other formal events, as well as group and one-on-one meetings. In September 2018, we invited a panel of
institutional investors to engage with directors at a Board meeting session, a practice we began in 2011. In addition, since 2011 we
have maintained an annual shareholder engagement program focused on governance and compensation issues and, more recently,
sustainability.
As part of our annual shareholder engagement program, management contacts our largest shareholders in the fall of each year and
reports their feedback directly to the Nominating Committee and the Compensation Committee. In the fall of 2018, management
contacted shareholders representing approximately 50% of shares outstanding and had discussions with shareholders representing
approximately 17% of shares outstanding, as many shareholders opted not to participate in calls, noting that they had no material
concerns.
2019 Proxy Statement
19
BOARD AND GOVERNANCE MATTERS
As a result of shareholder feedback received in 2018 and prior years, and an analysis of governance trends and best practices, the
Board and management took several important actions in 2018 to enhance The Hartford's corporate governance practices.
What we heard from shareholders
Actions taken
Periodic third-party board evaluations can lead to more candid
conversations, provide a neutral perspective and help boards
benchmark their corporate governance practices.
Diversity enhances board performance and is critical to
effective corporate governance.
Pay equity is an area of increasing concern and companies that
pay women and people of color fairly are at a competitive
advantage in attracting and retaining top talent.
Adopted third-party facilitated evaluations every three years
commencing in 2019.
Formalized existing company practice by amending our
Corporate Governance Guidelines to ensure that diverse
candidates are included in the pool from which board candidates
are selected.
Instituted annual pay equity reporting to the Compensation
Committee and committed to enhanced pay equity practices
disclosure beginning with the company's 2018 Sustainability
Report (expected to be published in summer 2019).
TALENT DEVELOPMENT AND SUCCESSION PLANNING
Talent development and succession planning are important parts of the Board’s governance responsibilities. The CEO and
independent directors conduct an annual review of succession and continuity plans for the CEO. Succession planning includes the
identification and development of potential successors, policies and principles for CEO selection, and plans regarding succession in
the case of an emergency or the retirement of the CEO. In addition, each year, the Compensation Committee reviews succession
and continuity plans for the CEO and each member of the executive leadership team that reports to the CEO. The Compensation
Committee’s charter requires that it discuss the results of these reviews with the independent directors and/or the CEO. However,
given the importance of the topic and the engagement of the full Board on the issue, all directors are invited to these sessions. The
full Board routinely meets and interacts with employees who have been identified as potential future leaders of the company.
In recent years, the Board's robust talent development and succession planning efforts have resulted in the seamless and well-
managed transition of internal candidates into the company’s most senior roles.
BUSINESS ETHICS AND CONDUCT
“Always act with integrity and honesty, and be accountable in
everything you do.”
The Hartford's Code of Ethics and Business Conduct
Striving to do the right thing every day and in every situation is fundamental to our culture, and we are proud that we have been
recognized eleven times, including in 2019, by The Ethisphere® Institute as one of the “World’s Most Ethical Companies.” We have
adopted a Code of Ethics and Business Conduct, which applies to all of our employees, including our principal executive officer,
principal financial officer and principal accounting officer. We have also adopted a Code of Ethics and Business Conduct for
Members of the Board of Directors (the “Board Code of Ethics”) and a Code of Ethics and Political Compliance. These codes require
that all of our employees and directors engage in honest and ethical conduct in performing their duties, provide guidelines for the
ethical handling of actual or apparent conflicts of interest, and provide mechanisms to report unethical conduct. Directors certify
compliance with the Board Code of Ethics annually.
We provide our employees with a comprehensive and ongoing educational program, including courses on our Code of Ethics and
Business Conduct, potential conflicts of interest, privacy and information protection, marketplace conduct, and ethical decision-
making. Hotlines and online portals have been established for employees, vendors, or others to raise ethical concerns and
employees are encouraged to speak up whenever they have an ethics-oriented question or problem.
POLITICAL ACTIVITIES
The Nominating Committee reviews the company's political and lobbying policies and reports of political contributions annually. As
part of our Code of Ethics and Business Conduct, we do not make corporate contributions to political candidates or parties, and we
require that no portion of our dues paid to trade associations be used for political contributions. We do allow the use of corporate
resources for non-partisan political activity, including voter education and registration. We have two political action committees
(“PACs”), The Hartford Advocates Fund and The Hartford Advocates Federal Fund. The PACs are solely funded by voluntary
contributions from eligible employees in management-level roles. The PACs support candidates for federal and state office who are
interested in understanding insurance issues and developing public policy to address them. Our website includes information on: (1)
contributions made by The Hartford's PACs; (2) our policy on corporate contributions for political purposes; and (3) annual dues,
assessments and contributions of $25,000 or more to trade associations and coalitions. To learn more, please access our 2018
Political Activities Report, at https://ir.thehartford.com/corporate-governance/political-engagement.
20 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
SUSTAINABILITY PRACTICES
We believe that having a positive impact on the world is the right thing to do and a business imperative. Fostering and safeguarding
human achievement has been our business for over two hundred years, and sustainability considerations are integral to our
strategy. We recognize that people want to work for, invest in, and buy from an organization that shares their values. Our
sustainability efforts address economic, environmental and social impacts as highlighted in four key areas:
ENVIRONMENT
SOCIAL
GOVERNANCE
Environmental
Stewardship
Communities
& Giving
Diversity
& Inclusion
Ethics &
Governance
As an insurance company,
we understand the risks that
environmental challenges
present to people and
communities. As stewards of
the environment, we are
committed to mitigating
climate change and reducing
our carbon footprint
incrementally each year.
We help individuals and
communities prevail by
building safe, strong and
successful neighborhoods
through targeted
philanthropic investments,
by partnering with like-
minded national and local
organizations, and by
harnessing the power of our
more than 18,500
employees to engage in their
communities.
We are committed to
building an inclusive and
engaging culture where
people are respected for
who they are, recognized for
how they contribute and
celebrated for growth and
exceptional performance.
We value the diversity of our
employees' skills and life
experiences and invest
deeply in their development
so they can deliver on our
strategy and propel our
company forward.
We believe that doing the
right thing every day is core
to our character, and we are
proud of our reputation for
being a company that places
ethics and integrity above all
else.
Our sustainability strategy is built around measurable goals intended to both create long-term shareholder value and contribute
positively to society at large. For example, by 2022 some of our goals are to:
•
•
Reduce non-biodegradable non-recyclable solid waste by 20% and eliminate the use of Styrofoam;
Reduce our facilities' use of both energy and water by 15%;
• Double the percentage of hybrid or electric fleet vehicles, and move to 100% electric for campus shuttles and security
vehicles;
•
•
•
Rank in the top quartile in the insurance industry for representation of women and people of color through three levels of
reporting to the CEO
Provide one million small business customers and their employees with access to addiction prevention and educational
resources to combat the opioid epidemic; and
Bring the total number of children deputized through our signature Junior Fire Marshal® program to more than 115
million.
To learn more, please access our Sustainability Highlight Report, which presents our sustainability goals and provides data on our
sustainability practices and achievements, and our Global Reporting Initiative (GRI) G4 Response, which offers greater detail on our
sustainability activities at: https://www.thehartford.com/about-us/corporate-sustainability.
ESG Governance
Under our Corporate Governance Guidelines, the full Board has oversight responsibility for The Hartford's corporate reputation
and ESG activities. The Board receives a "deep dive" report on an ESG topic annually. The first such report was a deep dive on
climate change and severe weather in February 2018, which, among other things, looked at (1) how the company is reducing its
environmental impact; (2) how the company helps its customers reduce their environmental impact through its products, services
and investments; and (3) how the company's Enterprise Risk Management function monitors and manages the risks associated
with climate change and severe weather.
In addition to the Board's oversight responsibility of substantive ESG topics, the Nominating Committee retains oversight of the
governance framework and processes related to ESG activities. This includes oversight of the company's Sustainability
Governance Committee, a management committee comprised of senior leaders that sets and helps drive execution of the
company's sustainability strategy. The Sustainability Governance Committee meets at least four times each year and reports up
to the full Board at least annually. In 2018, the Sustainability Governance Committee met six times.
2019 Proxy Statement
21
BOARD AND GOVERNANCE MATTERS
DIRECTOR COMPENSATION
We use a combination of cash and stock-based compensation to attract and retain qualified candidates to serve on the Board.
Members of the Board who are employees of The Hartford or its subsidiaries are not compensated for service on the Board or any
of its committees.
For the 2018-2019 Board service year, non-management directors received an annual cash retainer of $100,000 and a $160,000
annual equity grant of restricted stock units (“RSUs”). Annual cash and equity retainer amounts have not increased since 2014.
ANNUAL CASH FEES
Cash compensation for the 2018-2019 Board service year beginning on May 16, 2018, the date of the 2018 Annual Meeting of
Shareholders, and ending on May 15, 2019, the date of the 2019 Annual Meeting, is set forth below.
Annual Cash Compensation(1)
Director Compensation Program
Annual Retainer
Chair Retainer
$100,000
$25,000 – Audit
$25,000 – FIRMCO, Compensation
$15,000 – Nominating
Lead Director Retainer
$35,000
(1) Directors may elect to defer all or part of the annual Board cash retainer and any Committee Chair or Lead Director cash
retainer into RSUs, to be distributed as common stock following the end of the director’s Board service.
ANNUAL EQUITY GRANT
In 2018, directors received an annual equity grant of $160,000, payable solely in RSUs pursuant to The Hartford 2014 Incentive
Stock Plan.
The RSUs vest and are distributed as common stock at the end of the Board service year, unless the director has elected to defer
distribution until the end of Board service. Directors may not sell, exchange, transfer, pledge, or otherwise dispose of the RSUs.
Resignation from the Board will result in a forfeiture of all unvested RSUs at the time of such resignation unless otherwise determined
by the Compensation Committee. However, RSUs will automatically vest upon the occurrence of any of the following events: (a)
retirement from service on the Board in accordance with our Corporate Governance Guidelines; (b) death of the director; (c) total
disability of the director, as defined in the 2014 Incentive Stock Plan; (d) resignation by the director under special circumstances where
the Compensation Committee, in its sole discretion, consents to waive the remaining vesting period; or (e) a “change of control,” as
defined in the 2014 Incentive Stock Plan. Outstanding RSUs are credited with dividend equivalents equal to dividends paid to holders
of our common stock.
OTHER
We provide each director with $100,000 of group life insurance coverage and $750,000 of accidental death and dismemberment
and permanent total disability coverage while he or she serves on the Board. We also reimburse directors for travel and related
expenses they incur in connection with their Board and committee service.
STOCK OWNERSHIP GUIDELINES AND RESTRICTIONS ON TRADING
The Board has established stock ownership guidelines for each director to obtain, by the third anniversary of the director’s
appointment to the Board, an ownership position in our common stock equal to five times his or her total annual cash retainer
(including cash retainers paid for committee chair or Lead Director responsibilities). All directors with at least three years of Board
service met the stock ownership guidelines as of December 31, 2018.
Our insider trading policy prohibits all hedging activities by directors, and permits directors to engage in transactions involving The
Hartford's equity securities only through: (1) a pre-established trading plan pursuant to Rule 10b5-1 of the Securities Exchange Act
of 1934; or (2) during “trading windows” of limited duration following the filing with the SEC of our periodic reports on Forms 10-K
and 10-Q and following a determination by the company that the director is not in possession of material non-public information. In
addition, our insider trading policy grants us the ability to suspend trading of our equity securities by directors.
22 www.thehartford.com
DIRECTOR SUMMARY COMPENSATION TABLE
We paid the following compensation to directors for the fiscal year ended December 31, 2018.
BOARD AND GOVERNANCE MATTERS
Name
Robert Allardice
Carlos Dominguez(3)
Trevor Fetter
Stephen P. McGill(4)
Kathryn A. Mikells
Michael G. Morris
Thomas Renyi
Julie G. Richardson
Teresa W. Roseborough
Virginia P. Ruesterholz
Greig Woodring(4)
Fees Earned or
Paid in Cash
($)(1)
125,000
125,000
135,000
100,000
100,000
115,000
100,000
125,000
100,000
125,000
100,000
Stock Awards
($)(2)
All Other
Compensation
($)
160,000
200,000
160,000
226,700
160,000
160,000
160,000
160,000
160,000
160,000
226,700
2,745
951
789
1,253
902
2,745
2,745
789
1,065
789
1,797
Total
($)
287,745
325,951
295,789
327,953
260,902
277,745
262,745
285,789
261,065
285,789
328,497
(1) Directors Mikells, Renyi and Richardson each elected to receive vested RSUs in lieu of cash compensation. The vested RSUs will
be distributed as common stock following the end of the director's Board service.
(2) These amounts reflect the aggregate grant date fair value of RSU awards granted during the fiscal year ended December 31,
2018.
(3) Upon appointment to the Board on February 21, 2018, Mr. Dominguez received a pro-rated annual cash retainer of $25,000
which is included with the 2018-2019 cash retainer of $100,000 he received in May 2018. Mr. Dominguez also received a pro-
rated restricted stock unit award for the 2017-2018 Board service year valued at $40,000 based on a closing stock price of
$53.81 on February 27, 2018; this award vested on May 16, 2018, the last day of the 2017-2018 Board year.
(4) Mr. McGill and Mr. Woodring each received a pro-rated restricted stock unit award valued at $66,700 on February 27, 2018,
the first day of the Company’s scheduled trading window following the filing of the Company’s 2017 annual report on Form 10-
K. The number of RSUs subject to the award was determined by dividing the grant value of $66,700 by $53.81, the closing
market price per share of The Hartford common stock on the grant date of February 27, 2018. These awards fully vested on
May 16, 2018, the last day of the 2017-2018 Board year. Mr. McGill elected to defer receipt of his RSU award until the end of
his Board service.
2019 Proxy Statement
23
BOARD AND GOVERNANCE MATTERS
DIRECTOR COMPENSATION TABLE—OUTSTANDING EQUITY
The following table shows the number and value of unvested equity awards outstanding as of December 31, 2018. The value of
these unvested awards is calculated using a market value of $44.45, the NYSE closing price per share of our common stock on
December31, 2018. The numbers have been rounded to the nearest whole dollar or share.
Name
Robert Allardice
Carlos Dominguez
Trevor Fetter
Stephen P. McGill
Kathryn A. Mikells
Michael G. Morris
Thomas Renyi
Julie G. Richardson
Teresa W. Roseborough
Virginia P. Ruesterholz
Greig Woodring
Stock Awards(1)
Number
of Shares or
Units of Stock
That Have Not
Vested (#)(3)
Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
3,056
3,056
3,056
3,056
3,056
3,056
3,056
3,056
3,056
3,056
3,056
135,839
135,839
135,839
135,839
135,839
135,839
135,839
135,839
135,839
135,839
135,839
Stock
Grant Date(2)
7/30/2018
7/30/2018
7/30/2018
7/30/2018
7/30/2018
7/30/2018
7/30/2018
7/30/2018
7/30/2018
7/30/2018
7/30/2018
(1) Additional stock ownership information is set forth in the beneficial ownership table on page 65.
(2) The RSUs were granted on July 30, 2018, the first day of the scheduled trading window following the filing of our Form 10-Q
for the quarter ended June 30, 2018.
(3) The number of RSUs for each award was determined by dividing $160,000 by $52.67, the closing price of our common stock as
reported on the NYSE on the date of the award. The RSUs will vest on May 15, 2019, and will be distributed at that time in
shares of the company’s common stock unless the director had previously elected to defer distribution of all or a portion of his
or her annual RSU award until the end of Board service. Directors Fetter, McGill, Mikells, Renyi and Richardson have made
elections to defer distribution of 100% of their RSU award.
24 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
The Board has adopted a Policy for the Review, Approval or Ratification of Transactions with Related Persons. This policy requires
our directors and Section 16 executive officers to promptly disclose any actual or potential material conflict of interest to the Chair
of the Nominating Committee and the Chairman for evaluation and resolution. If the transaction involves a Section 16 executive
officer or an immediate family member of a Section 16 executive officer, the matter must also be disclosed to our General Auditor or
Director of Compliance for evaluation and resolution.
We did not have any transactions requiring review under this policy during 2018.
COMMUNICATING WITH THE BOARD
Shareholders and other interested parties may communicate with directors by contacting Donald C. Hunt, Vice President and
Corporate Secretary of The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155. The Corporate
Secretary will relay appropriate questions or messages to the directors. Only items related to the duties and responsibilities of the
Board will be forwarded.
Anyone interested in raising a complaint or concern regarding accounting issues or other compliance matters directly with the
Audit Committee may do so anonymously and confidentially by contacting EthicsPoint:
By internet
By telephone
By mail
Visit 24/7
www.ethicspoint.com
1-866-737-6812 (U.S. and Canada)
1-866-737-6850 (all other countries)
The Hartford c/o EthicsPoint
P.O. Box 230369
Portland, Oregon 97281
2019 Proxy Statement
25
BOARD AND GOVERNANCE MATTERS
DIRECTOR NOMINEES
Eleven individuals will be nominated for election as directors at the Annual Meeting. The terms of office for each elected director
will run until the next annual meeting of shareholders and until his or her successor is elected and qualified, or until his or her earlier
death, retirement, resignation or removal from office.
In accordance with our Corporate Governance Guidelines, each director has submitted a contingent, irrevocable resignation that
the Board may accept if the director fails to receive more votes “for” than “against” in an uncontested election. In that situation, the
Nominating Committee (or another committee comprised of at least three non-management directors) would make a
recommendation to the Board about whether to accept or reject the resignation. The Board, not including the subject director, will
act on this recommendation within 90 days from the date of the Annual Meeting, and we will publicly disclose the Board's decision
promptly thereafter.
If for any reason a nominee should become unable to serve as a director, either the shares of common stock represented by valid
proxies will be voted for the election of another individual nominated by the Board, or the Board will reduce the number of directors
in order to eliminate the vacancy.
The Nominating Committee believes that each director nominee has an established record of accomplishment in areas relevant to
our business and objectives, and possesses the characteristics identified in our Corporate Governance Guidelines as essential to a
well-functioning and deliberative governing body, including integrity, independence and commitment. Other experience,
qualifications and skills the Nominating Committee looks for include the following:
Experience /
Qualification
Leadership
Relevance to The Hartford
Experience in significant leadership positions provides us with new insights, and demonstrates key
management disciplines that are relevant to the oversight of our business.
Insurance and Financial
Services Industries
Extensive experience in the insurance and financial services industries provides an understanding of the
complex regulatory and financial environment in which we operate and is highly important to strategic
planning and oversight of our business operations.
Digital/Technology
Digital and technology expertise is important in light of the speed of digital progress and the
development of disruptive technologies both in the insurance industry and more broadly.
Corporate Governance An understanding of organizations and governance supports management accountability, transparency
and protection of shareholder interests.
Risk Management
Risk management experience is critical in overseeing the risks we face today and those emerging risks
that could present in the future.
Finance and Accounting Finance and accounting experience is important in understanding and reviewing our business
operations, strategy and financial results.
Business Operations
and Strategic Planning
An understanding of business operations and processes, and experience making strategic decisions, are
critical to the oversight of our business, including the assessment of our operating plan and business
strategy.
Regulatory
An understanding of laws and regulations is important because we operate in a highly regulated industry
and we are directly affected by governmental actions.
Talent Management
We place great importance on attracting and retaining superior talent, and motivating employees to
achieve desired enterprise and individual performance objectives.
The Nominating Committee believes that our current Board is a diverse group whose collective experiences and qualifications bring
a variety of perspectives to the oversight of The Hartford. All of our directors hold, or have held, senior leadership positions in large,
complex corporations and/or charitable and not-for-profit organizations. In these positions, they have demonstrated their
leadership, intellectual and analytical skills and gained deep experience in core disciplines significant to their oversight
responsibilities on our Board. Their roles in these organizations also permit them to offer senior management a diverse range of
perspectives about the issues facing a complex financial services company like The Hartford. Key qualifications, skills and
experience our directors bring to the Board that are important to the oversight of The Hartford are identified and described below.
26 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
ROBERT B. ALLARDICE, III INDEPENDENT
Professional highlights:
• Consultant to Chairman of Supervisory Board,
Deutsche Bank (2002-2006)
Director since: 2008
Age: 72
• Regional Chief Executive Officer of North and South
America, Advisory Director, Deutsche Bank Americas
Holding Company (1994-1999)
Committees:
• Audit
• FIRMCo (Chair)
• Consultant, Smith Barney (1993-1995)
• Founder of Merger Arbitrage Department, Chief
Operating Officer of Equity Department, Founding
member of Finance Committee, Morgan Stanley &
Company (1974-1993)
Other public company directorships:
• Ellington Residential Mortgage REIT
(2013-present)
• GasLog Partners LP (2014-present)
Skills and qualifications relevant to The Hartford:
Mr. Allardice has served as a senior leader for multiple large, complex financial institutions, including as regional chief executive
officer of Deutsche Bank Americas Holding Corporation, North and South America. He brings to the Board over 35 years of
experience in the financial services industry, including at the senior executive officer level. His experience leading capital markets-
based businesses is relevant to the oversight of our investment management company and corporate finance activities. In
addition, Mr. Allardice has experience in a highly regulated industry, including interfacing with regulators and establishing
governance frameworks relevant to the oversight of our business. He has extensive corporate governance experience from service
as a director and audit committee member for several large companies, including seven years as Chairman of The Hartford's Audit
Committee.
CARLOS DOMINGUEZ INDEPENDENT
Professional highlights:
• Sprinklr Inc.
– President (2015-present)
– Chief Operating Officer (2015-2018)
• Cisco Systems, Inc.
– Senior Vice President, Office of the Chairman and
Chief Executive Officer (2008-2015)
– Senior Vice President, Worldwide Service
Provider Operations (2004-2008)
– Vice President, U.S. Network Services Provider
Sales (1999-2004)
– Positions of increasing responsibility in
operations and sales (1992-1999)
Director since: 2018
Age: 60
Committees:
• FIRMCo
• Nominating
Other public company directorships:
• Medidata Solutions, Inc. (2008-
present)
Skills and qualifications relevant to The Hartford:
Mr. Dominguez has more than 30 years of enterprise technology experience. He brings to the Board extensive and relevant digital
expertise as the company focuses on data analytics and digital capabilities to continuously improve the way it operates and
delivers value to customers. As President and Chief Operating Officer of Sprinklr Inc., Mr. Dominguez guides strategic direction
and leads the marketing, sales, services, and partnerships teams for a leading social media management company. Prior to joining
Sprinklr, he spent seven years as a technology representative for the Chairman and CEO of Cisco Systems, Inc. In this role, Mr.
Dominguez engaged with senior executives in the Fortune 500 and government leaders worldwide, sharing insights on how to
leverage technology to enhance and transform their businesses. In addition, he led the creation and implementation of Cisco's
Innovation Academy, which delivered innovation content to Cisco employees globally.
2019 Proxy Statement
27
BOARD AND GOVERNANCE MATTERS
TREVOR FETTER INDEPENDENT
Professional highlights:
• Senior Lecturer, Harvard Business School (Jan. 2019-
present)
• Tenet Healthcare Corporation
– Chairman (2015-2017)
– Chief Executive Officer (2003-2017)
– President (2002-2017)
• Chairman and Chief Executive Officer, Broadlane, Inc.
(2000-2002)
• Chief Financial Officer, Tenet Healthcare Corporation
(1996-2000)
Director since: 2007
Age: 59
Committees:
• Compensation
• FIRMCo
Other public company directorships:
• Tenet Healthcare Corporation
(2003-2017)
Skills and qualifications relevant to The Hartford:
Mr. Fetter has nearly two decades of experience as chief executive officer of multiple publicly traded companies. He has
demonstrated his ability to lead the management, strategy and operations of complex organizations. As a Senior Lecturer at
Harvard Business School, he teaches leadership and corporate accountability. He brings to the Board significant experience in
corporate finance and financial reporting acquired through senior executive finance roles, including as a chief financial officer of a
publicly traded company. He has experience navigating complex regulatory frameworks as the president and chief executive
officer of a highly-regulated, publicly traded healthcare company. In addition, Mr. Fetter serves as The Hartford's lead director,
providing strong independent Board leadership. He also has extensive corporate governance expertise from service as director of
large public companies, including four years as Chairman of the Board’s Nominating and Corporate Governance Committee.
STEPHEN P. McGILL INDEPENDENT
Professional highlights:
• Aon plc
– Group President, Aon plc and Chairman and Chief
Executive Officer, Risk Solutions (2012-2017)
– Chairman and Chief Executive Officer, Aon Risk
Solutions (2008-2012)
– Chief Executive Officer, Aon Risk Services,
Americas (2007-2008)
– Chief Executive Officer, Aon Global (2005-2007)
• Jardine Lloyd Thompson Group plc
– Chief Executive Officer (2002-2005)
– Deputy Chief Executive Officer (2001-2002)
– Director (1997-2001)
Director since: 2017
Age: 60
Committees:
• Compensation
• FIRMCo
Other public company directorships:
• None
Skills and qualifications relevant to The Hartford:
Mr. McGill has over 25 years of insurance industry experience. With his deep understanding of the insurance industry, Mr. McGill
brings significant and relevant risk management, regulatory and business expertise to the Board. As the leader of an international
risk management and reinsurance brokerage, Mr. McGill is able to provide the Board with insights into complex distribution
channels, and what it takes to succeed in the marketplace and profitably grow the company’s businesses. In addition, Mr. McGill
brings an international perspective to the Board. He serves on the International Advisory Board of British American Business, and
is past president of the Insurance Institute of London. In 2014, Mr. McGill was awarded a Commander of the British Empire (CBE)
by Queen Elizabeth II in recognition for his exceptional service to the insurance industry and also for humanitarian services.
28 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
KATHRYN A. MIKELLS INDEPENDENT
Professional highlights:
• Chief Financial Officer, Diageo plc (2015-present)
• Chief Financial Officer, Xerox Corporation
(2013-2015)
• Chief Financial Officer, ADT Security Services
(2012-2013)
• Chief Financial Officer, Nalco Company (2010-2011)
• UAL Corporation (parent of United Airlines)
– Chief Financial Officer, Executive Vice President
(2008-2010)
– Head of Investor Relations (2007-2008)
– Vice President, Financial Planning and Analysis
(2006-2007)
– Treasurer (2005-2006)
Director since: 2010
Age: 53
Committees:
• Audit
• FIRMCo
Other public company directorships:
• Diageo plc (2015-present)
Skills and qualifications relevant to The Hartford:
Ms. Mikells has extensive experience in a variety of executive management positions, with a focus on leading the finance function
of global organizations. She has significant experience in corporate finance and financial reporting acquired through senior
executive roles in finance, including as a chief financial officer of multiple publicly traded companies. Ms. Mikells brings to the
Board strong management and transformational skills, demonstrated during ADT’s successful transition into an independent
company, as well as significant mergers and acquisitions experience acquired through the sale of Naclo to Ecolab and the merger
of United Airlines with Continental Airlines. She has demonstrated risk management skills as a leader responsible for financial
and corporate planning for domestic and international organizations. In addition, Ms. Mikells has strong talent development skills
acquired through years of leading global finance divisions.
MICHAEL G. MORRIS INDEPENDENT
Professional highlights:
• American Electric Power Company, Inc.
– Non-Executive Chairman (2012-2014)
– Chairman, President and Chief Executive Officer
(2004-2011)
• Chairman, President and Chief Executive Officer,
Northeast Utilities (1997-2003)
Director since: 2004
Age: 72
Committees:
• Audit
• FIRMCo
• Nominating
Other public company directorships:
• Alcoa Corporation (2002-present)
• American Electric Power Company,
Inc. (2004-2014)
• L Brands, Inc. (2012-present)
• Spectra Energy Corp. (2013-2017)
• Spectra Energy Partners GP, LLC
(2017-2018)
Skills and qualifications relevant to The Hartford:
Mr. Morris has over two decades of experience as chief executive officer and president of multiple publicly traded companies in
the highly regulated energy industry. He brings to the Board significant experience as a senior leader responsible for the strategic
direction and management of complex business operations. In addition, he has experience overseeing financial matters in his roles
as chairman, president and CEO of AEP, and as chairman, president and CEO of Northeast Utilities. He has proven skills
interacting with governmental and regulatory agencies acquired through years of leading various multi-national organizations in
the energy and gas industries, serving on the U.S. Department of Energy’s Electricity Advisory Board, the National Governors
Association Task Force on Electricity Infrastructure, the Institute of Nuclear Power Operations and as Chair of the Business
Roundtable’s Energy Task Force. In addition, he has corporate governance expertise from service as a director and member of the
audit, compensation, finance, risk management and nominating/governance committees of various publicly traded companies.
2019 Proxy Statement
29
BOARD AND GOVERNANCE MATTERS
JULIE G. RICHARDSON INDEPENDENT
Professional highlights:
• Providence Equity Partners LLC
– Senior Advisor (2012-2014)
– Managing Director and Head of New York Private
Equity Team (2003-2012)
• Managing Director and Head of Telecommunications,
Media and Technology Investment Banking Group,
JPMorgan Chase &Co. (1998-2003)
• Managing Director, Merrill Lynch (1987-1998)
Director since: 2014
Age: 55
Committees:
• Audit (Chair)
• FIRMCo
Other public company directorships:
• VEREIT, Inc. (2015-present);
• Yext, Inc. (2015-present)
• Arconic Inc. (2016-2018);
• UBS Group AG (2017-present)
Skills and qualifications relevant to The Hartford:
Ms. Richardson has over 25 years of financial services experience as a banker and investment professional at some of the world’s
largest financial services firms. Previously, she led management of Providence Equity Partners' New York Office as partner and
headed JPMorgan's Global Telecommunications, Media and Technology group. In these roles, Ms. Richardson demonstrated skills
leading and managing large, global teams. Ms. Richardson has significant experience in financial analysis and capital markets
acquired as a senior leader at global financial services institutions. She also has extensive risk management skills acquired
through a long and distinguished career as a leader in both private and public financial investment organizations.
TERESA WYNN ROSEBOROUGH INDEPENDENT
Professional highlights:
• Executive Vice President, General Counsel and
Director since: 2015
Age: 60
Corporate Secretary, The Home Depot (2011-present)
• Senior Chief Counsel Compliance & Litigation and
Deputy General Counsel, MetLife, Inc. (2006-2011)
• Partner, Sutherland, Asbill & Brennan LLP
(1996-2006)
• Deputy Assistant Attorney General, Office of Legal
Counsel, U.S. Department of Justice (1994-1996)
Committees:
• Compensation
• FIRMCo
• Nominating
Other public company directorships:
• None
Skills and qualifications relevant to The Hartford:
Ms. Roseborough has over two decades of experience as a senior legal advisor in government, law firm and corporate settings.
She has experience as a senior leader responsible for corporate compliance matters at major publicly traded companies and as an
attorney focused on complex litigation matters, including before the U.S. Supreme Court. She brings to the Board extensive
regulatory experience acquired as a government attorney providing legal counsel to the White House and all executive branch
agencies, as well as corporate governance expertise from service as General Counsel and Corporate Secretary of a publicly-
traded company. Ms. Roseborough also has in-depth knowledge of the financial services industry gained through senior legal
positions at MetLife, Inc., a major provider of insurance and employee benefits.
30 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
VIRGINIA P. RUESTERHOLZ INDEPENDENT
Professional highlights:
• Verizon Communications, Inc.
Director since: 2013
Age: 57
– Executive Vice President (Jan. 2012-Jul. 2012)
– President, Verizon Services Operations
(2009-2011)
– President, Verizon Telecom (2006-2008)
– President, Verizon Partner Solutions (2005-2006)
• Positions of increasing responsibility in operations,
sales and customer service, New York Telephone
(1984-2005)
Committees:
• Compensation (Chair)
• FIRMCo
• Nominating
Other public company directorships:
• Frontier Communications
Corporation (2013-present)
• Bed Bath & Beyond Inc. (2017-
present)
Skills and qualifications relevant to The Hartford:
Ms. Ruesterholz has held a variety of senior executive positions, including as Executive Vice President at Verizon
Communications and President of the former Verizon Services Operations. As a senior leader of a Fortune 100 company, she has
held principal oversight responsibility for key strategic initiatives, navigated the regulatory landscape of large-scale operations,
and led an organization with over 25,000 employees. Ms. Ruesterholz brings to the Board vast experience in large-scale
operations, including sales and marketing, customer service, technology and risk management. Ms. Ruesterholz also brings to the
Board substantial financial and strategic expertise acquired as president of various divisions within Verizon and is currently a
Trustee of the Board of Stevens Institute of Technology where she served as Chairman of the Board from 2013-2018.
CHRISTOPHER J. SWIFT
Professional highlights:
• The Hartford Financial Services Group, Inc.
– Chairman (2015-present)
– Chief Executive Officer (2014-present)
– Executive Vice President and Chief Financial
Officer (2010-2014)
• Vice President and Chief Financial Officer, Life and
Retirement Services, American International Group,
Inc. (2003-2010)
• Partner, KPMG, LLP (1999-2003)
• Executive Vice President, Conning Asset
Management, General American Life Insurance
Company (1997-1999)
• KPMG, LLP
– Partner (1993-1997)
– Auditor (1983-1993)
Director since: 2014
Age: 58
Committees:
• FIRMCo
Other public company directorships:
• None
Skills and qualifications relevant to The Hartford:
Mr. Swift has over 30 years of experience in the financial services industry, with a focus on insurance. As Chairman and CEO of
The Hartford, he brings to the Board unique insight and knowledge into the complexities of our businesses, relationships,
competitive and financial positions, senior leadership and strategic opportunities and challenges. Mr. Swift leads the execution of
our strategy, directs capital management actions and strategic investments, and oversees the continuous strengthening of the
company’s leadership pipeline. As Chief Financial Officer, he led the team that developed the company’s go-forward strategy. He
is a certified public accountant with experience working at a leading international accounting firm, including serving as head of its
Global Insurance Industry Practice.
2019 Proxy Statement
31
BOARD AND GOVERNANCE MATTERS
GREIG WOODRING INDEPENDENT
Professional highlights:
• Reinsurance Group of America
– President and Chief Executive Officer
(1993-2016)
• General American Life Insurance Company
– Executive Vice President (1992-1993)
– Head of Reinsurance (1986-1992)
– Positions of increasing responsibility (1979-1986)
Director since: 2017
Age: 67
Committees:
• Audit
• FIRMCo
Other public company directorships:
• Reinsurance Group of America,
Incorporated (1993-2016)
• Sun Life Financial Inc. (Jan. - April
2017)
Skills and qualifications relevant to The Hartford:
Mr. Woodring brings significant and valuable insurance industry and leadership experience to the Board, demonstrated by his
more than two decades leading Reinsurance Group of America, Incorporated (RGA), a leading life reinsurer with global
operations. During his tenure, RGA grew to become one of the world’s leading life reinsurers, with offices in 26 countries and
annual revenues of more than $10 billion. Mr. Woodring has demonstrated skills in areas that are relevant to the oversight of the
company, including risk management, finance, and operational expertise. Mr. Woodring serves as Chairman of the International
Insurance Society, and is a fellow of the Society of Actuaries and a member of the American Academy of Actuaries.
32 www.thehartford.com
AUDIT MATTERS
ITEM 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
In accordance with its Board-approved charter, the Audit Committee is directly responsible for the appointment, compensation,
retention and oversight of the independent external audit firm retained to audit the company’s financial statements. The Audit
Committee has appointed Deloitte & Touche LLP (“D&T”) as the company’s independent registered public accounting firm for the
fiscal year ending December 31, 2019. D&T has been retained as the company’s independent registered public accounting firm
since 2002. In order to assure continuing auditor independence, the Audit Committee periodically considers whether there should
be a regular rotation of the independent registered public accounting firm.
In selecting D&T for fiscal year 2019, the Audit Committee carefully considered, among other items:
• The professional qualifications of D&T, the lead audit partner and other key engagement partners;
• D&T’s depth of understanding of the company’s businesses, accounting policies and practices and internal control over
financial reporting;
• D&T’s quality controls and its processes for maintaining independence; and
• The appropriateness of D&T’s fees for audit and non-audit services.
The Audit Committee oversees and is ultimately responsible for the outcome of audit fee negotiations associated with the
company’s retention of D&T. In addition, when a rotation of the audit firm’s lead engagement partner is mandated, the Audit
Committee and its chairperson are involved in the selection of D&T’s new lead engagement partner. The members of the Audit
Committee and the Board believe that the continued retention of D&T to serve as the company’s independent external auditor is
in the best interests of the company and its investors.
Although shareholder ratification of the appointment of D&T is not required, the Board requests ratification of this appointment
by shareholders. If shareholders fail to ratify the selection, the Audit Committee will reconsider whether or not to retain D&T.
Representatives of D&T will attend the Annual Meeting, will have the opportunity to make a statement if they desire to do so, and
will be available to respond to appropriate questions.
✓ The Board recommends that shareholders vote “FOR” the ratification of the appointment of Deloitte & Touche LLP as
our independent registered public accounting firm for the fiscal year ending December 31, 2019.
FEES OF THE INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The following table presents fees for professional services provided by D&T, the member firms of Deloitte Touche Tohmatsu, and
their respective affiliates (collectively, the “Deloitte Entities”) for the years ended December 31, 2018 and 2017.
Audit fees
Audit-related fees(1)
Tax fees(2)
All other fees(3)
Total
Year Ended December 31, 2018
$
$
$
$
$
10,171,000 $
1,576,000 $
182,000 $
592,000 $
12,521,000 $
Year Ended December 31, 2017
13,881,000
1,356,000
184,000
—
15,421,000
(1) Fees for the years ended December 31, 2018 and 2017 principally consisted of procedures related to regulatory filings and
acquisition or divestiture related services.
(2) Fees for the years ended December 31, 2018 and 2017 principally consisted of tax compliance services.
(3) Fees for the year ended December 31, 2018 in this category pertain to an engagement for permissible consulting services with
an entity previously used by the company, but acquired by D&T in the interim and reengaged in 2018.
The Audit Committee reviewed the non-audit services provided by the Deloitte Entities during 2018 and 2017 and concluded that
they were compatible with maintaining the Deloitte Entities’ independence.
2019 Proxy Statement
33
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND
PROCEDURES
The Audit Committee has established policies requiring pre-approval of audit and non-audit services provided by the independent
registered public accounting firm. These policies require that the Audit Committee pre-approve specific categories of audit and
audit-related services annually.
The Audit Committee approves categories of audit services and audit-related services, and related fee budgets. For all pre-
approvals, the Audit Committee considers whether such services are consistent with the rules of the SEC and the PCAOB on
auditor independence. The independent registered public accounting firm and management report to the Audit Committee on a
timely basis regarding the services rendered by, and actual fees paid to, the independent registered public accounting firm to ensure
that such services are within the limits approved by the Audit Committee. The Audit Committee’s policies require specific pre-
approval of all tax services, internal control-related services and all other permitted services on an individual project basis.
As provided by its policies, the Audit Committee has delegated to its Chair the authority to address any requests for pre-approval of
services between Audit Committee meetings, up to a maximum of $100,000. The Chair must report any pre-approvals to the full
Audit Committee at its next scheduled meeting.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee currently consists of five independent directors, each of whom is “financially literate” within the meaning of
the listing standards of the NYSE and an “audit committee financial expert” within the meaning of the SEC’s regulations. The Audit
Committee oversees The Hartford's financial reporting process on behalf of the Board. Management has the primary responsibility
for establishing and maintaining adequate internal financial controls, for preparing the financial statements and for the public
reporting process. Deloitte & Touche LLP (“D&T”), our independent registered public accounting firm for 2018, is responsible for
expressing opinions that (1) our consolidated financial statements present fairly, in all material respects, the financial position,
results of operations and cash flows in conformity with generally accepted accounting principles and (2) we maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018.
In this context, the Audit Committee has:
(1) Reviewed and discussed the audited financial statements for the year ended December 31, 2018 with management;
(2) Discussed with D&T the matters required to be discussed by Public Company Accounting Oversight Board (“PCAOB”)
Auditing Standard No. 1301, Communications with Audit Committees; and
(3) Received the written disclosures and the letter from D&T required by applicable requirements of the PCAOB regarding
the independent accountant’s communications with the Audit Committee concerning independence, and has discussed
with D&T the independent accountant’s independence.
Based on the review and discussions described in this report, the Audit Committee recommended to the Board that the audited
financial statements should be included in the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018
for filing with the SEC.
Report Submitted: February 21, 2019
Members of the Audit Committee:
Julie G. Richardson, Chair
Robert B. Allardice, III
Kathryn A. Mikells
Michael G. Morris
Greig Woodring
34 www.thehartford.com
COMPENSATION MATTERS
ITEM 3
ADVISORY APPROVAL OF 2018 COMPENSATION OF
NAMED EXECUTIVE OFFICERS
Section 14A of the Securities Exchange Act of 1934, as amended, provides our shareholders with the opportunity to vote to
approve, on an advisory basis, the compensation of our NEOs as disclosed in this proxy statement in accordance with the rules of
the SEC. We currently intend to hold these votes on an annual basis.
As described in detail in the Compensation Discussion and Analysis beginning on page 36, our executive compensation program is
designed to promote long-term shareholder value creation and support our strategy by: (1) encouraging profitable growth
consistent with prudent risk management, (2) attracting and retaining key talent, and (3) appropriately aligning pay with short-
and long-term performance. The advisory vote on this resolution is not intended to address any specific element of
compensation; rather, it relates to the overall compensation of our NEOs, as well as the philosophy, policies and practices
described in this proxy statement. You have the opportunity to vote for, against or abstain from voting on the following resolution
relating to executive compensation:
RESOLVED, that the shareholders approve, on an advisory basis, the compensation of the named executive officers, as
disclosed pursuant to the compensation disclosure rules of the Securities and Exchange Commission, including the
Compensation Discussion and Analysis, the compensation tables and the narrative discussion contained in this proxy
statement.
Because the required vote is advisory, it will not be binding upon the Board. The Compensation Committee will, however, take
into account the outcome of the vote when considering future executive compensation arrangements.
✓
The Board recommends that shareholders vote “FOR” the above resolution to approve our compensation of named
executive officers as disclosed in the Compensation Discussion and Analysis, the compensation tables and the narrative
discussion contained in this proxy statement.
2019 Proxy Statement
35
COMPENSATION DISCUSSION AND ANALYSIS
This section explains our compensation philosophy, summarizes our compensation programs and reviews compensation decisions
for the Named Executive Officers (“NEOs”) listed below. It also describes programs that apply to the CEO and all of his executive
direct reports, other than senior executives directly supporting our Mutual Funds segment who have an independent compensation
program (collectively, “Senior Executives”).
Name
Christopher Swift
Beth Costello
Douglas Elliot
Brion Johnson
Title
Chairman and Chief Executive Officer
Executive Vice President and Chief Financial Officer
President
Executive Vice President and Chief Investment Officer; President of HIMCO
William Bloom
Executive Vice President, Operations, Technology & Data
EXECUTIVE SUMMARY
PERFORMANCE HIGHLIGHTS
Our 2018 financial results were excellent, despite elevated catastrophe losses for the second consecutive year. Full year net income
available to common stockholders was $1,801 million, core earnings* were $1,575 million, and our net income and core earnings
return on equity ("ROE)*† were 13.7% and 11.6%, respectively, well in excess of our cost of capital. 2018 was also a year of several
significant accomplishments, including:
•
•
•
The continued integration of Aetna's U.S. group life and disability business,
The announcement of our agreement to acquire The Navigators Group, Inc. ("Navigators"), a global specialty insurance
company, and
The close of the sale of Talcott Resolution.
We also made notable progress on our innovation agenda, including the launch of our Small Business Innovation Lab to design and
test new products and business models to meet the changing needs of our small business customers, and the purchase of Y-Risk, a
company specializing in the sharing and on-demand economy. During the year we also continued to make investments in our people,
processes, data, and technology. As we enter 2019, our strategic priorities remain consistent and we are focused on realizing the full
potential of the recent acquisitions. Expanding product capabilities and risk appetite are key pillars of our strategy; with the Group
Benefits and Navigators acquisitions, the near-term focus is on successfully integrating the acquisitions and maximizing our
combined potential, including deepening our distribution relationships and meeting a broader array of customer needs.
Highlighted below are year-over-year comparisons of our net income and core earnings performance and our three-year ROE and
core earnings ROE results. Core earnings is the primary determinant of our annual incentive plan funding, as described on page 40,
and average annual Core Earnings ROE over a three-year performance period is the metric used for 50% of performance shares
granted to Senior Executives, as described on page 41 (in each case, as adjusted for compensation purposes).
YEAR-OVER-YEAR PERFORMANCE
THREE-YEAR PERFORMANCE
Net Income (Loss)
Available to Common
Stockholders
$1,801
)
s
n
o
i
l
l
i
M
(
$
$(3,131)
2017 2018
Core Earnings
ROE
Core Earnings ROE
$1,575
5.2%
13.7%
11.6%
6.7%
5.2%
$1,014
)
s
n
o
i
l
l
i
M
(
$
2017 2018
2016 2017 2018
2016 2017 2018
(20.6)%
* Denotes a non-GAAP financial measure. For definitions and reconciliations to the most directly comparable GAAP measure, see Appendix A.
† Net income ROE represents net income (loss) available to common stockholders ROE.
36 www.thehartford.com
COMPENSATION MATTERS
2018 Business Performance
In February 2018, the company provided outlooks for the key business metrics highlighted below. These outlooks were
management's estimates for 2018 performance based on business, competitive, capital market, catastrophe and other assumptions,
and were tied to the company's 2018 operating plan. When setting the 2018 operating plan, both the Board and management
concluded that these key business metrics would only be achievable with strong business performance. As described on page 40,
these key business metrics drive core earnings results and meeting or exceeding the outlooks is a major determinant of our annual
incentive plan funding level. Excluding catastrophe losses, our business segment metrics were in line or better than our outlooks
from February 2018.
Commercial Lines
Personal Lines
Combined ratio of
92.6 was better than
outlook of 93.0 - 95.5
principally due to
favorable prior
accident year reserve
development, partially
offset by higher
catastrophe losses.
Combined ratio of
106.3 was worse than
outlook of 96.0 - 98.0.
Results were
negatively impacted by
two hurricanes and the
largest U.S. wildfire
loss in insurance
industry history.
Underlying combined
ratio* of 91.5, which
excludes catastrophes
and prior year
development, was in
line with outlook.
Underlying combined
ratio of 91.2, which
excludes catastrophes
and prior year
development, was in
line with outlook.
P&C Net
Investment Income
P&C net investment
income of $1.2 billion
was better than
outlook of $1.125 -
$1.175 billion
primarily due to higher
limited partnership
income.
Group Benefits
Net income of $340
million was
significantly better
than outlook of $275-
$295 million primarily
due to better loss and
expense ratios,
particularly in group
disability due to
continued favorable
incidence and recovery
trends, as well as
higher limited
partnership income.
What is
combined ratio?
This ratio measures the
cost of claims and
expenses for every
$100 of earned
premiums. If the
combined ratio is less
than 100, the company
is making an
underwriting profit.
* Denotes a non-GAAP financial measure. For definitions and reconciliations to the most directly comparable GAAP measure, see Appendix A.
Total Shareholder Returns
The following chart shows The Hartford's total shareholder return ("TSR") relative to the S&P 500, S&P 500 Insurance Composite
and S&P P&C indices. On both a one- and three-year basis, The Hartford's TSR has lagged the broader market and peers. This result
has had a direct impact on compensation for our Senior Executives, including both to their personal stock holdings and with no
payout on the TSR component of 2016-2018 performance shares, as described on page 49.
50
40
30
20
10
0
-10
-20
-30
30%
21%
35%
9%
(4)%
(5)%
(11)%
(19)%
1-YEAR (2018)
3-YEAR (2016-2018)
The Hartford (HIG)
S&P 500
S&P 500 Insurance Composite
S&P 500 Property and Casualty
2019 Proxy Statement
37
COMPENSATION MATTERS
2018 COMPENSATION HIGHLIGHTS
Our executive compensation program is designed to promote long-term shareholder value creation and support our strategy by: (1)
encouraging profitable growth consistent with prudent risk management; (2) attracting and retaining key talent; and (3)
appropriately aligning pay with annual and long-term performance.
The table below reflects the 2018 compensation package (base salary, annual incentive plan ("AIP") award and long-term incentive
("LTI") award) for each NEO. Although this table is not a substitute for the Summary Compensation Table information beginning on
page 52, we believe it provides a simple and concise picture of 2018 compensation decisions.
Compensation Component
Base Salary Rate
2018 AIP Award
2018 LTI Award
C. Swift
$ 1,150,000 $
B. Costello
D. Elliot
B. Johnson
725,000 $ 950,000 $ 575,000 $
W. Bloom
575,000
$ 4,800,000 $ 1,925,000 $ 3,050,000 $ 2,250,000 $ 1,550,000
$ 8,000,000 $ 1,775,000 $ 5,000,000 $ 1,600,000 $ 1,100,000
Total 2018 Compensation Package
$ 13,950,000 $ 4,425,000 $ 9,000,000 $ 4,425,000 $ 3,225,000
2018 Compensation Decisions
The Compensation Committee
approved an AIP funding level of
160% of target.
Rationale
Performance against pre-established Compensation Core Earnings targets produced a
formulaic AIP funding level capped at 200% of target. The Compensation Committee
reduced this funding level to 160% following its qualitative review, taking into
consideration a second consecutive year of elevated catastrophe losses. (pages 46-47)
The Compensation Committee
certified a 2016-2018
performance share award payout
at 100% of target.
The company's average annual Compensation Core ROE during the performance period
was 10.0%, resulting in a payout of 200% of target for the ROE component (50% of the
award). Because the company's TSR during the performance period was below threshold,
there was no payout for the TSR component (50% of the award). (page 49)
COMPONENTS OF COMPENSATION AND PAY MIX
NEO compensation is weighted towards variable compensation (annual and long-term incentives), where actual amounts earned
may differ from targeted amounts based on company and individual performance. Each NEO has a target total compensation
opportunity that is reviewed annually by the Compensation Committee (in the case of the CEO, by the independent directors) to
ensure alignment with our compensation objectives and market practice.
Compensation Component Description
Base Salary
• Fixed level of cash compensation based on market data, internal pay equity, responsibility,
expertise and performance.
Annual Incentive Plan
• Variable cash award based primarily on annual company operating performance against a
predetermined financial target and achievement of individual performance objectives.
Long-Term Incentive Plan
• Variable awards granted based on individual performance, potential and market data.
• Designed to drive long-term performance, encourage share ownership among senior
executives, and foster retention.
• Award mix (50% performance shares and 50% stock options) reflects actual stock price
performance, peer-relative stock price and dividend performance and actual operating
performance.
Approximately 91% of CEO target annual compensation and approximately 84% of other NEO target annual compensation are
variable based on performance, including stock price performance:
Pay Mix — CEO
Salary
9%
Annual Incentive
25%
Long-Term Incentive
66%
Variable with Performance: 91%
Pay Mix — Other NEOs
Salary
16%
Annual Incentive
30%
Long-Term Incentive
54%
Variable with Performance: 84%
38 www.thehartford.com
COMPENSATION MATTERS
COMPENSATION BEST PRACTICES
Our current compensation best practices include the following:
WHAT WE DO
✓ Compensation heavily weighted towards variable pay
✓ Senior Executives generally receive the same benefits as full-time employees
✓ Double trigger requirement for cash severance and equity vesting upon a change of control*
✓ Cash severance upon a change of control limited to 2x base salary + bonus
✓ Independent compensation consultant
✓ Risk mitigation in plan design and annual review of compensation plans, policies and practices
✓ Prohibition on hedging, monetization, derivative and similar transactions with company securities
✓ Prohibition on Senior Executives pledging company securities
✓ Stock ownership guidelines for directors and Senior Executives
✓ Periodic review of compensation peer groups
✓ Competitive burn rate and dilution for equity program
* In the case of equity, so long as the awards are assumed or replaced with substantially equivalent awards
WHAT WE DON'T DO
û No tax gross-ups
û No individual employment agreements
û No granting of stock options with an exercise price less than the fair market value of our common stock on the date of grant
û No re-pricing of stock options
û No buy-outs of underwater stock options
û No reload provisions in any stock option grant
û No payment of dividends on unvested performance shares
“SAY-ON-PAY” RESULTS
At last year’s Annual Meeting, shareholders voted 96% in favor of our “Say-on-Pay” proposal.
The Compensation Committee considered the vote to be an endorsement of The Hartford’s
executive compensation programs and policies, and took this strong level of support into
account in reviewing those programs and policies. During our annual shareholder outreach
program, management also discussed the vote, along with aspects of its executive
compensation, sustainability and corporate governance practices, to gain a deeper
understanding of shareholders’ perspectives.
2018
“Say-On-Pay”
Support
96%
2019 Proxy Statement
39
COMPENSATION MATTERS
COMPONENTS OF THE COMPENSATION PROGRAM
Each Senior Executive has a target total compensation opportunity comprised of both fixed (base salary) and variable (annual and
long-term incentives) compensation. In addition, Senior Executives are eligible for benefits available to employees generally. This
section describes the different components of our compensation program for Senior Executives and lays out the framework in
which compensation decisions are made. For a discussion of the 2018 compensation decisions made within this framework, see Pay
for Performance beginning on page 46.
1. BASE SALARY
Each Senior Executive’s base salary is reviewed by the Compensation Committee (in the case of the CEO, the independent
directors) annually, upon promotion, or following a change in job responsibilities, based on market data, internal pay equity and level
of responsibility, expertise and performance.
2. ANNUAL INCENTIVE PLAN AWARDS
Our employees, including the Senior Executives, are eligible to earn cash awards based on annual company and individual
performance. Each employee has a target AIP opportunity. The Compensation Committee uses the following process to determine
individual Senior Executive AIP awards. Actual results for 2018 are described on pages 46-49.
STEP 1:
Financial Performance Against Target (Primary Criterion) — Produces the formulaic company AIP funding level
The AIP funding level is based primarily on core earnings performance against the annual operating plan reviewed by the Board at
the start of the performance/fiscal year. The Compensation Committee selected core earnings because: (1) the Committee believes
it best reflects annual operating performance; (2) it is a metric investment analysts commonly look to when evaluating annual
performance; (3) it is prevalent among peers; and (4) all employees can impact it.
Certain adjustments are made to core earnings for compensation purposes
to ensure employees are held accountable for operating decisions made
that year, and are neither advantaged nor disadvantaged by the effect of
certain items outside their control. At the beginning of the year, the
Compensation Committee approves a definition of "Compensation Core
Earnings." The definition lists adjustments that will be made to core
earnings at year-end in order to arrive at Compensation Core Earnings,
such as accounting changes, catastrophe losses above or below budget, and
unusual or non-recurring items. The 2018 definition and a reconciliation
from GAAP net income to Compensation Core Earnings are provided in
Appendix A.
As illustrated below, target performance (i.e., achievement of the operating
plan) results in an AIP funding level of 100% of target. The Compensation
Committee also establishes a threshold performance level, below which no
AIP awards are earned, as well as a maximum funding level for performance
significantly exceeding target.
Compensation Core Earnings
I
L
E
V
E
L
G
N
D
N
U
F
P
A
C
A
L
U
M
R
O
F
I
I
200%
150%
100%
Threshold
Performance
50%
85%
Maximum
Performance
Target
Performance
100%
115%
PERFORMANCE VS. TARGET
Treatment of Catastrophes
Due to the unpredictability of catastrophe losses
(“CATs”), adjustments for, or the exclusion of, CATs
from annual award determinations are common
among P&C insurers. The AIP design includes an
adjustment in the definition of Compensation Core
Earnings for CATs above or below budget. The CAT
budget represents the estimated CATs included in
the company’s operating plan based on the
company’s long-term CAT experience, generally
over 10 years. The Compensation Committee
believes this is an appropriate way to manage the
year-to-year volatility that would result from
unusually heavy or unusually light CATs in any
given year, which would unduly penalize or unduly
benefit employees for results outside their control.
In its qualitative review under Step 2, the
Compensation Committee retains the flexibility to
use discretion to make adjustments to AIP funding
levels, including as a result of CATs.
Target Rigor and Alignment with Shareholders
• Both the Board and management deem our
annual fiscal year operating plan and the
associated AIP financial target to be achievable
only with strong business performance.
• Key business metrics within the plan, such as
combined ratios, P&C net investment income,
and Group Benefit margins drive core earnings
results.
• The outlook for certain of these metrics are
announced to investors at the beginning of each
year, which helps align the interests of our
Senior Executives with our shareholders, as
meeting or exceeding the outlooks is a major
determinant of the AIP funding level.
40 www.thehartford.com
COMPENSATION MATTERS
STEP 2: Qualitative Review — Produces the final company AIP funding level
To ensure a holistic review of performance, the Compensation Committee also considers a number of qualitative factors, including
achievements that cannot be measured formulaically, or are not yet evident in our financial performance. As a result of this
qualitative review, the Compensation Committee may decide to adjust the formulaic AIP funding level up or down to arrive at an
AIP funding level more commensurate with company performance in light of these additional factors. Among the qualitative factors
the Compensation Committee considers are the following broad performance categories:
Performance Criteria and Metrics
Quality of Earnings: earnings driven by current accident year
activity, including catastrophe losses, policyholder retention,
new business, underwriting profitability and expense
management
Rationale
An assessment of how current accident year activity drove
financial performance informs current year compensation
decisions
Non-Financial and Strategic Objectives: strategic initiatives
and transactions, diversity, employee engagement, risk
management and compliance
These achievements are critical for long-term success, but
impacts may not be reflected in current year-end financials or
may result in accounting charges in a particular period
Peer-Relative Performance: performance relative to peers on
metrics such as stock price and earnings
How the company performed on a relative basis across the
industry is not captured in the quantitative formula
The Compensation Committee believes that grounding the AIP funding level in formulaic financial performance against targets, but
retaining the flexibility to adjust the funding level to reflect qualitative factors, allows it to arrive at a final AIP funding level that
best reflects holistic performance and is aligned with shareholder interests.
STEP 3:
Individual Performance — Results in the Senior Executive's AIP award
For each Senior Executive, the company AIP funding level multiplied by the Senior Executive’s target AIP opportunity produces an
initial AIP award amount. Where appropriate, the Committee (and, in the case of the CEO, the independent directors) may adjust
the Senior Executive’s AIP award amount up or down based on his or her performance in leading a business or function.
3. LONG-TERM INCENTIVE AWARDS
The long-term incentive ("LTI") program is designed to drive long-term performance and encourage share ownership among Senior
Executives, aligning their interests with those of shareholders. LTI awards are granted on an annual basis following an assessment of
individual performance, potential and market data. 2018 LTI awards for Senior Executives consist of performance shares (50% of
the award value) and stock options (50% of the award value). This mix provides LTI awards that appropriately blend actual stock
price performance, peer-relative stock price and dividend performance and actual operating performance.
Performance Shares (50% of LTI Award)
Performance shares are designed to reward and retain Senior Executives by allowing them to earn shares of our common stock
based on pre-determined performance criteria. Performance shares have a three-year performance period and are settled in shares
of common stock ranging from 0% to 200% of the number of performance shares granted depending upon the performance
achieved on the following metrics:
Performance Metric
Compensation Core ROE
(50% weighting)
Peer-relative TSR
(50% weighting)
Rationale
Important strategic measure that drives shareholder value creation
Important measure of our performance against peers that are competing
investment choices in the capital markets
Compensation Core ROE: For 50% of the performance share award, payouts at the end of the performance period, if any, will
depend upon achieving a target average annual ROE over a three-year measurement period, as adjusted for compensation
purposes. Because of the adjustments made for compensation purposes, Compensation Core ROE will differ from the ROE numbers
provided in our financial statements. The Compensation Committee's definition of Compensation Core ROE for 2018 performance
share awards is provided in Appendix A.
2019 Proxy Statement
41
COMPENSATION MATTERS
As illustrated in the graph at right, for
2018 performance share awards, the
target level of performance is an average
annual Compensation Core ROE for 2018,
2019, and 2020 of 11.6%, as reflected in
the 2018-2020 operating plan. There is no
payout for performance below threshold.
The maximum Compensation Core ROE
payout of 200% reflects ambitious goals
that require performance significantly
beyond target. Threshold and maximum
reflect a range of +/-20% of target.
2018-2020 Compensation Core ROE
T
E
G
R
A
T
F
O
%
T
U
O
Y
A
P
200%
175%
150%
125%
100%
75%
50%
35%
0%
9.3%
13.9%
11.6%
Threshold
Target
Maximum
Peer-Relative TSR: For 50% of the performance share award, payouts, if any, will be based on company TSR performance relative to
a Performance Peer Group at the end of the three-year performance period. The Performance Peer Group represents 16 industry
specific public companies against which we benchmark performance for compensation purposes.* While there is some overlap, the
Performance Peer Group is distinct from the Corporate Peer Group described on page 45, which includes mutual companies where
financial data is not publicly available, as well as companies that compete with us for talent. The Compensation Committee believes
that the Performance Peer Group should be limited to industry companies that (1) publish results against which to measure our
performance and (2) are competing investment choices in capital markets. The Compensation Committee reviews the composition
of the Performance Peer Group annually and made the following changes for the 2018 performance share awards:
• Added CNA Financial Corp. because it is a competitor in Commercial Lines;
• Added MetLife, Inc. because, following our acquisition of the Aetna U.S. group life and disability benefits business, it
represents a competitor in group benefits and helps further diversify the Performance Peer Group;
• Removed Prudential Financial, Inc., which, following the sale of Talcott Resolution, no longer represents an aligned peer
to our current business mix; and
• Removed Aon plc, Arthur J. Gallagher & Co., and Marsh & McLennan Companies, Inc., because insurance brokers are not
considered direct competitors to our risk-based product businesses.
For each company in the Performance Peer Group, TSR will be measured using a 20-day stock price average at the beginning and
the end of the performance period in order to smooth out any volatility. As illustrated in the graph below, there would be no payout
for performance below the 30th percentile, 35% payout for performance at the 30th percentile, 100% payout for median
performance, and 200% payout for performance at the 85th percentile.
2018 Performance Peer Group
Alleghany Corp.
Allstate Corp.
American Financial Group, Inc.
The Chubb Corp.
Cincinnati Financial Corp.
CNA Financial Corp. — NEW
Everest Re Group, Ltd.
Hanover Insurance Group
Markel Corporation
Mercury General Corp.
MetLife, Inc. — NEW
Old Republic International Corp.
The Progressive Corp.
The Travelers Companies, Inc.
Unum
W.R. Berkley Group
Maximum
Performance
Three-Year Relative TSR Ranking
T
E
G
R
A
T
F
O
%
T
U
O
Y
A
P
200%
175%
150%
125%
100%
75%
50%
35%
0%
Target
Performance
Threshold
Performance
30%
50%
85%
PEER COMPANY PERFORMANCE PERCENTILE
* While the peer group at the time of the grant consisted of 17 companies, AXA subsequently acquired XL Group Ltd., resulting in a
performance peer group of 16 companies for measuring TSR performance.
42 www.thehartford.com
COMPENSATION MATTERS
Stock Options (50% of LTI Awards)
The use of stock options directly aligns the interests of our Senior Executives with those of shareholders because options only have
value if the price of our common stock on the exercise date exceeds the stock price on the grant date. The stock options are granted
at fair market value, vest in three equal installments over three years, and have a 10-year term.
EXECUTIVE BENEFITS AND PERQUISITES
Senior Executives are eligible for the same benefits as full-time employees generally, including health, life insurance, disability and
retirement benefits. Non-qualified savings and retirement plans provide benefits that would otherwise be provided but for the
Internal Revenue Code limits that apply to tax-qualified benefit plans.
We provide certain additional perquisites to Senior Executives, including reimbursement of costs for annual physicals and
associated travel, relocation benefits when a move is required, and occasional use of tickets for sporting and special events
previously acquired by the company when no other business use has been arranged and there is no incremental cost to the
company. The CEO also has the use of a company car and driver to allow for greater efficiency while commuting.
We own a fractional interest in a corporate aircraft to allow Senior Executives to safely and efficiently travel for business purposes.
The corporate aircraft enables Senior Executives to use travel time productively by providing a confidential environment in which to
conduct business and eliminating the schedule constraints imposed by commercial airline service. Our aircraft usage policy
generally prohibits personal travel via corporate aircraft by Senior Executives except in extraordinary circumstances. On two
occasions in January 2018, our CFO and General Counsel determined that extraordinary circumstances existed, permitting our
President to travel via corporate aircraft to attend to a family emergency. The Compensation Committee agreed with the finding of
extraordinary circumstances and was briefed on each related use of the corporate aircraft.
Following a review of peer company and market practices in February 2018, the Compensation Committee recommended, and the
independent directors approved, limited personal use of corporate aircraft by our CEO and President. The independent directors
encourage the use of corporate aircraft for the personal travel needs of our CEO and President in order to minimize their personal
travel time and increase the time they are available for business purposes. Corporate aircraft also enables them to work more
productively while traveling for time-sensitive personal matters. The CEO and President's use of corporate aircraft for personal
travel is subject to an annual limit of $160,000 and $90,000, respectively, in aggregate incremental costs to the Company. Fixed
costs, which do not change based on usage, are excluded.
From time to time, a Senior Executive’s expenses for a purpose deemed important to the business may not be considered “directly
and integrally related” to the performance of the Senior Executive’s duties as required by applicable SEC rules. These expenses are
considered perquisites for disclosure purposes. Examples of such expenses may include attendance at conferences, seminars or
award ceremonies, as well as attendance of a Senior Executive’s spouse or guest at business events or dinners where spousal or
guest attendance is expected.
Whenever required to do so under Internal Revenue Service regulations, we attribute income to Senior Executives for perquisites
and the Senior Executive is responsible for the associated tax obligation.
2019 Proxy Statement
43
COMPENSATION MATTERS
PROCESS FOR DETERMINING SENIOR EXECUTIVE COMPENSATION (INCLUDING
NEOs)
COMPENSATION COMMITTEE
The Compensation Committee is responsible for reviewing the performance of and approving compensation awarded to those
executives who either report to the CEO or who are subject to the filing requirements of Section 16 of the Securities Exchange Act
of 1934 (other than the CEO). The Compensation Committee also evaluates the CEO’s performance and recommends his
compensation for approval by the independent directors. With this input from the Compensation Committee, the independent
directors review the CEO’s performance and determine his compensation level in the context of the established goals and
objectives for the enterprise and his individual performance. The Compensation Committee and the independent directors typically
review performance and approve annual incentive awards for the prior fiscal year at their February meeting, along with annual LTI
awards and any changes to base salary and target bonus. To assist in this process, the Compensation Committee reviews tally sheets
for each NEO to understand how each element of compensation relates to other elements and to the compensation package as a
whole, including historical compensation and outstanding equity.
COMPENSATION CONSULTANT
Meridian Compensation Partners, LLP ("Meridian") is the Compensation Committee’s independent compensation consultant and
has regularly attended Compensation Committee meetings since its engagement. Pursuant to the Compensation Committee's
charter, Meridian has not provided services to the company other than consulting services provided to the Compensation
Committee and, with respect to CEO and director compensation, the Board.
In 2018, following a review of its records and practice guidelines, Meridian provided the Compensation Committee a letter that
confirmed its conformity with independence factors under applicable SEC rules and the listing standards of the NYSE.
ROLE OF MANAGEMENT
Our Human Resources team supports the Compensation Committee in the execution of its responsibilities. Our Executive Vice
President and Chief Human Resources Officer supervises the development of the materials for each Compensation Committee
meeting, including market data, historical compensation and outstanding equity, individual and company performance metrics and
compensation recommendations for consideration by the Compensation Committee. No member of our management team,
including the CEO, has a role in determining his or her own compensation.
BENCHMARKING
On an annual basis, the Compensation Committee reviews and considers a number of factors in establishing or recommending a
target total compensation opportunity for each individual including, but not limited to, market data, tenure in position, experience,
sustained performance, and internal pay equity. Although the Compensation Committee strives for total compensation to be at
median, it does not target a specific market position. The various sources of compensation information the Compensation
Committee uses to determine the competitive market for our executive officers are described in more detail below.
44 www.thehartford.com
COMPENSATION MATTERS
2018 Corporate Peer Group
The Compensation Committee reviews the peer group used for compensation benchmarking (the "Corporate Peer Group")
periodically or upon a significant change in business conditions for the company or its peers. As part of its review, the Compensation
Committee considers many factors, including market capitalization, revenues, assets, lines of business and sources and destinations
of talent. Several non-P&C and life insurance companies are included in the Corporate Peer Group because, due to their geographic
footprint and/or organizational complexity, we compete with them for talent. For this reason, the Corporate Peer Group differs
from the Performance Peer Group described above for purposes of the TSR performance measure applicable to performance
shares. For 2018, the Compensation Committee did not make any changes to the Corporate Peer Group.
Data in millions – as of 12/31/2018(1)
Company Name(2)
Aetna Inc.(3)
Allstate Corp
Berkley (W. R.) Corp.
CNA Financial Corp.
Chubb Ltd.
Cigna Corp.
Cincinnati Financial Corp.
Lincoln National Corp.
Marsh & McLennan Companies
MetLife Inc.
Principal Financial Group Inc.
Progressive Corp.
Prudential Financial Inc.
Travelers Companies Inc.
Unum Group
Voya Financial Inc.
XL Group Ltd.(3)
25TH PERCENTILE
MEDIAN
75TH PERCENTILE
THE HARTFORD
PERCENT RANK
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Revenues
Assets
39,815
7,692
10,134
32,679
48,569
5,407
16,424
14,950
67,915
14,237
31,955
63,304
30,282
11,599
8,514
— $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
$
$
$
$
10,866
16,424
36,247
18,955
— $
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
— $
$
$
$
$
112,249
24,896
57,152
167,771
153,226
21,935
298,147
21,578
687,538
243,036
46,575
815,078
104,233
61,876
154,682
51,864
112,249
205,404
62,307
Market Cap
—
28,461
9,026
11,983
59,527
72,317
12,599
10,960
40,171
40,520
12,502
35,184
33,680
31,720
6,427
6,242
—
11,471
28,461
37,678
15,946
51%
36%
44%
(1) Peer data provided by S&P Capital IQ. The amounts shown in the “Revenues” column reflect S&P Capital IQ adjustments to
facilitate comparability across companies.
(2) An additional four non-public companies are included in the Corporate Peer Group as they submit data to relevant
compensation surveys utilized in determining appropriate pay levels for Senior Executives: Liberty Mutual, MassMutual,
Nationwide Financial, and State Farm.
(3) The 2018 Corporate Peer Group included Aetna Inc., which was acquired by CVS Health Corp. on November 28, 2018, and XL
Group Ltd., which was acquired by AXA on September 12, 2018.
2019 Corporate Peer Group
For 2019 compensation purposes, in addition to the deletion of Aetna Inc. and XL Group Ltd. as a result of acquisitions, the
Compensation Committee made the following changes to better reflect competitors to the company's risk-based product
businesses, its current business mix following the sale of Talcott Resolution, and potential competitors for talent.
2018 Corporate
Peer Group ð
4
Deletions
ò
+
2
Additions
ò
= 2019 Corporate
Peer Group
• Aetna Inc.
• American International Group, Inc.
• Marsh & McLennan Companies, Inc.
• Hanover Insurance Group, Inc.
• Prudential Financial Inc.
• XL Group Ltd.
2019 Proxy Statement
45
COMPENSATION MATTERS
Use of Corporate Peer Group Compensation Data
When evaluating and determining individual pay levels, the Compensation Committee reviews compensation data prepared
annually by Aon showing the 25th, 50th and 75th percentiles of various pay elements for the companies listed above. As noted
previously, the Compensation Committee does not target a specific market position in pay. One of our NEOs, our Chief Investment
Officer and President of HIMCO, was also benchmarked against similar roles at a broader group of financial services companies
within the standard McLagan Investment Management survey.
The Compensation Committee also reviews general industry survey data published by third parties as a general indicator of
relevant market conditions and pay practices, including perquisites. Neither the Compensation Committee nor management has
any input into companies included in these general industry or financial services company surveys.
PAY FOR PERFORMANCE
2018 AIP PERFORMANCE
Based on the assessment of performance described below, the Compensation Committee established an AIP funding level of
160% of target for the 2018 performance year.
STEP 1: Financial Performance Against Target — Produced formulaic AIP funding level capped at 200%
When setting the 2018 operating plan, which forms the basis for the Compensation Core Earnings target, management and the
Board anticipated continued underwriting discipline in Commercial Lines and strong results in Group Benefits, improvement in
Personal Lines underwriting results, and rate increases in underperforming areas of the business, partially offset by the elimination
of core earnings from Talcott Resolution (as a result of its sale) and lower limited partnership returns relative to the strong returns
experienced in 2017.
The 2018 AIP Compensation Core Earnings target was set at $1,593 million, higher than both the 2017 Compensation Core
Earnings target of $1,398 million and 2017 actual performance of $1,572 million. The 2018 Compensation Core Earnings target
increased despite a significant loss in earnings power resulting from the sale of Talcott Resolution, partially offset by a lower
corporate income tax rate in 2018 and earnings from the Aetna U.S. group life and disability business acquisition.
Actual Compensation Core Earnings for 2018 were $1,842 million, producing a formulaic AIP funding level capped at 200% of
target, reflecting strong underlying financial performance in each of the company’s business units.
2018 Compensation Core Earnings
I
L
E
V
E
L
G
N
D
N
U
F
P
A
C
A
L
U
M
R
O
F
I
I
$ IN MILLIONS
Actual $1,842
$1,832
200%
150%
100%
$1,593
$1,354
50%
Threshold
85%
Target
100%
Maximum
115%
PERFORMANCE VS. TARGET
Illustrated at right are the minimum
threshold, target and maximum
Compensation Core Earnings levels
against actual results for 2018. As
discussed on page 40, Compensation Core
Earnings will differ from the earnings
numbers provided in our financial
statements due to pre-determined
adjustments made to ensure the AIP
funding level reflects the operating
performance within management's
control.
46 www.thehartford.com
COMPENSATION MATTERS
STEP 2: Qualitative Review — Compensation Committee reduced funding level
In assessing overall performance and arriving at the 2018 AIP funding level, the Compensation Committee undertook a qualitative
review focused on the following:
Qualitative Criteria Results Considered
Quality of Earnings The company's core earnings were above target, driven by favorable non-catastrophe prior year
development combined with increased investment income, including strong partnership returns.
Excellent business results in Group Benefits and Mutual Funds also contributed to the performance
above target. Lower P&C current accident year results, excluding catastrophes, partially offset these
favorable results. Results were negatively impacted by catastrophe losses significantly above operating
plan.
Risk & Compliance
The Hartford was again named one of the world’s most ethical companies by Ethisphere Institute in 2018.
The Hartford has appeared on the list ten times due to a culture built on a foundation of integrity and
respect, backed by a strong ethics and compliance program that emphasizes leadership accountability
and preventing ethical lapses and compliance issues
Peer-Relative
Performance
The company’s financial performance (core earnings growth and book value growth) compared favorably
to peers; however, the company’s stock underperformed the S&P 500, the S&P P&C index and the S&P
Insurance index.
Expense
Management
Excluding bonus above target and one-time items, expenses were favorable to budget due mainly to
managing headcount and IT costs.
Non-Financial and
Strategic
Objectives
On or ahead of schedule in integrating Aetna’s U.S. group life and disability business, realizing the revenue
and earnings growth we expected to date from the deal; successfully completed the sale of Talcott
Resolution, improving the core earnings growth profile of the company and generating approximately
$1.5 billion in proceeds for deployment; and announced an agreement to acquire The Navigators Group,
Inc., which will broaden and deepen our product offerings while greatly enhancing our ability to expand
internationally.
As a result of its qualitative review, the Compensation Committee determined that, while strong 2018 results supported AIP
funding above target, a second consecutive year of elevated catastrophe losses warranted a decrease in funding from the maximum
of 200%. This is consistent with the company's AIP design, described on page 40, which adjusts core earnings for catastrophe losses
above or below budget to manage year-to-year volatility, but retains flexibility for the use of Compensation Committee discretion
to make adjustments to AIP funding levels. Following a review of the impact of excluding catastrophes above and below budget from
Compensation Core Earnings over a multi-year period, the Compensation Committee used its informed discretion to reduce
funding to 160%, a level it believed was more commensurate with overall company performance.
2018 NAMED EXECUTIVE OFFICERS' COMPENSATION AND PERFORMANCE
STEP 3:
Individual Performance — Each NEO's 2018 AIP award
Christopher Swift
Mr. Swift has served as CEO since July 1, 2014; he was also appointed Chairman on January 5, 2015. For 2018, the independent
directors approved a base salary of $1,150,000, an AIP target of $3,000,000, and a 2018 LTI award of $8,000,000 granted in the
form of 50% stock options and 50% performance shares on February 27, 2018.
Based on the process outlined above, the independent directors approved an AIP award of $4,800,000 (160% of target), taking into
account that under Mr. Swift’s leadership, the company:
• Delivered strong underlying financial results across multiple business segments despite a second consecutive year of
elevated catastrophes
•
•
•
Successfully closed the divestiture of Talcott Resolution while simultaneously driving the integration of Aetna’s U.S. group
life and disability business and entering into an agreement to acquire Navigators
Continued to focus on innovation, including the launch of our Small Business Innovation Lab, the purchase of Y-Risk, a
company specializing in the sharing and on-demand economy, and the enhancement of advanced data and analytic
capabilities
Continued to focus on talent management, diversity and inclusion, resulting in employee engagement and enablement
scores that are in the top quartile of the market, as measured by the IBM® Kenexa® survey of global companies
2019 Proxy Statement
47
COMPENSATION MATTERS
Beth Costello
Ms. Costello has served as CFO since July 1, 2014. For 2018, the Compensation Committee approved a base salary of $725,000, an
AIP target of $1,200,000, and a 2018 LTI award of $1,775,000 granted in the form of 50% stock options and 50% performance
shares on February 27, 2018.
Based on the process outlined above, the Compensation Committee approved an AIP award of $1,925,000 (160% of target), taking
into account that Ms. Costello:
•
Co-led the complex closing process for Talcott Resolution while also delivering expense synergy savings on the Aetna
acquisition ahead of plan
• Delivered a capital management plan that reduced debt by $320 million and successfully launched and priced a $345
million retail preferred stock offering that will fulfill a portion of planned financing needs for 2019, while diversifying the
company's capital structure and investor base
•
•
Furthered external engagement with investors, rating agencies and bankers
Continued to focus on talent management, diversity and inclusion, resulting in employee engagement and enablement
scores that are in the top quartile of the market
Douglas Elliot
Mr. Elliot has served as President of The Hartford since July 1, 2014. For 2018, the Compensation Committee approved a base
salary of $950,000, an AIP target of $1,900,000, and a 2018 LTI award of $5,000,000 granted in the form of 50% stock options and
50% performance shares on February 27, 2018.
Based on the process outlined above, the Compensation Committee approved an AIP award of $3,050,000 (161% of target), taking
into account that Mr. Elliot:
• Delivered record core earnings in Group Benefits and strong Commercial Lines core earnings despite a second
consecutive year of elevated catastrophe
•
•
•
Led the continued expansion of product capabilities (including large property, professional liability for Small Commercial
and International), which allowed for broader and deeper risk participation
Advanced business intelligence capabilities and predictive modeling in all business segments and the company's Claims
organization
Continued to focus on talent management, diversity and inclusion resulting in employee engagement and enablement
scores that are in the top quartile of the market
Brion Johnson
Mr. Johnson has served as Chief Investment Officer and President of HIMCO since May 16, 2012. For 2018, the Compensation
Committee approved a base salary of $575,000, an AIP target of $1,400,000 and a 2018 LTI award of $1,600,000 granted in the
form of 50% stock options and 50% performance shares on February 27, 2018.
Based on the process outlined above, the Compensation Committee approved an AIP award of $2,250,000 (161% of target), taking
into account that Mr. Johnson:
• Delivered strong performance across all investment measures for HIMCO, resulting in net investment income that
exceeded the annual operating plan despite a challenging investment environment
•
•
•
Co-led the complex closing process for Talcott Resolution, completing a multi-year strategy to exit capital market-sensitive
businesses
Led several other complex and impactful initiatives, including a five-year agreement to manage the invested assets of
Talcott Resolution and Global Atlantic Financial Group and repositioning the Aetna U.S. group life and disability block's
investment portfolio
Continued to focus on talent management, diversity and inclusion resulting in employee engagement and enablement
scores that are in the top quartile of the market
William Bloom
Mr. Bloom has served as Executive Vice President of Operations, Technology & Data since July 1, 2014. For 2018, the
Compensation Committee approved a base salary of $575,000, an AIP target of $825,000 and a 2018 LTI award of $1,100,000
granted in the form of 50% stock options and 50% performance shares on February 27, 2018.
Based on the process outlined above, the Compensation Committee approved an AIP award of $1,550,000 (188% of target), taking
into account that Mr. Bloom:
•
•
Continued progress on all major IT and digital investments to improve the ease of doing business for customers and
distribution partners while achieving expense savings goals
Continued the deployment of robotics and artificial intelligence within Operations
48 www.thehartford.com
COMPENSATION MATTERS
•
•
Provided significant support for diversity and inclusion and talent initiatives, including Women in Technology, Step IT Up
America and Hartcode Academy, an internal front-end developer training program
Continued to strengthen organizational talent through key internal moves and new hires, while maintaining top quartile
employee engagement and enablement results
CERTIFICATION OF 2016-2018 PERFORMANCE SHARE AWARDS
On March 1, 2016, the Compensation Committee granted Senior Executives performance shares tied 50% to achievement of
average annual Compensation Core ROE(1)(2) goals over a three-year measurement period, and 50% to TSR performance relative to
a peer group of 17 companies.(3) For the Core ROE component of the award, achievement of average annual Compensation Core
ROE of 8.9%, 9.4% and 9.9% during the measurement period would have resulted in payouts of 50%, 100% and 200% of target,
respectively. For the TSR component of the award, there would be no payout for performance below the 30th percentile, 50%
payout for performance at the 30th percentile, 100% payout for median performance, and 200% payout if our TSR performance
ranks ahead of all companies in the performance peer group.
These performance shares vested as of December 31, 2018, the end of the three-year performance period, and the Compensation
Committee certified a payout at 100% of target on February 20, 2019 based on the following results:
•
•
The average of the company's Compensation Core ROE for each year of the measurement period was 10.0%, resulting in a
payout capped at 200% of target for the Compensation Core ROE component of the awards
Because the company’s TSR during the performance period was below threshold, there was no payout for the TSR
component of the awards
Details of the 2016 performance shares are given on page 35 of our 2017 Proxy Statement filed with the Securities and Exchange
Commission on April 6, 2017.
(1) Because threshold, target and maximum Compensation Core ROE values were established in February 2016 based on the company’s
2016-2018 operating plan before a decision to sell Talcott Resolution had been made, the definition of Compensation Core ROE for 2016
performance share awards was amended to include Talcott Resolution core earnings through September 30, 2017, the period in which
management was both actively managing the business and separately reporting its results externally.
(2) As a result of the Tax Cuts and Jobs Act of 2017: (a) an adjustment was made pursuant to the definition of Compensation Core Earnings to
use the previously enacted corporate income tax rate of 35%, which is higher than the current corporate income tax rate of 21%, and (b)
the definition of average equity was amended to exclude the impact on average equity of the charge to earnings that was the result of the
effect of the lower enacted corporate income tax rate on deferred tax assets.
(3) While the peer group at the time of the grant consisted of 20 companies, AXA subsequently acquired XL Group plc, ACE Limited acquired
The Chubb Corporation, and Meiji Yasuda Life Insurance Company acquired StanCorp Financial Group, Inc., resulting in a performance
peer group of 17 companies for measuring TSR performance.
COMPENSATION POLICIES AND PRACTICES
STOCK OWNERSHIP AND RETENTION GUIDELINES
Senior Executives are expected to meet or exceed certain levels of stock ownership to align their interests with those of
shareholders. The Compensation Committee has established the following ownership guidelines for the CEO and other NEOs
Level
CEO
Other NEOs
(As a Multiple of Base Salary)
6x
4x
The Compensation Committee reviews ownership levels annually. NEOs are generally expected to meet these ownership guidelines
within five years of appointment to position. As of March 18, 2019, the CEO and each of the NEOs met their respective guideline.
TIMING OF EQUITY GRANTS
Equity grants may be awarded four times per year, on the first day of a quarterly trading window following the filing of our Form 10-
Q or 10-K for the prior period. Our practice is to grant annual equity awards during the first quarterly trading window of the year.
This timing ensures that grants are made at a time when the stock price reflects the most current public data regarding our
performance and financial condition as is reasonably possible.
RECOUPMENT POLICY
We have a recoupment policy that allows for the recoupment of any incentive compensation (cash or equity) paid or payable at any
time to the extent such recoupment either (i) is required by applicable law or listing standards, or (ii) is determined to be necessary
or appropriate in light of business circumstances or employee misconduct.
2019 Proxy Statement
49
COMPENSATION MATTERS
RISK MITIGATION IN PLAN DESIGN
Management has concluded that our compensation policies and practices are not reasonably likely to have a material adverse effect
on the company. Our Enterprise Risk Management function performs a risk review of any new incentive compensation plans or any
material changes to existing plans annually and completes a comprehensive review of all incentive compensation plans every five
years. In 2018, Enterprise Risk Management conducted its annual review and discussed the results of that review with the
Compensation Committee. Enterprise Risk Management concluded that current incentive plans do not promote inappropriate risk-
taking or encourage the manipulation of reported earnings.
The following features of our executive compensation program guard against excessive risk-taking:
Feature
Pay Mix
Performance
Metrics
Equity
Incentives
Rationale
• A mix of fixed and variable, annual and long-term, and cash and equity compensation encourages strategies
and actions that are in the company’s long-term best interests
• Long-term compensation awards and overlapping vesting periods encourage executives to focus on sustained
company results and stock price appreciation
• Incentive awards based on a variety of performance metrics diversify the risk associated with any single
indicator of performance
• Stock ownership guidelines align executive and shareholder interests
• Equity grants are made only during a trading window following the release of financial results
• No reload provisions are included in any stock option awards
Plan Design
• Incentive plans are not overly leveraged, cap the maximum payout, and include design features intended to
balance pay for performance with an appropriate level of risk-taking
• The 2014 Incentive Stock Plan does not allow:
- Stock options with an exercise price less than the fair market value of our common stock on the grant date
- Re-pricing (reduction in exercise price) of stock options, without shareholder approval
- Single trigger vesting of awards upon a Change of Control if awards are assumed or replaced with
substantially equivalent awards
Recoupment
• We have a broad incentive compensation recoupment policy in addition to claw-back provisions under the
2014 Incentive Stock Plan
HEDGING AND PLEDGING COMPANY SECURITIES
We prohibit our employees and directors from engaging in hedging, monetization, derivative and similar transactions involving
company securities. In addition, Senior Executives are prohibited from pledging company securities.
POTENTIAL SEVERANCE AND CHANGE OF CONTROL PAYMENTS
The company does not have individual employment agreements. NEOs are covered under a common severance pay plan that
provides severance in a lump sum equal to 2x the sum of annual base salary plus target bonus, whether severance occurs before or
after a change of control (no gross-up is provided for any change of control excise taxes that might apply). As a condition to receiving
severance, Senior Executives must agree to restrictive covenants covering such items as non-competition, non-solicitation of
business and employees, non-disclosure and non-disparagement.
The company maintains change of control benefits to ensure continuity of management and to permit executives to focus on their
responsibilities without undue distraction related to concerns about personal financial security if the company is confronted with a
contest for control. These benefits are also designed to ensure that in any such contest, management is not influenced by events
that could occur following a change of control.
The 2014 Incentive Stock Plan provides for “double trigger” vesting on a change of control. If an NEO terminates employment for
“Good Reason” or his employment is terminated without “Cause” (see definitions on page 64) within 2 years following a change of
control, then any awards that were assumed or replaced with substantially equivalent awards would vest. If the awards were not
assumed or replaced with substantially equivalent awards, they would vest immediately upon the change of control.
50 www.thehartford.com
COMPENSATION MATTERS
EFFECT OF TAX AND ACCOUNTING CONSIDERATIONS ON COMPENSATION DESIGN
In designing our compensation programs, we consider the tax and accounting impact of our decisions. In doing so, we strive to strike
a balance between designing appropriate and competitive compensation programs for our executives, maximizing the deductibility
of such compensation, and, to the extent reasonably possible, avoiding adverse accounting effects and ensuring that any accounting
consequences are appropriately reflected in our financial statements.
Principal among the tax considerations has been the potential impact of Section 162(m) of the Internal Revenue Code, which
historically denied a publicly traded company a federal income tax deduction for compensation in excess of $1 million paid to the
CEO or any of the next three most highly compensated executive officers (other than the CFO) as determined as of the last day of
the applicable year, unless the amount of such excess was payable based solely upon the attainment of objective performance
criteria. While the Compensation Committee reserved the right to approve incentive awards or other payments that did not qualify
as exempt performance-based compensation, our variable compensation, including our performance share payouts, were generally
designed to qualify as exempt performance-based compensation. The exemption from Section 162(m)’s deduction limit for
performance-based compensation was repealed, effective for taxable years beginning after December 31, 2017, unless the
compensation qualifies for transition relief applicable to certain arrangements in place as of November 2, 2017.
Notwithstanding the repeal of the performance-based compensation exception and the possible loss of deductions under Section
162(m), we made payments for 2018 subject to the individual award limits and other terms of the Executive Bonus Plan, and we
currently expect that the Compensation Committee's process for determining the annual cash bonus amounts going forward will
generally remain consistent with its past practice. We believe that it will be necessary to pay compensation that may not be tax-
deductible in order to provide competitive compensation and appropriate incentives to certain of our executive officers.
Other tax considerations are factored into the design of our compensation programs, including compliance with the requirements
of Section 409A of the Internal Revenue Code, which can impose additional taxes on participants in certain arrangements involving
deferred compensation, and Sections 280G and 4999 of the Internal Revenue Code, which affect the deductibility of, and impose
certain additional excise taxes on, certain payments that are made upon or in connection with a change of control.
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
As of the date of this proxy statement, the Compensation and Management Development Committee consists of directors
Ruesterholz (Chair), Fetter, McGill, Renyi, and Roseborough, all of whom are independent non-management directors. None of the
Compensation and Management Development Committee members has served as an officer or employee of The Hartford and none
of The Hartford’s executive officers has served as a member of a compensation committee or board of directors of any other entity
that has an executive officer serving as a member of The Hartford’s Board.
REPORT OF THE COMPENSATION AND MANAGEMENT
DEVELOPMENT COMMITTEE
The Compensation Committee has reviewed and discussed the foregoing Compensation Discussion and Analysis with management.
Based on our review and discussion with management, we have recommended to the Board that the Compensation Discussion and
Analysis be included in this proxy statement and in the company’s Annual Report on Form 10-K for the year ended December 31,
2018.
Report submitted as of March 22, 2019 by:
Members of the Compensation and Management Development Committee:
Virginia P. Ruesterholz, Chair
Trevor Fetter
Stephen P. McGill
Thomas A. Renyi
Teresa W. Roseborough
2019 Proxy Statement
51
COMPENSATION MATTERS
EXECUTIVE COMPENSATION TABLES
SUMMARY COMPENSATION TABLE
The table below reflects total compensation paid to or earned by each NEO.
Name and Principal
Position
Christopher Swift
Chairman and Chief
Executive Officer
Beth Costello
Executive Vice
President and Chief
Financial Officer
Douglas Elliot
President
Brion Johnson
Executive Vice
President and Chief
Investment Officer;
President of HIMCO
William Bloom,
Executive Vice
President,
Operations,
Technology & Data
Year
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
2016
2018
2017
Salary
($)
Bonus
($)
1,137,500
1,100,000
1,075,000
718,750
700,000
687,500
943,750
925,000
918,750
562,500
525,000
525,000
568,750
550,000
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(4)
Non-Equity
Incentive Plan
Compensation
($)(3)
4,800,000
4,675,000
1,925,000
1,925,000
1,900,000
770,000
3,050,000
3,150,000
1,295,000
2,250,000
2,300,000
1,100,000
1,550,000
—
34,380
17,769
—
34,380
13,122
—
15,738
8,490
—
6,199
3,393
—
Stock
Awards
($)(1)
3,736,000
3,472,500
3,404,473
828,925
810,250
833,263
2,335,000
2,315,000
2,202,194
747,200
694,500
642,803
513,700
Option
Awards
($)(2)
4,000,000
3,750,000
3,575,000
887,500
875,000
875,000
2,500,000
2,500,000
2,312,500
800,000
750,000
675,000
550,000
All Other
Compensation
($)(5)
Total
($)
210,115
13,883,615
83,405
13,115,285
81,879
10,079,121
65,500
65,400
65,300
4,425,675
4,385,030
3,244,185
170,363
8,999,113
67,526
67,368
65,500
68,150
8,973,264
6,804,302
4,425,200
4,343,849
68,050
3,014,246
68,281
3,250,731
463,000
500,000
1,575,000
14,846
67,845
3,170,691
(1) This column reflects the full aggregate grant date fair value of performance shares calculated in accordance with FASB ASC
Topic 718 for the fiscal years ended December 31, 2018, 2017 and 2016. Detail on the 2018 grants is provided in the Grants of
Plan Based Awards Table on page 54. The amounts in this column are not reduced for estimated forfeiture rates during the
applicable vesting periods. Other assumptions used in the calculation of these amounts are included in footnote 19 of the
company's Annual Reports on Form 10-K for 2018, 2017 and 2016.
To determine the fair value of the performance share award under FASB ASC topic 718, the market value on the grant date is
adjusted by a factor of 0.9340 to take into consideration that dividends are not paid on unvested performance shares, and to
reflect the probable outcome of the performance condition(s) consistent with the estimated aggregate compensation cost to
be recognized over the service period, determined as of the grant date.
The number of shares payable under these awards will be based on the actual results as compared to pre-established
performance conditions and can range from 0-200% of the target award. The value of performance shares assuming the
highest possible outcome of the performance conditions determined at the time of grant (200% of the target award), and
including an adjustment for no payment of dividends on unvested performance shares, would in total be:
NEO
C. Swift
B. Costello
D. Elliot
B. Johnson
W. Bloom
$
$
$
$
$
2018 Performance
Shares
(February 27, 2018 grant date)
2017 Performance
Shares
(February 28, 2017 grant date)
2016 Performance
Shares
(March 1, 2016 grant date)
7,567,405
1,678,987
4,729,628
1,513,461
1,040,498
$
$
$
$
$
7,084,289
1,652,967
4,722,829
1,416,895
944,566
$
$
$
$
6,739,911
1,649,599
4,359,731
1,272,557
Under the 2014 Incentive Stock Plan, no more than 500,000 shares in the aggregate can be earned by an individual employee
with respect to RSUs and performance share awards made in a single calendar year. As a result, the number of shares ultimately
distributed to an employee (or former employee) with respect to awards made in the same year will be reduced, if necessary, so
that the number does not exceed this limit.
(2) This column reflects the full aggregate grant date fair value for the fiscal years ended December 31, 2018, 2017 and 2016
calculated in accordance with FASB ASC topic 718. The amounts in this column are not reduced for estimated forfeitures
during the applicable vesting periods. Other assumptions used in the calculation of these amounts are included in footnote 19
of the company's Annual Reports on Form 10-K for 2018, 2017 and 2016.
(3) This column reflects cash AIP awards paid for the respective years.
(4) This column reflects the actuarial increase, if any, in the present value of the accumulated benefits of the NEOs under all
pension plans established by the company. The amounts were calculated using discount rate and form of payment assumptions
consistent with those used in the company’s GAAP financial statements. Actuarial assumptions for 2018 are described in
52 www.thehartford.com
COMPENSATION MATTERS
further detail in the footnote to the Pension Benefits Table on page 57. Because the discount rate increased from 3.72% to
4.35% in 2018, the change in present value was negative for all five NEOS and therefore not reported in this table. These
negative values were ($3,033) for Mr. Swift; ($14,670) for Ms. Costello; ($491) for Mr. Elliot; ($68) for Mr. Johnson; and
($9,055) for Mr. Bloom.
(5) This column reflects amounts described in the Summary Compensation Table—All Other Compensation.
Summary Compensation Table - All Other Compensation
This table provides more details on the amounts presented in the “All Other Compensation” column in the Summary Compensation
Table on page 52 for the NEOs.
Name
Christopher Swift
Beth Costello
Douglas Elliot
Brion Johnson
William Bloom
Year
2018
2018
2018
2018
2018
Perquisites
($)
144,615 (2)
—
104,863 (3)
—
2,781 (4)
Contributions or Other
Allocations to Defined
Contribution Plans
($)(1)
65,500
65,500
65,500
65,500
65,500
Total
($)
210,115
65,500
170,363
65,500
68,281
(1) This column represents company contributions under the company’s tax-qualified 401(k) plan (The Hartford Investment and
Savings Plan) and The Hartford Excess Savings Plan (the “Excess Savings Plan”), a non-qualified plan established to “mirror” the
qualified plan to facilitate deferral of amounts that cannot be deferred under the 401(k) plan due to Internal Revenue Code
limits. Additional information can be found under the “Excess Savings Plan” section of the Non-Qualified Deferred Compensation
Table beginning on page 58.
(2) Perquisite amounts for Mr. Swift include personal use of corporate aircraft not requiring reimbursement to the company
($124,153), commuting costs, and expenses associated with the attendance of Mr. Swift's spouse at business functions.
(3) Perquisite amounts for Mr. Elliot include personal use of corporate aircraft related to a family emergency ($31,693), personal
use of corporate aircraft not requiring reimbursement to the company ($71,093), and expenses associated with the attendance
of Mr. Elliot's spouse at business functions.
(4) Perquisite amounts for Mr. Bloom include expenses associated with the annual physical examination benefit and attendance of
Mr. Bloom's spouse at a business function.
2019 Proxy Statement
53
COMPENSATION MATTERS
GRANTS OF PLAN BASED AWARDS TABLE
This table discloses information about equity awards granted to the NEOs in 2018 pursuant to the 2014 Incentive Stock Plan. The
table also discloses potential payouts under the AIP and performance share awards. Actual AIP payouts are reported in the
Summary Compensation Table on page 52 under the heading “Non-Equity Incentive Plan Compensation.” Equity awards have been
rounded to the nearest whole share or option.
Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards(1)
Estimated Future Payouts Under
Equity Incentive Plan
Awards(2)
Name
Plan
Grant Date
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
C. Swift
2018 AIP
1,500,000
3,000,000
5,000,000
All
Other
Stock
Awards:
Number
of
Shares
of
Stock or
Units (#)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)(3)
Exercise
or Base
Price of
Option
Awards
($/Sh)
Grant
Date Fair
Value of
Stock and
Option
Awards
($)(4)
284,819
53.81
4,000,000
Stock
Options
Performance
Shares
2/27/2018
2/27/2018
B. Costello 2018 AIP
600,000
1,200,000
2,400,000
Stock
Options
Performance
Shares
2/27/2018
2/27/2018
D. Elliot
2018 AIP
950,000
1,900,000
3,800,000
Stock
Options
Performance
Shares
2/27/2018
2/27/2018
B. Johnson 2018 AIP
700,000
1,400,000
2,800,000
Stock
Options
Performance
Shares
2/27/2018
2/27/2018
W. Bloom 2018 AIP
412,500
825,000
1,650,000
13,009
74,336
148,672
3,736,000
2,886
16,493
32,986
828,925
63,194
53.81
887,500
8,131
46,460
92,920
2,335,000
178,012
53.81
2,500,000
2,602
14,867
29,734
747,200
56,964
53.81
800,000
Stock
Options
Performance
Shares
2/27/2018
2/27/2018
1,789
10,221
20,442
513,700
39,163
53.81
550,000
(1) Consistent with company practice, the NEO’s threshold, target and maximum AIP award opportunities are based on salary for
2018. The “Threshold” column shows the payout amount for achieving the minimum level of performance for which an amount
is payable under the AIP (no amount is payable if this level of performance is not reached). The “Maximum” column shows the
maximum amount payable at 200% of target, subject to the limit set out in the Executive Bonus Program approved by
shareholders in 2014; the amount for Mr. Swift has been reduced to $5,000,000 to reflect this plan limit. To reward
extraordinary performance, the Compensation Committee may, in its sole discretion, authorize individual AIP awards of up to
the lower of 300% of the target annual incentive payment level or the Executive Bonus Program limit. The actual 2018 AIP
award for each NEO is reported in the “Non-Equity Incentive Plan Compensation” column in the Summary Compensation Table.
(2) The performance shares granted to the NEOs on February 27, 2018 vest on December 31, 2020, the end of the three year
performance period, based on the company’s TSR performance relative to a peer group established by the Compensation
Committee, and performance based on pre-established ROE targets. These two measures are weighted equally (50/50), as
described on page 41. The “Threshold” column for this grant represents 17.5% of target which is the payout for achieving the
minimum level of performance for which an amount is payable under the program (no amount is payable if this level of
performance is not reached). The “Maximum” column for this grant represents 200% of target and is the maximum amount
payable.
(3) The options granted in 2018 to purchase shares of the company's common stock vest 1/3 per year on each anniversary of the
grant date and each option has an exercise price equal to the fair market value of one share of common stock on the date of
grant. The value of each stock option award is $14.044 and was determined by using a lattice/Monte-Carlo based option
valuation model; this value was not reduced to reflect estimated forfeitures during the vesting period.
(4) The NYSE closing price per share of the company’s common stock on February 27, 2018, the date of the 2018 LTI grants for the
NEOs, was $53.81. To determine the fair value of the performance share award under FASB ASC topic 718, the market value on
the grant date is adjusted by a factor of 0.9340 to take into consideration that dividends are not paid on unvested performance
shares, and to reflect the probable outcome of the performance condition(s) consistent with the estimated aggregate
compensation cost to be recognized over the service period, determined as of the grant date.
54 www.thehartford.com
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END TABLE
This table shows outstanding stock option awards classified as exercisable and unexercisable and the number and market value of
any unvested or unearned equity awards outstanding as of December 31, 2018 and valued using $44.45, the NYSE closing price per
share of the company’s common stock on December 31, 2018.
Option Awards
Stock Awards
COMPENSATION MATTERS
Number of
Securities
Underlying
Unexercised
Options
Exercisable(#)(1)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable(#)(1)
Option
Exercise
Price
($)
Option
Expiration
Date
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)(2)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)(3)
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)(4)
92,937
148,448
141,388
103,872
301,887
196,320
100,969
—
47,214
77,830
48,050
23,559
—
128,535
94,429
207,547
126,990
67,313
—
51,936
56,604
37,067
20,194
—
33,019
21,966
13,462
—
—
—
—
—
—
98,161
201,939
284,819
—
—
24,026
47,120
63,194
—
—
—
28.91
3/1/2021
20.63
2/28/2022
24.15
35.83
41.25
43.59
3/5/2023
3/4/2024
3/3/2025
3/1/2026
48.89
2/28/2027
53.81
2/27/2028
35.83
41.25
43.59
3/4/2024
3/3/2025
3/1/2026
48.89
2/28/2027
53.81
2/27/2028
24.15
35.83
41.25
3/5/2023
3/4/2024
3/3/2025
63,496
43.59
3/1/2026
134,626
178,012
—
—
18,534
40,388
56,964
—
10,983
26,926
39,163
48.89
2/28/2027
53.81
2/27/2028
35.83
3/4/2024
41.25
3/3/2025
43.59
3/1/2026
48.89
2/28/2027
53.81
2/27/2028
41.25
43.59
3/3/2025
3/1/2026
48.89
2/28/2027
53.81
2/27/2028
76,703
74,336
3,409,448
3,304,235
17,897
16,493
795,522
733,114
51,135
46,460
2,272,951
2,065,147
15,341
14,867
681,907
660,838
10,227
10,221
454,590
454,323
19,576
870,153
Name
Christopher
Swift
Beth
Costello
Douglas
Elliot
Brion
Johnson
William Bloom
Grant Date
3/1/2011
2/28/2012
3/5/2013
3/4/2014
3/3/2015
3/1/2016
2/28/2017
2/27/2018
3/4/2014
3/3/2015
3/1/2016
2/28/2017
2/27/2018
3/5/2013
3/4/2014
3/3/2015
3/1/2016
2/28/2017
2/27/2018
3/4/2014
3/3/2015
3/1/2016
2/28/2017
2/27/2018
3/3/2015
3/1/2016
8/1/2016
2/28/2017
2/27/2018
(1) Stock options granted to the NEOs vest and become exercisable 1/3 per year on each anniversary of the grant date and
generally expire on the tenth anniversary of the grant date. See “(2) Accelerated Stock Option Vesting” on page 62 following
the Payments upon Termination or Change of Control table for a description of the circumstances in which vesting is accelerated.
(2) Mr. Bloom received a retention RSU award on August 1, 2016 that will vest on August 1, 2019, assuming continued service
through that date. See “(3) Accelerated Vesting of Performance Shares and Other LTI Awards” on page 62 following the
Payments upon Termination or Change of Control table for a description of the circumstances in which vesting is accelerated for
these RSUs. Dividends are credited on RSUs.
(3) This column represents unvested performance share awards at target. Dividends are not credited on performance shares.
See “(3) Accelerated Vesting of Performance Shares and Other LTI Awards” on page 62 following the Payments upon
Termination or Change of Control table for a description of the circumstances in which vesting is accelerated for performance
shares.
•
•
Performance shares granted on February 28, 2017 vest on December 31, 2019, the end of the three year
performance period, based on the company’s TSR performance relative to the peer group established by the
Compensation Committee and performance against pre-established ROE targets, with the two measures
weighted equally (50/50), as described on page 40 of the 2018 proxy statement.
Performance shares granted on February 27, 2018 vest on December 31, 2020, the end of the three year
performance period, based on the company’s TSR performance relative to the peer group established by the
Compensation Committee and performance against pre-established ROE targets, with the two measures
weighted equally (50/50), as described on page 41 of this proxy statement.
(4) This column reflects market value of performance shares granted on February 28, 2017 and February 27, 2018 at target.
2019 Proxy Statement
55
COMPENSATION MATTERS
OPTION EXERCISES AND STOCK VESTED TABLE
This table provides information regarding option awards exercised and stock awards that vested during 2018. The numbers have
been rounded to the nearest whole dollar or share.
Name
Christopher Swift
Beth Costello
Douglas Elliot
Brion Johnson
William Bloom
Option Awards
Stock Awards
Number of
Shares
Acquired on
Exercise
(#)
Value
Realized
on Exercise
($)(1)
Number of
Shares
Acquired on
Vesting
(#)(2)
Value
Realized
on Vesting
($)(3)
—
—
114,085
5,472,111
71,716
2,069,495
152,777
4,598,487
57,841
1,669,501
—
—
39,316
85,122
34,728
9,176
1,853,592
4,050,897
1,628,459
450,266
(1) The amounts in this column reflect the value realized upon the exercise of vested stock options during 2018. The value realized
is the difference between the fair market value of common stock on the date of exercise and the exercise price of the option. All
options were exercised pursuant to pre-planned trading plans in accordance with Rule 10b5-1 of the Securities Exchange Act of
1934.
(2) The numbers in this column reflect the total RSUs and performance shares that vested in 2018. The RSUs were granted on
October 30, 2013 and settled in shares for Mr. Swift, Ms. Costello, Mr. Elliott and Mr. Johnson on the vesting date of October 30,
2018. The performance shares were granted on March 1, 2016, vested on December 31, 2018, and paid out at 100% of target
following the Compensation Committee’s February 20, 2019 certification of company performance against two equally
weighted measures:
•
•
at maximum performance for pre-established ROE targets, and
below threshold performance against the relative TSR performance objective for the three-year performance
period January 1, 2016 – December 31, 2018.
The table below provides the number of vested RSUs and vested performance shares included in this column:
NEO
C. Swift
B. Costello
D. Elliot
B. Johnson
W. Bloom
Vested RSUs
Vested Performance Shares
32,071
19,243
32,071
19,243
—
82,014
20,073
53,051
15,485
9,176
(3) The value of the RSU awards (including accumulated dividend equivalents) is based on the NYSE closing price per share of the
company's common stock on October 30, 2018 ($45.14). The value of performance share awards is based on the NYSE closing
price per share of the company's common stock on February 20, 2019 ($49.07), the date the Compensation Committee certified
the vesting percentage.
56 www.thehartford.com
COMPENSATION MATTERS
PENSION BENEFITS TABLE
The table below shows the number of years of credited service, the actuarial present value of the accumulated pension benefit, and
the actual cash balance account as of December 31, 2018 under the company’s tax-qualified pension plan (The Hartford Retirement
Plan for U.S. Employees, or the “Retirement Plan”) and the non-qualified pension plan (The Hartford Excess Pension Plan II, or the
“Excess Pension Plan”) for each of the NEOs, except Mr. Bloom. Mr. Bloom had accrued a benefit in respect of a prior period of
employment when a final average pay formula was applicable. He was rehired after the cash balance account formula accruals
ceased as of December 31, 2012. Therefore, the Actual Cash Balance Account or Accrued Benefit column illustrates Mr. Bloom's
accrued final average pay formula benefit for his earlier period of employment.
Name
Christopher Swift
Beth Costello
Douglas Elliot
Brion Johnson
William Bloom(3)
Number of
Years
Credited
Service
(#)(1)
Present
Value of
Accumulated
Benefit
($)(2)
Actual Cash
Balance
Account or
Accrued
Benefit
($)
Payments
During
Last Fiscal
Year
($)
2.83
2.83
8.67
8.67
1.74
1.74
1.24
1.24
3.50
3.50
67,179
373,624
138,249
171,872
46,914
164,905
28,993
55,836
115,437
1,207
72,228
401,709
158,741
197,347
50,059
175,961
30,858
59,430
11,198
117
—
—
—
—
—
—
—
—
—
—
Plan Name
Retirement Plan
Excess Pension Plan
Retirement Plan
Excess Pension Plan
Retirement Plan
Excess Pension Plan
Retirement Plan
Excess Pension Plan
Retirement Plan
Excess Pension Plan
(1) Benefit accruals ceased as of December 31, 2012 under each Plan, but service continues to be credited for purposes of
determining whether employees have reached early or normal retirement milestones. As of December 31, 2018, each of the
NEOs was vested at 100% in his or her Final Average Earnings benefit or cash balance account.
(2) The present value of accumulated benefits under each Plan is calculated assuming that benefits commence at age 65, no pre-
retirement mortality, a lump sum form of payment and the same actuarial assumptions used by the company for GAAP financial
reporting purposes. Because the cash balance amounts are projected to age 65 using an assumed interest crediting rate of 3.3%
(the actual rate in effect for 2018), and the present value as of December 31, 2018 is determined using a discount rate of
4.35%, the present value amounts are lower than the actual December 31, 2018 cash balance accounts.
(3) For Mr. Bloom, the present value of the final average pay benefit portion of Mr. Bloom's benefit assumes commencement at the
date he would receive an unreduced benefit under the plan (age 62 plus one month) and an annuity form of payment. Mr.
Bloom has no accrued benefit under the cash balance formula.
Cash Balance Formula
Employees hired prior to January 1, 2001 accrued benefits under a final average pay formula through December 31, 2008 and
accrued benefits under the cash balance formula from January 1, 2009 to December 31, 2012.
For employees hired on or after January 1, 2001, retirement benefits accrued under the cash balance formula until December 31,
2012. Effective December 31, 2012, the cash balance formula under the Retirement Plan and the Excess Pension Plan was frozen
for all Plan participants, including the NEOs. Interest continues to be credited on previously accrued amounts, at a rate of 3.3% or
based on the 10 year Treasury rate, whichever is greater. All Plan participants are currently vested in their account balances, which
they may elect to receive following termination of employment in the form of a single lump sum payment or an actuarially-
equivalent form of annuity.
In the event of a Change of Control, each NEO would automatically receive a lump sum of the value of his or her Excess Pension Plan
cash balance benefit as of the date of the Change of Control, provided that the Change of Control also constitutes a “change in
control” as defined in regulations issued under Section 409A of the Internal Revenue Code.
Final Average Pay Formula
Because Mr. Bloom was previously employed by The Hartford from 1996-1999, he earned benefits under the final average pay
formula in effect for employees hired prior to January 1, 2001. This final average pay formula provides an annual pension payable in
the form of an annuity commencing as of normal retirement age (age 65) for the participant's lifetime, equal to 2% of the employee's
average final pay for each of the first 30 years of credited service prior to January 1, 2009, reduced by 1.67% of the employee's
primary Social Security benefit for each of the first 30 years of credited service prior to January 1, 2009. An employee's average
final pay is calculated as the sum of (i) average annual base salary for the 60 calendar months of the last 120 calendar months of
service prior to 2009 affording the highest average, plus (ii) average annual bonus payments in the five calendar years of the
employee's last ten calendar years of service prior to 2009 affording the highest average. Benefits are payable as a single life
2019 Proxy Statement
57
COMPENSATION MATTERS
annuity or reduced actuarially-equivalent amount in order to provide for payments to a contingent annuitant. Mr. Bloom is not
currently eligible to retire.
In the event of a Change of Control, Mr. Bloom would automatically receive a lump sum of the value of his Excess Pension Plan
benefit as of the date of the Change of Control, provided that the Change of Control also constitutes a “change in control” as defined
in regulations issued under Section 409A of the Internal Revenue Code.
NON-QUALIFIED DEFERRED COMPENSATION TABLE
Excess Savings Plan
NEOs, as well as other employees, may contribute to the company’s Excess Savings Plan, a non-qualified plan established as a
“mirror” to the company’s tax-qualified 401(k) plan (The Hartford Investment and Savings Plan). The Excess Savings Plan is intended
to facilitate deferral of amounts that cannot be deferred under the 401(k) plan for employees whose compensation exceeds the
Internal Revenue Code limit for the 401(k) plan ($275,000 in 2018). When an eligible employee’s annual compensation reaches that
Internal Revenue Code limit, the eligible employee can contribute up to six percent (6%) of compensation in excess of that limit to
the Excess Savings Plan, up to a combined $1 million annual limit on compensation for both plans. The company makes a matching
contribution to the Excess Savings Plan in an amount equal to 100% of the employee’s contribution. Company contributions to the
Excess Savings Plan are fully vested and plan balances are payable in a lump sum following termination of employment.
The table below shows the notional investment options available under the Excess Savings Plan during 2018 and their annual rates
of return for the calendar year ended December 31, 2018, as reported by the administrator of the Excess Savings Plan. The notional
investment options available under the Excess Savings Plan correspond to the investment options available to participants in the
401(k) plan.
Excess Savings Plan Notional Investment Options
Rate of Return
(for the year ended
Dec. 31, 2018)
Name of Fund
Rate of Return
(for the year ended
Dec. 31, 2018)
Name of Fund
The Hartford Stock Fund
ISP International Equity Fund(1)
ISP Active Large Cap Equity Fund(2)
ISP Small/Mid Cap Equity Fund(3)
Hartford Index Fund(4)
State Street S&P 500 Index Fund(4)
Hartford Stable Value Fund
(19.79)% Vanguard Target Retirement 2015 Trust
(18.06)% Vanguard Target Retirement 2020 Trust
(3.29)% Vanguard Target Retirement 2025 Trust
(12.30)% Vanguard Target Retirement 2030 Trust
4.78 % Vanguard Target Retirement 2035 Trust
(4.41)% Vanguard Target Retirement 2040 Trust
2.61 % Vanguard Target Retirement 2045 Trust
Hartford Total Return Bond HLS Fund
(0.81)% Vanguard Target Retirement 2050 Trust
State Street Real Asset Fund
(7.09)% Vanguard Target Retirement 2055 Trust
Vanguard Federal Money Market Fund
1.78 % Vanguard Target Retirement 2060 Trust
Vanguard Target Retirement Income Trust
(1.99)% Vanguard Target Retirement 2065 Trust
(1) The ISP International Equity Fund is a multi-fund portfolio made up of two underlying mutual funds that provides a blended
rate of return. The underlying funds are the Hartford International Opportunities HLS Fund (50%) and Dodge & Cox
International Stock Fund (50%).
(2) The ISP Active Large Cap Equity Fund is a multi-fund portfolio made up of two underlying funds that provides a blended rate of
return. The underlying funds are the Hartford Dividend and Growth HLS Fund (50%) and the Loomis Sayles Growth Fund
(50%).
(3) The ISP Small/Mid Cap Equity Fund is a multi-fund portfolio made up of four underlying funds (one mutual fund and three
managed separate accounts) that provides a blended rate of return. The underlying funds are the T. Rowe Price QM U.S. Small-
Cap Growth Fund (20%), Chartwell Investment Partners Small Cap Value Fund (20%), Hartford MidCap HLS Fund (30%) and
LMCG Investments Mid Cap Value Fund (30%).
(4) The State Street S&P 500 Index Fund was added as an investment option on June 18, 2018, replacing the Hartford Index Fund.
The Hartford Index Fund rate of return represents return from January 1, 2018 through June 15, 2018. The State Street S&P
500 Index Fund rate of return represents return from January 1, 2018 through December 31, 2018.
58 www.thehartford.com
(2.94)%
(4.16)%
(5.05)%
(5.78)%
(6.51)%
(7.27)%
(7.84)%
(7.82)%
(7.83)%
(7.80)%
(7.70)%
COMPENSATION MATTERS
Non-Qualified Deferred Compensation - Excess Savings Plan
The table below shows the NEO and company contributions, the aggregate earnings credited, and the total balance of each NEO’s
account under the Excess Savings Plan as of December 31, 2018.
Name
Christopher Swift
Beth Costello
Douglas Elliot
Brion Johnson
William Bloom
Executive
Contributions
in Last FY ($)(1)
43,500
Registrant
Contributions
in Last FY ($)(2)
43,500
Aggregate
Earnings
in Last FY ($)(3)
(44,516)
Aggregate
Withdrawals /
Distributions ($)
—
Aggregate
Balance
at Last FYE ($)(4)
783,698
43,500
43,500
43,500
43,500
43,500
43,500
43,500
43,500
13,187
14,498
(37,960)
(28,052)
—
—
—
—
579,040
634,902
542,328
276,502
(1) The amounts shown reflect executive contributions into the Excess Savings Plan during 2018 with respect to Annual Incentive
Plan cash awards paid in 2018 in respect of performance during 2017. These amounts are included in the “Non-Equity
Incentive Plan Compensation” column of the Summary Compensation Table in the 2018 proxy statement.
(2) The amounts shown reflect the company’s matching contributions into the Excess Savings Plan in respect of each NEO’s service
in 2018. These amounts are also included with the Company's contributions to the 401(k) plan in the “All Other Compensation”
column of the Summary Compensation Table on page 52.
(3) The amounts shown represent investment gains (or losses) during 2018 on notional investment funds available under the
Excess Savings Plan (which mirror investment options available under the 401(k) plan). No portion of these amounts is included
in the Summary Compensation Table on page 52 as the company does not provide above-market rates of return.
(4) The amounts shown represent the cumulative amount that has been credited to each NEO’s account under the applicable plan
as of December 31, 2018. The amounts reflect the sum of the contributions made by each NEO and the company since the NEO
first began participating in the Excess Savings Plan (including executive and company contributions reported in the Summary
Compensation Tables in previous years), adjusted for any earnings or losses as a result of the performance of the notional
investments. The reported balances are not based solely on 2018 service.
2019 Proxy Statement
59
COMPENSATION MATTERS
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The following section provides information concerning the value of potential payments and benefits as of December 31, 2018 that
would be payable to NEOs following termination of employment under various circumstances or in the event of a Change of Control
(as defined on page 64). Benefit eligibility and values as of December 31, 2018 vary based on the reason for termination.
Senior Executive Severance Pay Plan
The NEOs participate in The Hartford Senior Executive Officer Severance Pay Plan (the “Senior Executive Plan”), that provides
specified payments and benefits to participants upon termination of employment as a result of severance eligible events. The Senior
Executive Plan applies to the NEOs and other executives that the Executive Vice President and Chief Human Resources Officer (the
“Plan Administrator”) approves for participation. As a condition to participate in the Senior Executive Plan, the NEOs must agree to
such restrictive covenants as are required by the Plan Administrator. In addition to confidentiality and non-disparagement
provisions that continue after termination of employment, the NEOs have agreed that, while employed and for a one-year period
following a termination of employment, they are subject to non-competition and non-solicitation provisions.
If an NEO is involuntarily terminated, other than for Cause (as defined on page 64), and not eligible for retirement treatment under
the AIP or for some or all of his or her LTI award(s), he or she would receive:
•
•
•
A lump sum severance amount equal to two times the sum of the executive’s annual base salary and the target AIP award,
both determined as of the termination date, payable within 60 days of termination;
A pro rata AIP award, in a discretionary amount, under the company’s AIP for the year in which the termination occurs,
payable no later than the March 15 following the calendar year of termination;
To the extent provided by the LTI award terms, unless the NEO is retirement eligible, vesting in a pro rata portion of any
outstanding unvested LTI awards (other than Mr. Bloom's August 2016 RSU award), provided that at least one full year of
the performance or restriction period of an award has elapsed as of the termination date; and
•
Continued health coverage and outplacement services for up to twelve months following the termination date.
Treatment upon a Change of Control
If, within the two year period following a Change of Control (as defined on page 64), (1) the NEO is involuntarily terminated by the
company other than for Cause, or (2) the NEO voluntarily terminates employment with the company for Good Reason (as defined
on page 64), then the NEO would receive the same severance pay under the Senior Executive Plan as the NEO would have received
in the event of involuntary termination before a Change of Control, and would be eligible for a pro rata AIP award as set forth above,
except that the pro rata AIP award payable would be at least the same percentage of the target level of payout as is generally
applicable to executives whose employment did not terminate. LTI awards would not vest automatically upon a Change of Control
so long as the Compensation Committee determines that, upon the Change of Control, the awards would either continue to be
honored or be replaced with substantially equivalent alternative awards. If the awards were so honored or replaced, then those
awards would fully vest if, within the two year period following the Change of Control, (1) the NEO was involuntarily terminated by
the company other than for Cause, or (2) the NEO voluntarily terminated employment with the company for Good Reason.
In the event of a Change of Control, the NEO would receive a lump sum equal to the present value of the NEO's benefit under the
Excess Pension Plan and his or her Excess Savings Plan balance, provided that the Change of Control also constituted a “change in
control” as defined in regulations issued under Section 409A of the Internal Revenue Code. (See (6) Additional Pension Benefits
below for a description of Mr. Bloom's Excess Pension Plan benefit upon a Change in Control.)
No gross-up would be provided for any excise taxes that apply to an NEO upon a Change of Control.
Other Benefits in the Event of Death or Disability
In the event of death, an NEO would receive a company-paid life insurance benefit in addition to whatever voluntary group term life
insurance coverage is in effect. The company paid benefit would equal one times salary with a cap of $100,000, unless the employee
had elected a flat amount of $50,000.
In the event of disability, the NEO would be entitled to short and long term disability benefits if he or she were disabled in
accordance with the terms of the applicable plan. Upon the commencement of long term disability benefits and while in receipt of
long term disability benefits, each NEO would be eligible to participate in company health benefit and life insurance plans for up to a
maximum of three years.
Eligibility for Retirement Treatment
For AIP awards, an NEO is eligible for retirement treatment if (i) the NEO is at least age 50, has at least 10 years of service and the
sum of the NEO’s age and service is equal to at least 70, or (ii) the NEO is at least age 65 with at least 5 years of service (the"Rule of
70"). None of the NEOs were eligible to receive retirement treatment for their AIP awards as of December 31, 2018. However,
Messrs. Swift, Elliot and Johnson were eligible to receive retirement treatment for their 2016, 2017 and 2018 LTI awards under the
Rule of 65, as described below.
60 www.thehartford.com
COMPENSATION MATTERS
For the 2016, 2017 and 2018 LTI awards, an NEO will receive retirement treatment if he or she provides written notice three
months in advance of his or her planned retirement date, continues to perform his or her job responsibilities satisfactorily, and
meets one of the following retirement definitions as of the last date paid: (i) the NEO is at least age 55 with at least 5 years of
service, and age plus service equals or exceeds 65 (the "Rule of 65"), or (ii) as of the 2016 annual grant date of March 1, 2016, the
NEO was at least age 50 with at least 10 years of service and the sum of the NEO's age and service was equal to at least 70 , and the
NEO had an outstanding LTI grant as of December 31, 2015.
Payments upon Termination or Change of Control
The table and further discussion below address benefits that would be payable to the NEOs as of December 31, 2018 assuming
their termination of employment on December 31, 2018 under various circumstances or in the event of a Change of Control
effective December 31, 2018. The benefits discussed below are in addition to:
•
•
•
•
The vested stock options set forth in the Outstanding Equity Awards at Fiscal Year-End Table on page 55,
The vested performance shares set forth in the Option Exercises and Stock Vested Table on page 56,
The vested pension benefits set forth in the Pension Benefits Table on page 57, and
The vested benefits set forth in the Non-Qualified Deferred Compensation Table on page 58 (benefits payable from the
Excess Savings Plan).
The amounts shown for accelerated stock option and other LTI vesting are calculated using the NYSE closing price per share of the
company’s common stock on December 31, 2018 of $44.45.
Payment Type
VOLUNTARY TERMINATION OR RETIREMENT
2018 AIP Award ($)(1)
Accelerated Stock Option Vesting ($)(2)
Accelerated Performance Share Vesting ($)(3)
Accelerated Other LTI Vesting ($)(3)
TOTAL TERMINATION BENEFITS ($)
INVOLUNTARY TERMINATION – NOT FOR CAUSE
2018 AIP Award ($)(1)
Cash Severance ($)(4)
Accelerated Stock Option Vesting ($)(2)
Accelerated Performance Share Vesting ($)(3)
Accelerated Other LTI Vesting ($)(3)
Benefits Continuation and Outplacement ($)(5)
Christopher
Swift
Beth
Costello
Douglas
Elliot
Brion
Johnson
William
Bloom
—
84,418
6,713,683
—
6,798,101
—
—
—
—
—
—
—
54,607
15,939
4,338,098
1,342,745
—
—
4,392,705
1,358,684
—
—
—
—
—
4,800,000
1,925,000
3,050,000
2,250,000
1,550,000
8,300,000
3,850,000
5,700,000
3,950,000
2,800,000
84,418
17,191
54,607
15,939
6,713,683
774,719
4,338,098
1,342,745
—
—
—
—
7,859
454,501
—
41,591
41,591
36,024
41,795
41,591
TOTAL TERMINATION BENEFITS ($)
19,939,692
6,608,501
13,178,729
7,600,479
4,853,951
CHANGE OF CONTROL/ INVOLUNTARY TERMINATION
NOT FOR CAUSE OR TERMINATION FOR GOOD REASON
2018 AIP Award ($)(1)
Cash Severance ($)(4)
Accelerated Stock Option Vesting ($)(2)
Accelerated Performance Share Vesting ($)(3)
Accelerated Other LTI Vesting ($)(3)
Benefits Continuation and Outplacement ($)(5)
Additional Pension Benefits ($)(6)
4,800,000
1,925,000
3,050,000
2,250,000
1,550,000
8,300,000
3,850,000
5,700,000
3,950,000
2,800,000
84,418
20,662
54,607
15,939
6,713,683
1,528,636
4,338,098
1,342,745
—
—
—
—
41,591
41,591
36,024
41,795
—
—
—
—
9,445
908,913
870,153
41,591
207
TOTAL TERMINATION BENEFITS ($)
19,939,692
7,365,889
13,178,729
7,600,479
6,180,309
INVOLUNTARY TERMINATION – DEATH OR DISABILITY
2018 AIP Award ($)(1)
Accelerated Stock Option Vesting ($)(2)
Accelerated Performance Share Vesting ($)(3)
Accelerated Other LTI Vesting ($)(3)
Benefits Continuation ($)(5)
4,800,000
1,925,000
3,050,000
2,250,000
1,550,000
84,418
20,662
54,607
15,939
9,445
6,713,683
1,528,636
4,338,098
1,342,745
908,913
52,034
52,034
35,652
52,517
52,034
TOTAL TERMINATION BENEFITS ($)
11,650,135
3,526,332
7,478,357
3,661,201
2,520,392
2019 Proxy Statement
61
COMPENSATION MATTERS
(1) 2018 AIP Award
Voluntary Termination or Retirement. Generally, upon a voluntary termination of employment during 2018, the NEO would
not be eligible to receive an AIP award for 2018 unless the Compensation Committee determined otherwise. However, an
NEO who is eligible for retirement treatment for an AIP award would be entitled to receive a pro rata award for 2018 based
on the portion of the year served, payable no later than March 15 following the calendar year of termination. None of the
NEOs were eligible for retirement treatment as of December 31, 2018 under the AIP.
Involuntary Termination – Not For Cause. Each NEO would be eligible for a pro rata portion of his or her 2018 AIP award. The
amounts shown represent the actual award payable for 2018, as reflected in the “Non-Equity Incentive Plan Compensation”
column of the Summary Compensation Table on page 52.
Involuntary Termination – Not For Cause, or a Termination For Good Reason, Within Two Years Following a Change of
Control. Each NEO would be eligible for a pro rata portion of his or her 2018 AIP award, commensurate with amounts
received by the executives who did not terminate employment. The amounts shown represent the actual award payable for
2018, as reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 52.
Involuntary Termination For Cause. No AIP award would be payable.
Death or Disability. Each NEO would receive a 2018 AIP award comparable to the award that would have been paid had he or
she been subject to an involuntary termination (not for Cause).
(2) Accelerated Stock Option Vesting
Voluntary Termination or Retirement. For a voluntary termination, all unvested options would be canceled, unless the
Compensation Committee determined otherwise. Each NEO would be entitled to exercise stock options vested as of the date
of his or her termination of employment within the four month period following termination of employment but not beyond
the scheduled expiration date.
If the NEO is retirement eligible, unvested stock options would immediately vest. Vested options would need to be exercised
within the five year period following the applicable retirement date but not beyond the scheduled expiration date. Mr. Swift,
Mr. Elliot and Mr. Johnson were eligible for retirement treatment as of December 31, 2018 on their 2016, 2017 and 2018
option awards.
Involuntary Termination – Not For Cause. Each NEO would be entitled to pro rata vesting of unvested stock options as long
as the options had been outstanding for at least one year from the date of grant. Stock options vested as of the date of
termination of employment would need to be exercised within the four month period following termination of employment
but not beyond the scheduled expiration date.
If the NEO is retirement eligible, unvested stock options would immediately vest. Vested options would need to be exercised
within the five year period following the applicable retirement date but not beyond the scheduled expiration date. Mr. Swift,
Mr. Elliot and Mr. Johnson were eligible for retirement treatment as of December 31, 2018 on their 2016, 2017 and 2018
option awards.
Change of Control. Stock options would not automatically vest upon a Change of Control so long as the Compensation
Committee determined that, upon the Change of Control, the awards would either be honored or replaced with substantially
equivalent alternative awards. If the stock option awards were so honored or replaced, then vesting of those awards would
only be accelerated if the NEO’s employment were to be terminated within two years following the Change of Control
without Cause or by the NEO for Good Reason. Stock options, if vested upon the Change of Control, would be exercisable for
the remainder of their original term. The amounts shown in the Change of Control section of the table provide the in-the-
money value of accelerated stock option vesting presuming that all options were to vest upon a Change of Control on
December 31, 2018 (i.e., that the stock option awards were not honored or replaced, or that the NEOs were terminated at the
time of the Change of Control without Cause).
Involuntary Termination For Cause. All unvested stock options would be canceled.
Death or Disability. All unvested stock options would fully vest and would need to be exercised within the five year period
following the applicable termination date but not beyond the scheduled expiration date.
(3) Accelerated Vesting of Performance Shares and Other LTI Awards
Voluntary Termination or Retirement. For a voluntary termination, unvested performance shares and RSUs would be
canceled as of the termination of employment date, unless the Compensation Committee determined otherwise. For
retirement eligible employees, performance share awards granted on February 28, 2017 and February 27, 2018 would fully
vest, subject to compliance with a non-compete provision. As of December 31, 2018, Mr. Swift, Mr. Elliot and Mr. Johnson
were eligible to receive retirement treatment on their outstanding performance share awards, subject to compliance with the
non-competition provision. Unless the Compensation Committee determined otherwise, Mr. Bloom's RSU award granted on
August 1, 2016 would be forfeited upon voluntary termination or retirement, consistent with the terms of that award.
Involuntary Termination – Not For Cause. Each NEO would be entitled to pro rata payment of 2017 and 2018 performance
share awards at the end of the applicable performance period, except for Mr. Swift, Mr. Elliot and Mr. Johnson who would
receive full vesting for their 2017 and 2018 performance share award due to eligibility for retirement treatment, subject to
compliance with the non-competition provision. The amount shown is the value the NEO would be entitled to at the end of
62 www.thehartford.com
COMPENSATION MATTERS
the respective performance period for these awards to which pro rata or full payment applies, based on $44.45, the closing
stock price on December 31, 2018, and payout at target. RSUs granted to Mr. Bloom on August 1, 2016 would be forfeited,
unless the Compensation Committee determined otherwise.
Change Of Control. RSU and performance share awards would not automatically vest upon a Change of Control so long as the
Compensation Committee determined that, upon the Change of Control, the awards would either be honored or replaced
with substantially equivalent alternative awards. If the RSU awards and the performance share awards were so honored or
replaced, then vesting of those awards would only be accelerated if the NEO’s employment were to be terminated within two
years following the Change of Control without Cause or by the NEO for Good Reason. The amounts shown in the Change of
Control section of the table indicate the value of accelerated vesting presuming that all awards were to vest upon the Change
of Control (i.e., Mr. Bloom's RSU award and the performance share awards were not honored or replaced, or that the NEOs
were terminated at the time of the Change of Control without Cause), based on $44.45, the closing stock price on
December 31, 2018, and, in the case of performance shares, a payout at target. The Compensation Committee could
determine that performance share awards would pay out at greater than the target amount.
Involuntary Termination For Cause. All unvested awards would be canceled.
Death or Disability. Performance share awards granted in 2017 and 2018 would vest in full at target and be payable within 60
days of the termination date. RSUs granted to Mr. Bloom on August 1, 2016 would be forfeited, unless the Compensation
Committee determined otherwise.
(4) Cash Severance Payments
Voluntary Termination or Retirement, Involuntary Termination For Cause, Death or Disability. No benefits would be
payable.
Involuntary Termination - Not For Cause Before or After a Change of Control, or Termination For Good Reason Within Two
Years Following a Change of Control. Each NEO would receive a severance payment calculated as a lump sum equal to two
times the sum of base salary and the target AIP award at the time of termination (assumed to be December 31, 2018 for this
purpose).
In the event of termination after a Change of Control, if the aggregate present value of payments contingent on the Change of
Control would result in payment by the NEO of an excise tax on “excess parachute payments,” as described in regulations
under Sections 280G and 4999 of the Internal Revenue Code, then the severance amounts shown would be reduced if, as a
result, the NEO would thereby receive more on an after-tax basis than he or she would receive if the reduction in the
severance amount was not made. The amounts shown assume that such reduction does not occur.
(5) Benefits Continuation and Outplacement
Voluntary Termination or Retirement. No benefits would be payable. NEOs who terminate employment after attaining age
55 and completing 10 years of service can elect coverage under a company high deductible health plan until age 65 at their
own expense.
Involuntary Termination - Not For Cause Before or After A Change of Control, or Termination For Good Reason Within Two
Years Following a Change of Control. Each NEO would be provided up to one-year of health benefits at the employee cost
and up to one-year of executive outplacement services.
The amounts shown represent the estimated employer cost of health coverage continuation and outplacement.
Involuntary Termination - Death or Disability. Each NEO would be provided 36 months of life and health benefits
continuation from the date of termination due to long term disability.
(6) Additional Pension Benefits Upon a Change in Control
In the event of a Change in Control, all participants in the Excess Pension Plan automatically receive, in a single lump sum, the
present value of the benefit accrued as of the date of the Change in Control, provided that the Change of Control also
constitutes a "change of control" as defined in regulations issued under Section 409A of the Internal Revenue Code. In such
event, the provisions of the Excess Pension Plan regarding the calculation of the lump sum payments due under that Plan's
final average pay formula provide for different assumptions to be used, including lower discount rates, than have historically
been assumed by the company for GAAP financial reporting purposes. In the event of a Change of Control, the hypothetical
lump sum payout from the Excess Pension Plan to Mr. Bloom would thus be greater by $207 than the accumulated benefit
present value set forth in the Pension Benefits Table on page 57.
2019 Proxy Statement
63
COMPENSATION MATTERS
DEFINITIONS
“Cause” as used above is defined differently, depending upon whether an event occurs before or after a Change of Control.
Prior to a Change of Control, “Cause” is generally defined as termination for misconduct or other disciplinary action.
•
• Upon the occurrence of a Change of Control, “Cause” is generally defined as the termination of the executive’s
employment due to: (i) a felony conviction; (ii) an act or acts of dishonesty or gross misconduct which result or are intended
to result in damage to the company’s business or reputation; or (iii) repeated violations by the executive of the obligations
of his or her position, which violations are demonstrably willful and deliberate and which result in damage to the
company’s business or reputation.
“Change of Control” is generally defined as:
•
The filing of a report with the SEC disclosing that a person is the beneficial owner of 40% or more of the outstanding stock
of the company entitled to vote in the election of directors of the company;
• A person purchases shares pursuant to a tender offer or exchange offer to acquire stock of the company (or securities
convertible into stock), provided that after consummation of the offer, the person is the beneficial owner of 20% or more
of the outstanding stock of the company entitled to vote in the election of directors of the company;
The consummation of a merger, consolidation, recapitalization or reorganization of the company approved by the
stockholders of the company, other than in a transaction immediately following which the persons who were the beneficial
owners of the outstanding securities of the company entitled to vote in the election of directors of the company
immediately prior to such transaction are the beneficial owners of at least 55% of the total voting power represented by
the securities of the entity surviving such transaction entitled to vote in the election of directors of such entity in
substantially the same relative proportions as their ownership of the securities of the company entitled to vote in the
election of directors of the company immediately prior to such transaction;
The consummation of a sale, lease, exchange or other transfer of all or substantially all the assets of the company approved
by the stockholders of the company; or
•
•
• Within any 24 month period, the persons who were directors of the company immediately before the beginning of such
period (the “Incumbent Directors”) cease (for any reason other than death) to constitute at least a majority of the Board or
the board of directors of any successor to the company, provided that any director who was not a director at the beginning
of such period shall be deemed to be an Incumbent Director if such director (A) was elected to the Board by, or on the
recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors
either actually or by prior operation of this clause, and (B) was not designated by a person who has entered into an
agreement with the company to effect a merger or sale transaction described above.
“Good Reason” is generally defined as:
•
The assignment of duties inconsistent in any material adverse respect with the executive’s position, duties, authority or
responsibilities, or any other material adverse change in position, including titles, authority or responsibilities;
• A material reduction in base pay or target AIP award;
• Being based at any office or location more than 50 miles from the location at which services were performed immediately
prior to the Change of Control (provided that such change of office or location also entails a substantially longer
commute);
• A failure by the company to obtain the assumption and agreement to perform the provisions of the Senior Executive Plan
by a successor; or
• A termination asserted by the company to be for cause that is subsequently determined not to constitute a termination for
Cause.
CEO Pay Ratio
For 2018, Mr. Swift had total compensation, as reported in the Summary Compensation Table on page 52, of $13,883,615, while our
median employee had total compensation of $104,925, yielding a CEO pay ratio of 132 times the median. Annual base salary at
year-end 2018 was used to determine the median employee. The median employee's total compensation was calculated in the same
manner as for the CEO in the Summary Compensation Table. No statistical sampling was used and all non-U.S. employees were
excluded using the 5% de minimis rule (4 employees were based in Canada at year-end).
64 www.thehartford.com
INFORMATION ON STOCK OWNERSHIP
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows, as of March 18, 2019: (1) the number of shares of our common stock beneficially owned by each director,
director nominee, and NEO, and (2) the aggregate number of shares of common stock and common stock-based equity (including
RSUs, performance shares granted at target and stock options that will not vest or become exercisable within 60 days, as applicable)
held by all directors, director nominees, and Section 16 executive officers as a group.
As of March 18, 2019, no individual director or Section 16 executive officer beneficially owned 1% or more of the total outstanding
shares of our common stock. The directors and Section 16 executive officers as a group beneficially owned approximately 1.7% of
the total outstanding shares of our common stock as of March 18, 2019.
Name of Beneficial Owner
Robert B. Allardice, III
William A. Bloom
Beth Costello(3)
Carlos Dominguez
Douglas Elliot(4)
Trevor Fetter
Brion Johnson
Stephen P. McGill
Kathryn A. Mikells(5)
Michael G. Morris
Thomas A. Renyi
Julie G. Richardson(6)
Teresa W. Roseborough
Virginia P. Ruesterholz
Christopher J. Swift(4)(7)
Greig Woodring(8)
All directors and Section 16 executive officers as a group (21 persons)
Common Stock(1)
33,665
137,314
321,559
3,824
Total(2)
33,665
283,170
515,538
3,824
1,529,510
1,529,510
69,986
472,949
4,345
70,466
79,702
70,549
42,875
15,838
28,923
69,986
472,949
4,345
70,466
79,702
70,549
42,875
15,838
28,923
2,513,447
2,513,447
4,407
4,407
6,159,562
6,629,802
(1) All shares of common stock are owned directly except as otherwise indicated below. Pursuant to SEC regulations, shares of
common stock beneficially owned include shares of common stock that, as of March 18, 2019: (i) may be acquired by directors
and Section 16 executive officers upon the vesting or distribution of stock-settled RSUs or the exercise of stock options
exercisable within 60 days after March 18, 2019, (ii) are allocated to the accounts of Section 16 executive officers under the
company’s tax-qualified 401(k) plan, (iii) are held by Section 16 executive officers under The Hartford Employee Stock
Purchase Plan or (iv) are owned by a director’s or a Section 16 executive officer’s spouse or minor child. Of the number of
shares of common stock shown above, the following shares may be acquired upon exercise of stock options as of March 18,
2019 or within 60 days thereafter by: Mr. Bloom,105,947 shares; Ms. Costello, 265,303 shares; Mr. Elliot, 1,220,846 shares;
Mr. Johnson, 356,409 shares; Mr. Swift, 2,023,003 shares; and all Section 16 executive officers as a group, 4,501,366 shares.
(2) This column shows the individual’s total stock-based holdings in the company, including the securities shown in the “Common
Stock” column (as described in footnote 1), plus RSUs, performance shares (at target) and stock options that may vest or
become exercisable more than 60 days after March 18, 2019.
(3) The amount shown includes 11 shares of common stock held by Ms. Costello’s spouse.
(4) The amount shown for Messrs. Elliot, Johnson and Swift reflects retirement eligibility as of March 18, 2019 or within 60 days
thereafter, as applicable.
(5) The amount shown includes 6,800 shares of common stock held by a limited liability company of which Ms. Mikells is a
member.
(6) The amount shown includes 1,500 shares of common stock held in three separate trusts for which Ms. Richardson serves as
co-trustee.
(7) The amount shown includes 3,750 shares of common stock held by Mr. Swift’s spouse and 69,050 held in two trusts for which
Mr. Swift or his spouse serves as trustee.
(8) The amount shown includes 84 shares of common stock held by a trust for which Mr. Woodring serves a trustee.
2019 Proxy Statement
65
INFORMATION ON STOCK OWNERSHIP
CERTAIN SHAREHOLDERS
The following table shows those persons known to the company as of February 15, 2019 to be the beneficial owners of more than
5% of our common stock. In furnishing the information below, we have relied on information filed with the SEC by the beneficial
owners.
Name and Address of Beneficial Owner
Amount and Nature of Beneficial
Ownership
38,095,029(2)
Percent of Class(1)
10.61%
The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355
BlackRock Inc.
55 East 52nd Street
New York, NY 10055
JPMorgan Chase & Co.
270 Park Avenue
New York, NY 10017
State Street Corporation
One Lincoln Street
Boston, MA 02111
(1) The percentages contained in this column are based solely on information provided in Schedules 13G or 13G/A filed with the
29,817,087(3)
20,334,282(5)
22,987,494(4)
6.4%
5.7%
8.3%
SEC by each of the beneficial owners listed above regarding their respective holdings of our common stock as of December 31,
2018.
(2) This information is based solely on information contained in a Schedule 13G/A filed on February 11, 2019 by The Vanguard
Group to report that it was the beneficial owner of 38,095,029 shares of our common stock as of December 31, 2018.
Vanguard has (i) the sole power to vote or to direct the vote with respect to 412,698 of such shares, (ii) shared power to vote or
to direct the vote with respect to 94,432 of such shares, (iii) the sole power to dispose or direct the disposition with respect to
37,594,942 of such shares and (iv) the shared power to dispose or direct the disposition of 500,087 of such shares.
(3) This information is based solely on information contained in a Schedule 13G/A filed on February 11, 2019 by BlackRock, Inc. to
report that it was the beneficial owner of 29,817,087 shares of our common stock as of December 31, 2018. BlackRock has (i)
sole power to vote or to direct the vote with respect to 26,012,638 of such shares; and (ii) sole power to dispose or direct the
disposition of 29,817,087 of such shares.
(4) This information is based solely on information contained in a Schedule 13G filed on January 24, 2019 by JPMorgan Chase &
Co. to report that it was the beneficial owner of 22,987,494 shares of our common stock as of December 31, 2018. JPMorgan
has (i) sole power to vote or to direct the vote with respect to 21,537,105 of such shares; (ii) shared power to vote or to direct
the vote of 29,667 of such shares; (iii) sole power to dispose or to direct the disposition of 22,867,554 of such shares; and (iv)
shared power to dispose or to direct the disposition of 117,782 of such shares.
(5) This information is based solely on information contained in a Schedule 13G filed on February 14, 2019 by State Street
Corporation to report that it was the beneficial owner of 20,334,282 shares of our common stock as of December 31, 2018.
State Street has (i) the shared power to vote or to direct the vote with respect to 18,908,243 of such shares and (ii) shared
power to dispose or direct the disposition of 20,330,917 of such shares.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING
COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and designated Section 16 executive officers, and
persons who own more than 10% of a registered class of our equity securities, to file with the SEC initial reports of ownership and
reports of changes in ownership of our common stock and other equity securities. Section 16 executive officers, directors and
greater than 10% shareholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based upon a review of filings with the SEC and written representations from our directors and Section 16 executive officers that
no other reports were required, we believe that all Section 16(a) reports were filed timely in 2018.
66 www.thehartford.com
INFORMATION ABOUT THE HARTFORD’S
ANNUAL MEETING OF SHAREHOLDERS
HOUSEHOLDING OF PROXY MATERIALS
SEC rules permit companies and intermediaries such as brokers to satisfy delivery requirements for proxy statements and notices
with respect to two or more shareholders sharing the same address by delivering a single proxy statement or a single notice
addressed to those shareholders. This process, which is commonly referred to as “householding,” provides cost savings for
companies. Some brokers household proxy materials, delivering a single proxy statement or notice to multiple shareholders sharing
an address unless contrary instructions have been received from the affected shareholders. Once you have received notice from
your broker that they will be householding materials to your address, householding will continue until you are notified otherwise or
until you revoke your consent. If, at any time, you no longer wish to participate in householding and would prefer to receive a
separate proxy statement or notice, please notify your broker. You may also call (800) 542-1061 or write to: Householding
Department, 51 Mercedes Way, Edgewood, New York 11717, and include your name, the name of your broker or other nominee,
and your account number(s). You can also request prompt delivery of copies of the Notice of 2019 Annual Meeting of Shareholders,
Proxy Statement and 2018 Annual Report by writing to Donald C. Hunt, Vice President and Corporate Secretary, The Hartford
Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155.
FREQUENTLY ASKED QUESTIONS
The Board of Directors of The Hartford is soliciting shareholders’ proxies in connection with the 2019 Annual Meeting of
Shareholders, and at any adjournment or postponement thereof. The mailing to shareholders of the notice of Internet availability of
proxy materials took place on or about April 4, 2019.
Q: Why did I receive a one-page notice in the mail regarding the Internet availability of proxy materials instead of a full set of
proxy materials?
A:
Instead of mailing a printed copy of our proxy materials to each shareholder of record, the SEC permits us to furnish proxy
materials by providing access to those documents on the Internet. Shareholders will not receive printed copies of the proxy
materials unless they request them. The notice instructs you as to how to submit your proxy on the Internet. If you would like to
receive a paper or email copy of our proxy materials, you should follow the instructions in the notice for requesting those
materials.
Q: How are shares voted if additional matters are presented at the Annual Meeting?
A: Other than the items of business described in this proxy statement, we are not aware of any other business to be acted upon at
the Annual Meeting. If you grant a proxy, the persons named as proxyholders, David C. Robinson, Executive Vice President and
General Counsel, and Donald C. Hunt, Vice President and Corporate Secretary, will have the discretion to vote your shares on
any additional matters properly presented for a vote at the Annual Meeting in accordance with Delaware law and our By-laws.
Q: Who may vote at the Annual Meeting?
A: Holders of our common stock at the close of business on March 18, 2019 (the “Record Date”) may vote at the Annual Meeting.
On the Record Date, we had 360,740,923 shares of common stock outstanding and entitled to be voted at the Annual Meeting.
You may cast one vote for each share of common stock you hold on all matters presented at the Annual Meeting.
Participants in The Hartford Investment and Savings Plan (“ISP”) and The Hartford Deferred Restricted Stock Unit Plan (“Bonus
Swap Plan”) may instruct plan trustees as to how to vote their shares using the methods described on page 68. The trustees of
the ISP and the Bonus Swap Plan will vote shares for which they have not received direction in accordance with the terms of
the ISP and the Bonus Swap Plan, respectively.
Participants in The Hartford's Employee Stock Purchase Plan (“ESPP”) may vote their shares using the voting methods
described on page 68.
2019 Proxy Statement
67
INFORMATION ABOUT THE MEETING
Q: What vote is required to approve each proposal?
A:
Proposal
Election of Directors
1
2
3
Voting Standard
A director will be elected if the number of shares voted “for” that
director exceeds the number of votes “against” that director
To ratify the appointment of our independent
registered public accounting firm
An affirmative vote requires the majority of those shares present in
person or represented by proxy and entitled to vote
To approve, on a non-binding, advisory basis, the
compensation of our named executive officers as
disclosed in this proxy statement
An affirmative vote requires the majority of those shares present in
person or represented by proxy and entitled to vote
Q: What is the difference between a “shareholder of record” and a “street name” holder?
A: These terms describe the manner in which your shares are held. If your shares are registered directly in your name through
Computershare, our transfer agent, you are a “shareholder of record.” If your shares are held in the name of a brokerage firm,
bank, trust or other nominee as custodian on your behalf, you are a “street name” holder.
Q: How do I vote my shares?
A: Subject to the limitations described below, you may vote by proxy:
By internet
By telephone
Visit 24/7
www.proxyvote.com
Dial toll-free 24/7
1-800-690-6903
By mailing your Proxy Card
In person
Cast your ballot, sign your proxy card and send by mail
Shareholders of record may join us in person at the
Annual Meeting
When voting on any proposal you may vote “for” or “against” the item or you may abstain from voting.
Voting Through the Internet or by Telephone. Whether you hold your shares directly as the shareholder of record or beneficially in
“street name,” you may direct your vote by proxy without attending the Annual Meeting. You can vote by proxy using the Internet or
a telephone by following the instructions provided in the notice you received.
Voting by Proxy Card or Voting Instruction Form. Each shareholder, including any employee of The Hartford who owns common stock
through the ISP, the Bonus Swap Plan or the ESPP, may vote by using the proxy card(s) or voting instruction form(s) provided to him
or her. When you return a proxy card or voting instruction form that is properly completed and signed, the shares of common stock
represented by that card will be voted as you specified.
68 www.thehartford.com
INFORMATION ABOUT THE MEETING
Q: Can I vote my shares in person at the Annual Meeting?
A:
If you are a shareholder of record, you may vote your shares in person at the Annual Meeting. If you hold your shares in “street
name,” you must obtain a legal proxy from your broker, banker, trustee or nominee giving you the right to vote your shares at
the Annual Meeting.
Q: Can my shares be voted even if I abstain or don’t vote by proxy or attend the Annual Meeting?
A:
If you cast a vote of “abstention” on a proposal, your shares cannot be voted otherwise unless you change your vote (see below).
Because they are considered to be present and entitled to vote for purposes of determining voting results, abstentions will
have the effect of a vote against Proposal #2 and Proposal #3. Note, however, that abstentions will have no effect on Proposal
#1, since only votes “for” or “against” a director nominee will be considered in determining the outcome.
Abstentions are included in the determination of shares present for quorum purposes.
If you don’t vote your shares held in “street name,” your broker can vote your shares in its discretion on matters that the NYSE
has ruled discretionary. The ratification of Deloitte & Touche LLP as independent registered public accounting firm is a
discretionary item under the NYSE rules. If no contrary direction is given, your shares will be voted on this matter by your
broker in its discretion. The NYSE deems the election of directors, the implementation of equity compensation plans and
matters relating to executive compensation as non-discretionary matters in which brokers may not vote shares held by a
beneficial owner without instructions from such beneficial owner. Accordingly, brokers will not be able to vote your shares for
the election of directors, or the advisory vote on compensation of our named executive officers, if you fail to provide specific
instructions. If you do not provide instructions, a “broker non-vote” results, and the underlying shares will not be considered
voting power present at the Annual Meeting. Therefore, these shares will not be counted in the vote on those matters.
If you do not vote shares for which you are the shareholder of record, your shares will not be voted.
Q: What constitutes a quorum, and why is a quorum required?
A: A quorum is required for our shareholders to conduct business at the Annual Meeting. The presence at the Annual Meeting, in
person or by proxy, of the holders of a majority of the shares entitled to vote on the Record Date will constitute a quorum,
permitting us to conduct the business of the meeting. Abstentions and proxies submitted by brokers (even with limited voting
power such as for discretionary matters only) will be considered “present” at the Annual Meeting and counted in determining
whether there is a quorum present.
Q: Can I change my vote after I have delivered my proxy?
A: Yes. If you are a shareholder of record, you may revoke your proxy at any time before it is exercised by:
Entering a new vote using the Internet or a telephone;
1.
2. Giving written notice of revocation to our Corporate Secretary;
3.
4. Attending the Annual Meeting and revoking your proxy (your attendance at the Annual Meeting will not by itself revoke
Submitting a subsequently dated and properly completed proxy card; or
your proxy).
If you hold shares in “street name,” you may submit new voting instructions by contacting your broker, bank or other nominee.
You may also change your vote or revoke your proxy in person at the Annual Meeting if you obtain a legal proxy from the record
holder (broker, bank or other nominee) giving you the right to vote the shares.
Q: Where can I find voting results of the Annual Meeting?
A: We will announce preliminary voting results at the Annual Meeting and publish the results in a Form 8-K filed with the SEC
within four business days after the date of the Annual Meeting.
2019 Proxy Statement
69
INFORMATION ABOUT THE MEETING
Q: How can I submit a proposal for inclusion in the 2020 proxy statement?
A: We must receive proposals submitted by shareholders for inclusion in the 2020 proxy statement relating to the 2020 Annual
Meeting no later than the close of business on December 6, 2019. Any proposal received after that date will not be included in
our proxy materials for 2020. In addition, all proposals for inclusion in the 2020 proxy statement must comply with all of the
requirements of Rule 14a-8 under the Securities Exchange Act of 1934. No proposal may be presented at the 2020 Annual
Meeting unless we receive notice of the proposal by Friday, February 14, 2020. Proposals should be addressed to Donald C.
Hunt, Vice President and Corporate Secretary, The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT
06155. All proposals must comply with the requirements set forth in our By-laws, a copy of which may be obtained from our
Corporate Secretary or on the Corporate Governance page of the investor relations section of our website at http://
ir.thehartford.com.
Q: How may I obtain other information about The Hartford?
A: General information about The Hartford is available on our website at www.thehartford.com. You may view the Corporate
Governance page of the investor relations section of our website at http://ir.thehartford.com for the following information,
which is also available in print without charge to any shareholder who requests it in writing:
SEC Filings
• Copies of this proxy statement
• Annual Report on Form 10-K for the fiscal year ended December 31, 2018
• Other filings we have made with the SEC
Governance
Documents
• Articles of Incorporation
• By-laws
• Corporate Governance Guidelines (including guidelines for determining director
independence and qualifications)
• Charters of the Board’s committees
• Code of Ethics and Business Conduct
• Code of Ethics and Business Conduct for Members of the Board of Directors
Written requests for print copies of any of the above-listed documents should be addressed to Donald C. Hunt, Vice President
and Corporate Secretary, The Hartford Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155.
For further information, you may also contact our Investor Relations Department at the following address: The Hartford
Financial Services Group, Inc., One Hartford Plaza, Hartford, CT 06155, or call (860) 547-2537.
70 www.thehartford.com
INFORMATION ABOUT THE MEETING
OTHER INFORMATION
As of the date of this proxy statement, the Board of Directors has no knowledge of any business that will be properly presented for
consideration at the Annual Meeting other than that described above. As to other business, if any, that may properly come before
the Annual Meeting, the proxies will vote in accordance with their judgment.
Present and former directors and present and former officers and other employees of the company may solicit proxies by
telephone, telegram or mail, or by meetings with shareholders or their representatives. The company will reimburse brokers, banks
or other custodians, nominees and fiduciaries for their charges and expenses in forwarding proxy material to beneficial owners. The
company has engaged Morrow Sodali LLC to solicit proxies for the Annual Meeting for a fee of $13,000, plus the payment of
Morrow’s out-of-pocket expenses. The company will bear all expenses relating to the solicitation of proxies.
The proxy materials are available to you via the Internet. Shareholders who access the company’s materials this way get the
information they need electronically, which allows us to reduce printing and delivery costs and lessen adverse environmental
impacts. The notice of Internet availability contains instructions as to how to access and review these materials. You may also refer
to the notice for instructions regarding how to request paper copies of these materials.
We hereby incorporate by reference into this proxy statement “Item 10: Directors, Executive Officers and Corporate Governance
of The Hartford” and “Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters” of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
By order of the Board of Directors,
Donald C. Hunt
Vice President and Corporate Secretary
Dated: April 4, 2019
SHAREHOLDERS ARE URGED TO VOTE BY PROXY, WHETHER OR NOT THEY EXPECT TO ATTEND THE ANNUAL MEETING. A
SHAREHOLDER MAY REVOKE HIS OR HER PROXY AND VOTE IN PERSON IF HE OR SHE ATTENDS THE ANNUAL MEETING
(STREET HOLDERS MUST OBTAIN A LEGAL PROXY FROM THEIR BROKER, BANKER OR TRUSTEE TO VOTE IN PERSON AT THE
ANNUAL MEETING).
2019 Proxy Statement
71
APPENDIX A: RECONCILIATION OF GAAP TO
NON-GAAP FINANCIAL MEASURES
The Hartford uses non-GAAP financial measures in this proxy statement to assist investors in analyzing the company's operating
performance for the periods presented herein. Because The Hartford's calculation of these measures may differ from similar
measures used by other companies, investors should be careful when comparing The Hartford's non-GAAP financial measures to
those of other companies. Definitions and calculations of non-GAAP and other financial measures used in this proxy statement can
be found below and in The Hartford's Investor Financial Supplement for fourth quarter 2018, which is available on The Hartford's
website, https:// ir.thehartford.com.
Core Earnings: The Hartford uses the non-GAAP measure core earnings as an important measure of the company’s operating
performance. The Hartford believes that the measure core earnings provides investors with a valuable measure of the performance
of the company’s ongoing businesses because it reveals trends in our insurance and financial services businesses that may be
obscured by including the net effect of certain realized capital gains and losses, certain restructuring and other costs, integration
and transaction costs in connection with an acquired business, pension settlements, loss on extinguishment of debt, gains and losses
on reinsurance transactions, income tax benefit from reduction in deferred income tax valuation allowance, impact of tax reform on
net deferred tax assets, and results of discontinued operations. Some realized capital gains and losses are primarily driven by
investment decisions and external economic developments, the nature and timing of which are unrelated to the insurance and
underwriting aspects of our business. Accordingly, core earnings excludes the effect of all realized gains and losses (net of tax) that
tend to be highly variable from period to period based on capital market conditions. The Hartford believes, however, that some
realized capital gains and losses are integrally related to our insurance operations, so core earnings includes net realized gains and
losses such as net periodic settlements on credit derivatives. These net realized gains and losses are directly related to an offsetting
item included in the income statement such as net investment income. Results from discontinued operations are excluded from core
earnings for businesses held for sale because such results could obscure trends in our ongoing businesses that are valuable to our
investors' ability to assess the company's financial performance. Core earnings are net of preferred stock dividends declared since
they 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 comparable U.S. GAAP measures to core earnings. Income from continuing operations, net of tax,
available to common stockholders is net income available to common shareholders, 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, The Hartford 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. Below is a reconciliation of net income
(loss) to core earnings for the years ended Dec. 31, 2018 and 2017.
($ in millions)
Net income (loss) available to common stockholders GAAP Net Income
Less: Net realized capital gains (losses), excluded from core earnings, before tax
Less: Loss on extinguishment of debt, before tax
Less: Pension settlement, before tax
Less: Integration and transaction costs associated with acquired business, before tax
Less: Income tax benefit (expense)
Less: Income (loss) from discontinued operations, net of tax
= Core Earnings
Year Ended
Dec. 31, 2018
Year Ended
Dec. 31, 2017
$
1,801 $
(3,131)
(118)
(6)
—
(47)
75
322
$
1,575 $
160
—
(750)
(17)
(669)
(2,869)
1,014
Compensation Core Earnings: As discussed under “Annual Incentive Plan Awards” on page 40, at the beginning of each
year, the Compensation Committee approves a definition of “Compensation Core Earnings,” a non-GAAP financial measure.
Compensation Core Earnings is used to set AIP award targets and threshold levels below which no AIP award is earned. Below is the
Compensation Committee’s 2018 definition of “Compensation Core Earnings” and a reconciliation of this non-GAAP financial
72 www.thehartford.com
measure to 2018 GAAP net income.
($ in millions)
2018 Core Earnings as reported
Adjusted for, after tax:
APPENDIX A
$
1,575
Income (losses) associated with the cumulative effect of accounting changes and accounting extraordinary items
Total catastrophe losses, including reinstatement premiums, state catastrophe fund assessments and terrorism
losses, that are (below) or above the annual catastrophe budget
Prior accident year reserve development associated with asbestos and environmental reserves
Entire amount of a (gain) or loss (or such percentage of a gain or loss as determined by the Compensation
Committee) associated with any other unusual or non-recurring item, including but not limited to reserve
development, significant policyholder behavior changes or transactions in Talcott Resolution, litigation and
regulatory settlement charges and/or prior/current year non-recurring tax benefits or charges
Income/(losses) associated with discontinued operations through the last date externally reported as core
earnings
= Compensation Core Earnings
$
—
320
—
(53)
-
1,842
Core Earnings Return on Equity: The company provides different measures of the return on stockholders' equity
(“ROE”). Net income (loss) available to common stockholders ROE ("net income (loss) ROE) is calculated by dividing (a) net income
(loss) available to common stockholders for the prior four fiscal quarters by (b) average common stockholders' equity, including
AOCI. Core earnings ROE is calculated based on non-GAAP financial measures. Core earnings ROE is calculated by dividing (a) core
earnings for the prior four fiscal quarters by (b) average common stockholders' equity, excluding AOCI. Net income ROE is the most
directly comparable U.S. GAAP measure. The company excludes AOCI in the calculation of core earnings ROE to provide investors
with a measure of how effectively the company is investing the portion of the company's net worth that is primarily attributable to
the company's business operations. The company provides to investors return on equity measures based on its non-GAAP core
earnings financial measures for the reasons set forth in the related discussion above. A reconciliation of net income ROE to core
earnings ROE is set forth below.
Last Twelve
Months
Ended
Dec. 31, 2018
Last Twelve
Months
Ended
Dec. 31, 2017
Last Twelve
Months
Ended
Dec. 31, 2016
Net Income (loss) available to common stockholders ROE
13.7%
(20.6)%
Less: Net realized capital gains (losses), excluded from core earnings,
before tax
Less: Loss on reinsurance transactions, before tax
Less: Pension settlement, before tax
Less: Integration and transaction costs associated with an acquired
business, before tax
Less: Income tax benefit (expense) on items not included in core
earnings
Less: Income (loss) from discontinued operations, after tax
Less: Impact of AOCI, excluded from Core Earnings ROE
(0.9)
—
—
(0.4)
0.6
2.5
0.3
1.1
—
(4.9)
(0.1)
(4.4)
(18.9)
(0.1)
5.2%
(0.6)
(3.8)
—
—
2.7
1.6
0.1
= Core earnings ROE
11.6%
6.7 %
5.2%
Compensation Core ROE: As discussed under "Long-Term Incentive Awards" on page 41, Compensation Core ROE is
used to set performance share targets and threshold levels below which there is no payout. The adjustments described in the left
hand column of the table below constitute the Compensation Committee’s 2018 definition of “Compensation Core ROE.” A
reconciliation of Compensation Core ROE to GAAP net income ROE for the 2018 performance share awards will not be available
until the end of the performance period in 2020. Reconciliations to GAAP net income for 2016 performance share awards are
provided in the columns on the right, with any variations from the 2018 definition explained in the notes below the table.
2019 Proxy Statement
73
APPENDIX A
GAAP net income
Preferred stock dividends
Net income (loss) available to common shareholders
Less the following items:
Net realized capital gains/losses after tax and deferred acquisition costs ("DAC"), except
for those net realized capital gains/losses resulting from net periodic settlements on
credit derivatives and net periodic settlements on fixed annuity cross-currency swaps
(these included net realized capital gains and/or losses are directly related to offsetting
items included in the income statement, such as net investment income), before tax
The impact of the unlock due to change in estimated gross profits (DAC Unlock)
Restructuring costs, before tax
Income/losses associated with discontinued operations, before tax
Loss on extinguishment of debt, before tax
Reinsurance gains/losses on dispositions, before tax
Pension settlement gain (loss), before tax
Integration and transaction costs associated with acquired business, before tax
Income tax benefit (expense)
Income from discontinued operations, after tax
= Core Earnings as reported
Adjusted for after tax:
Income (losses) associated with the cumulative effect of accounting changes, and
accounting extraordinary items;
Total catastrophe losses, including reinstatement premiums, state catastrophe fund
assessments and terrorism losses that are (below) or above the catastrophe budget.(1)
Prior accident year reserve development associated with asbestos and environmental
reserves
Entire amount of a (gain) loss associated with litigation and regulatory settlement
charges and/or with prior/current year non-recurring tax benefits or charges(2)
2018
1,807 $
2017
(3,131) $
$
(6)
—
1,801
(3,131)
2016
896
—
896
(118)
160
(112)
—
—
—
(6)
—
—
(47)
75
322
1,575
—
249
—
(191)
—
—
—
—
—
(750)
(17)
(669)
(2,869)
1,014
—
273
—
—
—
—
—
—
(650)
—
—
463
283
912
—
1
174
(14)
423
Income/(losses) associated with discontinued operations through the last date
externally reported as core earnings(3)
—
278
= Core Earnings as adjusted
Prior year ending common stockholders' equity, excluding accumulated other
comprehensive income (AOCI)
Prior year ending common stockholders' equity, excluding AOCI, adjusted for Tax
Reform
1,633
—
1,565
17,240
1,496
17,971
13,708
—
—
Current year ending common stockholders' equity, excluding AOCI
14,346
12,831
17,240
Less: Impact of Tax Reform on equity
Current year ending common stockholders' equity, excluding AOCI, adjusted for Tax
Reform
736
877
15,082
13,708
—
—
Average common stockholders' equity, excluding AOCI, adjusted for Tax Reform
14,395
15,474
17,606
= Compensation Core ROE
11.3%
10.1%
8.5%
Average of 2016, 2017 and 2018 Compensation Core ROE = 10.00%
(1)
(2)
(3)
(4)
The catastrophe budget for each year will be based on the multi-year outlook prepared as of February 2016. The catastrophe budget will be adjusted only for
changes in exposures between what is assumed in the multi-year outlook versus exposures as the book is actually constituted in each respective year; and for
tornado/hail catastrophes per exposure equal to an 8-year average of prior actual experience for 2016, a 9-year average for 2017 and a 10-year average for
2018.
For 2018, an adjustment was made pursuant to the definition of Compensation Core Earnings to use the previously enacted corporate income tax rate of 35%,
which is higher than the current corporate income tax rate of 21%.
Amendment to the definition of Compensation Core ROE following the agreement to sell Talcott Resolution, as described on p. 49. For 2017, the amount
represents Talcott Resolution earnings through September 30, 2017.
As a result of the Tax Cuts and Jobs Act of 2017, the definition of average equity was amended to exclude the impact of the charge to earnings that was the result
of the effect of the lower enacted corporate income tax rate on net deferred tax assets.
74 www.thehartford.com
APPENDIX A
Underlying Combined Ratio: Represents the combined ratio before catastrophes and prior accident year development
(PYD) and is a non-GAAP financial measure. Combined ratio is the most directly comparable GAAP measure. The combined ratio is
the sum of the loss and loss adjustment expense ratio (also known as a loss ratio), the expense ratio and the policyholder dividend
ratio. This ratio measures the cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100
demonstrates a positive underwriting result. A combined ratio above 100 indicates a negative underwriting result. The underlying
combined ratio represents the combined ratio for the current accident year, excluding the impact of current accident year
catastrophes. The company believes this ratio is an important measure of the trend in profitability since it removes the impact of
volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve. Below is a
reconciliation of combined ratio to the underlying combined ratio for individual reporting segments for the year-ended December
31, 2018.
Combined Ratio
Less: Impact of catastrophes and PYD on combined ratio
= Underlying Combined Ratio
Commercial Lines
Personal Lines
92.6
1.1
91.5
106.3
15.2
91.2
2019 Proxy Statement
75
[This Page Intentionally Left Blank]
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
TABLE OF CONTENTS
Description
Part I
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
MINE SAFETY DISCLOSURES
Part II
MARKET FOR THE HARTFORD'S COMMON EQUITY, RELATED STOCKHOLDER MATTER AND ISSUER
PURCHASES OF EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
Part III
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE OF THE HARTFORD
EXECUTIVE COMPENSATION
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
Part IV
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Item
1
1A.
1B.
4
5
6
7
7A.
8
9
9A.
9B.
10
11
13
14
Page
4
13
None
Not Applicable
25
27
28
[a]
[b]
None
104
None
106
[c]
[d]
[e]
F-1
[a] The information required by this item is set forth in the Enterprise Risk Management section of Item 7, Management's Discussion and Analysis of Financial Condition and Results
of Operations and is incorporated herein by reference.
[b] See Index to Consolidated Financial Statements and Schedules elsewhere herein.
[c] The information called for by Item 11 will be set forth in the Proxy Statement under the subcaptions "Compensation Discussion and Analysis", "Executive Compensation", "Director
Compensation", "Report of the Compensation and Management Development Committee", and "Compensation and Management Development Committee Interlocks and Insider
Participation" and is incorporated herein by reference.
[d] Any information called for by Item 13 will be set forth in the Proxy Statement under the caption and subcaption "Board and Governance Matters" and "Director Independence"
and is incorporated herein by reference.
[e] The information called for by Item 14 will be set forth in the Proxy Statement under the caption "Audit Matters" and is incorporated herein by reference.
1
Forward-Looking Statements
Certain of the statements contained herein are forward-looking statements made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as “anticipates,” “intends,” “plans,”
“seeks,” “believes,” “estimates,” “expects,” “projects,” and similar references to future periods.
Forward-looking statements are based on management's current expectations and assumptions regarding future economic, competitive,
legislative and other developments and their potential effect upon The Hartford Financial Services Group, Inc. and its subsidiaries
(collectively, the “Company” or “The Hartford”). Because forward-looking statements relate to the future, they are subject to inherent
uncertainties, risks and changes in circumstances that are difficult to predict. Actual results could differ materially from expectations,
depending on the evolution of various factors, including the risks and uncertainties identified below, as well as factors described in such
forward-looking statements or in Part I, Item 1A. Risk Factors, in Part II, Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations, and those identified from time to time in our other filings with the Securities and Exchange
Commission.
•
Risks Relating to Economic, Political and Global Market Conditions:
◦
◦
◦
◦
◦
challenges related to the Company’s current operating environment, including global political, economic and market conditions, and
the effect of financial market disruptions, economic downturns, changes in trade regulation including tariffs and other barriers or
other potentially adverse macroeconomic developments on the demand for our products and returns in our investment portfolios;
market risks associated with our business, including changes in credit spreads, equity prices, interest rates, inflation rate, and
market volatility;
the impact on our investment portfolio if our investment portfolio is concentrated in any particular segment of the economy;
the impacts of changing climate and weather patterns on our businesses, operations and investment portfolio including on claims,
demand and pricing of our products, the availability and cost of reinsurance, our modeling data used to evaluate and manage risks of
catastrophes and severe weather events, the value of our investment portfolios and credit risk with reinsurers and other
counterparties;
the risks associated with the change in or replacement of the London Inter-Bank Offered Rate ("LIBOR") on the securities we hold
or may have issued, other financial instruments and any other assets and liabilities whose value is tied to LIBOR;
•
Insurance Industry and Product-Related Risks:
◦
◦
◦
◦
◦
◦
◦
◦
◦
◦
the possibility of unfavorable loss development, including with respect to long-tailed exposures;
the significant uncertainties that limit our ability to estimate the ultimate reserves necessary for asbestos and environmental claims
the possibility of a pandemic, earthquake, or other natural or man-made disaster that may adversely affect our businesses;
weather and other natural physical events, including the intensity and frequency of storms, hail, wildfires, flooding, winter storms,
hurricanes and tropical storms, as well as climate change and its potential impact on weather patterns;
the possible occurrence of terrorist attacks and the Company’s inability to contain its exposure as a result of, among other factors,
the inability to exclude coverage for terrorist attacks from workers' compensation policies and limitations on reinsurance coverage
from the federal government under applicable laws;
the Company’s ability to effectively price its property and casualty policies, including its ability to obtain regulatory consents to
pricing actions or to non-renewal or withdrawal of certain product lines;
actions by competitors that may be larger or have greater financial resources than we do;
technological changes, such as usage-based methods of determining premiums, advancements in automotive safety features, the
development of autonomous vehicles, and platforms that facilitate ride sharing, which may alter demand for the Company's
products, impact the frequency or severity of losses, and/or impact the way the Company markets, distributes and underwrites its
products;
the Company's ability to market, distribute and provide insurance products and investment advisory services through current and
future distribution channels and advisory firms;
the uncertain effects of emerging claim and coverage issues;
•
Financial Strength, Credit and Counterparty Risks:
◦
◦
risks to our business, financial position, prospects and results associated with negative rating actions or downgrades in the
Company’s financial strength and credit ratings or negative rating actions or downgrades relating to our investments;
the impact on our statutory capital of various factors, including many that are outside the Company’s control, which can in turn
affect our credit and financial strength ratings, cost of capital, regulatory compliance and other aspects of our business and results;
2
◦
◦
◦
losses due to nonperformance or defaults by others, including credit risk with counterparties associated with investments,
derivatives, premiums receivable, reinsurance recoverables and indemnifications provided by third parties in connection with
previous dispositions;
the potential for losses due to our reinsurers' unwillingness or inability to meet their obligations under reinsurance contracts and
the availability, pricing and adequacy of reinsurance to protect the Company against losses;
regulatory limitations on the ability of the Company and certain of its subsidiaries to declare and pay dividends;
•
Risks Relating to Estimates, Assumptions and Valuations:
◦
◦
◦
risk associated with the use of analytical models in making decisions in key areas such as underwriting, pricing, capital management,
reserving, investments, reinsurance and catastrophe risk management;
the potential for differing interpretations of the methodologies, estimations and assumptions that underlie the Company’s fair value
estimates for its investments and the evaluation of other-than-temporary impairments on available-for-sale securities;
the potential for further impairments of our goodwill or the potential for changes in valuation allowances against deferred tax
assets;
•
Strategic and Operational Risks:
◦
◦
◦
◦
◦
◦
◦
the Company’s ability to maintain the availability of its systems and safeguard the security of its data in the event of a disaster, cyber
or other information security incident or other unanticipated event;
the potential for difficulties arising from outsourcing and similar third-party relationships;
the risks, challenges and uncertainties associated with capital management plans, expense reduction initiatives and other actions,
which may include acquisitions, divestitures or restructurings;
failure to complete our proposed acquisition of The Navigators Group, Inc. may cause volatility in our securities;
risks associated with acquisitions and divestitures including the challenges of integrating acquired companies or businesses or
separating from our divested businesses that may result in our not being able to achieve the anticipated benefits and synergies and
may result in unintended consequences;
difficulty in attracting and retaining talented and qualified personnel including key employees, such as executives, managers and
employees with strong technological, analytical and other specialized skills;
the Company’s ability to protect its intellectual property and defend against claims of infringement;
•
Regulatory and Legal Risks:
◦
◦
◦
◦
◦
the cost and other potential effects of increased regulatory and legislative developments, including those that could adversely
impact the demand for the Company’s products, operating costs and required capital levels;
unfavorable judicial or legislative developments;
the impact of changes in federal or state tax laws;
regulatory requirements that could delay, deter or prevent a takeover attempt that stockholders might consider in their best
interests; and
the impact of potential changes in accounting principles and related financial reporting requirements.
Any forward-looking statement made by the Company in this document speaks only as of the date of the filing of this Form 10-K. Factors or
events that could cause the Company’s actual results to differ may emerge from time to time, and it is not possible for the Company to predict
all of them. The Company undertakes no obligation to publicly update any forward-looking statement, whether as a result of new
information, future developments or otherwise.
3
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.
2018 Revenues of $18,955 [1] by Segment
Hartford Funds
$1,033
6%
Group
Benefits
$6,025
32%
Commercial
Lines
$8,035
43%
Personal Lines
$3,671
20%
[1]Includes Revenue of $86 for P&C Other Operations and $105 for Corporate.
The following discussion describes the principal products and
services, marketing and distribution, and competition of The
Hartford's reporting segments. For further discussion of the
reporting segments, including financial disclosures of revenues by
product line, net income (loss), and assets for each reporting
segment, see Note 4 - Segment Information of Notes to
Consolidated Financial Statements.
Part I - Item 1. Business
Item 1. BUSINESS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
GENERAL
The Hartford Financial Services Group, Inc. (together with its
subsidiaries, “The Hartford”, the “Company”, “we”, or “our”) is a
holding company for a group of subsidiaries that provide property
and casualty insurance, group benefits, and mutual funds and
exchange-traded products to individual and business customers
in the United States. The Hartford is headquartered in
Connecticut and its oldest subsidiary, Hartford Fire Insurance
Company, dates back to 1810. At December 31, 2018, total assets
and total stockholders’ equity of The Hartford were $62.3
billion and $13.1 billion, respectively.
ORGANIZATION
The Hartford strives to maintain and enhance its position as a
market leader within the financial services industry. The
Company sells diverse and innovative products through multiple
distribution channels to individuals and businesses and is
considered a leading property and casualty and employee group
benefits insurer. The Company endeavors to expand its insurance
product offerings and distribution and capitalize on the strength
of the Company's brand. The Hartford Stag logo is one of the most
recognized symbols in the financial services industry. The
Company is also working to increase efficiencies through
investments in technology.
As a holding company, The Hartford Financial Services Group, Inc.
is separate and distinct from its subsidiaries and has no significant
business operations of its own. The holding company relies on the
dividends from its insurance companies and other subsidiaries as
the principal source of cash flow to meet its obligations, pay
dividends and repurchase common stock. Information regarding
the cash flow and liquidity needs of The Hartford Financial
Services Group, Inc. may be found in Part II, Item 7,
Management’s Discussion and Analysis of Financial Condition
and Results of Operations (“MD&A”) — Capital Resources and
Liquidity.
REPORTING SEGMENTS
The Hartford conducts business principally in five reporting
segments including Commercial Lines, Personal Lines, Property &
Casualty ("P&C") Other Operations, Group Benefits and Hartford
Funds (previously referred to as "Mutual 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 debt financing and related interest
expense), 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 new holding company of the life and annuity business that we
4
Part I - Item 1. Business
COMMERCIAL LINES
2018 Earned Premiums of $7,047 by Line of
Business
2018 Earned Premiums of $7,047 by Product
Specialty commercial
$851
12%
Other
$45
1%
Middle
market
$2,421
34%
Workers’
compensation
$3,329
47%
Small
commercial
$3,730
53%
Bond
$241
3%
Property
$617
9%
Automobile
$608
9%
General
liability
$653
9%
Professional
liability
$253
4%
Package
business
$1,346
19%
Principal Products and Services
Automobile
Property
General
Liability
Package
Business
Workers'
Compensation
Covers damage to a business's fleet of vehicles due to collision or other perils (automobile physical damage). In addition to
first party automobile physical damage, commercial automobile covers liability for bodily injuries and property damage
suffered by third parties and losses caused by uninsured or under-insured motorists.
Covers the building a business owns or leases as well as its personal property, including tools and equipment, inventory,
and furniture. A commercial property insurance policy covers losses resulting from fire, wind, hail, earthquake, theft and
other covered perils, including coverage for assets such as accounts receivable and valuable papers and records.
Commercial property may include specialized equipment insurance, which provides coverage for loss or damage resulting
from the mechanical breakdown of boilers and machinery, and ocean and inland marine insurance, which provides
coverage for goods in transit and unique, one-of-a-kind exposures.
Covers a business in the event it is sued for causing harm to a person and/or damage to property. General liability
insurance covers third-party claims arising from accidents occurring on the insured’s premises or arising out of their
operations. General liability insurance may also cover losses arising from product liability and provide replacement of lost
income due to an event that interrupts business operations.
Covers both property and general liability damages.
Covers employers for losses incurred due to employees sustaining an injury, illness or disability in connection with their
work. Benefits paid under workers’ compensation policies may include reimbursement of medical care costs, replacement
income, compensation for permanent injuries and benefits to survivors. Workers’ compensation is provided under both
guaranteed cost policies (coverage for a fixed premium) and loss sensitive policies where premiums are adjustable based
on the loss experience of the employer.
Professional
Liability
Covers liability arising from directors and officers acting in their official capacity and liability for errors and omissions
committed by professionals and others. Coverage may also provide employment practices insurance relating to allegations
of wrongful termination and discrimination.
Bond
Encompasses fidelity and surety insurance, including commercial surety, contract surety and fidelity bonds. Commercial
surety includes bonds that insure non-performance by contractors, license and permit bonds to help meet government-
mandated requirements and probate and judicial bonds for fiduciaries and civil court proceedings. Contract surety bonds
may include payment and performance bonds for contractors. Fidelity bonds may include ERISA bonds related to the
handling of retirement plan assets and bonds protecting against employee theft or fraud. The Company also provides
credit and political risk insurance offered to clients with global operations.
Through its three lines of business of small commercial, middle
market and specialty, Commercial Lines principally provides
workers’ compensation, property, automobile and general liability
insurance products to businesses, primarily throughout the
United States. In addition, the specialty line of business provides
professional liability, bond, credit and political risk, loss-sensitive
workers compensation, general liability, automobile liability and
automobile physical damage coverages. The majority of
5
Part I - Item 1. Business
Commercial Lines written premium is generated by small
commercial and middle market, which provide coverage options
and customized pricing based on the policyholder’s individual risk
characteristics. Within small commercial, both property and
general liability coverages are offered under a single package
policy, marketed under the Spectrum name. Specialty provides a
variety of customized insurance products and services.
Small commercial provides coverages for small businesses, which
the Company considers to be businesses with an annual payroll
under $12, revenues under $25 and property values less than $20
per location. Through Maxum Specialty Insurance Group
("Maxum"), small commercial also provides excess and surplus
lines coverage to small businesses including umbrella, general
liability, property and other coverages. Middle market provides
insurance coverages to medium-sized businesses, which are
companies whose payroll, revenue and property values exceed
the small business definition. The Company has a small amount of
property and casualty business written internationally. For U.S.
exporters and other U.S. companies with international exposures,
the Company covers property, marine and liability risks outside
the U.S. as the assuming reinsurer under reinsurance agreements
with third parties.
In addition to offering standard commercial lines products,
middle market includes program business which provides tailored
programs, primarily to customers with common risk
characteristics. Within specialty, a significant portion of the
business is written through large deductible programs for
national accounts. Other programs written within specialty are
retrospectively-rated where the premiums are adjustable based
on loss experience. Also within specialty, the Company writes
captive programs business, which provides tailored programs to
those seeking a loss sensitive solution where premiums are
adjustable based on loss experience. On August 22, 2018, the
Company entered into a definitive agreement to acquire The
Navigators Group, Inc., a global specialty underwriter. This
acquisition could change the way we go to market as a
commercial lines carrier.
Marketing and Distribution
Commercial Lines provides insurance products and services
through the Company’s regional offices, branches and sales and
policyholder service centers throughout the United States. The
products are marketed and distributed nationally using
independent agents, brokers and wholesalers. The independent
agent and broker distribution channel is consolidating and this
trend is expected to continue. This will likely result in a larger
proportion of written premium being concentrated among fewer
agents and brokers. In addition, the Company offers insurance
products to customers of payroll service providers through its
relationships with major national payroll companies and to
members of affinity organizations.
Competition
Small Commercial
In small commercial, The Hartford competes against large
national carriers, regional carriers and direct writers.
Competitors include stock companies, mutual companies and
other underwriting organizations. The small commercial market
remains highly competitive and fragmented as carriers seek to
differentiate themselves through product expansion, price
6
reduction, enhanced service and leading technology. Larger
carriers such as The Hartford continually advance their pricing
sophistication and ease of doing business with agents and
customers through the use of technology, analytics and other
capabilities that improve the process of evaluating a risk, quoting
new business and servicing customers. The Company also
continuously enhances digital capabilities as customers and
distributors demand more access and convenience, and expands
product and underwriting capabilities to accommodate both
larger accounts and a broader risk appetite. Existing competitors
and new entrants, including start-up and non-traditional carriers,
are actively looking to expand sales of business insurance
products to small businesses through increasing their
underwriting appetite, deepening their relationships with
distribution partners, and through on-line and direct-to-
consumer marketing.
Middle Market
Middle market business is considered “high touch” and involves
individual underwriting and pricing decisions. The pricing of
middle market accounts is prone to significant volatility over time
due to changes in individual account characteristics and exposure,
as well as legislative and macro-economic forces. National and
regional carriers participate in the middle market insurance
sector, resulting in a competitive environment where pricing and
policy terms are critical to securing new business and retaining
existing accounts. Within this competitive environment, The
Hartford is working to deepen its product and underwriting
capabilities, leverage its sales and underwriting talent and expand
its use of data analytics to make risk selection and pricing
decisions. In product development and related areas such as
claims and risk engineering, the Company is extending its
capabilities in industry verticals, such as energy, construction,
automobile parts manufacturing, food processing and hospitality.
Through a business partner, the Company offers business
insurance coverages to exporters and other U.S. companies with a
physical presence overseas. The Hartford’s middle market
business will leverage the investments in product, underwriting,
and technology to better match price to individual risk as the firm
pursues responsible growth strategies to deliver target returns.
Specialty Commercial
Specialty commercial competes on an account-by-account basis
due to the complex nature of each transaction. Competition in
this market includes stock companies, mutual companies,
alternative risk sharing groups and other underwriting
organizations.
For specialty casualty businesses, pricing competition continues
to be significant, particularly for the larger individual accounts. As
a means to mitigate the cost of insurance on larger accounts,
more insureds may opt for the loss-sensitive products offered in
our national accounts segment, including retrospectively rated
contracts, in lieu of guaranteed cost policies. Under a
retrospectively-rated contract, the ultimate premium collected
from the insured is adjusted based on how incurred losses for the
policy year develop over time, subject to a minimum and
maximum premium. Within national accounts, the Company
implemented a new risk management platform, allowing
customers better access to claims data and other information
needed by corporate risk managers. This system allows the
Company to work more closely with customers to improve long-
term account performance.
Part I - Item 1. Business
In the bond business, favorable underwriting results in recent
years has led to increased competition for market share.
In professional liability, large and medium-sized businesses are in
differing competitive environments. Large public director &
officers coverage, specifically excess layers, is under significant
competitive price pressure. The middle market private
management liability segment is in a more stable competitive and
pricing environment.
PERSONAL LINES
2018 Earned Premiums of $3,399 by Line of
Business
2018 Earned Premiums of $3,399 by Product
AARP agency
$290
9%
Other agency
$336
10%
Other
$40
1%
Homeowners
$1,030
30%
AARP direct
$2,733
80%
Automobile
$2,369
70%
Principal Products and Services
Automobile
Homeowners
Covers damage to an individual insured’s own vehicle due to collision or other perils and is referred to as automobile
physical damage. In addition to first party automobile physical damage, automobile insurance covers liability for bodily
injuries and property damage suffered by third parties and losses caused by uninsured or underinsured motorists. Also,
under no-fault laws, policies written in some states provide first party personal injury protection. Some of the
Company’s personal automobile insurance policies also offer personal umbrella liability coverage for an additional
premium.
Insures against losses to residences and contents from fire, wind and other perils. Homeowners insurance includes
owned dwellings, rental properties and coverage for tenants. The policies may provide other coverages, including loss
related to recreation vehicles or watercraft, identity theft and personal items such as jewelry.
Personal Lines provides automobile, homeowners and personal
umbrella coverages to individuals across the United States,
including a program designed exclusively for members of AARP
(“AARP Program”). The Hartford's automobile and homeowners
products provide coverage options and pricing tailored to a
customer's individual risk. The Hartford has individual customer
relationships with AARP Program policyholders and, as a group,
they represent a significant portion of the total Personal Lines'
business. Business sold to AARP members, either direct or
through independent agents, amounted to earned premiums of
$3.0 billion, $3.2 billion and $3.3 billion in 2018, 2017 and 2016,
respectively.
During 2018, Personal Lines continued to refine its
automobile and home product offerings marketed under
the Open Road Auto and Home Advantage names.
Overall rate levels, price segmentation, rating factors
and underwriting procedures were examined and
updated to reflect the company’s actual experience with
these products. In addition, Personal Lines also
continued working with carrier partners to provide risk
protection options for AARP members with needs
beyond the company’s current product offering.
Marketing and Distribution
Personal Lines reaches diverse customers through multiple
distribution channels, including direct-to-consumer and
independent agents. In direct-to-consumer, Personal Lines
markets its products through a mix of media, including direct mail,
digital marketing, television as well as digital and print
advertising. Through the agency channel, Personal Lines provides
products and services to customers through a network of
independent agents in the standard personal lines market,
primarily serving mature, preferred consumers. These
7
Part I - Item 1. Business
independent agents are not employees of the Company.
Personal Lines has made significant investments in offering direct
and agency-based customers the opportunity to interact with the
company online, including via mobile devices. In addition, its
technology platform for telephone sales centers enables sales
representatives to provide an enhanced experience for direct-to-
consumer customers, positioning the Company to offer unique
capabilities to AARP’s member base.
Most of Personal Lines' sales are associated with its exclusive
licensing arrangement with AARP, with the current agreement in
place through January 1, 2023, to market automobile,
homeowners and personal umbrella coverages to AARP's
approximately 37 million members, primarily direct but also
through independent agents. This relationship with AARP, which
has been in place since 1984, provides Personal Lines with an
important competitive advantage given the increase in the
population of those over age 50 and the strength of the AARP
brand. In most states, auto and home policies issued to AARP
members include a lifetime continuation agreement
endorsement, providing that the policies will be renewed as long
as certain terms are met, such as timely payment of premium and
maintaining a driver’s license in good standing.
In addition to selling to AARP members, Personal Lines offers its
automobile and homeowners products to non-AARP customers,
primarily through the independent agent channel within select
underwriting markets where we believe we have a competitive
advantage. Personal Lines leverages its agency channel to target
AARP members and other customer segments that value the
advice of an independent agent and recognize the differentiated
experience the Company provides. In particular, the Company
has taken action to distinguish its brand and improve profitability
in the independent agent channel with fewer and more highly
partnered agents.
Competition
The personal lines automobile and homeowners insurance
markets are highly competitive. Personal lines insurance is
written by insurance companies of varying sizes that compete
principally on the basis of price, product, service, including claims
handling, the insurer's ratings and brand recognition. Companies
with strong ratings, recognized brands, direct sales capability and
economies of scale will have a competitive advantage. In recent
years, insurers have increased their advertising in the direct-to-
consumer market, in an effort to gain new business and retain
profitable business. The growth of direct-to-consumer sales
continues to outpace sales in the agency distribution channel.
Insurers that distribute products principally through agency
channels compete by offering commissions and additional
incentives to attract new business. To distinguish themselves in
the marketplace, top tier insurers are offering online and self
service capabilities that make it easier for agents and consumers
to do business with the insurer. A large majority of agents have
been using “comparative rater” tools that allow the agent to
compare premium quotes among several insurance companies.
The use of comparative rater tools increases price competition.
Insurers that are able to capitalize on their brand and reputation,
differentiate their products and deliver strong customer service
are more likely to be successful in this market.
The use of data mining and predictive modeling is used by more
and more carriers to target the most profitable business, and
carriers have further segmented their pricing plans to expand
market share in what they believe to be the most profitable
segments. The Company continues to invest in capabilities to
better utilize data and analytics, and thereby, refine and manage
underwriting and pricing.
Also, new automobile technology advancements, including lane
departure warnings, backup cameras, automatic braking and
active collision alerts, are being deployed rapidly and are
expected to improve driver safety and reduce the likelihood of
vehicle collisions. However, these features include expensive
parts, potentially increasing average claim severity.
PROPERTY & CASUALTY OTHER OPERATIONS
Property & Casualty Other Operations includes certain property
and casualty operations, managed by the Company, that have
discontinued writing new business and includes substantially all
of the Company's asbestos and environmental ("A&E") exposures.
For a discussion of coverages provided under policies written
with exposure to A&E, assumed reinsurance and all other non-
A&E, see Part II, Item 7, MD&A - Critical Accounting Estimates,
Property & Casualty Insurance Product Reserves.
8
Part I - Item 1. Business
GROUP BENEFITS
2018 Premiums and Fee Income of $5,598
Other
$241
4%
Group life
$2,611
47%
Group
disability
$2,746
49%
Principal Products and Services
Group Life
Group Disability
Typically is term life insurance provided in the form of yearly renewable term life insurance. Other life
coverages in this category include accidental death and dismemberment and travel accident insurance.
Typically comprised of both short-term and long-term disability coverage that pays a percentage of an
employee’s salary for a period of time if they are ill or injured and cannot perform the duties of their job. Short-
term and long-term disability policies have elimination periods that must be satisfied prior to benefit payments.
The Company also earns fee income from leave management services and the administration of underwriting,
enrollment and claims processing for employer self-funded plans.
Other Products
Includes other group coverages such as retiree health insurance, critical illness, accident, hospital indemnity
and participant accident coverages.
Group insurance typically covers an entire group of people under
a single contract, most typically the employees of a single
employer or members of an association.
Group Benefits provides group life, disability and other group
coverages to members of employer groups, associations and
affinity groups through direct insurance policies and provides
reinsurance to other insurance companies. In addition to
employer paid coverages, the segment offers voluntary product
coverages which are offered through employee payroll
deductions. Group Benefits also offers disability underwriting,
administration, and claims processing to self-funded employer
plans. In addition, the segment offers a single-company leave
management solution, which integrates work absence data from
the insurer’s short-term and long-term group disability and
workers’ compensation insurance with its leave management
administration services.
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. Policies are typically sold with one, two or
three-year rate guarantees depending upon the product and
market segment.
On November 1, 2017, the Company's group benefits subsidiary,
Hartford Life and Accident Insurance Company ("HLA") acquired
Aetna's U.S. group life and disability business through a
reinsurance transaction. Revenues and earnings of the Aetna U.S.
group life and disability business are included in operating results
of the Company's Group Benefits segment since the acquisition
date. For discussion of this transaction, see Note 2- Business
Acquisitions of Notes to Consolidated Financial Statements.
Marketing and Distribution
The Group Benefits distribution network is managed through a
regional sales office system to distribute its group insurance
products and services through a variety of distribution outlets
including brokers, consultants, third-party administrators and
trade associations. Additionally, the segment has relationships
with several private exchanges which offer its products to
employer groups.
The acquisition of Aetna's U.S. group life and disability business
further enhanced Group Benefit's distribution footprint by
increasing its sales force. The acquisition also provided Group
Benefits an exclusive, multi year collaboration to sell it's group life
and disability products through Aetna's medical sales team.
9
Part I - Item 1. Business
Competition
Group Benefits competes with numerous insurance companies
and financial intermediaries marketing insurance products. In
order to differentiate itself, Group Benefits uses its risk
management expertise and economies of scale to derive a
competitive advantage. Competitive factors include the extent of
products offered, price, the quality of customer and claims
handling services, and the Company's relationship with third-
party distributors and private exchanges. Active price
competition continues in the marketplace, resulting in multi-year
rate guarantees being offered to customers. Top tier insurers in
the marketplace also offer on-line and self service capabilities to
third party distributors and consumers. The relatively large size
and underwriting capacity of the Group Benefits business
provides a competitive advantage over smaller competitors.
Group Benefits' acquisition of Aetna's U.S. group life and
disability business further increased its market presence and
competitive capabilities through the addition of industry-leading
digital technology and an integrated absence management and
claims platform.
Additionally, as employers continue to focus on reducing the cost
of employee benefits, we expect more companies to offer
voluntary products paid for by employees. Competitive factors
affecting the sale of voluntary products include the breadth of
products, product education, enrollment capabilities and overall
customer service.
The Company has expanded its employer group product offerings,
including the voluntary product suite, including coverages for
short term absences from work, critical illness and accident
coverages. The Company's enhanced enrollment and marketing
tools, such as My Tomorrow©, are providing additional
opportunities to educate individual participants about
supplementary benefits and deepen their knowledge about
product selection.
HARTFORD FUNDS
Hartford Funds Segment AUM of $104,840 as
of December 31, 2018
Mutual Fund AUM as of December 31, 2018
Talcott Resolution life and
annuity separate accounts
$13,283
13%
ETP
$1,871
2%
Multi-strategy investments
$18,233
20%
Fixed income
$14,467
16%
Mutual funds
$89,686
86%
Equity
$56,986
64%
Principal Products and Services
Mutual funds
ETP
Includes 70 actively managed open-ended mutual funds across a variety of asset
classes including domestic and international equity, fixed income, and multi-strategy
investments, principally subadvised by two unaffiliated institutional asset
management firms that have comprehensive global investment capabilities.
Includes a suite of exchange-traded products (“ETP”) traded on the New York Stock
Exchange that is comprised of strategic beta and actively managed fixed income
exchange-traded funds ("ETF"). Strategic beta ETF’s are designed to track indices
using both active and passive investment techniques that strive to improve
performance relative to traditional capitalization weighted indices.
Talcott Resolution life and annuity separate
accounts
Relates to assets of the life and annuity business sold in May 2018 that are still
managed by the Company's Hartford Funds segment.
The Hartford Funds segment provides investment management,
administration, product distribution and related services to
investors through a diverse set of investment products in
domestic and international markets. Hartford Funds'
comprehensive range of products and services assist clients in
achieving their desired investment objectives. Assets under
management are separated into three distinct categories referred
to as mutual funds, ETP and Talcott Resolution life and annuity
10
Part I - Item 1. Business
separate accounts, which relate to the life and annuity business
sold in May 2018. The Hartford Funds segment will continue to
manage the mutual fund assets of Talcott Resolution, though
these assets are expected to continue to decline over time.
Marketing and Distribution
Our funds and ETPs are sold through national and regional
broker-dealer organizations, independent financial advisers,
defined contribution plans, financial consultants, bank trust
groups and registered investment advisers. Our distribution team
is organized to sell primarily in the United States. The investment
products for Talcott Resolution are not actively distributed.
Competition
The investment management industry is mature and highly
competitive. Firms are differentiated by investment performance,
range of products offered, brand recognition, financial strength,
proprietary distribution channels, quality of service and level of
fees charged relative to quality of investment products. The
Hartford Funds segment competes with a large number of asset
management firms and other financial institutions and
differentiates itself through superior fund performance, product
breadth, strong distribution and competitive fees. In recent years
demand for lower cost passive investment strategies has
outpaced demand for actively managed strategies and has taken
market share from active managers.
CORPORATE
The Company includes in the Corporate category investment
management fees and expenses related to managing third party
business, including management of the invested assets of Talcott
Resolution, reserves for run-off structured settlement and
terminal funding agreement liabilities, capital raising activities
(including debt financing and related interest expense), purchase
accounting adjustments related to goodwill and other expenses
not allocated to the reporting segments.
Additionally, included in the Corporate category are discontinued
operations from the Company's life and annuity business sold in
May 2018 and a 9.7% ownership interest in the legal entity that
acquired this business. The assets and liabilities of this business
had been accounted for as held for sale until closing and operating
results of the life and annuity business are included in
discontinued operations for all periods prior to the closing date.
RESERVES
Total Reserves as of December 31, 2018
Total Property & Casualty Reserves as of
December 31, 2018
All Other [1]
$1,409
4%
Group Benefits
unpaid losses and
loss adjustment
expenses
$8,445
25%
P&C unpaid losses
and loss
adjustment
expenses
$24,584
71%
P&C Other Operations
$2,673
11%
Personal Lines
$2,456
10%
[1]Includes reserves for future policy benefits and other policyholder funds and
benefits payable of $642 and $767, respectively, of which $427 and $455,
respectively, relate to the Group Benefits segment with the remainder related to
run-off structured settlement and terminal funding agreements within Corporate.
Commercial Lines
$19,455
79%
The reserve for unpaid losses and loss adjustment expenses
includes a liability for unpaid losses, including those that have
been incurred but not yet reported, as well as estimates of all
expenses associated with processing and settling these insurance
claims, including reserves related to both Property & Casualty
and Group Benefits.
11
UNDERWRITING FOR
P&C AND GROUP
BENEFITS
The Company underwrites the risks it insures in order to manage
exposure to loss through favorable risk selection and
diversification. Risk modeling is used to manage, within specified
limits, the aggregate exposure taken in each line of business and
across the Company. For property and casualty business,
aggregate exposure limits are set by geographic zone and peril.
Products are priced according to the risk characteristics of the
insured’s exposures. Rates charged for Personal Lines products
are filed with the states in which we write business. Rates for
Commercial Lines products are also filed with the states but the
premium charged may be modified based on the insured’s relative
risk profile and workers’ compensation policies may be subject to
modification based on prior loss experience. Pricing for Group
Benefits products, including long-term disability and life
insurance, is also based on an underwriting of the risks and a
projection of estimated losses, including consideration of
investment income.
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.
Geographic Distribution of Earned Premium
(% of total)
Location
California
New York
Texas
Florida
New Jersey
All other [1]
Total
Commercial
Lines
Personal
Lines
Group
Benefits
Total
8%
5%
3%
2%
3%
23%
44%
2%
1%
2%
2%
—%
15%
22%
3%
3%
2%
2%
2%
22%
34%
13%
9%
7%
6%
5%
60%
100%
[1]No other single state or country accounted for 5% or more of the Company's
consolidated earned premium written in 2018.
Part I - Item 1. Business
Further discussion of The Hartford’s property and casualty
insurance product reserves, including asbestos and
environmental claims reserves within P&C Other Operations,
may be found in Part II, Item 7, MD&A — Critical Accounting
Estimates — Property and Casualty Insurance Product Reserves.
Additional discussion may be found in Notes to Consolidated
Financial Statements, including in the Company’s accounting
policies for insurance product reserves within Note 1 - Basis of
Presentation and Significant Accounting Policies and in Note 11 -
Reserve for Unpaid Losses and Loss Adjustment Expenses of
Notes to Consolidated Financial Statements.
Total Group Benefits Reserves as of
December 31, 2018
Other policyholder funds and
benefits payable
$455
5%
STD and
supp.
health [1]
$161
2%
Life
premium
waiver
$705
8%
Reserve for
future policy
benefits [2]
$427
5%
Life and accident,
excl. premium
waiver
$577
6%
LTD
$7,002
75%
[1]Includes $118 of short-term disability ("STD") reserves and $43 of supplemental
health reserves.
[2]Includes $311 of paid up life reserves and policy reserves on life policies, $107 of
reserves for conversions to individual life and $9 of other reserves.
Other policyholder funds and benefits payable represent deposits
from policyholders where the company does not have insurance
risk but is subject to investment risk. Reserves for future policy
benefits represent life-contingent reserves for which the
company is subject to insurance and investment risk.
Further discussion of The Hartford's Group Benefits long-term
disability reserves may be found in Part II, Item 7, MD&A —
Critical Accounting Estimates — Group Benefits Long-term
Disability ("LTD") Reserves, Net of Reinsurance. Additional
discussion may be found in Note 11 - Reserve for Unpaid Losses
and Loss Adjustment Expenses of Notes to Consolidated
Financial Statements.
12
Part I - Item 1. Business
CLAIMS
ADMINISTRATION FOR
P&C AND GROUP
BENEFITS
Claims administration includes the functions associated with the
receipt of initial loss notices, claims adjudication and estimates,
legal representation for insureds where appropriate,
establishment of case reserves, payment of losses and
notification to reinsurers. These activities are performed by
approximately 6,720 claim professionals located in 49 states,
organized to meet the specific claim service needs for our various
product offerings. Our combined Workers’ Compensation and
Group Benefits units enable us to leverage synergies for
improved outcomes.
Claim payments for benefit, loss and loss adjustment expenses
are the largest expenditure for the Company.
REINSURANCE
For discussion of reinsurance, see Part II, Item 7, MD&A —
Enterprise Risk Management and Note 8 - Reinsurance of Notes
to Consolidated Financial Statements.
INVESTMENT
OPERATIONS
Hartford Investment Management Company (“HIMCO”) is an SEC
registered investment advisor and manages the Company's
investment operations. HIMCO provides customized investment
strategies for The Hartford's investment portfolio, as well as for
The Hartford's pension plan and institutional clients. In
connection with the life and annuity business sold in May 2018,
HIMCO entered into an agreement for an initial five year term to
manage the invested assets of Talcott Resolution.
As of December 31, 2018 and 2017, the fair value of HIMCO’s
total assets under management was approximately $89.6 billion
and $98.6 billion, respectively, of which $40.2 billion and $2.1
billion, respectively, were held in HIMCO managed third party
accounts.
Item 1A. RISK FACTORS
In deciding whether to invest in The Hartford, you should
carefully consider the following risks, any of which could have a
material adverse effect on our business, financial condition,
results of operation or liquidity and could also impact the trading
price of our securities. These risks are not exclusive, and
additional risks to which we are subject include, but are not
limited to, the factors mentioned under “Forward-Looking
Statements” above and the risks of our businesses described
elsewhere in this Annual Report on Form 10-K.
The following risk factors have been organized by category for
ease of use, however many of the risks may have impacts in more
than one category. The occurrence of certain of them may, in turn,
13
Management of The Hartford's
Investment Portfolio
HIMCO manages the Company's investment portfolios to
maximize economic value and generate the returns necessary to
support the Hartford’s various product obligations, within
internally established objectives, guidelines and risk tolerances.
The portfolio objectives and guidelines are developed based upon
the asset/liability profile, including duration, convexity and other
characteristics within specified risk tolerances. The risk
tolerances considered include, but are not limited to, asset sector,
credit issuer allocation limits, and maximum portfolio limits for
below investment grade holdings. The Company attempts to
minimize adverse impacts to the portfolio and the Company’s
results of operations from changes in economic conditions
through asset diversification, asset allocation limits, asset/liability
duration matching and the use of derivatives. For further
discussion of HIMCO’s portfolio management approach, see
Part II, Item 7, MD&A — Enterprise Risk Management.
The Hartford's Investment Portfolio of $46.8
billion as of December 31, 2018
Taxable fixed
maturities
(excl. U.S.
treasuries &
govt. agencies)
46%
U.S. treasuries
and gov't
agencies and
short-terms 18%
Tax-exempt fixed
maturities 21%
Mortgage loans 8%
Equity and other 3%
Limited partnerships and other
alternative investments 4%
cause the emergence or exacerbate the effect of others. Such a
combination could materially increase the severity of the impact
of these risks on our business, results of operations, financial
condition or liquidity.
Part I - Item 1A. Risk Factors
Risks Relating to
Economic, Political and
Global Market
Conditions
Unfavorable economic, political and global
market conditions may adversely impact our
business and results of operations.
The Company’s investment portfolio and insurance liabilities are
sensitive to changes in economic, political and global capital
market conditions, such as the effect of a weak economy and
changes in credit spreads, equity prices, interest rates and
inflation. Weak economic conditions, such as high unemployment,
low labor force participation, lower family income, a weak real
estate market, lower business investment and lower consumer
spending may adversely affect the demand for insurance and
financial products and lower the Company’s profitability in some
cases. In addition, a deterioration in global economic conditions,
including due to a trade war, tariffs or other actions with respect
to international trade agreements or policies, has the potential to,
among other things, reduce demand for our products, reduce
exposures we insure, drive higher inflation that could increase the
Company’s loss costs and result in increased incidence of claims,
particularly for workers’ compensation and disability claims. The
Company’s investment portfolio includes limited partnerships
and other alternative investments and equity securities for which
changes in value are reported in earnings. These investments may
be adversely impacted by economic volatility, including real
estate market deterioration, which could impact our net
investment returns and result in an adverse impact on operating
results.
Below are several key factors impacted by changes in economic,
political, and global market conditions and their potential effect
on the Company’s business and results of operation:
•
•
Credit Spread Risk - Credit spread exposure is reflected in
the market prices of fixed income instruments where lower
rated securities generally trade at a higher credit spread. If
issuer credit spreads increase or widen, the market value of
our investment portfolio may decline. If the credit spread
widening is significant and occurs over an extended period of
time, the Company may recognize other-than-temporary
impairments, resulting in decreased earnings. If credit
spreads tighten, significantly, the Company’s net investment
income associated with new purchases of fixed maturities
may be reduced. In addition, the value of credit derivatives
under which the Company assumes exposure or purchases
protection are impacted by changes in credit spreads, with
losses occurring when credit spreads widen for assumed
exposure or when credit spreads tighten if credit protection
has been purchased.
Equity Markets Risk - A decline in equity markets may result
in unrealized capital losses on investments in equity
securities recorded against net income and lower earnings
from Hartford Funds where fee income is earned based upon
the fair value of the assets under management. Equity
markets are unpredictable. During 2018, the equity markets
were more volatile than in prior periods, which could be
indicative of a greater risk of a decline. For additional
information on equity market sensitivity, see Part II, Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operation (MD&A), Enterprise Risk
Management, Financial Risk- Equity Risk.
•
Interest Rate Risk - Global economic conditions may result
in the persistence of a low interest rate environment which
would continue to pressure our net investment income and
could result in lower margins on certain products. For
additional information on interest rate sensitivity, see Part II,
Item 7, MD&A, Enterprise Risk Management, Financial Risk -
Interest Rate Risk
New and renewal business for our property and casualty and
group benefits products is priced considering prevailing
interest rates. As interest rates decline, in order to achieve
the same economic return, we would have to increase
product prices to offset the lower anticipated investment
income earned on invested premiums. Conversely, as interest
rates rise, pricing targets will tend to decrease to reflect
higher anticipated investment income. Our ability to
effectively react to such changes in interest rates may affect
our competitiveness in the marketplace, and in turn, could
reduce written premium and earnings. For additional
information on interest rate sensitivity, see Part II, Item 7
Management's Discussion and Analysis of Financial
Condition and Results of Operation (MD&A), Enterprise Risk
Management, Financial Risk - Interest Rate Risk.
In addition, due to the long-term nature of the liabilities
within our Group Benefits operations, particularly for long-
term disability, declines in interest rates over an extended
period of time would result in our having to reinvest at lower
yields. On the other hand, a rise in interest rates, in the
absence of other countervailing changes, would reduce the
market value of our investment portfolio. A decline in market
value of invested assets due to an increase in interest rates
could also limit our ability to realize tax benefits from
previously recognized capital losses.
•
Inflation Risk - Inflation is a risk to our property and casualty
business because, in many cases, claims are paid out many
years after a policy is written and premium is collected for
the risk. Accordingly, a greater than expected increase in
inflation related to the cost of medical services and repairs
over the claim settlement period can result in higher claim
costs than what was estimated at the time the policy was
written. Inflation can also affect consumer spending and
business investment which can reduce the demand for our
products and services.
Concentration of our investment portfolio
increases the potential for significant losses.
The concentration of our investment portfolios in any particular
industry, collateral type, group of related industries or geographic
sector could have an adverse effect on our investment portfolios
and consequently on our business, financial condition, results of
operations, and liquidity. Events or developments that have a
negative impact on any particular industry, collateral type, group
of related industries or geographic region may have a greater
adverse effect on our investment portfolio to the extent that the
portfolio is concentrated rather than diversified.
14
•
effects of extreme weather events on the physical and
operational exposure of industries and issuers
Because there is significant variability associated with the
impacts of climate change, we cannot predict how physical, legal,
regulatory and social responses may impact our business.
A change in or replacement of the London
Inter-Bank Offered Rate ("LIBOR") may
adversely affect the value of certain
derivatives and floating rate securities we
hold and floating rate securities we have
issued, and any other assets or liabilities
whose value may be tied to LIBOR.
Should financial institutions stop reporting the benchmark
interest rate known as LIBOR or change how the rate is
calculated, the Company could suffer economic loss to the extent
it has fixed maturity investments or other financial instruments
that do not provide for a replacement reference rate and which
mature after the date LIBOR is changed or is no longer published.
LIBOR is the interest rate at which banks have historically offered
to lend funds to one another for short-term loans. Actions by
regulators or law enforcement agencies, as well as the
Intercontinental Exchange (ICE) Benchmark Administration (the
current administrator of LIBOR) may result in changes to the way
LIBOR is determined or the establishment of alternative
reference rates. For example, on July 27, 2017, the U.K. Financial
Conduct Authority announced that it intends to stop persuading
or compelling banks to submit LIBOR rates after 2021. The U.S.
Federal Reserve, based on the recommendations of the New York
Federal Reserve’s Alternative Reference Rate Committee
(constituted of major derivative market participants and their
regulators), has begun publishing a Secured Overnight Funding
Rate (“SOFR”) which is intended to replace U.S. dollar LIBOR.
Plans for alternative reference rates for other currencies have
also been announced. At this time, it is not possible to predict how
markets will respond to these new rates, and the effect that any
changes in LIBOR or discontinuation of LIBOR might have on new
or existing financial instruments. If LIBOR ceases to exist or if the
methods of calculating LIBOR change from current methods for
any reason, outstanding contracts with interest rates tied to
LIBOR may be adversely affected if those contracts either do not
automatically provide for a replacement rate such as SOFR or
convert to another reference rate that could be less favorable to
the Company. Outstanding contracts that could be affected
include interest rates on certain derivatives and floating rate
securities we hold, securities we have issued, and any other assets
or liabilities whose value is tied to LIBOR. Further, any
uncertainty regarding the continued use and reliability of LIBOR
as a benchmark interest rate could adversely affect the value of
such instruments.
Part I - Item 1A. Risk Factors
Further, if issuers of securities or loans we hold are acquired,
merge or otherwise consolidate with other issuers of securities or
loans held by the Company, our investment portfolio’s credit
concentration risk to issuers could increase for a period of time,
until the Company is able to sell securities to get back in
compliance with the established investment credit policies.
Changing climate and weather patterns may
adversely affect our business, financial
condition and results of operation.
Climate change presents risks to us as an insurer, investor and
employer. Climate models indicate that rising temperatures will
likely result in rising sea levels over the decades to come and may
increase the frequency and intensity of natural catastrophes and
severe weather events. Extreme weather events such as
abnormally high temperatures may result in increased losses
associated with our property, auto, workers’ compensation and
group benefits businesses. Changing climate patterns may also
increase the duration, frequency and intensity of heat/cold waves,
which may result in increased claims for property damage,
business interruption and losses under workers’ compensation,
group disability and group life coverages. Precipitation patterns
across the U.S. are projected to change, which if realized, may
increase risks of flash floods and wildfires. Additionally, there may
be an impact on the demand, price and availability of automobile
and homeowners insurance, and there is a risk of higher
reinsurance costs or more limited availability of reinsurance
coverage. Changes in climate conditions may also cause our
underlying modeling data to not adequately reflect frequency and
severity, limiting our ability to effectively evaluate and manage
risks of catastrophes and severe weather events. Among other
impacts, this could result in not charging enough premiums or not
obtaining timely state approvals for rate increases to cover the
risks we insure. We may also experience significant interruptions
to the Company’s systems and operations that hinder our ability
to sell and service business, manage claims and operate our
business.
In addition, climate change-related risks may adversely impact
the value of the securities that we hold. The effects of climate
change could also lead to increased credit risk of other
counterparties we transact business with, including reinsurers.
Rising sea levels may lead to decreases in real estate values in
coastal areas, reducing premium and demand for commercial
property and homeowners insurance and adversely impacting the
value of our real estate-related investments. Additionally,
government policies or regulations to slow climate change, such
as emission controls or technology mandates, may have an
adverse impact on sectors such as utilities, transportation and
manufacturing, affecting demand for our products and our
investments in these sectors.
Changes in security asset prices may impact the value of our fixed
income, real estate and commercial mortgage investments,
resulting in realized or unrealized losses on our invested assets.
Our decision to invest in certain securities and loans may also be
impacted by changes in climate patterns due to:
•
•
changes in supply/demand characteristics for fuel (e.g., coal,
oil, natural gas)
advances in low-carbon technology and renewable energy
development and
15
Part I - Item 1A. Risk Factors
Insurance Industry and
Product Related Risks
Unfavorable loss development may adversely
affect our business, financial condition,
results of operations and liquidity.
We establish property and casualty loss reserves to cover our
estimated liability for the payment of all unpaid losses and loss
expenses incurred with respect to premiums earned on our
policies. Loss reserves are estimates of what we expect the
ultimate settlement and administration of claims will cost, less
what has been paid to date. These estimates are based upon
actuarial projections and on our assessment of currently available
data, as well as estimates of claims severity and frequency, legal
theories of liability and other factors.
Loss reserve estimates are refined periodically as experience
develops and claims are reported and settled, potentially
resulting in increases to our reserves. Increases in reserves
would be recognized as an expense during the periods in which
these determinations are made, thereby adversely affecting our
results of operations for those periods. In addition, since reserve
estimates of aggregate loss costs for prior years are used in
pricing our insurance products, inaccurate reserves can lead to
our products not being priced adequately to cover actual losses
and related loss expenses in order to generate a profit.
We continue to receive asbestos and environmental ("A&E")
claims, the vast majority of which relate to policies written before
1986. Estimating the ultimate gross reserves needed for unpaid
losses and related expenses for asbestos and environmental
claims is particularly difficult for insurers and reinsurers. The
actuarial tools and other techniques used to estimate the
ultimate cost of more traditional insurance exposures tend to be
less precise when used to estimate reserves for some A&E
exposures.
Moreover, the assumptions used to estimate gross reserves for
A&E claims, such as claim frequency over time, average severity,
and how various policy provisions will be interpreted, are subject
to significant uncertainty. It is also not possible to predict changes
in the legal and legislative environment and their effect on the
future development of A&E claims. These factors, among others,
make the variability of gross reserves estimates for these longer-
tailed exposures significantly greater than for other more
traditional exposures.
Effective December 31, 2016, the Company entered into an
agreement with National Indemnity Company (“NICO”), a
subsidiary of Berkshire Hathaway Inc. (“Berkshire”) whereby the
Company is reinsured for subsequent adverse development on
substantially all of its net A&E reserves up to an aggregate net
limit of $1.5 billion. The adverse development cover excludes risk
of adverse development on net A&E reserves held by the
Company's U.K. Property and Casualty run-off subsidiaries which
have been accounted for as liabilities held for sale in the
consolidated balance sheets as of December 31, 2016. We remain
directly liable to claimants and if the reinsurer does not fulfill its
obligations under the agreement or if future adverse
development exceeds the $1.5 billion aggregate limit, we may
need to increase our recorded net reserves which could have a
material adverse effect on our financial condition, results of
operations and liquidity. As of December 31, 2018, $977 of
aggregated limit remained available under the adverse
development cover. Furthermore, if cumulative A&E losses ceded
to NICO were to exceed the $650 of ceded premium paid to
NICO, the Company would defer recognition of the reinsurance
benefit related to incurred losses above $650, resulting in a
charge to earnings until such periods as reinsurance recoveries
begin to be collected. As of December 31, 2018, the Company
had ceded cumulative losses of $523 to NICO. For additional
information related to risks associated with the adverse
development cover, see Note 8 - Reinsurance and Note 14 -
Commitments and Contingencies of Notes to Consolidated
Financial Statements.
We are vulnerable to losses from
catastrophes, both natural and man-made.
Our insurance operations expose us to claims arising out of
catastrophes. Catastrophes can be caused by various
unpredictable natural events, including, among others,
earthquakes, hurricanes, hailstorms, severe winter weather, wind
storms, fires, tornadoes, and pandemics. Catastrophes can also be
man-made, such as terrorist attacks, cyber-attacks, explosions or
infrastructure failures.
The geographic distribution of our business subjects us to
catastrophe exposure for events occurring in a number of areas,
including, but not limited to: hurricanes in Florida, the Gulf Coast,
the Northeast and the Atlantic coast regions of the United States;
tornadoes and hail in the Midwest and Southeast; earthquakes in
geographical regions exposed to seismic activity; wildfires in the
West and the spread of disease. Any increases in the values and
concentrations of insureds and property in these areas would
increase the severity of catastrophic events in the future. In
addition, changes in climate and/or weather patterns may
increase the frequency and/or intensity of severe weather and
natural catastrophe events potentially leading to increased
insured losses. Potential examples include, but are not limited to:
•
an increase in the frequency or intensity of wind and
thunderstorm and tornado/hailstorm events due to
increased convection in the atmosphere,
• more frequent and larger wildfires in certain geographies,
•
•
higher incidence of deluge flooding, and
the potential for an increase in frequency and severity of
hurricane events.
For a further discussion of climate-related risks, see the above-
referenced Risk Factor, “Changing climate and weather patterns
may adversely affect our business, financial condition and results
of operation.”
Our businesses also have exposure to global or nationally
occurring pandemics caused by highly infectious and potentially
fatal diseases spread through human, animal or plant populations.
In the event of one or more catastrophes, policyholders may be
unable to meet their obligations to pay premiums on our
insurance policies. Further, our liquidity could be constrained by a
catastrophe, or multiple catastrophes, which could result in
extraordinary losses. In addition, in part because accounting rules
do not permit insurers to reserve for such catastrophic events
until they occur, claims from catastrophic events could have a
material adverse effect on our business, financial condition,
16
Part I - Item 1A. Risk Factors
results of operations or liquidity. The amount we charge for
catastrophe exposure may be inadequate if the frequency or
severity of catastrophe losses changes over time or if the models
we use to estimate the exposure prove inadequate. In addition,
regulators or legislators could limit our ability to charge adequate
pricing for catastrophe exposures or shift more responsibility for
covering risk.
Terrorism is an example of a significant man-made caused
potential catastrophe. Private sector catastrophe reinsurance is
limited and generally unavailable for terrorism losses caused by
attacks with nuclear, biological, chemical or radiological weapons.
In addition, workers' compensation policies generally do not have
exclusions or limitations for terrorism losses. Reinsurance
coverage from the federal government under the Terrorism Risk
Insurance Program Reauthorization Act of 2015 (“TRIPRA”) is
also limited and only applies for certified acts of terrorism that
exceed a certain threshold of industry losses. Accordingly, the
effects of a terrorist attack in the geographic areas we serve may
result in claims and related losses for which we do not have
adequate reinsurance. Further, the continued threat of terrorism
and the occurrence of terrorist attacks, as well as heightened
security measures and military action in response to these threats
and attacks or other geopolitical or military crises, may cause
significant volatility in global financial markets, disruptions to
commerce and reduced economic activity. These consequences
could have an adverse effect on the value of the assets in our
investment portfolio. Terrorist attacks also could disrupt our
operation centers. In addition, TRIPRA expires on December 31,
2020 and if the U.S. Congress does not reauthorize the program
or significantly reduces the government’s share of covered
terrorism losses, the Company’s exposure to terrorism losses
could increase materially unless it can purchase alternative
terrorism reinsurance protection in the private markets at
affordable prices or takes actions to materially reduce its
exposure in lines of business subject to terrorism risk. For a
further discussion of TRIPRA, see Part II, Item 7, MD&A -
Enterprise Risk Management - Insurance Risk Management,
Reinsurance as a Risk Management Strategy.
As a result, it is possible that any, or a combination of all, of these
factors related to a catastrophe, or multiple catastrophes,
whether natural or man-made, can have a material adverse effect
on our business, financial condition, results of operations or
liquidity.
Pricing for our products is subject to our
ability to adequately assess risks, estimate
losses and comply with state insurance
regulations.
We seek to price our property and casualty and group benefits
insurance policies such that insurance premiums and future net
investment income earned on premiums received will provide for
an acceptable profit in excess of underwriting expenses and the
cost of paying claims. Pricing adequacy depends on a number of
factors, including proper evaluation of underwriting risks, the
ability to project future claim costs, our expense levels, net
investment income realized, our response to rate actions taken by
competitors, legal and regulatory developments, and the ability to
obtain regulatory approval for rate changes.
State insurance departments regulate many of the premium rates
we charge and also propose rate changes for the benefit of the
property and casualty consumer at the expense of the insurer,
which may not allow us to reach targeted levels of profitability. In
addition to regulating rates, certain states have enacted laws that
require a property and casualty insurer to participate in assigned
risk plans, reinsurance facilities, joint underwriting associations
and other residual market plans. State regulators also require
that an insurer offer property and casualty coverage to all
consumers and often restrict an insurer's ability to charge the
price it might otherwise charge or restrict an insurer's ability to
offer or enforce specific policy deductibles. In these markets, we
may be compelled to underwrite significant amounts of business
at lower than desired rates or accept additional risk not
contemplated in our existing rates, participate in the operating
losses of residual market plans or pay assessments to fund
operating deficits of state-sponsored funds, possibly leading to
lower returns on equity. The laws and regulations of many states
also limit an insurer's ability to withdraw from one or more lines
of insurance in the state, except pursuant to a plan that is
approved by the state's insurance department. Additionally,
certain states require insurers to participate in guaranty funds for
impaired or insolvent insurance companies. These funds
periodically assess losses against all insurance companies doing
business in the state. Any of these factors could have a material
adverse effect on our business, financial condition, results of
operations or liquidity.
Additionally, the property and casualty and group benefits
insurance markets have been historically cyclical, experiencing
periods characterized by relatively high levels of price
competition, less restrictive underwriting standards, more
expansive coverage offerings, multi-year rate guarantees and
declining premium rates, followed by periods of relatively low
levels of competition, more selective underwriting standards,
more coverage restrictions and increasing premium rates. In all of
our property and casualty and group benefits insurance product
lines and states, there is a risk that the premium we charge may
ultimately prove to be inadequate as reported losses emerge. In
addition, there is a risk that regulatory constraints, price
competition or incorrect pricing assumptions could prevent us
from achieving targeted returns. Inadequate pricing could have a
material adverse effect on our results of operations and financial
condition.
Competitive activity, use of data analytics, or
technological changes may adversely affect
our market share, demand for our products,
or our financial results.
The industries in which we operate are highly competitive. Our
principal competitors are other property and casualty insurers,
group benefits providers and providers of mutual funds and
exchange-traded products. Competitors may expand their risk
appetites in products and services where The Hartford currently
enjoys a competitive advantage. Larger competitors with more
capital and new entrants to the market could result in increased
pricing pressures on a number of our products and services and
may harm our ability to maintain or increase our profitability. For
example, larger competitors, including those formed through
consolidation or who may acquire new entrants to the market,
such as insurtech firms, may have lower operating costs and an
ability to absorb greater risk while maintaining their financial
strength ratings, thereby allowing them to price their products
more competitively. In addition, a number of insurers are making
17
Part I - Item 1A. Risk Factors
use of "big data" analytics to, among other things, improve pricing
accuracy, be more targeted in marketing, strengthen customer
relationships and provide more customized loss prevention
services. If they are able to use big data more effectively than we
are, it may give them a competitive advantage. Because of the
highly competitive nature of the industries we compete in, there
can be no assurance that we will continue to compete effectively
with our industry rivals, or that competitive pressure will not
have a material adverse effect on our business and results of
operations.
Our business could also be affected by technological changes,
including further advancements in automotive safety features,
the development of autonomous or “self-driving” vehicles, and
platforms that facilitate ride sharing. These technologies could
impact the frequency or severity of losses, disrupt the demand for
certain of our products, or reduce the size of the automobile
insurance market as a whole. In addition, the risks we insure are
affected by the increased use of technology in homes and
businesses, including technology used in heating, ventilation, air
conditioning and security systems and the introduction of more
automated loss control measures. While there is substantial
uncertainty about the timing, penetration and reliability of such
technologies, and the legal frameworks that may apply, such as
for example to autonomous vehicles, any such impacts could have
a material adverse effect on our business and results of
operations.
We may experience difficulty in marketing
and providing insurance products and
investment advisory services through
distribution channels and advisory firms.
We distribute our insurance products, mutual funds and ETPs
through a variety of distribution channels and financial
intermediaries, including brokers, independent agents, broker-
dealers, banks, registered investment advisors, affinity partners,
our own internal sales force and other third-party organizations.
In some areas of our business, we generate a significant portion of
our business through third-party arrangements. For example, we
market personal lines products in large part through an exclusive
licensing arrangement with AARP that continues through January
1, 2023. Our ability to distribute products through the AARP
program may be adversely impacted by membership levels and
the pace of membership growth. In addition, the independent
agent and broker distribution channel is consolidating which
could result in a larger proportion of written premium being
concentrated among fewer agents and brokers, potentially
increasing our cost of acquiring new business. While we
periodically seek to renew or extend third party arrangements,
there can be no assurance that our relationship with these third
parties will continue or that the economics of these relationships
won't change to make them less financially attractive to the
Company. An interruption in our relationship with certain of
these third parties could materially affect our ability to market
our products and could have a material adverse effect on our
business, financial condition, results of operations and liquidity.
Unexpected and unintended claim and
coverage issues under our insurance
contracts may adversely impact our financial
performance.
Changes in industry practices and in legal, judicial, social and
other environmental conditions, technological advances or
fraudulent activities, may require us to pay claims we did not
intend to cover when we wrote the policies. These issues may
either extend coverage beyond our underwriting intent or
increase the frequency or severity of claims. In some instances,
these changes, advances or activities may not become apparent
until some time after we have issued insurance contracts that are
affected by the changes, advances or activities. As a result, the full
extent of liability under our insurance contracts may not be
known for many years after a contract is issued, and this liability
may have a material adverse effect on our business, financial
condition, results of operations and liquidity at the time it
becomes known.
Financial Strength,
Credit and Counterparty
Risks
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.
Financial strength and credit ratings are important in establishing
the competitive position of insurance companies. Rating agencies
assign ratings based upon several factors. While most of the
factors relate to the rated company, others relate to the views of
the rating agency (including its assessment of the strategic
importance of the rated company to the insurance group), general
economic conditions, and circumstances outside the rated
company's control. In addition, rating agencies may employ
different models and formulas to assess the financial strength of a
rated company, and from time to time rating agencies have
altered these models. Changes to the models or factors used by
the rating agencies to assign ratings could adversely impact a
rating agency's judgment of its internal rating and the publicly
issued rating it assigns us.
Our financial strength ratings, which are intended to measure our
ability to meet policyholder obligations, are an important factor
affecting public confidence in most of our products and, as a
result, our competitiveness. A downgrade or a potential
downgrade in the rating of our financial strength or of one of our
principal insurance subsidiaries could affect our competitive
position and reduce future sales of our products.
Our credit ratings also affect our cost of capital. A downgrade or a
potential downgrade of our credit ratings could make it more
difficult or costly to refinance maturing debt obligations, to
support business growth at our insurance subsidiaries and to
maintain or improve the financial strength ratings of our principal
insurance subsidiaries. These events could materially adversely
affect our business, financial condition, results of operations and
liquidity. For a further discussion of potential impacts of ratings
18
Part I - Item 1A. Risk Factors
downgrades on derivative instruments, including potential
collateral calls, see Part II, Item 7, MD&A - Capital Resources and
Liquidity - Derivative Commitments.
The amount of statutory capital that we must
hold to maintain our financial strength and
credit ratings and meet other requirements
can vary significantly from time to time and is
sensitive to a number of factors outside of
our control.
We conduct the vast majority of our business through licensed
insurance company subsidiaries. Statutory accounting standards
and statutory capital and reserve requirements for these entities
are prescribed by the applicable insurance regulators and the
National Association of Insurance Commissioners (“NAIC”). The
minimum capital we must hold is based on risk-based capital
(“RBC”) formulas for both life and property and casualty
companies. The RBC formula for life companies is applicable to
our group benefits business and establishes capital requirements
relating to insurance, business, asset, credit, interest rate and off-
balance sheet risks. The RBC formula for property and casualty
companies sets required statutory surplus levels based on
underwriting, asset, credit and off-balance sheet risks.
In any particular year, statutory surplus amounts and RBC ratios
may increase or decrease depending on a variety of factors,
including
•
•
•
•
•
•
•
•
•
the amount of statutory income or losses generated by our
insurance subsidiaries,
the amount of additional capital our insurance subsidiaries
must hold to support business growth,
the amount of dividends or distributions taken out of our
insurance subsidiaries,
changes in equity market levels,
the value of certain fixed-income and equity securities in our
investment portfolio,
the value of certain derivative instruments,
changes in interest rates,
admissibility of deferred tax assets, and
changes to the NAIC RBC formulas.
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 the amount of statutory capital we must hold
in order to maintain our current ratings. The RBC ratio could also
be negatively affected if the NAIC or state insurance regulators
change the statutory accounting guidance for determining
statutory capital. If our statutory capital resources are
insufficient to maintain a particular rating by one or more rating
agencies, we may need to use holding company resources or seek
to raise capital through public or private equity or debt financing.
If we were not to raise additional capital, either at our discretion
or because we were unable to do so, our financial strength and
credit ratings might be downgraded by one or more rating
agencies.
Losses due to nonperformance or defaults by
counterparties can have a material adverse
effect on the value of our investments,
reduce our profitability or sources of liquidity.
We have credit risk with counterparties associated with
investments, derivatives, premiums receivable, reinsurance
recoverables and indemnifications provided by third parties in
connection with previous dispositions. Among others, our
counterparties include issuers of fixed maturity and equity
securities we hold, borrowers of mortgage loans we hold,
customers, trading counterparties, counterparties under swaps
and other derivative contracts, reinsurers, clearing agents,
exchanges, clearing houses and other financial intermediaries and
guarantors. These counterparties may default on their obligations
to us due to bankruptcy, insolvency, lack of liquidity, adverse
economic conditions, operational failure, fraud, government
intervention and other reasons. In addition, for exchange-traded
derivatives, such as futures, options and "cleared" over-the-
counter derivatives, the Company is generally exposed to the
credit risk of the relevant central counterparty clearing house.
Defaults by these counterparties on their obligations to us could
have a material adverse effect on the value of our investments,
business, financial condition, results of operations and liquidity.
Additionally, if the underlying assets supporting the structured
securities we invest in default on their payment obligations, our
securities will incur losses.
The availability of reinsurance and our ability
to recover under reinsurance contracts may
not be sufficient to protect us against losses.
As an insurer, we frequently use reinsurance to reduce the effect
of losses that may arise from, among other things, catastrophes
and other risks that can cause unfavorable results of operations.
Under these reinsurance arrangements, other insurers assume a
portion of our losses and related expenses; however, we remain
liable as the direct insurer on all risks reinsured. Consequently,
ceded reinsurance arrangements do not eliminate our obligation
to pay claims, and we are subject to our reinsurers' credit risk
with respect to our ability to recover amounts due from them.
The inability or unwillingness of any reinsurer to meet its financial
obligations to us, including the impact of any insolvency or
rehabilitation proceedings involving a reinsurer that could affect
the Company's access to collateral held in trust, could have a
material adverse effect on our financial condition, results of
operations and liquidity.
In addition, should the availability and cost of reinsurance change
materially, we may have to pay higher reinsurance costs, accept
an increase in our net liability exposure, reduce the amount of
business we write, or access to the extent possible other
alternatives to reinsurance, such as use of the capital markets.
Further, due to the inherent uncertainties as to collection and the
length of time before reinsurance recoverables will be due, it is
possible that future adjustments to the Company’s reinsurance
recoverables, net of the allowance, could be required, which could
have a material adverse effect on the Company’s consolidated
results of operations or cash flows in a particular quarterly or
annual period.
19
Part I - Item 1A. Risk Factors
Our ability to declare and pay dividends is
subject to limitations.
The payment of future dividends on our capital stock is subject to
the discretion of our board of directors, which considers, among
other factors, our operating results, overall financial condition,
credit-risk considerations and capital requirements, as well as
general business and market conditions. Our board of directors
may only declare such dividends out of funds legally available for
such payments. Moreover, our common stockholders are subject
to the prior dividend rights of any holders of depositary shares
representing such preferred stock then outstanding. The terms of
our outstanding junior subordinated debt securities prohibit us
from declaring or paying any dividends or distributions on our
capital stock or purchasing, acquiring, or making a liquidation
payment on such stock, if we have given notice of our election to
defer interest payments and the related deferral period has not
yet commenced or a deferral period is continuing.
Moreover, as a holding company that is separate and distinct from
our insurance subsidiaries, we have no significant business
operations of our own. Therefore, we rely on dividends from our
insurance company subsidiaries and other subsidiaries as the
principal source of cash flow to meet our obligations. Subsidiary
dividends fund payments on our debt securities and the payment
of dividends to stockholders on our capital stock. Connecticut
state laws and certain other jurisdictions in which we operate
limit the payment of dividends and require notice to and approval
by the state insurance commissioner for the declaration or
payment of dividends above certain levels. Dividends paid from
our insurance subsidiaries are further dependent on their cash
requirements. In addition, in the event of liquidation or
reorganization of a subsidiary, prior claims of a subsidiary’s
creditors may take precedence over the holding company’s right
to a dividend or distribution from the subsidiary except to the
extent that the holding company may be a creditor of that
subsidiary. For further discussion on dividends from insurance
subsidiaries, see Part II, Item 7, MD&A - Capital Resources &
Liquidity.
Risks Relating to
Estimates, Assumptions
and Valuations
Actual results could materially differ from the
analytical models we use to assist our
decision making in key areas such as
underwriting, pricing, capital management,
reserving, investments, reinsurance and
catastrophe risks.
We use models to help make decisions related to, among other
things, underwriting, pricing, capital allocation, reserving,
investments, reinsurance, and catastrophe risk. Both proprietary
and third party models we use incorporate numerous
assumptions and forecasts about the future level and variability
of interest rates, capital requirements, loss frequency and
severity, currency exchange rates, policyholder behavior, equity
markets and inflation, among others. The models are subject to
the inherent limitations of any statistical analysis as the historical
internal and industry data and assumptions used in the models
may not be indicative of what will happen in the future.
Consequently, actual results may differ materially from our
modeled results. The profitability and financial condition of the
Company substantially depends on the extent to which our actual
experience is consistent with assumptions we use in our models
and ultimate model outputs. If, based upon these models or other
factors, we misprice our products or our estimates of the risks we
are exposed to prove to be materially inaccurate, our business,
financial condition, results of operations or liquidity may be
adversely affected.
The valuation of our securities and
investments and the determination of
allowances and impairments are highly
subjective and based on methodologies,
estimations and assumptions that are subject
to differing interpretations and market
conditions.
Estimated fair values of the Company’s investments are based on
available market information and judgments about financial
instruments, including estimates of the timing and amounts of
expected future cash flows and the credit standing of the issuer
or counterparty. During periods of market disruption, it may be
difficult to value certain of our securities if trading becomes less
frequent and/or market data becomes less observable. There may
be certain asset classes that were in active markets with
significant observable data that become illiquid due to the
financial environment. In addition, there may be certain securities
whose fair value is based on one or more unobservable inputs,
even during normal market conditions. As a result, the
determination of the fair values of these securities may include
inputs and assumptions that require more estimation and
management judgment and the use of complex valuation
methodologies. These fair values may differ materially from the
value at which the investments may be ultimately sold. Further,
rapidly changing or unprecedented credit and equity market
conditions could materially impact the valuation of securities and
the period-to-period changes in value could vary significantly.
Decreases in value could have a material adverse effect on our
business, results of operations, financial condition and liquidity.
Similarly, management’s decision on whether to record an other-
than-temporary impairment or write down is subject to
significant judgments and assumptions regarding changes in
general economic conditions, the issuer's financial condition or
future recovery prospects, estimated future cash flows, the
effects of changes in interest rates or credit spreads, the expected
recovery period and the accuracy of third party information used
in internal assessments. As a result, management’s evaluations
and assessments are highly judgmental and its projections of
future cash flows over the life of certain securities may ultimately
prove incorrect as facts and circumstances change.
If our businesses do not perform well, we may
be required to establish a valuation allowance
against the deferred income tax asset or to
recognize an impairment of our goodwill.
Our income tax expense includes deferred income taxes arising
from temporary differences between the financial reporting and
tax bases of assets and liabilities and carry-forwards for possible
20
Part I - Item 1A. Risk Factors
foreign tax credits, capital losses and net operating losses.
Deferred tax assets are assessed periodically by management to
determine if it is more likely than not that the deferred income
tax assets will be realized. Factors in management's
determination include the performance of the business, including
the ability to generate, from a variety of sources and tax planning
strategies, sufficient future taxable income and capital gains
before net operating loss and capital loss carry-forwards expire.
As interest rates rise, it may be difficult to generate realized
capital gains from the sale of fixed maturity securities to use
capital loss carryforwards. If based on available information, it is
more likely than not that we are unable to recognize a full tax
benefit on deferred tax assets, then a valuation allowance will be
established with a corresponding charge to net income (loss).
Charges to increase our valuation allowance could have a
material adverse effect on our results of operations and financial
condition.
Goodwill represents the excess of the amounts we paid to acquire
subsidiaries and other businesses over the fair value of their net
assets at the date of acquisition. We test goodwill at least
annually for impairment. Impairment testing is performed based
upon estimates of the fair value of the “reporting unit” to which
the goodwill relates. The reporting unit is the operating segment
or a business one level below an operating segment if discrete
financial information is prepared and regularly reviewed by
management at that level. The fair value of the reporting unit
could decrease if new business, customer retention, profitability
or other drivers of performance differ from expectations. If it is
determined that the goodwill has been impaired, the Company
must write down the goodwill by the amount of the impairment,
with a corresponding charge to net income (loss). These write
downs could have a material adverse effect on our results of
operations or financial condition.
Strategic and
Operational Risks
Our businesses may suffer and we may incur
substantial costs if we are unable to access
our systems and safeguard the security of our
data in the event of a disaster, cyber breach
or other information security incident.
We use technology to process, store, retrieve, evaluate and utilize
customer and company data and information. Our information
technology and telecommunications systems, in turn, interface
with and rely upon third-party systems. We and our third party
vendors must be able to access our systems to provide insurance
quotes, process premium payments, make changes to existing
policies, file and pay claims, administer mutual funds, provide
customer support, manage our investment portfolios, report on
financial results and perform other necessary business functions.
Systems failures or outages could compromise our ability to
perform these business functions in a timely manner, which could
harm our ability to conduct business and hurt our relationships
with our business partners and customers. In the event of a
disaster such as a natural catastrophe, a pandemic, an industrial
accident, a cyber-attack, a blackout, a terrorist attack (including
conventional, nuclear, biological, chemical or radiological) or war,
systems upon which we rely may be inaccessible to our
employees, customers or business partners for an extended
period of time. Even if our employees and business partners are
able to report to work, they may be unable to perform their duties
for an extended period of time if our data or systems used to
conduct our business are disabled or destroyed.
Our systems have been, and will likely continue to be, subject to
viruses or other malicious codes, unauthorized access, cyber-
attacks or other computer related penetrations. The frequency
and sophistication of such threats continue to increase as well.
While, to date, The Hartford is not aware of having experienced a
material breach of our cyber security systems, administrative and
technical controls as well as other preventive actions may be
insufficient to prevent physical and electronic break-ins, denial of
service, cyber-attacks or other security breaches to our systems
or those of third parties with whom we do business. Such an event
could compromise our confidential information as well as that of
our clients and third parties, impede or interrupt our business
operations and result in other negative consequences, including
remediation costs, loss of revenue, additional regulatory scrutiny
and litigation and reputational damage. In addition, we routinely
transmit to third parties personal, confidential and proprietary
information, which may be related to employees and customers,
by email and other electronic means, along with receiving and
storing such information on our systems. Although we attempt to
protect privileged and confidential information, we may be
unable to secure the information in all events, especially with
clients, vendors, service providers, counterparties and other third
parties who may not have appropriate controls to protect
confidential information.
Our businesses must comply with regulations to control the
privacy of customer, employee and third party data, and state and
federal regulations regarding data privacy are becoming
increasingly more onerous. A misuse or mishandling of
confidential or proprietary information could result in legal
liability, regulatory action and reputational harm.
Third parties, including third party administrators, are also
subject to cyber-breaches of confidential information, along with
the other risks outlined above, any one of which may result in our
incurring substantial costs and other negative consequences,
including a material adverse effect on our business, reputation,
financial condition, results of operations and liquidity. While we
maintain cyber liability insurance that provides both third party
liability and first party insurance coverages, our insurance may
not be sufficient to protect against all loss.
Performance problems due to outsourcing
and other third-party relationships may
compromise our ability to conduct business.
We outsource certain business and administrative functions and
rely on third-party vendors to perform certain functions or
provide certain services on our behalf and have a significant
number of information technology and business processes
outsourced with a single vendor. If we are unable to reach
agreement in the negotiation of contracts or renewals with
certain third-party providers, or if such third-party providers
experience disruptions or do not perform as anticipated, we may
be unable to meet our obligations to customers and claimants,
incur higher costs and lose business which may have a material
adverse effect on our business and results of operations. For
other risks associated with our outsourcing of certain functions,
see the immediately preceding risk factor.
21
Part I - Item 1A. Risk Factors
Our ability to execute on capital management
plans, expense reduction initiatives and other
actions is subject to material challenges,
uncertainties and risks.
The ability to execute on capital management plans is subject to
material challenges, uncertainties and risks. From time to time,
our capital management plans may include the repurchase of
common stock, the paydown of outstanding debt or both. We may
not achieve all of the benefits we expect to derive from these
plans. In the case an equity repurchase plan is approved by the
Board, such capital management plan would be subject to
execution risks, including, among others, risks related to market
fluctuations, investor interest and potential legal constraints that
could delay execution at an otherwise optimal time. There can be
no assurance that we will fully execute any such plan. In addition,
we may not be successful in keeping our businesses cost efficient.
The Company may not be able to achieve all the revenue
increases, expense reductions and other synergies that it expects
to realize as a result of acquisitions, divestitures or
restructurings. We may take future actions, including
acquisitions, divestitures or restructurings that may involve
additional uncertainties and risks that negatively impact our
business, financial condition, results of operations and liquidity.
Failure to complete our proposed acquisition
of The Navigators Group, Inc. could impact
our securities.
The completion of the acquisition of The Navigators Group, Inc.
(Navigators Group) is subject to a number of conditions, including
required regulatory approvals. The failure to satisfy all the
required conditions could prevent the acquisition from occurring.
In addition, regulators could impose additional requirements or
obligations as conditions for their approval. We can provide no
assurance that we will obtain the necessary approvals within the
estimated timeframe or at all, or that any such requirements that
are imposed by regulators would not result in the termination of
the transaction. Investors’ reactions to a failure to complete the
acquisition of Navigators Group, including possible speculation
about alternative uses of capital, may cause volatility in our
securities. A failure to complete a proposed transaction of this
nature can also result in litigation by stockholders and other
disaffected parties. Furthermore, we will have incurred costs, and
devoted management time and resources, in connection with the
transaction for which we will receive little or no benefit. In
addition, even if we complete the proposed Navigators Group
acquisition, we may not be able to successfully integrate
Navigators Group into our business and therefore may not be
able to achieve the synergies we would expect to receive as a
result of the acquisition.
Acquisitions and divestitures may not
produce the anticipated benefits and may
result in unintended consequences, which
could have a material adverse impact on our
financial condition and results of operations.
We may not be able to successfully integrate acquired businesses
or achieve the expected synergies as a result of such acquisitions
or divestitures. The process of integrating an acquired company
or business can be complex and costly and may create unforeseen
operating difficulties including ineffective integration of
underwriting, risk management, claims handling, finance,
information technology and actuarial practices. Difficulties
integrating an acquired business may also result in the acquired
business performing differently than we expected including
through the loss of customers or in our failure to realize
anticipated increased premium growth or expense-related
efficiencies. We could be adversely affected by the acquisition
due to unanticipated performance issues and additional expense,
unforeseen liabilities, transaction-related charges, downgrades of
third-party rating agencies, diversion of management time and
resources to integration challenges, loss of key employees,
regulatory requirements, exposure to tax liabilities, amortization
of expenses related to intangibles and charges for impairment of
long-term assets or goodwill. In addition, we may be adversely
impacted by uncertainties related to reserve estimates of the
acquired company and its design and operation of internal
controls over financial reporting. We may be unable to distribute
as much capital to the holding company as planned due to
regulatory restrictions or other reasons that may adversely affect
our liquidity.
In addition in the case of business dispositions, we may have
difficulties in separating from our divested businesses which may
result in our incurring additional, unforeseen expenses, and
diversion of management’s time and resources to the challenges
of business separation. In the case of business or asset
dispositions, we may have continued financial exposure to the
divested businesses through reinsurance, indemnification or
other financial arrangements following the transaction. We may
also retain a position in securities of the acquirer that purchased
the divested business, which subjects us to risks related to the
price of the equity securities and our ability to monetize such
securities. The expected benefits of acquired or divested
businesses may not be realized and involve additional
uncertainties and risks that may negatively impact our business,
financial condition, results of operations and liquidity.
Difficulty in attracting and retaining talented
and qualified personnel may adversely affect
the execution of our business strategies.
Our ability to attract, develop and retain talented employees,
managers and executives is critical to our success. There is
significant competition within and outside the insurance and
financial services industry for qualified employees, particularly
for individuals with highly specialized knowledge in areas such as
underwriting, actuarial, data and analytics, technology and digital
commerce. Our continued ability to compete effectively in our
businesses and to expand into new business areas depends on our
ability to attract new employees and to retain and motivate our
existing employees. The loss of any one or more key employees,
including executives, managers and employees with strong
technological, analytical and other specialized skills, may
adversely impact the execution of our business objectives or
result in loss of important institutional knowledge. Our inability
to attract and retain key personnel could have a material adverse
effect on our financial condition and results of operations.
We may not be able to protect our intellectual
property and may be subject to infringement
claims.
We rely on a combination of contractual rights and copyright,
trademark, patent and trade secret laws to establish and protect
22
Part I - Item 1A. Risk Factors
our intellectual property. Although we use a broad range of
measures to protect our intellectual property rights, third parties
may infringe or misappropriate our intellectual property. We may
have to litigate to enforce and protect our intellectual property
and to determine its scope, validity or enforceability, which could
divert significant resources and may not prove successful.
Litigation to enforce our intellectual property rights may not be
successful and cost a significant amount of money. The inability to
secure or enforce the protection of our intellectual property
assets could harm our reputation and have a material adverse
effect on our business and our ability to compete. We also may be
subject to costly litigation in the event that another party alleges
our operations or activities infringe upon their intellectual
property rights, including patent rights, or violate license usage
rights. Any such intellectual property claims and any resulting
litigation could result in significant expense and liability for
damages, and in some circumstances we could be enjoined from
providing certain products or services to our customers, or
utilizing and benefiting from certain patent, copyrights,
trademarks, trade secrets or licenses, or alternatively could be
required to enter into costly licensing arrangements with third
parties, all of which could have a material adverse effect on our
business, results of operations and financial condition.
Regulatory and Legal
Risks
Regulatory and legislative developments
could have a material adverse impact on our
business, financial condition, results of
operations and liquidity.
In the U.S., regulatory initiatives and legislative developments
may significantly affect our operations and prospects in ways that
we cannot predict. For example, further reforms to the Affordable
Care Act, and potential modification of the Dodd-Frank Act could
have unanticipated consequences for the Company and its
businesses. It is unclear whether and to what extent Congress will
make changes to the Dodd-Frank Act, and how those changes
might impact the Company, its business, financial conditions,
results of operations and liquidity.
We are subject to extensive laws and regulations that are
complex, subject to change and often conflicting in their approach
or intended outcomes. Compliance with these laws and
regulations can increase cost, affect our strategy, and constrain
our ability to adequately price our products.
Our insurance subsidiaries are regulated by the insurance
departments of the states in which they are domiciled, licensed or
authorized to conduct business. State regulations generally seek
to protect the interests of policyholders rather than an insurer or
the insurer’s stockholders and other investors. U.S. state laws
grant insurance regulatory authorities broad administrative
powers with respect to, among other things, licensing and
authorizing lines of business, approving policy forms and
premium rates, setting statutory capital and reserve
requirements, limiting the types and amounts of certain
investments and restricting underwriting practices. State
insurance departments also set constraints on domestic insurer
transactions with affiliates and dividends and, in many cases,
must approve affiliate transactions and extraordinary dividends
as well as strategic transactions such as acquisitions and
divestitures.
In addition, future regulatory initiatives could be adopted at the
federal or state level that could impact the profitability of our
businesses. For example, the NAIC and state insurance regulators
are continually reexamining existing laws and regulations,
specifically focusing on modifications to statutory accounting
principles, interpretations of existing laws and the development
of new laws and regulations. The NAIC continues to enhance the
U.S. system of insurance solvency regulation, with a particular
focus on group supervision, risk-based capital, accounting and
financial reporting, enterprise risk management and reinsurance
which could, among other things, affect statutory measures of
capital sufficiency, including risk-based capital ratios.
Any proposed or future legislation or NAIC initiatives, if adopted,
may be more restrictive on our ability to conduct business than
current regulatory requirements or may result in higher costs or
increased statutory capital and reserve requirements. In addition,
the Federal Reserve Board and the International Association of
Insurance Supervisors ("IAIS") each have initiatives underway to
develop insurance group capital standards. While the Company
would not currently be subject to either of these capital standard
regimes, it is possible that in the future standards similar to what
is being contemplated by the Federal Reserve Board or the IAIS
could apply to the Company. The NAIC is in the process of
developing a U.S. group capital calculation that will employ a
methodology based on aggregated risk-based capital.
Further, a particular regulator or enforcement authority may
interpret a legal, accounting, or reserving issue differently than
we have, exposing us to different or additional regulatory risks.
The application of these regulations and guidelines by insurers
involves interpretations and judgments that may be challenged by
state insurance departments. The result of those potential
challenges could require us to increase levels of statutory capital
and reserves or incur higher operating and/or tax costs.
In addition, our asset management businesses are also subject to
extensive regulation in the various jurisdictions where they
operate. These laws and regulations are primarily intended to
protect investors in the securities markets or investment advisory
clients and generally grant supervisory authorities broad
administrative powers. Compliance with these laws and
regulations is costly, time consuming and personnel intensive, and
may have an adverse effect on our business, financial condition,
results of operations and liquidity.
Our insurance business is sensitive to
significant changes in the legal environment
that could adversely affect The Hartford’s
results of operations or financial condition or
harm its businesses.
Like any major P&C insurance company, litigation is a routine part
of The Hartford’s business - both in defending and indemnifying
our insureds and in litigating insurance coverage disputes. The
Hartford accounts for such activity by establishing unpaid loss
and loss adjustment expense reserves. Significant changes in the
legal environment could cause our ultimate liabilities to change
from our current expectations. Such changes could be judicial in
nature, like trends in the size of jury awards, developments in the
law relating to tort liability or the liability of insurers, and rulings
23
will consider such factors as the financial strength of the
applicant, the acquirer's plans for the future operations of the
domestic insurer, and any such additional information as the
insurance commissioner may deem necessary or appropriate for
the protection of policyholders or in the public interest.
Generally, state statutes provide that control over a domestic
insurer is presumed to exist if any person, directly or indirectly,
owns, controls, holds with the power to vote, or holds proxies
representing 10 percent or more of the voting securities of the
domestic insurer or its parent company. Because a person
acquiring 10 percent or more of our common stock would
indirectly control the same percentage of the stock of our U.S.
insurance subsidiaries, the insurance change of control laws of
various U.S. jurisdictions would likely apply to such a transaction.
Other laws or required approvals pertaining to one or more of our
existing subsidiaries, or a future subsidiary, may contain similar or
additional restrictions on the acquisition of control of the
Company. These laws may discourage potential acquisition
proposals and may delay, deter, or prevent a change of control,
including transactions that our Board of Directors and some or all
of our stockholders might consider to be desirable.
Changes in accounting principles and
financial reporting requirements could
adversely affect our results of operations or
financial condition.
As an SEC registrant, we are currently required to prepare our
financial statements in accordance with U.S. GAAP, as
promulgated by the Financial Accounting Standards Board
("FASB"). Accordingly, we are required to adopt new guidance or
interpretations which may have a material effect on our results of
operations and financial condition that is either unexpected or
has a greater impact than expected. For a description of changes
in accounting standards that are currently pending and, if known,
our estimates of their expected impact, see Note 1 of the
consolidated financial statements.
Part I - Item 1A. Risk Factors
concerning the scope of insurance coverage or the amount or
types of damages covered by insurance. Legislative
developments, like changes in federal or state laws relating to the
liability of policyholders or insurers, could have a similar effect. It
is impossible to forecast such changes reliably, much less to
predict how they might affect our loss reserves or how those
changes might adversely affect our ability to price our insurance
products appropriately. Thus, significant judicial or legislative
developments could adversely affect The Hartford’s business,
financial condition, results of operations and liquidity.
Changes in federal or state tax laws could
adversely affect our business, financial
condition, results of operations and liquidity.
Changes in federal or state tax laws and tax rates or regulations
could have a material adverse effect on our profitability and
financial condition. For example, the recent reduction in tax rates
due to the Tax Cuts and Jobs Act reduced our deferred tax assets
resulting in a charge against earnings.
In addition, the Company’s tax return reflects certain items such
as tax-exempt bond interest, tax credits, and insurance reserve
deductions. There is an increasing risk that, in the context of
deficit reduction or overall tax reform, federal and/or state tax
legislation could modify or eliminate these items, impacting the
Company, its investments, investment strategies, and/or its
policyholders. In the context of deficit reduction or overall tax
reform, federal and/or state tax legislation could modify or
eliminate provisions of current tax law that are beneficial to the
Company, including tax-exempt bond interest, tax credits, and
insurance reserve deductions, or could impose new taxes such as
on goods or services purchased overseas.
On December 22, 2017, the U.S. government enacted
comprehensive tax legislation commonly referred to as the "Tax
Cuts and Jobs Act" ("Tax Reform"). There is a risk that Congress
may enact a technical corrections bill or other legislation that
could affect how provisions of Tax Reform apply to The Hartford.
In response to the recent changes in the federal tax law, we could
see states enact changes to their tax laws which, in turn, could
affect the Company negatively. Among other risks, there is risk
that these additional clarifications could increase the taxes on the
Company, further increase administrative costs, make the sale of
our products more costly and/or make our products less
competitive.
While the Company expects a benefit to earnings from lower
corporate federal income tax rates, there is uncertainty about
how insurance carriers will adjust their product pricing, if at all,
going forward. If the Company reduces its pricing in response to
competition or to state regulatory action, product price
reductions could serve to reduce, or even eliminate, the benefit of
lower Corporate federal tax rates in periods after 2018.
Regulatory requirements could delay, deter or
prevent a takeover attempt that stockholders
might consider in their best interests.
Before a person can acquire control of a U.S. insurance company,
prior written approval must be obtained from the insurance
commissioner of the state where the domestic insurer is
domiciled. Prior to granting approval of an application to acquire
control of a domestic insurer, the state insurance commissioner
24
Part II - Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Item 5. MARKET FOR THE HARTFORD’S
COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The Hartford’s common stock is traded on the New York Stock
Exchange (“NYSE”) under the trading symbol “HIG”. As of
February 21, 2019, the Company had approximately 11,146
registered holders of record of the Company's common stock. A
substantially greater number of holders of our common stock are
“street name” holders or beneficial holders, whose shares are held
of record by banks, brokers and other financial institutions.
On June 1, 2018, the Company’s Chief Executive Officer certified
to the NYSE that he is not aware of any violation by the Company
of NYSE corporate governance listing standards, as required by
Section 303A.12(a) of the NYSE’s Listed Company Manual.
There are various legal and regulatory limitations governing the
extent to which The Hartford’s insurance subsidiaries may extend
credit, pay dividends or otherwise provide funds to The Hartford
Financial Services Group, Inc. as discussed in the Liquidity
Requirements and Sources of Capital section of Part II, Item 7,
MD&A — Capital Resources and Liquidity.
During the year ended December 31, 2018, the Company did not
repurchase any common shares. In February, 2019, the Company
announced a $1.0 billion share repurchase authorization by the
Board of Directors which is effective through December 31,
2020. Based on projected holding company resources, the
Company expects to use a portion of the authorization in 2019
but anticipates using the majority of the program in 2020. Any
repurchase of shares under the equity repurchase program is
dependent on market conditions and other factors.
Total Return to
Stockholders
The following tables present The Hartford’s annual return
percentage and five-year total return on its common stock
including reinvestment of dividends in comparison to the S&P
500 and the S&P Insurance Composite Index.
Annual Return Percentage
For the years ended
Company/Index
2014
2015
2016
2017
2018
The Hartford Financial Services Group, Inc.
S&P 500 Index
S&P Insurance Composite Index
17.13%
13.69%
8.29%
6.12%
1.38%
2.33%
11.76%
11.96%
17.58%
20.26%
21.83%
16.19%
(19.24%)
(4.38%)
(11.21%)
Company/Index
The Hartford Financial Services Group, Inc.
S&P 500 Index
S&P Insurance Composite Index
Cumulative Five-Year Total Return
Base
Period
2013
For the years ended
2014
2015
2016
2017
2018
$
$
$
100
100
100
117.13
113.69
108.29
124.30
115.26
110.81
138.92
129.05
130.29
167.06
157.22
151.38
134.92
150.33
134.42
25
Part II - Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
200
150
100
50
0
Dec 2013
Dec 2014
Dec 2015
Dec 2016
Dec 2017
Dec 2018
The Hartford Financial Services Group, Inc.
S&P 500 Index
S&P Insurance Composite Index
26
Part II - Item 6. Selected Financial Data
Item 6. SELECTED FINANCIAL DATA
The following table sets forth the Company's selected
consolidated financial data at the dates and for the periods
indicated below. The selected financial data should be read in
conjunction with Management’s Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A")
presented in Item 7 and the Company's Consolidated Financial
Statements and the related Notes beginning on page F-1.
(In millions, except per share data)
Income Statement Data
Total revenues
Income from continuing operations before income taxes
Income (loss) from continuing operations, net of tax
Income (loss) from continuing operations, net of tax, available to common
stockholders
Income (loss) from discontinued operations, net of tax
Net income (loss)
Balance Sheet Data
Total assets
Short-term debt
Total debt (including capital lease obligations)
Preferred stock
Total stockholders’ equity
Income (loss) from continuing operations, net of tax, available to common
stockholders per common share
2018
2017
2016
2015
2014
$ 18,955 $ 17,162 $ 16,291 $ 16,187 $ 15,905
$
$
$
$
$
1,753 $
723 $
447 $
1,478 $
1,232
1,485 $
(262) $
613 $
1,189 $
925
1,479 $
(262) $
613 $
1,189 $
925
322 $
(2,869) $
283 $
493 $
(127)
1,807 $
(3,131) $
896 $
1,682 $
798
$ 62,307 $ 225,260 $ 224,576 $ 229,616 $ 245,566
$
$
$
413 $
320 $
416 $
275 $
456
4,678 $
4,998 $
4,910 $
5,216 $
5,966
334 $
— $
— $
— $
—
$ 13,101 $ 13,494 $ 16,903 $ 18,024 $ 19,130
Basic
Diluted
Cash dividends declared per common share
$
$
$
4.13 $
(0.72) $
4.06 $
(0.72) $
1.10 $
0.94 $
1.58 $
1.55 $
0.86 $
2.86 $
2.80 $
0.78 $
2.09
2.01
0.66
27
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in millions, except for per share data, unless
otherwise stated)
The Hartford 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 2 and 3 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 the Securities and Exchange Commission. The
Hartford undertakes no obligation to publicly update any
forward-looking statements, whether as a result of new
information, future developments or otherwise.
On August 22, 2018, the Company announced it entered into a
definitive agreement to acquire all outstanding common shares
of The Navigators Group, Inc. ("Navigators Group"), a global
specialty underwriter, for $70 a share, or $2.1 billion in cash.
The transaction is expected to close in late March or April
2019, subject to customary closing conditions, including receipt
of regulatory approvals.
On May 31, 2018, Hartford Holdings, Inc., a wholly owned
subsidiary of the Company, completed the sale of the issued
and outstanding equity of Hartford Life, Inc. (“HLI”), a holding
company, and its life and annuity operating subsidiaries. For
discussion of this transaction, see Note 20 - Business
Dispositions and Discontinued Operations of Notes to
Consolidated Financial Statements.
On February 16, 2018, The Hartford entered into a renewal
rights agreement with the Farmers Exchanges, of the Farmers
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.
On November 1, 2017, Hartford Life and Accident Insurance
Company ("HLA"), a wholly owned subsidiary of the Company,
completed the acquisition of Aetna's U.S. group life and
disability business through a reinsurance transaction. Aetna's
U.S. group life and disability revenue and earnings since the
acquisition date are included in the operating results of the
Company's Group Benefits reporting segment. For discussion
of this transaction, see Note 2 - Business Acquisitions of Notes
to Consolidated Financial Statements.
On May 10, 2017, the Company completed the sale of its U.K.
property and casualty run-off subsidiaries. The operating
results of the Company's U.K. property and casualty run-off
subsidiaries are included in the P&C Other Operations
reporting segment. For discussion of this transaction, see Note
20 - Business Dispositions and Discontinued Operations of
Notes to Consolidated Financial Statements.
On July 29, 2016, the Company completed the acquisition of
Maxum Specialty Insurance Group and Lattice Strategies LLC.
Maxum's revenue and earnings since the acquisition date are
included in the operating results of the Company's Commercial
Lines reporting segment. Lattice's revenue and earnings since
the acquisition date are included in the operating results of the
Company's Hartford Funds reporting segment. For discussion
of these transactions, see Note 2 - Business Acquisitions of
Notes to 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.
Distribution costs within the Hartford Funds segment that
were previously netted against fee income are presented gross
in insurance operating costs and other expenses.
The Hartford defines increases or decreases greater than or
equal to 200% as “NM” or not meaningful.
Index
Description
Key Performance Measures and Ratios
The Hartford's Operations
Consolidated Results of Operations
Investment Results
Critical Accounting Estimates
Commercial Lines
Personal Lines
Property & Casualty Other Operations
Group Benefits
Hartford Funds
Corporate
Enterprise Risk Management
Capital Resources and Liquidity
Page
28
32
35
39
40
61
65
69
71
74
76
77
95
Impact of New Accounting Standards
103
28
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 The Hartford’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.
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")- is calculated based upon a non-GAAP financial
measure. It is calculated by dividing (a) common stockholders'
equity, excluding AOCI, after tax, by (b) common shares
outstanding and dilutive potential common shares. Book value
per diluted share is the most directly comparable U.S. GAAP
("GAAP") measure. The Company provides this measure to enable
investors to analyze the amount of the Company's net worth that
is primarily attributable to the Company's business operations.
The Company believes it is useful to investors because it
eliminates the effect of items in AOCI that can fluctuate
significantly from period to period, primarily based on changes in
interest rates.
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. 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. The current accident
year catastrophe ratio includes the effect of catastrophe losses,
but does not include the effect of reinstatement premiums.
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- a non-GAAP measure, is an important
measure of the Company’s operating performance. The Company
believes that core earnings provides investors with a valuable
measure of the underlying performance of the Company’s
businesses because it reveals trends in our insurance and
financial services businesses that may be obscured by including
the net effect of certain realized capital gains and losses, certain
restructuring and other costs, loss on extinguishment of debt,
pension settlements, integration and transaction costs in
connection with an acquired business, gains and losses on
reinsurance transactions, income tax benefit from a reduction in
deferred income tax valuation allowance, impact of the Tax Cuts
and Jobs Act of 2017 ("Tax Reform") on net deferred tax assets,
and results of discontinued operations. Some realized capital
gains and losses are primarily driven by investment decisions and
external economic developments, the nature and timing of which
are unrelated to the insurance and underwriting aspects of our
business. Accordingly, core earnings excludes the effect of all
realized gains and losses that tend to be variable from period to
period based on capital market conditions. The Company
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. Core earnings
are net of preferred stock dividends declared since they 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 (loss) from continuing
operations, net of tax, 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), 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, the Company
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.
29
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income (Loss) to Core Earnings
For the years ended December 31,
2018
2017
2016
Net income (loss)
Preferred stock dividends
Net income (loss) available to common stockholders
Less: Net realized capital gains (losses) excluded from core earnings, before tax
Less: Loss on extinguishment of debt, before tax
Less: Loss on reinsurance transactions, before tax
Less: Pension settlement, before tax
Less: Integration and transaction costs associated with acquired business, before tax
Less: Income tax benefit (expense) [1]
Less: Income (loss) from discontinued operations, net of tax
$
1,807 $
(3,131) $
6
—
1,801 $
(3,131) $
(118)
(6)
—
—
(47)
75
322
160
—
—
(750)
(17)
(669)
(2,869)
Core earnings
$
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 $877 charge in 2017 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%.
896
—
896
(112)
—
(650)
—
—
463
283
912
Core Earnings Margin- a non-GAAP financial measure
that the Company uses to evaluate, and believes is an important
measure of, the Group Benefits segment’s operating
performance. Core earnings margin is calculated by dividing (a)
core earnings by (b) revenues excluding buyouts and realized
gains (losses). Net income margin is the most directly comparable
U.S. GAAP measure. The Company believes that core earnings
margin provides investors with a valuable measure of the
performance of Group Benefits because it reveals trends in the
business that may be obscured by the effect of buyouts and
realized gains (losses) on revenues or obscured by the effect on
net income of realized capital gains (losses), integration costs, and
the impact of Tax Reform on net deferred tax assets. 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 net income margin and core
earnings 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.
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.
Deferred policy acquisition costs 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 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
30
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
ratemaking process, adjust the assumption as appropriate for the
particular state, product or coverage.
Loss and Loss Adjustment Expense Ratio
before Catastrophes and Prior Accident 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.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 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 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- a non-
GAAP financial measure that the Company uses to evaluate, and
believes is an important measure of, the Hartford Funds
segment’s operating performance. ROA, core earnings is
calculated by dividing 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 realized gains (losses). 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- a non-GAAP financial
measure, represents the combined ratio before catastrophes and
prior accident year development. Combined ratio is the most
directly comparable U.S. GAAP measure. The Company believes
the underlying combined ratio is an important measure of the
trend in profitability since it removes the impact of volatile and
31
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
unpredictable catastrophe losses and prior accident year loss and
loss adjustment expense reserve development. 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 Company's
management evaluates profitability of the P&C businesses
primarily on the basis of underwriting gain (loss). Underwriting
gain (loss) is a before tax measure that represents earned
premiums less incurred losses, loss adjustment expenses,
amortization of deferred policy acquisition costs, underwriting
expenses, amortization of other intangible assets and dividends
to policyholders. Underwriting gain (loss) is influenced
significantly by earned premium growth and the adequacy of the
Company's pricing. Underwriting profitability over time is also
greatly influenced by the Company's pricing and underwriting
discipline, which seeks to manage exposure to loss through
favorable risk selection and diversification, its management of
claims, its use of reinsurance 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. Net income (loss) is the most directly comparable
GAAP measure. The Company believes that underwriting gain
(loss) provides investors with a valuable measure of before tax
profitability derived from underwriting activities, which are
managed separately from the Company's investing activities. A
reconciliation of net income (loss) to underwriting gain (loss) for
Commercial Lines, Personal Lines and Property & Casualty Other
Operations is set forth in segment sections of MD&A.
Written and Earned Premiums- Written premium is
a statutory accounting financial measure which represents the
amount of premiums charged for policies issued, net of
reinsurance, during a fiscal period. Earned premium is a U.S.
GAAP and statutory measure. 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 investment management fees and expenses
related to managing third party business, including management
of the invested assets of Talcott Resolution, 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
debt financing and related interest expense), purchase accounting
adjustments related to goodwill and other expenses not allocated
to the reporting segments. In addition, Corporate includes a 9.7%
ownership interest in the legal entity that acquired the life and
annuity business sold in May 2018.
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.
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
32
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Company’s products could prove to be inadequate if loss and
expense trends emerge adversely during the rate guarantee
period. 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
stockholders. 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 after 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.
Net Income (Loss) Available to
Common Stockholders
Financial Highlights
Net Income (Loss) Available to
Common Stockholders per
Diluted Share
Book Value per Diluted Share
$2,500
$1,801
$0
-$2,500
-$5,000
$(3,131)
$4.95
$8.00
$4.00
$0.00
-$4.00
-$8.00
-$12.00
$(8.61)
$50.00
$40.00
$30.00
$20.00
$10.00
$0.00
$37.11
$35.06
2017
2018
2017
2018
2017
2018
Net Income (loss) available to common stockholders of $1,801, or $5.03 per basic share and $4.95 per diluted share,
compared with prior year net loss of $3,131, or $8.61 per basic and diluted share. The change from net loss in 2017 to a net income in 2018
was primarily due to a number of charges in 2017, including a $3.3 billion loss on the life and annuity business sold in May 2018, net of tax,
$877 of income tax expense primarily from reducing net deferred tax assets due to the reduction of the corporate Federal income tax rate,
and the effect of a pension settlement charge of $488, net of tax. Apart from these charges in 2017, net income available to common
stockholders increased, driven by higher net income in Commercial Lines, Group Benefits and Hartford Funds that was partially attributable
to a lower corporate Federal income tax rate in 2018.
33
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Book value per diluted common share decreased to $35.06 from $37.11 as of December 31, 2017 as a result of a 5%
decrease in common stockholders' equity resulting primarily from a decrease in AOCI over the period, partially offset by net income in excess
of stockholder dividends.
Net Investment Income
Investment Yield After Tax
$1,603
$1,780
$2,500
$2,000
$1,500
$1,000
$500
$0
4%
3%
2%
1%
0%
3.0%
3.3%
2017
2018
2017
2018
Net investment income increased 11% to $1,780 compared with the prior year primarily due to higher average fixed maturities
asset levels during 2018 as compared to 2017 largely driven by the acquisition of Aetna's U.S. group life and disability business in November
2017 and, to a lesser extent, higher income from partnerships and other alternative investments and a higher reinvestment rate on fixed
maturities.
Net realized capital gains (losses) changed to net losses of $112 from net gains of $165 for the year ended December 31,
2017, with losses in 2018 primarily driven by net losses on sales of fixed maturity securities due to sector repositioning and duration,
liquidity and credit management as well as net losses on equity securities resulting from depreciation in value due to lower equity market
levels, partially offset by gains on sales due to tactical repositioning.
Annualized investment yield, after tax of 3.3%, was up 30 basis points from 2017 primarily due to the effect of a lower
corporate Federal income tax rate.
Net unrealized gains, after tax for fixed maturities in the investment portfolio decreased by $2,180 compared with the prior
year primarily due to the effect of credit spread widening and higher interest rates and the removal of AOCI related to the life and annuity
business sold in May 2018.
P&C Written Premiums
P&C Combined Ratio
100.0
97.8
$10,517
$10,408
100.0
75.0
50.0
25.0
0.0
$12,000
$9,000
$6,000
$3,000
$0
2017
2018
2017
2018
Written premiums for Property & Casualty decreased 1.0% compared with the prior year, reflecting a decrease in Personal Lines,
largely offset by an increase in Commercial Lines.
34
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Combined ratio for Property & Casualty decreased 2.2 points to 97.8 compared with a combined ratio of 100.0 for 2017 largely due to
a lower current accident year loss and loss adjustment expense ratio for Personal Lines and favorable prior accident year development,
partially offset by higher expenses.
Catastrophe losses of $821, before tax, decreased from catastrophe losses of $836, before tax, in the prior year, with catastrophes in
both years including losses from California wildfires, hurricanes, winter storms and various wind and hail events.
Prior accident year development for property and casualty was a net favorable $167, before tax, in 2018 primarily due to a
decrease in reserves for workers' compensation, automobile liability and 2017 catastrophes, partially offset by an increase in reserves for
general liability. Reserve development was a net favorable $41, before tax, in 2017 primarily due to a decrease in reserves for workers
compensation and package business, partially offset by a reserve increase for customs bond claims.
Group Benefits Net Income Margin
10%
8%
6%
4%
2%
0%
7.2%
5.6%
2017
2018
Net income margin for Group Benefits declined from 7.2% in 2017 to 5.6% in 2018 primarily due to net realized capital losses of $39,
net of tax, in 2018 as compared to net realized capital gains of $19, net of tax, in 2017, integration costs of $37, net of tax, in 2018 as
compared to $11, net of tax, in 2017, and a tax benefit of $52 in 2017 from reducing net deferred tax liabilities due to the lower corporate
income tax rate, partially offset by an increase in favorable prior incurral year development on long-term disability and premium waiver
primarily due to favorable incidence trends and the effect of scale from the acquisition of Aetna’s U.S. group life and disability business on
fixed expenses. Prior accident year development, pre-tax, for Group Benefits increased from $185 in 2017 to $324 in 2018 with most of that
development from the 2017 incurral year as incidence trends become known after the elimination period is satisfied.
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 MD&A.
35
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results of Operations
2018
2017
2016
Increase
(Decrease) From
2017 to 2018
Increase
(Decrease) From
2016 to 2017
Earned premiums
Fee income [1]
Net investment income
Net realized capital gains (losses)
Other revenues
Total revenues
Benefits, losses and loss adjustment expenses
Amortization of deferred policy acquisition costs
Insurance operating costs and other expenses
Loss on extinguishment of debt
Loss on reinsurance transactions
Interest expense
Amortization of other intangible assets
Total benefits, losses and expenses
Income from continuing operations, before tax
Income tax expense (benefit)
Income (loss) from continuing operations, net of tax
Income (loss) from discontinued operations, net of tax
Net income (loss)
Preferred stock dividends
$ 15,869 $ 14,141 $ 13,697 $
1,168
1,603
165
85
17,162
10,174
1,372
4,563
—
—
316
14
16,439
723
985
(262)
(2,869)
(3,131)
—
1,041
1,577
(110)
86
16,291
9,961
1,377
3,525
—
650
327
4
15,844
447
(166)
613
283
896
—
896 $
1,313
1,780
(112)
105
18,955
11,165
1,384
4,281
6
—
298
68
17,202
1,753
268
1,485
322
1,807
6
1,728 $
145
177
(277)
20
1,793
991
12
(282)
6
—
(18)
54
763
1,030
(717)
1,747
3,191
4,938
6
4,932 $
444
127
26
275
(1)
871
213
(5)
1,038
—
(650)
(11)
10
595
276
1,151
(875)
(3,152)
(4,027)
—
(4,027)
Net income (loss) available to common stockholders
$
1,801 $ (3,131) $
[1]Excludes distribution costs of $188 and $184 for the years ended December 31, 2017, and 2016, respectively, that were previously netted against fee income and are now
presented gross in insurance operating costs and other expenses.
Year ended December 31, 2018 compared
to year ended December 31, 2017
Net income (loss) available to common
stockholders increased from a net loss in 2017, primarily
due to a number of charges in 2017, including a $3.3 billion after
tax loss on sale of the life and annuity business sold in May 2018,
$877 of income tax expense primarily from reducing net
deferred tax assets due to the reduction of the corporate Federal
income tax rate, and the effect of a pension settlement charge of
$488, after tax. Apart from these charges in 2017, net income
available to common stockholders increased, driven by higher
net income in Commercial Lines, Group Benefits and Hartford
Funds that was partially attributable to a lower corporate
Federal income tax rate in 2018. Higher earned premium and net
investment income in Commercial Lines and Group Benefits,
including from the acquisition of Aetna’s U.S. group life and
disability business, increased fee income in Hartford Funds, more
favorable prior accident year development in workers’
compensation, a lower current accident year loss ratio before
catastrophes in Personal Lines and improved long term disability
results, were partially offset by the effect of lower Personal Lines
earned premium and higher insurance operating costs and other
expenses, and a change to net realized capital losses.
Earned premiums increased primarily due to the
acquisition of Aetna's U.S. group life and disability benefits
business that has increased earned premiums in the Group
Benefits segment. Earned premiums in Property and Casualty
declined reflecting an 8% decline in Personal Lines, partially
offset by a 3% increase in Commercial Lines. For a discussion of
the Company's operating results by segment, see MD&A -
Segment Operating Summaries.
Fee income increased, reflecting higher income in Group
Benefits related to an increase in administrative service contracts
as a result of the acquisition from Aetna and in Hartford Funds
largely due to higher average daily AUM during the year despite a
decline in AUM at the end of the year.
Net investment income increased primarily due to a
higher level of invested assets due to the acquisition of Aetna's
U.S. group life and disability business. For further discussion of
investment results, see MD&A - Investment Results, Net
Investment Income.
Net realized capital losses of $112 in 2018 were down
from net realized capital gains of $165 in 2017. Net losses in
2018 were primarily driven by net losses on sales of fixed
maturity securities due to sector repositioning and duration,
liquidity and credit management as well as net losses on equity
securities resulting from depreciation in value due to lower
equity market levels, partially offset by gains on sales due to
tactical repositioning. For further discussion of investment
results, see MD&A - Investment Results, Net Realized Capital
Gains.
Benefits, losses and loss adjustment
expenses increased in Group Benefits, partially offset by a
decrease in Property & Casualty with the increase in Group
Benefits primarily due to the effect of growth in earned premium
36
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
largely resulting from the acquisition of Aetna's U.S. group life
and disability business, partially offset by a lower group disability
loss ratio. The decrease in incurred losses for Property & Casualty
was driven by:
•
•
Current accident year loss and loss adjustment expenses
before catastrophes in Property & Casualty decreased,
primarily resulting from the effect of lower Personal Lines
earned premium and lower loss costs in auto, homeowners
and general liability, partially offset by higher loss costs in
workers’ compensation.
Current accident year catastrophe losses of $821, before tax,
for the year ended December 31, 2018 decreased compared
to $836, before tax, for the prior year period. Catastrophe
losses in 2018 were primarily from wildfires in California,
hurricanes Florence and Michael in the Southeast, wind and
hail storms in Colorado, 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. Catastrophe losses in 2017
were primarily due to hurricanes Harvey and Irma in the
third quarter, California wildfires, and multiple wind and hail
events across various U.S. geographic regions, primarily in
the Midwest, Colorado, Texas and the Southeast. For
additional information, see MD&A - Critical Accounting
Estimates, Property & Casualty Insurance Product Reserves,
Net of Reinsurance.
• Net prior accident year reserve development in Property &
Casualty was favorable $167, before tax, for the year ended
December 31, 2018 compared to favorable net reserve
development of $41, before tax, for the prior year period.
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.
Amortization of deferred policy acquisition
costs was relatively flat year over year as an increase in
Commercial Lines was largely offset by a decrease in Personal
Lines.
Insurance operating costs and other
expenses decreased due to a $750 pension settlement charge
in the 2017 period, partially offset by an increase in operating
costs associated with the acquisition of Aetna's U.S. group life and
disability business, increased commissions in Commercial Lines,
and higher variable expenses in Hartford Funds.
Amortization of other intangible assets
increased, reflecting the amortization of customer relationship
intangibles in the Group Benefits segment that arose from the
acquisition of the Aetna U.S. group life and disability business.
Income tax expense decreased primarily due to an $877
charge in 2017 due to a reduction in net deferred tax assets as a
result of the lower corporate Federal income tax rate partially
offset by an increase in before tax income and the effect of a
lower corporate Federal income tax rate in 2018. Differences
between the Company's effective income tax rate and the U.S.
statutory rate of 21% and 35% in 2018 and 2017, respectively,
are due primarily to tax-exempt interest earned on invested
assets, stock-based compensation, non-deductible executive
compensation and the effects of Tax Reform on net deferred tax
assets. For further discussion of income taxes, see Note 16 -
Income Taxes of Notes to Consolidated Financial Statements.
Income from discontinued operations, net of
tax of $322 in 2018, increased from a net loss from discontinued
operations of $2.9 billion in 2017. The $322 of income from
discontinued operations in 2018 was mostly attributable to
recognizing additional retained tax benefits from the sale of the
life and annuity business in May 2018 and the reclassification of
$193 of stranded tax effects from AOCI to retained earnings
related to this sale, both of which reduced the estimated loss on
sale. The reclassification of stranded tax effects resulted in a
corresponding increase in AOCI related to the assets held for
sale. For more information on the reclassification of stranded tax
effects, see Note 1 - Basis of Presentation and Significant
Accounting Policies of Notes to Consolidated Financial
Statements. The $2.9 billion net loss on discontinued operations
in 2017 was driven by a $3.3 billion net loss on the sale of the life
and annuity business which closed on May 31, 2018.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Net income (loss) available to common
stockholders decreased from net income in 2016 to a net
loss in 2017 primarily due to a loss on discontinued operations of
$2.9 billion related to the pending sale of the life and annuity
business, a charge to income tax expense of $877 arising
primarily from the reduction of net deferred tax assets due to the
enactment of lower Federal income tax rates and a pension
settlement charge of $488 after tax. Partially offsetting the
decline were the effects of a $179 after tax change from net
realized capital losses in 2016 to net realized capital gains in
2017, the effect of a $423 after tax charge in 2016 related to a
loss on reinsurance covering the Company’s asbestos and
environmental exposures and a reduction in the valuation
allowance on capital loss carryovers in 2016. In addition, a $324
after tax improvement in P&C prior accident year development
and higher earnings in Group Benefits and Hartford Funds were
largely offset by a $273 after tax increase in current accident
year catastrophes and higher variable incentive compensation.
Earned premiums increased by $444, before tax,
reflecting growth of 3% in Commercial Lines, including the effect
of the Maxum acquisition, and 14% in Group Benefits, including
the effect of acquiring the Aetna U.S. group life and disability
business, partially offset by a 5% decrease in Personal Lines. For a
discussion of the Company's operating results by segment, see
MD&A - Results of Operations by segment.
Fee income increased reflecting a 15% increase in Hartford
Funds due to higher assets under management driven by market
appreciation and positive net flows and the addition of Schroders
funds in the fourth quarter of 2016. For a discussion of the
Company's operating results by segment, see MD&A - Results of
Operations by segment.
Net investment income increased 2%, primarily due to
higher income from limited partnerships and other alternative
investments, partially offset by lower make-whole payment
income on fixed maturities and increased investment expenses.
For further discussion of investment results, see MD&A -
Investment Results, Net Investment Income (Loss).
37
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net realized capital gains of $165 before tax
compared to net realized capital losses of $110 before tax in
2016, primarily due to higher net gains on sales, lower
impairments and the effect of losses in 2016 related to the sale of
the Company's U.K. property and casualty run-off subsidiaries
and the write-down of investments in solar energy partnerships
in 2016 that generated tax benefits. For further discussion of
investment results, see MD&A - Investment Results, Net Realized
Capital Gains (Losses).
Benefits, losses and loss adjustment
expenses increased 11% in Group Benefits and decreased 1%
in P&C. The increase in Group Benefits was largely due to the
acquisition of Aetna’s U.S. group life and disability business. The
decrease in P&C was primarily due to the effect of unfavorable
prior accident year reserve development in 2016, largely offset
by higher catastrophe losses in 2017.
•
•
•
Current accident year losses and loss adjustment expenses
before catastrophes in Property & Casualty were relatively
flat, primarily resulting from improved loss ratios and lower
earned premiums in Personal Lines, offset by higher loss
ratios in workers' compensation and general liability.
Current accident year catastrophe losses of $836, before tax,
compared to $416, before tax, for the prior year period.
Catastrophe losses in 2017 were primarily due to hurricanes
Harvey and Irma, California wildfires and multiple wind and
hail events across various U.S. geographic regions, primarily
in the Midwest, Colorado, Texas and the Southeast.
Catastrophe losses in 2016 were primarily due to multiple
wind and hail and winter storm events across various U.S.
geographic regions, concentrated in Texas and the central
and southern plains and, to a lesser extent, winter storms and
hurricane Matthew. For additional information, see MD&A -
Critical Accounting Estimates, Property & Casualty
Insurance Product Reserves, Net of Reinsurance.
Favorable prior accident year reserve development in
Property & Casualty of $41, before tax, compared to
unfavorable reserve development of $457, before tax, for the
prior year period. Prior accident year development in 2017
primarily included decreases in reserves for workers’
compensation and small commercial package business,
partially offset by an increase in reserves for bond claims.
Prior accident year development in 2016 was largely due to a
$268 increase in asbestos and environmental reserves and a
$160 increase in Personal Lines automobile liability reserves.
For additional information, see MD&A - Critical Accounting
Estimates, Reserve Rollforwards and Development.
Amortization of deferred policy acquisition
costs was relatively flat as higher amortization on higher
earned premium for Commercial Lines was offset by lower
amortization on lower earned premium for Personal Lines.
Insurance operating costs and other
expenses increased primarily due to a $750 pre-tax pension
settlement charge. Apart from the pension settlement charge,
insurance operating costs and other expenses increased by 9%,
primarily driven by higher variable incentive plan compensation,
increased IT costs in Commercial Lines, higher variable expenses
in Hartford Funds and $20, before tax, of state guaranty fund
assessments in Group Benefits, partially offset by lower direct
marketing and operation costs in Personal Lines. Effective with
awards granted in March 2017, long-term incentive
compensation awards to retirement-eligible employees now fully
vest when they are granted, which resulted in an accelerated
recognition of compensation expense in 2017 of $22 before tax.
For additional information on the pension settlement charge in
second quarter 2017, see Note 15 - Employee Benefit Plans of
Notes to Condensed Consolidated Financial Statements.
Amortization of other intangible assets
increased by $10 largely due to amortization of identifiable
intangible assets recorded as a result of the acquisition of the
Aetna U.S. group life and disability business, including in-force
contracts, customer relationships and a marketing agreement
with Aetna.
Income tax expense increased primarily due to a charge
of $877 as a result of the Tax Cuts and Jobs Act ("Tax Reform")
enacted in December, 2017. Among other changes, Tax Reform
reduced the Federal corporate income tax rate from 35% to 21%
effective January 1, 2018 which resulted in a reduction of the
Company's net deferred tax assets, including its net operating
loss carryovers. Also contributing to the increase in income tax
expense were Federal income tax benefits of $113 in 2016 arising
from investments in solar energy partnerships that generated tax
benefits and the effect of a federal income tax benefit of $65 in
2016 related to the sale of the Company's U.K. property and
casualty run-off subsidiaries.
Differences between the Company's effective income tax rate
and the U.S. statutory rate of 35% are due primarily to the effects
of Tax Reform on net deferred tax assets, tax exempt interest
earned on invested assets, changes in the valuation allowance
recorded on capital loss carryovers and federal tax credits
associated with investments in solar energy partnerships. For
further discussion of income taxes, see Note 16 - Income Taxes of
Notes to Consolidated Financial Statements.
Income (loss) from discontinued operations,
net of tax decreased from income of $283 in 2016 to a net
loss of $2.9 billion in 2017 with the net loss in 2017 due to a loss
on sale of the Company’s life and annuity business of $3.3 billion,
partially offset by operating income from discontinued operations
of $388. Operating income from discontinued operations
increased from $283 in 2016 primarily due to lower net realized
capital losses in 2017. Apart from the reduction in net realized
capital losses, earnings were relatively flat as an increase in the
unlock benefit and lower interest credited were largely offset by
lower net investment income and lower fee income due to the
continued run off of the variable annuity block.
38
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
INVESTMENT RESULTS
Composition of Invested Assets
December 31, 2018
December 31, 2017
Amount
Percent
Amount
Percent
Fixed maturities, available-for-sale ("AFS"), at fair value
$
35,652
76.2% $
36,964
Fixed maturities, at fair value using the fair value option ("FVO")
Equity securities, at fair value [1]
Equity securities, AFS, at fair value [1]
Mortgage loans
Limited partnerships and other alternative investments
Other investments [2]
Short-term investments
Total investments
22
1,214
3,704
1,723
192
4,283
—%
2.6%
7.9%
3.7%
0.4%
9.2%
41
1,012
3,175
1,588
96
2,270
81.9%
0.1%
2.3%
7.0%
3.5%
0.2%
5.0%
$
46,790
100.0% $
45,146
100.0%
[1]Effective January 1, 2018, with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value.
[2]Primarily consists of investments of consolidated investment funds and derivative instruments which are carried at fair value.
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Total investments increased primarily due to an increase
in short-term investments and mortgage loans, largely offset by a
decrease in fixed maturities, AFS.
Fixed maturities, AFS decreased primarily due to a
decrease in valuations due to widening of spreads and higher
interest rates.
Short-term investments increased due to proceeds
from the sale of the life and annuity business sold in May 2018
and holding additional short-term investments in preparation to
fund the Navigators acquisition and debt that matured in January
2019.
Mortgage Loans increased largely due to new originations
of commercial mortgage loans within the industrial, multifamily
and single family markets.
Net Investment Income
(Before tax)
Fixed maturities [2]
Equity securities
Mortgage loans
Limited partnerships and other alternative investments
Other [3]
Investment expense
Total net investment income
For the years ended December 31,
2018
2017
2016
Amount Yield [1] Amount Yield [1] Amount Yield [1]
$ 1,459
3.9% $ 1,303
3.9% $ 1,319
3.1%
4.1%
13.2%
32
141
205
20
(77)
2.8%
4.1%
12.0%
24
124
174
49
(71)
22
116
128
51
(59)
4.0%
3.2%
4.2%
8.6%
$ 1,780
4.0% $ 1,603
4.0% $ 1,577
4.0%
Total net investment income excluding limited partnerships and other
alternative investments
$ 1,575
3.7% $ 1,429
3.7% $ 1,449
3.8%
[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 December 31, 2018 compared
to the year ended December 31, 2017
Total net investment income increased primarily due
to higher income from fixed maturities as a result of higher
average asset levels during 2018 as compared to 2017 largely
driven by the acquisition of Aetna's U.S. group life and disability
business in November 2017. In addition, total net investment
income increased due to higher returns on private equity and real
estate limited partnership investments as well as a higher
reinvestment rate on fixed maturities.
Annualized net investment income yield,
excluding non-routine items which include prepayment penalties
on mortgage loans and make-whole payments on fixed maturities,
was 3.7% in 2018 up from 3.6% for the same period for 2017.
39
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Average reinvestment rate, excluding certain U.S.
Treasury securities and cash equivalent securities, for the year
ended December 31, 2018, was approximately 4.0% which was
above the average yield of sales and maturities of 3.7% for the
same period. For the year ended December 31, 2018, the average
reinvestment rate of 4.0% increased from 3.5% for the 2017
period, due to higher interest rates.
We expect the annualized net investment income yield for the
2019 calendar year, excluding limited partnerships and other
alternative investments, to approximate the portfolio yield
earned in 2018 though it could be higher depending on if
reinvestment rates stay above the sales/maturity yield. 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.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Total net investment income increased primarily
due to higher income from limited partnerships and other
alternative investments, partially offset by lower make whole
payment income on fixed maturities and increased investment
expense. Income from limited partnerships and other alternative
investments increased due to higher valuation write-ups of
private equity partnerships and strong returns on real estate
investments in 2017.
Net Realized Capital Gains (Losses)
(Before tax)
Gross gains on sales
Gross losses on sales
Equity securities [1]
Net other-than-temporary impairment ("OTTI") losses recognized in earnings [2]
Valuation allowances on mortgage loans [3]
Transactional foreign currency revaluation
Non-qualifying foreign currency derivatives
Other, net [4]
Net realized capital gains (losses)
For the years ended December 31,
2018
2017
2016
$
114 $
(172)
(48)
(1)
—
1
3
(9)
275 $
(113)
—
(8)
(1)
14
(14)
12
$
(112) $
165 $
222
(159)
—
(27)
—
(78)
83
(151)
(110)
[1]Effective January 1, 2018. with the adoption of new accounting standards for equity securities at fair value, includes all changes in fair value and trading gains and losses for
equity securities.
[2]See Other-Than-Temporary Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
[3]See Valuation Allowances on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the MD&A.
[4]Primarily consists of changes in value of non-qualifying derivatives, including credit derivatives and interest rate derivatives used to manage duration. Also included for the year
ended December 31, 2016, is a loss related to the write-down of investments in solar energy partnerships, which generated tax benefits, and a loss related to the sale of the
Company's U.K. property and casualty run-off subsidiaries.
impact of a decline in the equity market on the investment
portfolio.
Year ended December 31, 2016
Gross gains and losses on sales were primarily a
result of duration, liquidity and credit management within
corporate securities, U.S. treasury securities, equity securities,
and tax-exempt municipal bonds.
Other, net loss included losses of $96 related to the write-
down of investments in solar energy partnerships that generated
solar tax credits and losses of $81 associated with the Company's
U.K. property and casualty run-off subsidiaries that were sold in
May 2017. In addition, there were losses of $15 related to equity
derivatives which were hedging against the impact of a decline in
the equity market on the investment portfolio.
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.
Year ended December 31, 2017
Gross gains and losses on sales were primarily a
result of duration, liquidity and credit management within
corporate securities, U.S. treasury securities, equity securities,
and tax-exempt municipal bonds.
Other, net gain included gains of $21 related to credit
derivatives due to credit spread tightening, partially offset by
losses of $7 related to equity derivatives hedging against the
40
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 long-term disability (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
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, 2018
Property & Casualty
Other Operations
$1,686
8%
Personal Lines
$2,348
12%
Commercial
Lines
$16,318
80%
Loss and LAE Reserves, Net of Reinsurance as of December 31, 2018
Commercial Lines
Personal Lines
Property &
Casualty
Other Operations
Total Property &
Casualty Insurance
— $
10,005
Workers’ compensation
$
10,005 $
General liability
Package business [1]
Commercial property
Automobile liability
Automobile physical damage
Professional liability
Bond
Homeowners
Asbestos and environmental
Assumed reinsurance
All other
Total reserves-net
Reinsurance and other recoverables
2,276
1,609
384
878
13
578
290
—
108
—
177
16,318
3,137
— $
—
—
—
1,652
40
—
—
642
11
—
3
2,348
108
—
—
—
—
—
—
—
—
1,135
113
438
1,686
987
Total reserves-gross
$
19,455 $
2,456 $
2,673 $
[1]Commercial Lines policy packages that include property and general liability coverages are generally referred to as the package line of business.
41
% Total
Reserves-
net
49.2%
2,276
11.2%
1,609
384
7.9%
1.9%
2,530
12.4%
53
578
290
642
1,254
113
618
0.3%
2.8%
1.4%
3.2%
6.2%
0.6%
3.0%
20,352
100.0%
4,232
24,584
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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
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. 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.
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.
Factors that Change Reserve Estimates-
Reserve estimates can change over time because of unexpected
changes in the external environment. Inflation in 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
resulting in greater 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. New lines of business may have
loss development patterns that are not well established. Changes
42
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 insurance risk from certain pools and
associations and, prior to 2004, assumed property and casualty
risks from other insurance companies. 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 how
IBNR for losses 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 $126 as of December 31, 2018,
comprised of $20 related to Commercial Lines, $1 related to
Personal Lines and $105 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 (“A&E”) reserves are reviewed by type of event
rather than by line of business.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reserve adjustments, which may be material, are reflected in the
operating results of the period in which the adjustment is
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
For a discussion of how A&E reserves are set, see MD&A - P&C
Insurance Product Reserves, Reserving for Asbestos and
Environmental Claims within Property & Casualty Other
Operations. 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.
How Reserves Are Set- Reserves are set by line of
business within the operating segments. A single line of business
may be written in more than one segment. 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. 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 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. In 2018, new methods were
added 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, 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
43
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 certain reserves for
indemnity payments due to permanently disabled claimants
under workers’ compensation policies. 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 of December 31, 2018 and 2017, U.S.
property and casualty insurance product reserves for losses and
loss adjustment expenses, net of reinsurance recoverables,
reported under U.S. GAAP were less than net reserves reported
on a statutory basis. The primary difference between the
statutory and GAAP reserve amounts is due to a reinsurance
recoverable on ceded asbestos and environmental adverse
reserve development under a retroactive reinsurance agreement
between the Company and National Indemnity Company
("NICO"), a subsidiary of Berkshire Hathaway Inc. ("Berkshire"),
which is included as a reduction of other liabilities under
statutory accounting.
Reserving Methods by Line of Business- Apart
from 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.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Commercial property,
homeowners and
automobile physical
damage
Personal automobile
liability
Preferred Reserving Methods by Line of Business
These short-tailed lines are fast-developing and paid and reported development techniques are used as these
methods use historical data to develop paid and reported loss development patterns, which are then applied to
cumulative paid and reported losses by accident period to estimate ultimate losses. In 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.
For automobile liability, and bodily injury in particular, the Company performs a greater number of techniques
than it does for commercial property, homeowners and automobile physical damage. In addition to traditional
paid and reported 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.
Automobile liability for
commercial lines
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 liability
Reported and paid loss development patterns for this line tend to be volatile. Therefore, the Company typically
relies on frequency and severity techniques.
General liability, bond
and large deductible
workers’ compensation
For these long-tailed lines of business, the Company generally relies on the expected loss ratio 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 more on the reported development method as an
accident year matures.
Workers’
compensation
Workers’ compensation is the Company’s single largest reserve 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, and an in-depth analysis on the largest states. In recent years, we have seen an acceleration of
paid losses relative to historical patterns and have adjusted our expected loss development patterns accordingly.
This acceleration is due to an increase in lump sum settlements to claimants across multiple accident years.
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.
Assumed reinsurance
and all other
For these lines, the Company tends to rely mostly on reported development techniques. In assumed reinsurance,
assumptions are influenced by information gained from claim and underwriting audits.
Allocated loss
adjustment expenses
(ALAE)
For some lines of business (e.g., professional liability and assumed reinsurance), ALAE and losses are analyzed
together. For most lines of 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 loss
adjustment expenses
(ULAE)
ULAE is analyzed separately from loss and ALAE. For most lines of business, incurred ULAE costs to be paid in the
future are projected based on an expected claim handling cost per claim year, the anticipated claim closure
pattern and the ratio of paid ULAE to paid loss is applied to estimated unpaid losses.
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
also considers the magnitude of the difference between the
actuarial indication and the recorded reserves. As of December
31, 2018, recorded reserves were above the actuarial indications
by an amount comparable with December 31, 2017.
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
2018, see the Reserve Development section below.
Current Trends Contributing to
Reserve Uncertainty
The Hartford is a multi-line company in the property and casualty
insurance business. The Hartford 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
44
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
claims. 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.
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, 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.
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 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,
the similarities to other mass torts and the potential impact on
the Company’s reserves.
Workers’ compensation- Included in middle market and
specialty 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. Within specialty
commercial, 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 is primarily in excess
layers, making estimates of loss more complex.
Personal Lines automobile- In Personal Lines, 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, particularly for auto liability
45
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Personal
Automobile
Liability
Commercial
Automobile
Liability
Workers'
Compensation
General
Liability
Possible
Change in Key
Indicator
+/- 2.5. points
to the annual
assumed
change in loss
cost severity
for the two
most recent
accident years
+/- 2.5 points
to the annual
assumed
change in loss
cost severity
for the two
most recent
accident years
2.0% change in
paid loss
development
patterns
10% change in
reported loss
development
patterns
Reserves, Net of
Reinsurance
December 31,
2018
Estimated
Range of
Variation
in
Reserves
$1.7 billion
+/- $80
$0.9 billion
+/- $20
$10.0 billion
+/- $400
$2.3 billion
+/- $200
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.
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 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
(“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. In 2018 and
2017, the Company completed the comprehensive annual review
of asbestos and environmental reserves during the fourth
quarter, instead of the second quarter as it had done in previous
years.
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, 2018 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
46
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for
the Year Ended December 31, 2018
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property
& Casualty
Insurance
Beginning liabilities for unpaid losses and loss adjustment
expenses, gross
$
18,893 $
2,294 $
Reinsurance and other recoverables
Beginning liabilities for unpaid losses and loss adjustment
expenses, net
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes
Current accident year ("CAY") catastrophes
Prior accident year development ("PYD")
Total provision for unpaid losses and loss adjustment expenses
Less: payments
Ending liabilities for unpaid losses and loss adjustment
expenses, net
Reinsurance and other recoverables
Ending liabilities for unpaid losses and loss adjustment
expenses, gross
Earned premiums and fee income
Loss and loss expense paid ratio [1]
Loss and loss expense incurred ratio
Prior accident year development (pts) [2]
3,147
15,746
4,037
275
(200)
4,112
3,540
16,318
3,137
$
$
19,455 $
7,081 $
50.0
58.4
(2.8)
71
2,223
2,249
546
(32)
2,763
2,638
2,348
108
2,456 $
3,439
76.7
81.3
(0.9)
[1]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums.
[2]“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
2,588 $
739
1,849
—
—
65
65
228
1,686
987
23,775
3,957
19,818
6,286
821
(167)
6,940
6,406
20,352
4,232
2,673 $
24,584
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2018, Net of
Reinsurance
Wind and hail
Winter storms
Flooding
Volcanic eruption
Wildfire
Hurricanes
Massachusetts gas explosion
Earthquake
Total catastrophe losses
Commercial
Lines
Personal
Lines
Total
$
124 $
164 $
50
1
—
56
71
1
—
303
(28)
275 $
25
1
2
384
23
—
1
600
(54)
546 $
288
75
2
2
440
94
1
1
903
(82)
821
Less: reinsurance recoverable under the property aggregate treaty [1]
Net catastrophe losses
$
[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.
47
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2018
Workers’ compensation
$
(164) $
— $
— $
(164)
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property &
Casualty
Insurance
Workers’ compensation discount accretion
General liability
Package business
Commercial property
Professional liability
Bond
Automobile liability
Homeowners
Net asbestos reserves
Net environmental reserves
Catastrophes
Uncollectible reinsurance
Other reserve re-estimates, net
40
52
(26)
(12)
(12)
2
(15)
—
—
—
(67)
—
2
—
—
—
—
—
—
(18)
(25)
—
—
18
—
(7)
Total prior accident year development
$
(200) $
(32) $
—
—
—
—
—
—
—
—
—
—
—
22
43
65 $
40
52
(26)
(12)
(12)
2
(33)
(25)
—
—
(49)
22
38
(167)
During 2018, the Company’s re-estimates of prior accident year
reserves included the following significant reserve changes:
officers liability claims principally due to a number of older claims
closing with limited or no payment.
Workers’ compensation reserves were reduced in
small commercial and middle market, primarily for accident years
2014 and 2015, as claim severity has emerged favorably
compared to previous reserve estimates. Also contributing was a
reduction in estimated reserves for unallocated loss adjustment
expense ("ULAE").
Automobile liability reserves were reduced, primarily
driven by reduced estimates of loss adjustment expenses in small
commercial for recent accident years and favorable development
in personal automobile liability for accident years 2014 to 2017,
principally due to lower severity, including with uninsured and
underinsured motorist claims.
General liability reserves were increased, primarily due
to an increase in reserves for higher hazard general liability
exposures in middle market for accident years 2009 to 2017,
partially offset by a decrease in reserves for other lines within
middle market, including premises and operations, umbrella and
products liability, principally for accident years 2015 and prior.
Contributing to the increase in reserves for higher hazard general
liability exposures was an increase in average claim severity,
including from large losses and, in more recent accident years, an
increase in claim frequency. Contributing to the reduction in
reserves for other middle market lines were more favorable
outcomes due to initiatives to reduce legal expenses. In addition,
reserve increases for claims with lead paint exposure were offset
by reserve decreases for other mass torts and extra-contractual
liability claims.
Package business reserves were reduced, primarily
due to lower reserve estimates for both liability and property for
accident years 2010 and prior, including a recovery of loss
adjustment expenses for the 2005 accident year.
Commercial property reserves were reduced, driven
by an increase in estimated reinsurance recoverables on middle
market property losses from the 2017 accident year.
Professional liability reserves were reduced,
principally for accident years 2014 and prior, for directors and
Homeowners reserves were reduced, primarily in
accident years 2013 to 2017, driven by lower than expected
severity across multiple perils.
Asbestos and environmental reserves were
unchanged as $238 of adverse development arising from the
fourth quarter 2018 comprehensive annual review was offset by
a $238 recoverable from NICO. For additional information
related to the adverse development cover with NICO, see Note 8
- Reinsurance and Note 14 - Commitments and Contingencies of
Notes to Consolidated Financial Statements.
Catastrophe reserves were reduced, primarily as a
result of lower estimated net losses from 2017 catastrophes,
principally related to hurricanes Harvey and Irma. Before
reinsurance, estimated losses for 2017 catastrophe events
decreased by $133, resulting in a decrease in reinsurance
recoverables of $90 as the Company no longer expects to recover
under the 2017 Property Aggregate reinsurance treaty as
aggregate ultimate losses for 2017 catastrophe events are now
projected to be less than $850.
Uncollectible reinsurance reserves were increased
due to lower anticipated recoveries related to older accident
years.
Other reserve re-estimates, net, primarily
represents an increase in ULAE reserves in Property & Casualty
48
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Other Operations that was principally driven by an increase in
expected claim handling costs associated with asbestos and
environmental and mass tort claims.
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for
the Year Ended December 31, 2017
Beginning liabilities for unpaid losses and loss adjustment
expenses, gross
$
17,950 $
2,094 $
2,501 $
Reinsurance and other recoverables
3,037
25
426
22,545
3,488
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property
& Casualty
Insurance
Beginning liabilities for unpaid losses and loss adjustment
expenses, net
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes
Current accident year catastrophes
Prior accident year development
Total provision for unpaid losses and loss adjustment expenses
Less: payments
Ending liabilities for unpaid losses and loss adjustment
expenses, net
Reinsurance and other recoverables
Ending liabilities for unpaid losses and loss adjustment
expenses, gross
Earned premiums and fee income
Loss and loss expense paid ratio [1]
Loss and loss expense incurred ratio
Prior accident year development (pts) [2]
14,913
2,069
2,075
19,057
3,961
383
(22)
4,322
3,489
15,746
3,147
$
$
18,893 $
6,902 $
50.6
63.0
(0.3)
2,584
453
(37)
3,000
2,846
2,223
71
2,294 $
3,734
76.2
81.3
(1.0)
—
—
18
18
244
1,849
739
6,545
836
(41)
7,340
6,579
19,818
3,957
2,588 $
23,775
[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, 2017, Net of
Reinsurance
Wind and hail
Hurricanes [1]
Wildfires
Winter storms
Total catastrophe losses
Less: reinsurance recoverable under the property aggregate treaty [2]
Net catastrophe losses
Commercial
Lines
Personal
Lines
Total
138 $
176 $
236
51
1
426
(43)
68
253
3
500
(47)
383 $
453 $
$
$
314
304
304
4
926
(90)
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.
49
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2017
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property &
Casualty
Insurance
Workers’ compensation
$
(79) $
— $
— $
28
11
(25)
(8)
1
32
17
—
—
—
—
(15)
16
(22) $
—
—
—
—
—
—
—
(14)
—
—
(16)
—
(7)
(37) $
—
—
—
—
—
—
—
—
—
—
—
—
18
18 $
(79)
28
11
(25)
(8)
1
32
17
(14)
—
—
(16)
(15)
27
(41)
Automobile liability reserves within Commercial
Lines were increased in small commercial and large national
accounts for the 2013 to 2016 accident years, driven by higher
frequency of more severe accidents, including litigated claims.
Asbestos and environmental reserves were
unchanged as $285 of adverse development arising from the
fourth quarter 2017 comprehensive annual review was offset by
a $285 recoverable from NICO. For additional information
related to the adverse development cover with NICO, see Note 8
- Reinsurance and Note 14 - Commitments and Contingencies of
Notes to Consolidated Financial Statements.
Catastrophes reserves were reduced primarily due to
lower estimates of 2016 wind and hail event losses and a
decrease in losses on a 2015 wildfire.
Uncollectible reinsurance reserves decreased as a
result of giving greater weight to favorable collectibility
experience in recent calendar periods in estimating future
collections.
Workers’ compensation discount accretion
General liability
Package business
Commercial property
Professional liability
Bond
Automobile liability
Homeowners
Net asbestos reserves
Net environmental reserves
Catastrophes
Uncollectible reinsurance
Other reserve re-estimates, net
Total prior accident year development
$
During 2017, the Company’s re-estimates of prior accident year
reserves included the following significant reserve changes:
Workers’ compensation reserves were reduced in
small commercial and middle market, given the continued
emergence of favorable frequency, primarily for accident years
2013 to 2015, as well as a reduction in estimated reserves for
ULAE, partially offset by strengthening reserves for captive
programs within specialty commercial.
General liability reserves were increased for the 2013
to 2016 accident years on a class of business that insures service
and maintenance contractors. This increase was partially offset
by a decrease in recent accident year reserves for other middle
market general liability reserves.
Package business reserves were reduced for accident
years 2013 and prior largely due to reducing the Company’s
estimate of allocated loss adjustment expenses incurred to settle
the claims.
Bond business reserves increased for customs bonds
written between 2000 and 2010 which was partly offset by a
reduction in reserves for recent accident years as reported losses
for commercial and contract surety have emerged favorably.
50
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, 2016
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property
& Casualty
Insurance
$
17,302 $
1,845 $
3,421 $
Beginning liabilities for unpaid losses and loss adjustment
expenses, gross
Reinsurance and other recoverables
Beginning liabilities for unpaid losses and loss adjustment
expenses, net
Add: Maxum Acquisition
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes
Current accident year catastrophes
Prior accident year development
Total provision for unpaid losses and loss adjustment expenses
Less: payments
Less: net reserves transferred to liabilities held for sale [1]
Ending liabilities for unpaid losses and loss adjustment
expenses, net
Reinsurance and other recoverables
Ending liabilities for unpaid losses and loss adjustment
expenses, gross
Earned premiums and fee income
Loss and loss expense paid ratio [2]
Loss and loss expense incurred ratio
Prior accident year development (pts) [3]
3,036
14,266
122
3,766
200
28
3,994
3,469
—
14,913
3,037
$
$
17,950 $
6,690 $
51.9
60.1
0.4
19
1,826
—
2,808
216
151
3,175
2,932
—
2,069
25
2,094 $
3,937
74.5
81.5
3.9
570
2,851
—
—
—
278
278
567
487
2,075
426
22,568
3,625
18,943
122
6,574
416
457
7,447
6,968
487
19,057
3,488
2,501 $
22,545
[1]Represents liabilities classified as held-for-sale as of December 31, 2016 and subsequently transferred to the buyer in connection with the sale of the Company's U.K. property and
casualty run-off subsidiaries in May 2017. For discussion of the sale transaction, see Note 20 - Business Dispositions and Discontinued Operations 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 and fee income.
[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, 2016, Net of
Reinsurance
Wind and hail
Winter storms
Hurricane Matthew
Wildfires
Total Catastrophe Losses
Commercial
Lines
Personal
Lines
Total
$
$
156 $
24
17
3
200 $
186 $
7 $
16 $
7
216 $
342
31
33
10
416
51
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2016
Workers’ compensation
$
(119) $
— $
— $
(119)
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property &
Casualty
Insurance
Workers’ compensation discount accretion
General liability
Package business
Commercial property
Professional liability
Bond
Automobile liability
Homeowners
Net asbestos reserves
Net environmental reserves
Catastrophes
Uncollectible reinsurance
Other reserve re-estimates, net
28
65
65
1
(37)
(8)
57
—
—
—
(4)
(30)
10
—
—
—
—
—
—
160
(10)
—
—
(3)
—
4
—
—
—
—
—
—
—
—
197
71
—
—
10
Total prior accident year development
$
28 $
151 $
278 $
28
65
65
1
(37)
(8)
217
(10)
197
71
(7)
(30)
24
457
During 2016, the Company’s re-estimates of prior accident year
reserves included the following significant reserve changes:
Workers' compensation reserves consider favorable
emergence on reported losses for recent accident years as well as
a partially offsetting adverse impact related to two recent Florida
Supreme Court rulings that have increased the Company’s
exposure to workers’ compensation claims in that state. The
favorable emergence has been driven by lower frequency and, to
a lesser extent, lower medical severity and management has
placed additional weight on this favorable experience as it
becomes more credible.
General liability reserves increased for accident years
2012 - 2015 primarily due to higher severity losses incurred on a
class of business that insures service and maintenance
contractors and increased for accident years 2008 and 2010
primarily due to indemnity losses and legal costs associated with
a litigated claim.
Package business reserves increased due to higher
than expected severity on liability claims, principally for accident
years 2013 - 2015. Severity for these accident years has
developed unfavorably and management has placed more weight
on emerged experience.
Professional liability reserves decreased for claims
made years 2008 - 2013, primarily for large accounts, including
on non-securities class action cases. Claim costs have emerged
favorably as these years have matured and management has
placed more weight on the emerged experience.
Automobile liability reserves increased due to
increases in both commercial lines automobile and personal lines
automobile. Commercial automobile liability reserves increased,
predominately for the 2015 accident year, primarily due to
increased frequency of large claims. Personal automobile liability
reserves increased, primarily related to increased bodily injury
52
frequency and severity for the 2015 accident year, including for
uninsured and under-insured motorist claims, and increased
bodily injury severity for the 2014 accident year. Increases in
automobile liability loss costs were across both the direct and
agency distribution channels.
Asbestos and environmental reserves were
increased during the period as a result of the second quarter
2016 comprehensive annual review.
Uncollectible reinsurance reserves decreased as a
result of giving greater weight to favorable collectibility
experience in recent calendar periods in estimating future
collections.
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.
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
$3,000
$2,000
$1,000
$0
$2,075
$1,282
$234
$559
$1,849
$1,143
$182
$524
$1,686
$984
$151
$551
12/31/16
12/31/17
12/31/18
All other
Environmental
Asbestos
Property & Casualty Reserves
Asbestos and Environmental Summary as of
December 31, 2018
Gross
Direct
Asbestos Environmental
Total
A&E
$ 1,442 $
359 $ 1,801
Assumed Reinsurance
Total
Ceded- other than NICO
Ceded - NICO ADC
431
1,873
(472)
(350)
54
413
(37)
(173)
485
2,286
(509)
(523)
Net
$ 1,051 $
203 $ 1,254
Rollforward of Asbestos and Environmental
Losses and LAE
Asbestos Environmental
Asbestos and Environmental Reserves
Reserves for asbestos and environmental are primarily within
P&C Other Operations with less significant amounts of asbestos
and environmental reserves included within Commercial Lines
and Personal Lines. The following tables include all asbestos and
environmental reserves, including reserves in P&C Other
Operations and Commercial Lines and Personal Lines.
2018
Beginning liability — net
$ 1,215 $
Losses and loss adjustment
expenses incurred [1]
Losses and loss adjustment
expenses paid
Reclassification of allowance for
uncollectible insurance [4]
—
(164)
—
Ending liability — net
$ 1,051 $
Asbestos and Environmental Net Reserves
2017
Asbestos Environmental
2018
Property and Casualty Other
Operations
Commercial Lines and Personal
Lines
$
984 $
67
Ending liability — net
$
1,051 $
2017
Property and Casualty Other
Operations
Commercial Lines and Personal
Lines
$
1,143 $
72
Ending liability — net
$
1,215 $
2016
Property and Casualty Other
Operations
Commercial Lines and Personal
Lines
$
1,282 $
81
Ending liability — net
$
1,363 $
151
52
203
182
55
237
234
58
292
Beginning liability — net
$ 1,363 $
Losses and loss adjustment
expenses incurred [1]
Losses and loss adjustment
expenses paid
Reclassification of allowance for
uncollectible insurance [4]
Ending liability — net
2016
—
(149)
1
$ 1,215 $
Beginning liability — net
$ 1,803 $
Losses and loss adjustment
expenses incurred
Losses and loss adjustment
expenses paid [2]
Reclassification of allowance for
uncollectible insurance [4]
Net reserves transferred to
liabilities held for sale [3]
197
(462)
30
(205)
Ending liability — net
$ 1,363 $
237
—
(34)
—
203
292
—
(55)
—
237
318
71
(56)
—
(41)
292
[1]Cumulative incurred losses of $523, net, have been ceded to NICO under an
adverse development cover reinsurance agreement. See the section that follows
entitled ADC for additional information.
[2]Included $289 related to the settlement in 2016 of PPG Industries, Inc. ("PPG")
asbestos liabilities, net of reinsurance billed to third-party reinsurers.
[3]A&E liabilities classified as held for sale related to the sale of the Company's U.K.
property and casualty run-off subsidiaries.
[4]Related to the reclassification of an allowance for uncollectible reinsurance from
the "All Other" category of P&C Other Operations reserves.
53
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Adverse Development Cover
Effective December 31, 2016, the Company entered into an A&E
ADC reinsurance agreement with NICO, a subsidiary of Berkshire
Hathaway Inc., to reduce uncertainty about potential adverse
development. Under the 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 of
December 31, 2016 of approximately $1.7 billion. 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 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 after December 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 ADC. Cumulative ceded losses
exceeding the $650 reinsurance premium paid would result in a
deferred gain. The deferred gain would be recognized over the
claim 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 after
December 31, 2016 in excess of $650 may result in significant
charges against earnings.
As of December 31, 2018, the Company has incurred a
cumulative $523 in adverse development on A&E reserves that
have been ceded under the ADC treaty with NICO, leaving
approximately $977 of coverage 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.
The survival ratios shown below are calculated for the one and
three year periods ended December 31, 2018. The net basis
survival ratio has been materially affected by the adverse
development cover entered into between the Company and
NICO. The Company cedes adverse asbestos and environmental
development in excess of its December 31, 2016 net carried
reserves of $1.7 billion to NICO up to a limit of $1.5 billion. Since
December 31, 2016, net reserves for asbestos and environmental
have been declining as the Company has had no net incurred
losses but continues to pay down net loss reserves. This has the
effect of reducing the one- and three-year net survival ratios
shown in the table below. For asbestos, the table also presents
the net survival ratios excluding the effect of the PPG settlement
in 2016. See section that follows entitled Major Categories of
Asbestos Accounts for discussion of the PPG settlement.
Net and Gross Survival Ratios
Asbestos Environmental
One year net survival ratio
Three year net survival ratio-
excluding PPG settlement
One year gross survival ratio
Three year gross survival ratio -
excluding PPG settlement
6.4
6.6
8.6
9.1
5.9
4.2
8.3
7.1
Asbestos and Environmental
Paid and Incurred Losses and LAE
Development
Asbestos
Environmental
Paid
Losses &
LAE
Incurred
Losses &
LAE
Paid
Losses &
LAE
Incurred
Losses &
LAE
$
218 $
252 $
50 $
83
(54)
(85)
(16)
—
(167)
164 $
— $
34 $
(12)
(71)
—
199 $
306 $
66 $
126
(50)
(123)
—
(183)
(11)
—
149 $
— $
55 $
(24)
(102)
—
535 $
257 $
61 $
(73)
—
(60)
—
(5)
—
$
462 $
197 $
56 $
77
(6)
—
71
2018
Gross
Ceded- other
than NICO
Ceded - NICO
ADC
Net
2017
Gross
Ceded- other
than NICO
Ceded - NICO
ADC
Net
2016
Gross
Ceded- other
than NICO
Ceded - NICO
ADC
Net
$
$
$
$
Annual Reserve Reviews
Review of Asbestos Reserves
Since 2017, the Company has performed its regular
comprehensive annual review of asbestos reserves in the fourth
quarter. As part of the evaluation in the fourth quarter of 2018,
the Company reviewed all of its open direct domestic insurance
accounts exposed to asbestos liability, as well as assumed
reinsurance accounts.
During the 2018 fourth quarter review, the Company increased
estimated reserves before NICO reinsurance by $167, 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
54
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
increase in reserves from umbrella and excess policies in the
1981-1985 policy years contributed to the adverse development.
The increase in reserves was offset by a $167 reinsurance
recoverable under the NICO treaty.
As a result of the 2017 fourth quarter review, the Company
increased estimated reserves before NICO reinsurance by $183,
primarily due to mesothelioma claim filings not declining as
expected, unfavorable developments in coverage law in some
jurisdictions and continued filings in specific, adverse
jurisdictions. An increase in reserves from umbrella and excess
policies in the 1981-1985 policy years contributed to the adverse
development. This increase in reserves was offset by a $183
reinsurance recoverable under the NICO treaty.
During the 2016 second quarter review, a substantial majority of
the Company’s direct accounts trended as expected, and the
Company observed no material changes in the underlying legal
environment. However, mesothelioma claims filings have not
declined as expected for a small subset of peripheral defendants
with a high concentration of asbestos filings in specific, adverse
jurisdictions. As a result, aggregate indemnity and defense costs
did not decline as expected. While the mesothelioma and adverse
jurisdiction claim trends observed in the 2016 comprehensive
annual review were similar to the 2015 comprehensive annual
review, most of the defendants that had reserve increases in the
2016 review did not have a material impact in the 2015 review.
Based on this evaluation, the Company increased its net asbestos
reserves for prior year development by $197 in second quarter
2016.
Review of Environmental Reserves
Since 2017, the Company has performed its regular
comprehensive annual review of environmental reserves in the
fourth quarter. As part of its evaluation in the fourth quarter of
2018, the Company reviewed all of its open direct domestic
insurance accounts exposed to environmental liability, as well as
assumed reinsurance accounts.
As a result of the 2018 fourth quarter review, 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
the Pacific Northwest), and increased liability shares due to
unavailability of other responsible parties. The increase in
environmental reserves was offset by a $71 reinsurance
recoverable under the NICO treaty.
As a result of the 2017 comprehensive annual review, the
Company increased estimated reserves before NICO reinsurance
by $102. This increase was offset by a reinsurance recoverable of
$102 under the NICO cover. A substantial majority of the
Company’s direct environmental accounts trended as expected.
However, a small percentage of the Company’s direct accounts
exhibited deterioration due to increased clean-up costs and
liability shares associated with Superfund sites and sediments in
waterways, as well as adverse legal rulings, most notably from
jurisdictions in the Pacific Northwest.
During the 2016 comprehensive annual review, a substantial
majority of the Company's direct environmental accounts
trended as expected. However, a small percentage of the
Company's direct accounts exhibited deterioration associated
with the tendering of new sites for coverage, increased defense
costs stemming from individual bodily injury liability suits, and
increased clean-up costs associated with waterways. Based on
this evaluation, the Company increased its net environmental
reserves for prior year development by $71 in second quarter
2016.
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 69% of the Company's total Direct gross
asbestos reserves as of December 31, 2018 compared to
approximately 63% as of December 31, 2017. Major
Asbestos Defendants have been defined as the “Top 70”
accounts in Tillinghast's published Tiers 1 and 2 and
Wellington 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 and up through second quarter 2016 had included
reserves related to PPG Industries, Inc. (“PPG”). In May 2016,
the Company pre-paid its funding obligation in the amount of
$315 as permitted under the settlement agreement, arising
from participation in a 2002 settlement of asbestos liabilities
of PPG. The Company's funding obligation approximated the
amount reserved for this exposure.
• 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 31% of
the Company's Direct gross asbestos reserves as of
December 31, 2018 compared to approximately 37% as of
December 31, 2017.
Review of "All Other" Reserves in Property &
Casualty Other Operations
In the fourth quarters of 2018, 2017 and 2016, the Company
completed evaluations of certain of its non-asbestos and non-
environmental reserves in Property & Casualty Other
Operations, including its assumed reinsurance liabilities,
unallocated loss adjustment expense reserves, and allowance for
uncollectible reinsurance. Overall prior year development on all
other reserves resulted in increases (decreases) of $65, $18 and
$(20), respectively for calendar years 2018, 2017 and 2016.
Included in the 2018 adverse reserve development was a $38
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.
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 second
and third quarters of 2018, the Company increased the allowance
by $19, largely driven by potential coverage disputes on a limited
number of claims. During the fourth quarters of 2018 and 2017,
and second quarter of 2016, the Company completed its annual
evaluations of the collectability of the reinsurance recoverables
and the adequacy of the allowance for uncollectible reinsurance
associated with older, long-term casualty liabilities reported in
55
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 of December 31, 2018, 2017, and 2016 the allowance
for uncollectible reinsurance for Property & Casualty Other
Operations totaled $105, $86 and $136, 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
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 The Hartford 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 - Impact of Changes in Key
Assumptions on Reserve Volatility section.
Range of Prior Accident Year Unfavorable (Favorable) Development for the Ten Years Ended
December 31, 2018
Commercial Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property &
Casualty [1]
Annual range of prior accident year unfavorable
(favorable) development for the ten years ended
December 31, 2018
(3.1%) - 1.0%
(6.9%) - 8.3%
0.9% - 9.8%
(1.1%) - 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 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 ended December 31, 2018. 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 ended December 31, 2018 for the
indicated accident year in each row.
56
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Effect of Net Reserve Re-estimates on Calendar Year Operations
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Calendar Year
$ (186) $ (157) $ 135 $
(19) $
(28) $ 345 $ 327 $ 291 $
83 $
(58) $ 733
(39)
(13)
245
(24)
3
36
(8)
61
148
19
7
(22)
(4)
—
(98)
7
16
12
(55)
(43)
(14)
10
15
(6)
(35)
(29)
20
191
(12)
16
6
(12)
(33)
(19)
(41)
(29)
20
1
11
(15)
(2)
(54)
(93)
14
9
(52)
335
203
(98)
(205)
(67)
57
(15)
9
By Accident Year
2008 & Prior
2009
2010
2011
2012
2013
2014
2015
2016
2017
Increase (decrease) in net reserves $ (186) $ (196) $ 367 $
(4) $ 192 $ 228 $ 250 $ 457 $
(41) $ (167) $ 900
Accident years 2008 and Prior
The net increases in estimates of ultimate losses for accident
years 2008 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
personal automobile liability claims were reduced largely due to
improvement in emerged claim severity.
Accident year 2009
Estimates of ultimate losses have emerged favorably for accident
year 2009 mainly related to personal automobile liability.
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, favorable professional
liability claim emergence, and lower frequency of late emerging
general liability claims for the 2012 accident year. 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
and increased severity of liability claims on package business,
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, somewhat offset
by unfavorable reserve estimates for higher hazard general
liability exposures due to increased frequency and severity
trends.
Accident year 2017
Ultimate loss estimates were increased for the 2017 accident
year mainly due to unfavorable reserve estimates in general
liability, bond and commercial auto liability, largely offset by a
reserve release related to catastrophes. General liability was
related to higher hazard exposures which experienced increased
frequency and severity trends. Unfavorable bond reserve re-
estimates were driven by one large claim.
Group Benefit Long-term
Disability ("LTD") Reserves, Net
of Reinsurance
The 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 The Hartford’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
57
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 $6,767 and
$6,807 of LTD unpaid losses and loss adjustment expenses, net of
reinsurance, as of December 31, 2018 and 2017, 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 from
Social 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, 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 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 or Social
Security Disability Insurance ("SSDI"). Possible changes to the
frequency, timing, or amount of offsets, such as a change in SSDI
58
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 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 of Aetna's U.S. group life and disability business are all
discounted using current rates as of the November 1, 2017
acquisition date. The weighted average discount rate on LTD
reserves was 3.4% and 3.5% in 2018 and 2017, respectively. 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 $32, pretax,
as of December 31, 2018.
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 10
years, claim termination rates for a single incurral year have
generally increased and have ranged from 6% below to 13%
above current assumptions over that time period. For a single
recent incurral year (such as 2018), a one percent decrease in our
assumption for LTD claim termination rates would increase our
reserves by $9. For all incurral years combined, as of
December 31, 2018, 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.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Evaluation of Goodwill for
Impairment
Goodwill 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 include small commercial
within the Commercial Lines segment, Group Benefits, Personal
Lines and Hartford Funds.
The carrying value of goodwill is $1,290 as of December 31, 2018
and is comprised of $38 for small commercial, $272 for Hartford
Funds, $861 for Group Benefits and $119 for Personal Lines.
The annual goodwill assessment for the small commercial,
Hartford Funds, Group Benefits and Personal Lines reporting
units was completed as of October 31, 2018, and resulted in no
write-downs of goodwill for the year ended December 31, 2018.
All reporting units passed the first step of the annual impairment
test with a significant margin. For information regarding the 2017
and 2016 impairment tests see Note 10 -Goodwill & Other
Intangible Assets of Notes to Consolidated Financial Statements.
Valuation of Investments and
Derivative Instruments
Fixed Maturities, Equity Securities,
Short-term Investments and Free-
standing Derivatives
The 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 free-standing 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 Free-standing Derivatives section in Note 5 -
Fair Value Measurements of Notes to Consolidated Financial
Statements.
Evaluation of OTTI on Available-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. Under U.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 of
December 31, 2018, 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 of December 31, 2018 and December 31, 2017, the Company
had no valuation allowance. The reduction in the valuation
59
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
allowance in 2016 stems primarily from taxable gains on the
termination of derivatives during the period. The Company’s net
operating loss carryovers, if unused, would expire between 2026
and 2036. As of December 31, 2018, the Company projects there
will be sufficient future taxable income to fully recover the
remainder of its loss carryovers, though the Company's estimate
of the likely realization may change over time. As of December 31,
2018, the Company had AMT credit carryovers of $841 which are
reflected as a current income tax receivable within Other Assets
in the accompanying consolidated balance sheet. AMT credits
may be used to offset a regular tax liability for any taxable year
beginning after December 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 the 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.
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.
60
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
SEGMENT OPERATING SUMMARIES
COMMERCIAL LINES
Results of Operations
Written premiums
Change in unearned premium reserve
Earned premiums
Fee income
Losses and loss adjustment expenses
Current accident year before catastrophes
Current accident year catastrophes [1]
Prior accident year development [1]
Total losses and loss adjustment expenses
Amortization of DAC
Underwriting expenses
Amortization of other intangible assets
Dividends to policyholders
Underwriting gain
Net servicing income
Net investment income [2]
Net realized capital gains (losses) [2]
Other income (expenses)
Income before income taxes
Income tax expense [3]
Underwriting Summary
2018
2017
2016
$
7,136 $
6,956 $
89
7,047
34
4,037
275
(200)
4,112
1,048
1,369
4
23
525
2
997
(43)
(2)
1,479
267
91
6,865
37
3,961
383
(22)
4,322
1,009
1,347
1
35
188
1
949
103
1
1,242
377
6,732
81
6,651
39
3,766
200
28
3,994
973
1,230
—
15
478
2
917
13
(1)
1,409
415
Net income
[1]For discussion of current accident year catastrophes and prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product
1,212 $
865 $
$
994
Reserves Development, 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.
Premium Measures [1]
2018
2017
2016
New business premium
Standard commercial lines policy count retention
Standard commercial lines renewal written price increase
Standard commercial lines renewal earned price increase
Standard commercial lines policies in-force as of end of period (in thousands)
[1]Standard commercial lines consists of small commercial and middle market. Standard commercial premium measures exclude Maxum, higher hazard general liability in middle
1,183 $
84%
3.2%
2.8%
1,298 $
82%
2.1%
3.0%
1,340
1,338
$
1,140
1,346
84%
2.2%
2.3%
market and livestock lines of business.
61
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Underwriting Ratios
Loss and loss adjustment expense ratio
Current accident year before catastrophes
Current accident year catastrophes
Prior accident year development
Total loss and loss adjustment expense ratio
Expense ratio
Policyholder dividend ratio
Combined ratio
Current accident year catastrophes and prior year development
Underlying combined ratio
2019 Outlook
The Company expects higher Commercial Lines written
premiums in 2019, driven by continued strong policy retention in
small commercial and national accounts, growth in industry
verticals in middle market and an increase in new business across
Commercial Lines. Management expects positive renewal written
pricing in all lines of business except workers' compensation,
which is expected to be flat to down modestly. 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 2019.
Pricing varies significantly by product line with low-to-mid single
digit pricing increases expected in property and general liability
and higher written pricing increases expected in commercial
automobile. In workers’ compensation, given favorable
profitability trends, rates are expected to decline in 2019.
The Company expects the Commercial Lines combined ratio will
be between approximately 94.5 and 96.5 for 2019, compared to
92.6 in 2018, largely due to lower favorable prior year
development, partially offset by lower catastrophe losses
expected in 2019. The underlying combined ratio is expected to
be flat to slightly higher as earned pricing increases may not keep
pace with moderate increases in loss costs, and the Company
continues to invest in the business . Current accident year
catastrophes are assumed to be 3.0 points of the combined ratio
in 2019 compared to 3.9 points in 2018.
Net Income
$1,500
$1,250
$1,000
$750
$500
$1,212
$994
$865
2016
2017
2018
2018
2017
2016
57.3
3.9
(2.8)
58.4
33.9
0.3
92.6
1.1
91.5
57.7
5.6
(0.3)
63.0
33.8
0.5
97.3
5.3
92.0
56.6
3.0
0.4
60.1
32.5
0.2
92.8
3.4
89.4
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Net income increased in 2018 due to a higher underwriting
gain, a lower corporate Federal income tax rate and, to a lesser
extent, an increase in net investment income, partially offset by a
shift from net realized capital gains in 2017 to net realized capital
losses in 2018. (For further discussion of investment results, see
MD&A - Investment Results).
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Net income decreased in 2017 due to a lower underwriting
gain, partially offset by increases in net investment income and
net realized capital gains. (For further discussion of investment
results, see MD&A - Investment Results).
Underwriting Gain
$800
$600
$400
$200
$0
$478
$525
$188
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Underwriting gain increased in 2018 primarily due to
more favorable prior accident year reserve development in 2018
compared to 2017, lower current accident year catastrophes, and
higher earned premium, partially offset by higher underwriting
expenses, including higher amortization of DAC.
62
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
rights agreement with Farmers Group to acquire its
Foremost-branded small commercial business. The increase in
new business premium was largely offset by the decline in
renewal premium. The decline in renewal premium was driven
by the effect of lower policy retention, partially offset by
renewal written price increases.
• Middle market written premium growth in 2018 was primarily
due to strong new business growth, improved retention and
higher renewal written price increases.
•
Specialty commercial written premium increased in 2018
driven by growth in financial products and bond, partially
offset by a decline in National Accounts.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Earned premiums increased in 2017 reflecting written
premium growth over the preceding twelve months.
Written premiums increased in 2017 primarily due to
growth in small commercial.
•
Small commercial written premium growth for 2017 was
primarily due to higher renewal premium driven by renewal
written price increases and growth from the acquisition of
Maxum, partially offset by lower new business premium,
excluding Maxum, and the effect of lower policy retention.
• Middle market written premiums in 2017 were up modestly
as higher new and renewal premium was partially offset by
modestly higher property reinsurance costs.
•
Specialty commercial written premiums in 2017 were up
slightly as growth in Bond was largely offset by new business
declines in National Accounts.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Underwriting gain decreased in 2017 primarily due to
higher catastrophe losses and higher underwriting expenses
largely driven by an increase in variable incentive compensation
and higher IT costs. Also contributing to the decrease were higher
current accident year loss costs for workers’ compensation,
general liability and non-catastrophe property, offset by the
effect of earned premium growth and a change from unfavorable
prior accident year development in 2016 to favorable
development in 2017.
Earned Premiums
$8,000
$7,000
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
$6,651
$3,467
$6,865
$3,646
$7,047
$3,730
$2,334
$2,349
$2,421
$808
2016
$824
2017
$851
2018
Specialty Commercial
Middle Market
Small Commercial
Other [1]
[1]Other of $45, $46, and $42 for 2018, 2017, and 2016, respectively, is included
in the total.
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Earned premiums increased in 2018 reflecting written
premium growth over the preceding twelve months.
Written premiums increased in 2018 primarily due to
growth in middle market, small commercial and specialty
commercial. In standard commercial lines, renewal written price
increases declined in 2018, mostly attributable to bigger rate
decreases in small commercial workers' compensation. New
business and renewal written premium increased across most
lines of business, particularly in middle market, partially offset by
declines in small commercial workers' compensation.
•
Small commercial written premium increased in 2018,
primarily driven by the business acquired under a renewal
63
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Loss and LAE Ratio before Catastrophes and
Prior Accident Year Development
Catastrophes and Prior Accident Year
Development
56.6
57.7
57.3
70
60
50
40
30
20
10
0
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Loss and LAE ratio before catastrophes and
prior accident year development decreased slightly
in 2018, primarily due to a lower loss and loss adjustment
expense ratio in general liability and commercial auto. The
current accident year loss and loss adjustment expense ratio for
workers' compensation was relatively flat as the effect of higher
claim frequency was largely offset by the benefit of increased
audit premium driven by higher than initially estimated insured
payroll.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Loss and LAE ratio before catastrophes and
prior accident year development increased in
2017, primarily due to a higher loss and loss adjustment expense
ratio in both workers' compensation and general liability, as well
as higher commercial property losses in middle market. The
workers’ compensation current accident year loss ratio
deteriorated from 2016 to 2017 as increases in average claim
severity outpaced the effect of earned pricing and a modest
reduction in loss cost frequency.
$500
$400
$300
$200
$100
$0
-$100
-$200
-$300
$383
$275
$200
$28
$(22)
CAY CATs
PYD
$(200)
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Current accident year catastrophe losses for
2018 were lower than in 2017 with catastrophes in 2018
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.
Catastrophe losses in 2017 were primarily from hurricanes
Harvey and Irma as well as from wind and hail events in the
Midwest, Texas and Colorado.
Prior accident year development was a net
favorable $200, before tax, for 2018 compared to favorable $22,
before tax, for 2017. 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.
Estimated losses for 2017 catastrophe events in Commercial
Lines decreased by $93 in 2018 resulting in a decrease in
reinsurance recoverables of $43 as the Company no longer
expects to recover under the 2017 Property Aggregate
reinsurance treaty.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Current accident year catastrophe losses for
2017 were primarily from hurricanes Harvey and Irma as well as
from wind and hail events in the Midwest, Texas and Colorado.
Catastrophe losses for 2016 were primarily due to wind and hail
events and winter storms across various U.S. geographic regions.
Prior accident year development was favorable in
2017 compared to unfavorable prior accident year development
64
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
in 2016. Net reserve decreases for 2017 were primarily related to
reduced loss reserve estimates for workers' compensation and
small commercial package business, partially offset by reserve
increases for bond.
PERSONAL LINES
Underwriting Summary
Results of Operations
Written premiums
Change in unearned premium reserve
Earned premiums
Fee income
Losses and loss adjustment expenses
Current accident year before catastrophes
Current accident year catastrophes [1]
Prior accident year development [1]
Total losses and loss adjustment expenses
Amortization of DAC
Underwriting expenses
Amortization of other intangible assets
Underwriting loss
Net servicing income [2]
Net investment income [3]
Net realized capital gains (losses) [3]
Other income (expenses)
Income (loss) before income taxes
Income tax expense (benefit) [4]
Net loss
2018
2017
2016
$
3,276 $
3,561 $
(123)
3,399
40
2,249
546
(32)
2,763
275
611
4
(214)
16
155
(7)
(1)
(51)
(19)
(129)
3,690
44
2,584
453
(37)
3,000
309
577
4
(156)
16
141
15
1
17
26
$
(32) $
(9) $
3,837
(61)
3,898
39
2,808
216
151
3,175
348
599
4
(189)
20
135
2
—
(32)
(23)
(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 $84, $85, and $86 for 2018, 2017, and 2016, respectively and includes servicing expenses of $68, $69, and $66 for 2018, 2017, and 2016,
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
Product Line
Automobile
Homeowners
Total
Earned Premiums
Product Line
Automobile
Homeowners
Total
2018
2017
2016
$
$
$
$
2,273 $
1,003
3,276 $
2,369 $
1,030
3,399 $
2,497 $
1,064
3,561 $
2,584 $
1,106
3,690 $
2,694
1,143
3,837
2,720
1,178
3,898
65
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Premium Measures
2018
2017
2016
1,510
927
1,702
1,038
$
$
169 $
46 $
152 $
44 $
82%
83%
7.2%
9.7%
9.6%
9.3%
81%
83%
10.9%
8.9%
9.6%
8.5%
1,965
1,176
311
74
84%
84%
7.6%
8.0%
6.3%
7.6%
2018
2017
2016
66.2
16.1
(0.9)
81.3
25.0
106.3
15.2
91.2
70.0
12.3
(1.0)
81.3
22.9
104.2
11.3
93.0
72.0
5.5
3.9
81.5
23.4
104.8
9.4
95.4
2018
2017
2016
98.6
98.2
124.3
75.1
101.6
99.7
110.4
77.1
111.6
103.9
89.3
75.9
Policies in-force end of period (in thousands)
Automobile
Homeowners
New business written premium
Automobile
Homeowners
Policy count retention
Automobile
Homeowners
Renewal written price increase
Automobile
Homeowners
Renewal earned price increase
Automobile
Homeowners
Underwriting Ratios
Loss and loss adjustment expense ratio
Current accident year before catastrophes
Current accident year catastrophes
Prior accident year development
Total loss and loss adjustment expense ratio
Expense ratio
Combined ratio
Current accident year catastrophes and prior year development
Underlying combined ratio
Product Combined Ratios
Automobile
Combined ratio
Underlying combined ratio
Homeowners
Combined ratio
Underlying combined ratio
2019 Outlook
In 2019, the Company expects the level of pricing increases for
automobile and homeowners across the industry to decrease, as
loss cost trends have moderated. Accordingly, the Company
expects written pricing increases in 2019 to be in the mid single-
digits for automobile and high single-digits for homeowners.
Written premium is expected to decline slightly in 2019 as non-
renewal of premium more than offsets new business growth,
particularly in the agency channel. The Company expects to drive
new business growth in more states in 2019, particularly in the
direct channel.
The Company expects the combined ratio for Personal Lines will
be between approximately 97.5 and 99.5 for 2019 compared to
106.3 in 2018, primarily due to lower current accident year
catastrophes with the underlying combined ratio flat to slightly
higher, as the Company increases spending on marketing. Current
accident year catastrophes are budgeted to be 6.5 points of the
combined ratio in 2019 compared with 16.1 points in 2018. For
automobile, we expect the underlying combined ratio to improve
slightly as a modest loss ratio improvement is partially offset by
an increase in acquisition costs to increase new business. While
management actions, including the effect of earned pricing, are
expected to modestly exceed an increase in loss cost severity,
66
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
those will be partially offset by an increase in direct marketing
and other expenses to generate new business. The underlying
combined ratio for homeowners is expected to increase slightly in
2019, driven by a return to a more normal level of non-
catastrophe weather loss experience and higher acquisition costs,
partially offset by earned pricing increases.
Net Loss
$100
$0
-$100
$(9)
$(9)
$(32)
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Net loss was higher in 2018 than in 2017 due to a higher
underwriting loss, a change to net realized capital losses and the
effect of a lower corporate income tax rate, partially offset by
higher net investment income.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Net loss in 2017 was unchanged from 2016 as lower
underwriting loss and higher net realized capital gains was offset
by $33 of income tax expense arising primarily from the reduction
of net deferred tax assets due to the enactment of lower Federal
income tax rates.
Underwriting Loss
$200
$100
$0
-$100
-$200
-$300
$(189)
$(156)
2016
2017
$(214)
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Underwriting loss increased in 2018 primarily due to
higher current accident year catastrophe losses, higher
underwriting expenses and the effect of lower earned premium,
partially offset by lower current accident year loss ratios before
catastrophes in both auto and homeowners and lower
amortization of DAC. The increase in underwriting expenses was
largely driven by an increase in direct marketing spending, selling
expenses, and operational costs to generate new business.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Underwriting loss decreased in 2017 primarily due to a
change from unfavorable prior accident year development in
2016 to favorable development in 2017 and lower current
accident year loss costs in both auto and homeowners, partially
offset by higher current accident year catastrophe losses. The
decrease in underwriting expenses was primarily due to lower
marketing and operations costs, partially offset by higher variable
incentive compensation and the decrease in DAC amortization
was driven primarily by lower Agency commissions.
Earned Premiums
$4,500
$3,000
$1,500
$0
$3,898
$2,720
$3,690
$2,584
$3,399
$2,369
$1,178
$1,106
$1,030
2016
2017
2018
Homeowners
Automobile
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Earned premiums decreased in 2018, reflecting a decline
in written premium over the prior six to twelve months in both
Agency channels and, to a lesser extent, in AARP Direct.
Written premiums decreased in 2018 in AARP Direct and
both Agency channels. Despite an increase in new business and
stable 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 2018 were
higher in homeowners driven by actions taken to improve
profitability and were lower in automobile as loss cost trends
have moderated and the Company has sought to increase new
business.
Policy count retention increased in automobile as
renewal written price increases decreased. Policy count
67
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
retention in homeowners was flat despite higher renewal written
price increases.
Policies in-force decreased in 2018 in both automobile
and homeowners, driven by not generating enough new business
to offset the loss of non-renewed policies.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Earned premiums decreased in 2017, reflecting a decline
in written premium over the prior six to twelve months in the
Other Agency channel and, to a lesser extent, in AARP Direct.
Written premiums decreased in 2017 in AARP Direct and
both Agency channels primarily due to a decline in new business
and lower policy count retention in both automobile and
homeowners partially offset by the effect of renewal written
price increases.
Renewal written pricing increases were higher in 2017 in both
automobile and home, as the Company increased rates to
improve profitability.
Policy count retention decreased in 2017 in both
automobile and homeowners, driven in part by renewal written
pricing increases.
Loss and Loss Adjustment Expense Ratio
before Catastrophes and Prior Accident Year
Development
72.0
70.0
66.2
80
70
60
50
40
30
20
10
0
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Loss and loss adjustment expense ratio
before catastrophes and prior accident year
development decreased in 2018, primarily due to the effect
of earned pricing increases in both automobile and homeowners
and lower non-catastrophe weather-related homeowners loss
costs.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Loss and loss adjustment expense ratio
before catastrophes and prior accident year
development decreased in 2017, primarily as a result of
lower automobile liability and auto physical damage frequency
and lower non-catastrophe weather-related homeowners losses
and the effect of earned pricing increases.
Current Accident Year Catastrophes and
Unfavorable (Favorable) Prior Accident Year
Development
$600
$550
$500
$450
$400
$350
$300
$250
$200
$150
$100
$50
$0
-$50
-$100
$546
$453
$216
$151
$(37)
$(32)
CAY CATs
PYD
2016
2017
2018
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Current accident year catastrophe losses for
2018 were primarily from wildfires in California, wind and hail
storms in Colorado, hurricanes Florence and Michael in the
Southeast and various wind storms and winter storms across the
country. Catastrophe losses in 2018 are net of an estimated
68
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
reinsurance recoverable of $54 under the 2018 Property
Aggregate reinsurance treaty that was allocated to Personal
Lines. Catastrophe losses for 2017 were primarily due to
hurricanes Harvey and Irma and wildfires in California as well as
multiple wind and hail events across various U.S. geographic
regions, concentrated in Texas, Colorado, the Midwest and the
Southeast.
Prior accident year development was less favorable
in 2018 than in 2017 with favorable development in 2018
primarily in automobile liability.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Current accident year catastrophe losses for
2017 were primarily due to hurricanes Harvey and Irma and
wildfires in California as well as multiple wind and hail events
across various U.S. geographic regions, concentrated in Texas,
Colorado, the Midwest and the Southeast. Catastrophe losses for
2016 were primarily due to multiple wind and hail events across
various U.S. geographic regions, concentrated in the Midwest and
central plains.
Prior accident year development was favorable for
2017 compared to unfavorable prior accident year development
for 2016. Net reserves decreased in 2017 primarily due to
decreases in reserves for prior accident year catastrophes and
homeowners.
PROPERTY & CASUALTY OTHER OPERATIONS
Results of Operations
Written premiums
Change in unearned premium reserve
Earned premiums
Losses and loss adjustment expenses
Prior accident year development [1]
Total losses and loss adjustment expenses
Underwriting expenses
Underwriting loss
Net investment income [2]
Net realized capital gains (losses) [2]
Loss on reinsurance transaction
Other income (expenses)
Income (loss) before income taxes
Income tax expense (benefit) [3]
Underwriting Summary
$
2018
2017
2016
(4) $
(4)
—
65
65
12
(77)
90
(4)
—
(1)
8
(7)
— $
—
—
18
18
14
(32)
106
14
—
5
93
24
Net income (loss)
[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.
69 $
15 $
$
(1)
(1)
—
278
278
19
(297)
127
(70)
650
6
(884)
(355)
(529)
69
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Income (Loss)
Pre-tax Charge for Asbestos and
Environmental Reserve Increases
$69
$15
$200
$0
-$200
-$400
-$600
$(529)
-$800
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Net income decreased from 2017 to 2018, primarily due to
greater adverse reserve development in 2018 related to
unallocated loss adjustment expenses, the allowance for
uncollectible reinsurance and certain mass torts. Also
contributing to the decrease was lower net investment income
driven by the decline in invested assets associated with this run-
off business.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Net loss improved from a loss of $529 to net income of $69
primarily due to ceded premium of $423 after tax incurred in
2016 for an Adverse Reserve Development ("ADC") reinsurance
cover on asbestos and environmental reserves after 2016. (For
further discussion on the ADC, see MD&A - Critical Accounting
Estimates, Property and Casualty Other Operations). Prior
accident year asbestos and environmental losses in 2016 before
execution of the ADC also contributed to the year over year
improvement.
$300
$200
$100
$0
$268
$197
$71
2016
$0
2017
$0
2018
Environmental
Asbestos
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Asbestos Reserves reflected no net incurred losses and
allocated loss adjustment expenses in 2018 as a $167 increase in
estimated reserves before NICO reinsurance was offset by $167
of losses recoverable under the NICO treaty. The increase in
reserves before NICO reinsurance was primarily due to a higher
than previously expected number of mesothelioma claim filings,
an increase in the average settlement value of mesothelioma
claims, an increase in defense costs, and the Company assuming a
greater share of liability due to unfavorable interpretations of
coverage. An increase in reserves from umbrella and excess
policies in the 1981-1985 policy years contributed to the adverse
development.
Environmental Reserves reflected no net incurred
losses and allocated loss adjustment expenses in 2018 as a $71
increase in estimated reserves before NICO reinsurance was
offset by $71 of loss recoverable under the NICO treaty. The
increase in reserves before NICO reinsurance was primarily due
to increased clean-up costs and liability shares associated with
Superfund sites and sediment in waterways, increased defense
costs and adverse legal rulings, most notably from jurisdictions in
the Pacific Northwest.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Asbestos Reserves reflected no net incurred losses and
allocated loss adjustment expenses in 2017 as a $183 increase in
estimated reserves before NICO reinsurance was offset by $183
of losses recoverable under the NICO treaty. The increase in
reserves before NICO reinsurance was primarily due to
mesothelioma claim filings not declining as expected, unfavorable
developments in coverage law in some jurisdictions and
continued filings in specific, adverse jurisdictions. An increased
share of adverse development from the fourth quarter review is
from umbrella and excess policies in the 1981-1985 policy years.
Environmental Reserves reflected no net incurred
losses and allocated loss adjustment expenses in 2017 as a $102
increase in estimated reserves before NICO reinsurance was
offset by $102 of loss recoverable under the NICO treaty. The
70
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
increase in reserves before NICO reinsurance was primarily due
to increased clean-up costs and liability shares associated with
Superfund sites and sediment in waterways, as well as adverse
legal rulings, most notably from jurisdictions in the Pacific
Northwest.
GROUP BENEFITS
Operating Summary
Results of Operations
Premiums and other considerations
Net investment income [2]
Net realized capital gains (losses) [2]
Total revenues
Benefits, losses and loss adjustment expenses
Amortization of DAC
Insurance operating costs and other expenses
Amortization of other intangible assets
Total benefits, losses and expenses
Income before income taxes
Income tax expense [3]
Net income
2018
2017 [1]
2016
$
5,598 $
3,677 $
474
(47)
6,025
4,214
45
1,282
60
5,601
424
84
381
34
4,092
2,803
33
915
9
3,760
332
38
$
340 $
294 $
3,223
366
45
3,634
2,514
31
776
—
3,321
313
83
230
[1]The Results of Operations related to 2017 include two months of results from Aetna's U.S. group life and disability business due to the acquisition that occurred on November 1,
2017. For discussion of the acquisition, see Note 2 - Business Acquisitions of Notes to the Consolidated Financial Statements.
[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 the Consolidated Financial Statements.
Premiums and Other Considerations
Fully insured — ongoing premiums
Buyout premiums
Fee income
Total premiums and other considerations
Fully insured ongoing sales, excluding buyouts
Group disability loss ratio
Group life loss ratio
Total loss ratio
Expense ratio [1]
Ratios, Excluding Buyouts
2018
2017
2016
5,418 $
3,571 $
3,142
5
175
5,598 $
704 $
15
91
3,677 $
449 $
6
75
3,223
450
$
$
$
2018
2017
2016
73.1%
78.4%
75.3%
24.0%
76.5%
76.7%
76.1%
25.7%
81.4%
75.7%
78.0%
25.1%
[1] Integration and transaction costs related to the acquisition of Aetna's U.S. group life and disability business are not included in the expense ratio.
Margin
Net income margin
Less: Net realized capital gains (losses) excluded from core earnings, after tax
Less: Integration and transaction costs associated with acquired business, after tax
Less: Income tax benefit
Core earnings margin
2018
2017
2016
5.6%
(0.6%)
(0.6%)
(0.2%)
7.0%
7.2%
0.4%
(0.3%)
1.3%
5.8%
6.3%
0.6%
—%
—%
5.7%
71
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2019 Outlook
The Company expects Group Benefits fully insured ongoing
premiums to be relatively flat in 2019, driven by an expected
decrease in sales, partly due to the introduction of the New York
Paid Family Leave product in 2018, offset by strong persistency.
In 2019, the segment's net income margin is expected to be
between 5.5% and 6.5%, compared to a net income margin of
5.6% in 2018. The expected increase largely reflects net realized
capital losses and higher integration costs associated with the
acquired business in 2018. Management expects that the 2019
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 6.0% to 7.0%, down
from prior year as strong investment returns from limited
partnerships in 2018 are not assumed to repeat in 2019. The total
loss ratio and expense ratio are expected to be consistent with
2018.
Net Income
$340
$294
$350
$300
$250
$230
$200
$150
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Net income increased in 2018 compared to 2017, primarily
due to higher premiums and other considerations and higher net
investment income, including from the acquisition of Aetna's U.S.
group life and disability business, a lower loss ratio, and the
benefit of a lower corporate income tax rate, partially offset by
higher insurance operating costs and other expenses, including
integration costs, and amortization of intangible assets in
connection with the acquisition, and a change to net realized
capital losses. The benefit of the lower corporate income tax rate
was largely offset by a $52 tax benefit in 2017 that was primarily
due to reducing net deferred tax liabilities given the reduction in
the corporate income tax rate.
Insurance operating costs and other
expenses increased 40% primarily due to the acquisition of
Aetna's U.S. group life and disability business, including
integration costs and amortization of intangible assets, partially
offset by state guaranty fund assessments of $20 before tax
related to the liquidation of a life and health insurance company
in 2017. Integration costs were $47 in 2018 compared to $17 in
2017.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Net income increased in 2017 compared to 2016, primarily
due to $52 of income tax benefits arising primarily from the
reduction of net deferred tax liabilities due to the enactment of
lower Federal income tax rates. In addition, net income increased
as a result of growth in premiums and other considerations and a
lower group disability loss ratio, partially offset by an increase in
insurance operating costs and other expenses due, in part, to
higher variable incentive compensation as well as integration and
transaction costs related to the acquisition of Aetna's U.S. group
life and disability business. Insurance operating costs and other
expenses in 2017 also included state guaranty fund assessments
of $20 before tax related to the liquidation of a life and health
insurance company. The acquisition of Aetna's U.S. group life and
disability business, which closed on November 1, 2017, did not
have a material impact on results in 2017.
Insurance operating costs and other
expenses increased 18%, primarily due to the inclusion of two
months of expenses for the acquired Aetna's U.S. group life and
disability business, state guaranty fund assessments of $20
before tax related to the liquidation of a life and health insurance
company and an increase in variable incentive compensation.
Fully Insured Ongoing Premiums
$6,000
$5,000
$4,000
$3,000
$2,000
$1,000
$0
$3,142
$1,434
$1,503
$205
2016
$3,571
$1,631
$1,726
$214
2017
$5,418
$2,567
$2,610
$241
2018
Other
Group life
Group disability
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Fully insured ongoing premiums increased 52% in
2018 driven primarily by the acquisition of Aetna's U.S. group life
and disability business, sales in excess of cancellations with strong
group life and disability persistency, and premium from the New
York Paid Family Leave product.
Fully insured ongoing sales, excluding
buyouts increased 57% primarily due to new business
generated by our larger combined sales force following the
acquisition of Aetna's U.S. group life and disability business. The
72
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
insurance company, partially offset by higher intangible asset
amortization incurred in 2018.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Total loss ratio decreased 1.9 points, primarily due to a
lower group disability loss ratio. The group disability loss ratio
decreased 4.9 points, driven by continued improvements in
incidence trends, higher recoveries and modest pricing increases.
The group life loss ratio increased 1.0 points, primarily driven by
favorable changes in reserve estimates of 1.3 points in 2016
partially offset by favorable mortality in the current year.
Expense ratio increased 0.6 points primarily due to state
guaranty fund assessments related to the liquidation of a life and
health insurance company, an increase in variable incentive
compensation and amortization of intangible assets recorded in
connection with the acquisition of Aetna's U.S. group life and
disability business. Integration and transaction costs of $17 in
2017 related to the acquisition are not included in the expense
ratio.
Company also saw an increase in the sale of voluntary products
and sales of fully insured disability in 2018 due, in part, to the
addition of the New York Paid Family Leave product.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Fully insured ongoing premiums increased in 2017,
in part, because it included two months of premiums for the
acquired Aetna's U.S. group life and disability business. Excluding
the impact of the acquisition, fully insured ongoing premiums
increased 3% due to sales, strong persistency and modest group
disability pricing increases.
Fully insured ongoing sales, excluding
buyouts were essentially flat to prior year reflecting higher
group disability sales offset by lower group life and other sales.
Ratios
125
100
75
50
25
0
78.0
25.1
2016
76.1
25.7
2017
75.3
24.0
2018
Expense ratio
Loss ratio
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Total loss ratio decreased 0.8 points from 2017 to 2018 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 3.4 points driven by continued favorable
incidence trends, including favorable prior incurral year
development of approximately $230 with most of that
development from the 2017 incurral year as incidence trends
become known after the elimination period is satisfied. In
addition, the group disability loss ratio benefited from the lower
discount accretion associated with the disability business
acquired from Aetna.
The group life loss ratio increased 1.7 points primarily driven by
higher expected loss ratios associated with the group life business
acquired from Aetna. Group life business (including group life
premium waiver) included favorable prior incurral year
development of approximately $90 in 2018, mostly from the
2017 incurral year.
Expense ratio decreased 1.7 points due to a greater mix of
lower commission national accounts business due to the
acquisition of Aetna's group life and disability business, higher
revenues to cover fixed costs and the effect of state guaranty
assessments in 2017 related to the liquidation of a life and health
73
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
HARTFORD FUNDS
Operating Summary
$
Results of Operations
Fee income and other revenue
Net investment income
Net realized capital losses
Total revenues
Amortization of DAC
Operating costs and other expenses [1]
Total benefits, losses and expenses
Income before income taxes
Income tax expense [2]
Net income
2018
2017
2016
992 $
3
—
995
21
805
826
169
63
106 $
107,593 $
1,032 $
5
(4)
1,033
16
831
847
186
38
148 $
116,876 $
12.6
(0.4)
0.1
12.9
$
$
885
1
—
886
24
741
765
121
43
78
92,042
8.5
—
—
8.5
Daily average total Hartford Funds segment AUM
Return on Assets ("ROA") [3]
Less: Effect of net realized capital losses, excluded from core earnings, before tax
Less: Effect of income tax expense
Return on Assets ("ROA"), core earnings [3]
[1]Includes distribution costs of $188 and $184 for the twelve months ended December 31, 2017 and 2016, respectively, that were previously netted against fee income and are
9.9
—
(0.3)
10.2
now presented gross in insurance operating costs and other expenses.
[2]2017 includes $4 of income tax expense primarily from reducing net deferred tax assets due to the reduction in the corporate Federal income tax rate from 35% to 21%. For
further discussion, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements.
[3]Represents annualized earnings divided by a daily average of assets under management, as measured in basis points.
Hartford Funds Segment AUM
Mutual Fund and ETP AUM - beginning of period
Sales - mutual fund
Redemptions - mutual fund
Net flows - ETP
Net Flows - mutual fund and ETP
Change in market value and other
Mutual Fund and ETP AUM - end of period
Talcott Resolution life and annuity separate account AUM [2]
Hartford Funds AUM
2018
2017 [1]
2016 [1]
$
99,090 $
81,507 $
22,198
23,654
74,413
19,135
(23,888)
(20,409)
(20,055)
1,404
(286)
(7,247)
91,557
13,283
157
3,402
14,181
99,090
16,260
$
104,840 $
115,350 $
8
(912)
8,006
81,507
16,010
97,517
[1]ETP AUM has been combined with mutual fund AUM. Previously ETPs were shown separately.
[2]Represents AUM of the life and annuity business sold in May, 2018 that is still managed by the Company's Hartford Funds segment.
Mutual Fund AUM by Asset Class
Equity
Fixed Income
Multi-Strategy Investments [1]
Exchange-traded products
Mutual Fund and ETP AUM
[1]Includes balanced, allocation, and alternative investment products.
2018
2017
2016
$
56,986 $
63,740 $
14,467
18,233
1,871
14,401
20,469
480
50,826
13,301
17,171
209
$
91,557 $
99,090 $
81,507
74
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2019 Outlook
Hartford Funds AUM
$97,517
$115,350
$104,840
$125,000
$100,000
$75,000
$50,000
$25,000
$0
12/31/16
12/31/17
12/31/18
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Hartford Funds AUM decreased from December 31,
2017 to December 31, 2018 largely due to a decline in markets in
the fourth quarter of 2018 and the continued expected decline of
the Talcott Resolution AUM still managed by the Company.
Despite the decline in AUM in the fourth quarter of 2018, average
daily assets under management for the year were up 9% due to
market appreciation and net positive flows during the first 9
months of 2018.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Hartford Funds AUM increased in 2017 primarily due to
positive net flows and market appreciation, partially offset by the
continued expected decline of the Talcott Resolution AUM still
managed by the Company.
Due in large part to the effect of the decline in markets on assets
under management since October 2018, the Company expects
net income for Hartford Funds to be relatively flat from 2018 to
2019, provided the Company continues to deliver strong fund
performance and generates positive net flows. The Company
expects to increase net sales in 2019 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 continued decline of the Talcott Resolution
AUM.
Net Income
$148
$106
$78
$150
$125
$100
$75
$50
$25
$0
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Net income increased in 2018 due to higher investment
management fees driven by higher average daily assets under
management, partially offset by higher variable costs. Also
contributing to the increase was the effect of a lower corporate
Federal income tax rate.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Net income increased in 2017 due to higher investment
management fees resulting from higher daily average AUM levels
driven in part by the addition of Schroders' funds in late 2016, as
well as a reduction in estimated state income tax expense,
partially offset by higher variable costs including sub-advisory
and distribution and service expenses.
75
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
CORPORATE
Operating Summary
Fee income
Other revenue
Net investment income
Net realized capital losses
Total revenues (losses)
Benefits, losses and loss adjustment expenses [1]
Insurance operating costs and other expenses
Pension settlement
Loss on extinguishment of debt [2]
Interest expense [2]
Total benefits, losses and expenses
Loss before income taxes
Income tax expense (benefit) [3]
Loss from continuing operations, net of tax
Income (loss) from discontinued operations,net of tax
Net income (loss)
Preferred stock dividends
Net income (loss) available to common stockholders
2018
2017
2016
$
32 $
4 $
21
59
(7)
105
11
83
—
6
298
398
(293)
(95)
(198)
322
—
23
(1)
26
31
59
750
—
316
1,156
(1,130)
457
(1,587)
(2,869)
$
$
124 $
6
118 $
(4,456) $
—
(4,456) $
3
—
31
(100)
(66)
—
87
—
—
327
414
(480)
(329)
(151)
283
132
—
132
[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]2017 includes $867 of income tax expense primarily from reducing net deferred tax assets due to the reduction in the corporate Federal income tax rate from 35% to 21%. For
discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements.
Net Income (Loss)
$132
$124
$(4,456)
2016
2017
2018
$1,500
$0
-$1,500
-$3,000
-$4,500
-$6,000
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Net income compared to a net loss in 2017, primarily due to
a number of charges in 2017, including a $3.3 billion after tax loss
on the life and annuity business sold in May 2018, $867 of income
tax expense primarily from reducing net deferred tax assets due
to the reduction of the corporate Federal income tax rate from
35% to 21%, and the effect of a pension settlement charge of
76
$488, after tax. The settlement charge in 2017 related to the
purchase of a group annuity contract to transfer $1.6 billion of
certain U.S. qualified pension plan liabilities to a third party.
Apart from the effect of these charges in 2017, an increase in fee
income from managing Talcott Resolution invested assets post-
sale and lower interest expense, as well as higher net investment
income and lower benefits and losses incurred related to run-off
structured settlement and terminal funding agreement liabilities
was partially offset by higher investment management expenses
and a lower tax benefit due to the reduction in the corporate
Federal income tax rate. Other revenue in 2018 from providing
transition services to Talcott Resolution was offset by the cost of
providing those services.
Insurance operating costs and other
expenses increased in 2018 largely due to costs incurred to
manage the invested assets of Talcott Resolution post-sale,
partially offset by a reduction in centralized services costs
previously allocated to the life and annuity business sold in May
2018.
Income (loss) from discontinued operations
increased from loss of $2,869 in 2017 to income of $322 in 2018
with the net loss in 2017 due to a loss on sale of the Company’s
life and annuity business of $3.3 billion in 2017. A $202 reduction
in loss on sale in 2018 was largely offset by a decline in operating
income from the life and annuity business sold in May 2018. The
reduction in loss on sale was largely attributable to an increase in
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Interest Expense
$327
$316
$298
$400
$300
$200
$100
$0
2016
2017
2018
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Interest expense decreased primarily due to the
redemption of junior subordinated debentures. On June 15,
2018, The Hartford redeemed $500 aggregate principal amount
of its 8.125% Fixed-to-Floating Rate Junior Subordinated
Debentures due 2068 and recognized a $6 loss on
extinguishment of debt for unamortized deferred debt issuance
costs. On March 15, 2018, the Company issued $500 of 4.4%
senior notes due March 15, 2048 for net proceeds of
approximately $490. The Company used a portion of the net
proceeds to repay the Company's $320 of 6.3% senior notes at
maturity. See Note 13 -Debt of Notes to the Consolidated
Financial Statements.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Interest expense decreased primarily due to a decrease in
outstanding debt due to debt maturities and the paydown of
senior notes.
ERCC Members
CEO (Chair)
President
Chief Financial Officer
Chief Investment Officer
Chief Risk Officer
General Counsel
Others as deemed necessary by the Committee Chair
the estimated retained net operating loss carryover tax benefits
from the life and annuity business sold in May 2018 as well as the
reclassification to retained earnings of $193 of tax effects
stranded in AOCI due to the accounting for Tax Reform. For more
information on the reclassification of stranded tax effects, see
Note 1-Basis of Presentation and Significant Accounting Policies
within Notes to the Consolidated Financial Statements.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Net loss increased primarily due to a $3.3 billion estimated
loss on sale of the life and annuity business, $867 of income tax
expense arising primarily from the reduction of net deferred tax
assets due to the enactment of lower Federal income tax rates
and a $488 after tax pension settlement charge.
Insurance operating costs and other
expenses decreased in 2017 largely due lower centralized
services costs and lower estimated state income tax expense.
Upon reporting the life and annuity business as discontinued
operations, centralized services costs were reallocated to
Corporate for all periods presented and those reallocated costs
declined from 2016 to 2017 principally due to a lower allocation
of IT costs.
Income (loss) from discontinued operations
decreased from income of $283 in 2016 to a net loss of $2.9
billion in 2017 with the net loss in 2017 due to a loss on sale of
the Company’s life and annuity business of $3.3 billion, partially
offset by operating income from discontinued operations of $388.
Operating income from discontinued operations increased from
$283 in 2016 primarily due to lower net realized capital losses in
2017. Apart from the reduction in net realized capital losses,
earnings were relatively flat as an increase in the assumption
study benefit and lower interest credited were largely offset by
lower net investment income and lower fee income due to the
continued run off of the variable annuity block.
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, an Enterprise
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.
77
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
ERCC
Asset Liability
Committee
Underwriting
Risk Committee
Emerging Risk
Steering
Committee
Operational
Risk
Committee
Catastrophe
Risk Steering
Committee
Economic
Capital
Executive
Committee
Model
Oversight
Committee
The Company's enterprise risk management ("ERM") function
supports the ERCC and functional committees, and is tasked with,
among other things:
• Morbidity- Risk of loss to an insured from illness incurred
during the course of employment or illness from other
covered perils.
•
•
•
•
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.
Insurance Risk
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 divisions
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
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.
• 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.
Catastrophe risk primarily arises in the property, automobile,
group life, group disability, and workers' compensation product
lines.
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.
Management The 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 The Hartford
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.
78
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Definition
Details and Company Limits
Risk
Natural
catastrophe
Exposure arising from natural phenomena
(e.g., earthquakes, wildfires, etc.) that
create a concentration or aggregation of
loss across the Company's insurance or
asset portfolios and the inherent volatility
of weather or climate pattern changes.
The Company generally limits its estimated pre-tax loss as a result of natural
catastrophes for property & casualty exposures from a single 250-year event
to less than 30% of statutory surplus of the property and casualty insurance
subsidiaries prior to reinsurance and to less than 15% of statutory surplus of
the property and casualty insurance subsidiaries after reinsurance. From time
to time the estimated loss to natural catastrophes from a single 250-year
event prior to reinsurance may fluctuate above or below these limits due to
changes in modeled loss estimates, exposures or statutory surplus.
- The estimated 250 year pre-tax probable maximum loss from earthquake
events is estimated to be $917 before reinsurance and $470 net of
reinsurance. [1]
- The estimated 250 year pre-tax probable maximum losses from hurricane
events are estimated to be $1.6 billion before reinsurance and $877 net of
reinsurance. [1]
Enterprise limits for terrorism apply to aggregations of risk across property-
casualty, group benefits and specific asset portfolios and are defined based on
a deterministic, single-site conventional terrorism attack scenario. The
Company manages its potential estimated loss from a conventional terrorism
loss scenario, up to $2.0 billion net of reinsurance and $2.5 billion gross of
reinsurance, before coverage under the Terrorism Risk Insurance Program
established under “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.
The Company generally limits its estimated pre-tax loss from a single 250 year
pandemic event to less than 18% of statutory surplus of the property and
casualty and group benefits insurance subsidiaries. In evaluating these
scenarios, the Company assesses the impact on group life policies, short-term
and long-term disability, property & casualty claims, and losses in the
investment portfolio associated with market declines in the event of a
widespread pandemic. 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.
Terrorism
The risk of losses from terrorist attacks,
including losses caused by single-site and
multi-site conventional attacks, as well as
the potential for attacks using nuclear,
biological, chemical or radiological
weapons (“NBCR”).
Pandemic
The exposure to loss arising from
widespread influenza or other pathogens
or bacterial infections that create an
aggregation of loss across the Company's
insurance or asset portfolios.
[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.
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. The Hartford also participates in
governmentally administered reinsurance facilities such as the
Florida 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 has catastrophe
reinsurance programs, including reinsurance treaties that cover
property and workers’ compensation losses aggregating from
single catastrophe events.
79
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Primary Catastrophe Treaty Reinsurance Coverages as of January 1, 2019
Per Occurrence Property Catastrophe Treaty for 1/1/2019 to 12/31/2019 [1]
Losses of $0 to $350 from one event
Losses of $350 to $500 from one event
Losses of $500 to $1.1 billion from one event [2]
Aggregate Property Catastrophe Treaty for 1/1/2019 to 12/31/2019 [3]
$0 to $775 of aggregate losses
$775 to $1.0 billion of aggregate losses
Workers' Compensation Catastrophe Treaty for 1/1/2019 to 12/31/2019
Portion of losses
reinsured
Portion of losses retained
by The Hartford
None
100% retained
75% of $150 in excess of
$350
90% of $600 in excess of
$500
25% co-participation
10% co-participation
None
100%
100% retained
None
Losses of $0 to $100 from one event
Losses of $100 to $450 from one event [4]
None
100% retained
80% of $350 in excess of
$100
20% co-participation
[1]In addition to the Property Occurrence Treaty, for Florida events, The Hartford has purchased the mandatory FHCF reinsurance for the period from 6/1/2018 to 5/30/2019.
Retention and coverage varies by writing company. The writing company with the largest coverage under FHCF is Hartford Insurance Company of the Midwest, with coverage for
$84 of per event losses in excess of a $29 retention.
[2]Portions of this layer of coverage extend beyond the traditional one year term.
[3]The aggregate treaty is not limited to a single event; rather, it is designed to provide reinsurance protection for the aggregate of all events designated as catastrophes by PCS
(Property Claims Services/Verisk) with a $350 limit on any one event.
[4]In addition to the limits shown, the worker's 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 limits 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 2020.
TRIPRA provides a backstop for insurance-related losses
resulting from any “act of terrorism”, which is certified by the
Secretary of the Treasury, in consultation with the Secretary of
Homeland Security and the Attorney General, for losses that
exceed a threshold of industry losses of $180 in 2019, with the
threshold increasing to $200 by 2020. Under the program, in any
one calendar year, the federal government would 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 81% in 2019, decreasing to 80% in
2020. The Company's estimated deductible under the program is
$1.3 billion for 2019. 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 Reserve Development- Under an ADC
reinsurance agreement, NICO assumes adverse net loss and
allocated loss adjustment expense reserve development up to
$1.5 billion above the Company’s net A&E reserves recorded as of
December 31, 2016. Under retroactive reinsurance accounting,
net adverse A&E reserve development after December 31, 2016
results in an offsetting reinsurance recoverable up to the $1.5
billion limit. Cumulative ceded losses up to the $650 reinsurance
premium paid for the ADC are recognized as a dollar-for-dollar
offset to direct losses incurred. As of December 31, 2018, $523 of
incurred asbestos and environmental losses had been ceded to
NICO, leaving approximately $977 of coverage available for
future adverse net reserve development, if any. Cumulative ceded
losses exceeding the $650 reinsurance premium paid would
result in a deferred gain. The deferred gain would be recognized
over the claim 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 after
December 31, 2016 in excess of $650 may result in significant
charges against earnings. Furthermore, there is a risk that
cumulative adverse development of A&E claims could ultimately
exceed the $1.5 billion treaty limit in which case all adverse
development in excess of the treaty limit would be absorbed as a
charge to earnings by the Company. In these scenarios, the effect
of these charges could be material to the Company’s consolidated
operating results and liquidity.
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.
80
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Property & Casualty Reinsurance
Recoverables
As of December 31,
2018
2017
Paid loss and loss adjustment expenses
$
127 $
84
Unpaid loss and loss adjustment expenses
Gross reinsurance recoverables
Less: Allowance for uncollectible
reinsurance
3,773
3,900
3,496
3,580
(126)
(104)
Net reinsurance recoverables
$ 3,774 $ 3,476
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
Gross reinsurance
recoverables
Less: mandatory (assigned
risk) pools and structured
settlements
Gross reinsurance
recoverables excluding
mandatory pools and
structured settlements
As of December 31,
2018
2017
$ 3,900
$ 3,580
(1,220)
(1,199)
$ 2,680
$ 2,381
% of
Total
% of
Total
Rated A- (excellent) or
better by A.M. Best [1]
Other rated by A.M.
Best
$ 2,194
81.8% $ 1,836
77.1%
1
0.1%
1
0.1%
Total rated companies
2,195
81.9% 1,837
77.2%
Voluntary pools
Captives
Other not rated
companies
Total
35
302
1.3%
11.3%
37
323
1.5%
13.6%
148
5.5%
184
7.7%
$ 2,680 100.0% $ 2,381 100.0%
[1]Based on A.M. Best ratings as of December 31, 2018 and 2017, respectively.
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.
81
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, 81.8% of the gross reinsurance
recoverables due from reinsurers rated by A.M. Best were rated
A- (excellent) or better as of December 31, 2018.
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,
2018
2017
Paid loss and loss adjustment expenses
$
12 $
Unpaid loss and loss adjustment expenses
Gross reinsurance recoverables
Less: Allowance for uncollectible
reinsurance [1]
239
251
—
Net reinsurance recoverables
$
251 $
[1]No allowance for uncollectible reinsurance was required as of December 31,
2018 and 2017.
27
209
236
—
236
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 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.
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.
from cybersecurity incidents and internal and external testing of
our cyber defenses.
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
The Hartford has implemented an information protection
program with established governance routines that promote an
adaptive approach for assessing and managing risks. The Hartford
has invested to build 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 the National 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.
The Hartford, 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 employs 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
82
Financial Risk
Financial risks include direct and indirect risks to the Company's
financial objectives coming from events that impact market
conditions or prices. 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 a U.S. GAAP, statutory, and economic
basis. Exposures are actively monitored and mitigated where
appropriate. The Company uses various risk management
strategies, including reinsurance and over-the-counter ("OTC")
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, as described below.
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 of liquid assets. 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 other capital securities and borrowings from its credit
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 the Federal 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,
but it is also present in the Company’s reinsurance and insurance
portfolios.
Impact A decline in creditworthiness is typically associated
with an increase in an investment’s credit spread, potentially
resulting in an increase in other-than-temporary impairment, and
an increased probability of a realized loss upon sale. Premiums
receivable and reinsurance recoverables 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 on an aggregate portfolio basis and to limit
potential losses in accordance with an established credit risk
management policy. The Company primarily manages its credit
risk by holding a diversified mix of investment grade issuers and
counterparties across its investment, reinsurance, and insurance
portfolios. Potential losses are also limited within portfolios by
diversifying across geographic regions, asset types, and sectors.
The Company manages credit risk on an on-going basis through
the use of various processes and analyses. Both the investment
and reinsurance areas have formulated procedures for
counterparty approvals and authorizations, which establish
minimum levels of creditworthiness and financial stability. Credits
considered for investment are subjected to underwriting reviews.
Within the investment portfolio, 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.
83
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, 2018, 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 the U.S. government and certain U.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 $1 and $2, in 2018 and 2017,
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
$4,357 and $4,061, as of December 31, 2018 and 2017,
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 $3,995 and $3,910, as
of December 31, 2018 and 2017, 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
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 collateralization before entering into
any new trades.
permissible investments under the Company’s investment
policies. These swaps reference investment grade single
corporate issuers and indexes. As of December 31, 2018 and
2017, the notional amount related to credit derivatives that
assume credit risk was $1.1 billion and $823, respectively, while
the fair value was $3 for both periods. 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 rates arising from its fixed maturity
securities, long-term debt obligations, short and long-term
disability claim reserves, and discount rate assumptions
associated with the Company’s pension and other post
retirement benefit obligations.
Impact Changes in interest rates from current levels can have
both favorable and unfavorable effects for the Company.
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 has developed credit exposure thresholds which
are based upon counterparty ratings. Credit exposures are
generally quantified based on the prior business day's net fair
value, including income accruals, resulting in amounts owed to
the Company by its counterparties or potential payment
obligations from the Company to its counterparties. The notional
amounts of derivative contracts represent the basis upon which
pay or receive amounts are calculated and are not reflective of
credit risk. For purposes of daily derivative collateral
maintenance, credit exposures are generally quantified based on
the prior business day’s market value and collateral is pledged to
and held by, or on behalf of, the Company to the extent the
current value of the derivatives is greater than zero, subject to
minimum transfer thresholds. In accordance with industry
standards and the contractual agreements, collateral is typically
settled on the same business day.
For the year ended December 31, 2018, the Company incurred no
losses on derivative instruments due to counterparty default.
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, 2018 and 2017, the
notional amount related to credit derivatives that purchase credit
protection was $6 and $61, respectively, while the fair value was
$0 and $1, 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
84
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Favorable Effects
Unfavorable Effects
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 $43.7 billion and $42.5 billion at December 31, 2018 and
2017, respectively. The weighted average duration of the
portfolio, including derivative instruments, was approximately
4.7 years and 5.2 years as of December 31, 2018 and 2017,
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 may rely upon actuarial pricing
assumptions (including mortality and morbidity) and have an
element of cash flow uncertainty. As of December 31, 2018
and 2017, the Company had $8,445 and $8,512, 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.
Change
in
Interest
Rates
ñ
ò
Additional net
investment income due
to reinvesting at higher
yields
Increase in the fair value
of the fixed income
investment portfolio
Decrease in the fair value
of the fixed income
investment portfolio
Higher interest expense
on variable rate debt
obligations
Lower net investment
income due to reinvesting
at lower investment
yields
Acceleration in paydowns
and prepayments or calls
of certain mortgage-
backed and municipal
securities
Management The Company primarily 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 may also utilize 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, 2018 and 2017, notional amounts pertaining to
derivatives utilized to manage interest rate risk, including
offsetting positions, totaled $10.5 billion and $10.2 billion,
respectively primarily related to investments. The fair value of
these derivatives was $(61) and $(83) as of December 31, 2018
and 2017, respectively.
85
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 2018 and 2017, the Company had $791 and
$926, 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 above 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,
2018
2017
Basis point shift
-100
+100
-100
+100
Increase (decrease) in
economic value, before tax
$
47 $
(68) $ 51 $ (75)
The carrying value of assets supporting the liabilities related to
the businesses included in the table above was $10.0 billion and
$10.1 billion, as of December 31, 2018 and 2017, 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, 2018 and 2017. 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,
2018
2017
Basis point shift
-100
+100
-100
+100
Increase (decrease) in
fair value, before tax
$ 1,761 $ (1,511) $ 1,819 $ (1,710)
The carrying value of fixed maturities, commercial mortgage
loans and short-term investments related to the businesses
included in the table above was $33.7 billion and $32.4 billion, as
of December 31, 2018 and 2017, respectively.
Long-term Debt
A 100 basis point parallel decrease in the yield curve would result
in an increase in the fair value of the liability of $331 and $340 as
of December 31, 2018 and 2017, respectively. A 100 basis point
parallel increase in the yield curve would result in a decrease in
the fair value of the liability of $(279) and $(287) as of December
31, 2018 and 2017, 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.
86
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
The asset allocation mix is reviewed on a periodic basis. In
order to minimize the risk, the pension plans maintain a
listing of permissible and prohibited investments and impose
concentration limits and investment quality requirements on
permissible investment options. 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 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 the Standard & 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 may not fully
capture the impact of portfolio re-allocations or significant
product sales.
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 net pension
and other post-retirement plan obligations liability of $178 and
$226 as of December 31, 2018 and 2017, respectively. A 100
basis point parallel increase in the yield curve would have the
inverse effect and result in a decrease in the net pension and
other post-retirement plan obligations liability of $(134) and
$(170) as of December 31, 2018 and 2017, 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.
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.
Impact The investment portfolio is exposed to losses from
market declines affecting equity securities, 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 the U.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.
Assets and Liabilities Subject to Equity Risk
Investment portfolio is exposed to losses from market
declines affecting equity securities 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.
87
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Equity Sensitivity [1]
As of December 31, 2018
As of December 31, 2017
Shock to S&P 500
Shock to S&P 500
(Before tax)
Investment Portfolio
Assets supporting pension and other post-retirement
benefit plans
Fair Value
+20%
-20%
Fair Value
+20%
-20%
$
$
3,045 $
419 $
(418) $
2,676 $
360 $
(360)
1,226 $
209 $
(209) $
1,459 $
251 $
(251)
[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 the U.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 $(37) as of December 31, 2018. 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.
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
investments, which primarily consist of fixed maturity and equity
investments and foreign denominated cash.
Impact Changes in relative values between currencies can
create variability in cash flows and realized or unrealized gains
and losses on changes in the fair value of assets and liabilities.
Based on the fair values of the Company’s non-U.S. dollar
denominated securities and derivative instruments as of
December 31, 2018 and 2017, management estimates that a
hypothetical 10% unfavorable change in exchange rates would
decrease the fair values by a before tax total of $9 and $10,
respectively. Actual results could differ materially due to the
nature of the estimates and assumptions used in the analysis.
Management The open 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
currency futures/forwards/swaps. In order to manage the
currency risk related to any non-U.S. dollar denominated liability
contracts, the Company holds non-U.S. dollar denominated
investments which match the underlying currency exposure of
the liabilities.
Assets and Liabilities Subject to Foreign
Currency Exchange Risk
Non-U.S. dollar denominated fixed
maturities, equities, and cash The fair values of the
non-U.S. dollar denominated fixed maturities, equities and
cash, excluding assets held for sale, at December 31, 2018
and 2017 were approximately $178 and $298, respectively.
Included in these amounts are $119 and $128 at
December 31, 2018 and 2017, respectively, related to non-
U.S. dollar denominated fixed maturities, equities and cash
that directly support liabilities denominated in the same
currencies. The currency risk of the remaining non-U.S. dollar
denominated fixed maturities and equities are hedged with
foreign currency swaps.
Investment in a P&C run-off entity in the
United Kingdom During 2015, the Company entered
into certain foreign currency forwards to hedge the currency
impacts on changes in equity of a P&C run-off entity in the
United Kingdom that was sold during 2017. At December 31,
2016, the derivatives used to hedge the currency impacts
had a total notional amount of $200, and a total fair value of
$(2), respectively. The Company terminated these hedges in
2017.
Financial Risk on Statutory Capital
Statutory surplus amounts and risk-based capital (“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 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, 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
88
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 2018
December 31, 2017
Amortized
Cost
Fair
Value
Percent of
Total Fair
Amortized
Cost
Fair
Value
Percent of
Total Fair
United States Government/Government agencies
$
4,446 $ 4,430
12.4% $
4,492 $ 4,536
AAA
AA
A
BBB
BB & below
Total fixed maturities, AFS
6,366
6,861
8,314
8,335
1,281
6,440
6,985
8,370
8,163
1,264
18.1%
19.6%
23.5%
22.9%
3.5%
5,864
7,467
8,510
7,632
1,647
6,072
7,810
8,919
7,931
1,696
12.3%
16.4%
21.1%
24.1%
21.5%
4.6%
$
35,603 $ 35,652
100.0% $
35,612 $ 36,964
100.0%
The fair value of fixed maturities, AFS decreased as compared to
December 31, 2017, primarily due to a decrease in valuations due
to widening of credit spreads and higher interest rates. 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.
89
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Securities by Type
December 31, 2018
December 31, 2017
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Percent
of Total
Fair Value
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Percent
of Total
Fair Value
Asset-backed securities
("ABS")
Consumer loans
$
1,159 $
5 $
(1) $ 1,163
3.3% $
925 $
7 $
(2) $
113
1,455
1,447
1,845
289
604
1,132
943
1,936
1,156
3,368
1,720
548
2,017
272
866
629
9,343
1,508
933
43
786
1,491
35,603
—
2
13
13
9
8
8
9
11
14
17
34
4
43
—
7
14
407
7
5
4
28
41
703
—
113
0.3%
194
(20)
1,437
4.0%
1,257
(33)
(29)
(2)
(21)
(31)
(29)
(71)
(43)
(99)
(54)
(18)
(69)
(11)
1,427
1,829
296
591
1,109
923
1,876
1,127
3,286
1,700
534
1,991
261
4.0%
5.1%
0.8%
1.7%
3.1%
2.6%
5.3%
3.1%
9.2%
4.8%
1.5%
5.6%
0.7%
1,199
1,726
379
523
1,050
857
1,643
1,056
2,722
1,618
555
2,097
249
(26)
847
2.4%
1,071
(17)
(30)
(29)
(6)
—
—
626
9,720
1,486
932
47
814
(15)
1,517
1.8%
27.3%
537
11,206
4.2%
2.6%
0.1%
2.3%
4.2%
1,530
227
58
1,170
1,763
2
3
16
32
10
28
44
33
46
43
77
87
18
110
4
43
30
724
10
3
4
46
46
930
196
2.5%
0.5%
1,260
3.4%
1,201
1,749
386
550
1,090
888
1,682
1,096
2,789
1,696
573
2,188
252
3.2%
4.7%
1.0%
1.5%
2.9%
2.4%
4.6%
3.0%
7.5%
4.6%
1.6%
5.9%
0.7%
—
—
(14)
(9)
(3)
(1)
(4)
(2)
(7)
(3)
(10)
(9)
—
(19)
(1)
(4)
1,110
3.0%
(5)
562
(7) 11,923
1.5%
32.3%
(4)
1,536
—
—
—
(10)
230
62
1,216
1,799
4.2%
0.6%
0.2%
3.3%
4.9%
(654) 35,652
100.0%
35,612
1,466
(114) 36,964
100.0%
115
792
907
19
102
121
—
(16)
134
878
13.3%
86.7%
(16)
1,012
100.0%
Other
Collateralized loan
obligations ("CLOs")
CMBS
Agency [1]
Bonds
Interest only
Corporate
Basic industry
Capital goods
Consumer cyclical
Consumer non-
cyclical
Energy
Financial services
Tech./comm.
Transportation
Utilities
Other
Foreign govt./govt.
agencies
Municipal bonds
Taxable
Tax-exempt
RMBS
Agency
Non-agency
Alt-A
Sub-prime
U.S. Treasuries
Fixed maturities, AFS
Equity securities
Financial services
Other
Equity securities, AFS
[2]
Total AFS securities
Fixed maturities, FVO
$ 35,603 $
703 $
(654) $ 35,652
$ 36,519 $
1,587 $
(130) $ 37,976
$
22
$
41
Equity securities, at fair
value [2]
[1]Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.
[2]Effective January 1, 2018, with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities, at fair value.
$ 1,214
The fair value of AFS securities decreased as compared with
December 31, 2017, primarily due to a decrease in valuations
due to widening of credit spreads and higher interest rates. Also,
tax-exempt municipal bonds were reallocated into corporate
bonds and structured securities during the period.
90
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
European Exposure
While the European economy is still growing, the International
Monetary Fund cut its 2019 growth forecasts for the region,
citing the prospect for a more turbulent external environment,
including escalating trade tensions and slowing global demand.
Political risk will likely remain elevated in Europe during 2019
due to uncertainty surrounding Great Britain's pending departure
from the European Union ("Brexit"), increasing pressure on
centrist governments in France and Germany 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.
As of December 31, 2018, the Company’s European investment
exposure had both an amortized cost and fair value of $2.5 billion,
or 5% of total invested assets; as of December 31, 2017,
amortized cost and fair value totaled $1.9 billion and $2 billion,
respectively. The investment exposure largely relates to
corporate entities which are domiciled in or generate a significant
portion of their revenue within the United Kingdom, Germany,
Sweden, Switzerland, and the Netherlands. As of both
December 31, 2018 and 2017, the weighted average credit
quality of European investments was A-. Entities domiciled in the
United Kingdom comprise the Company's largest European
exposure; as of December 31, 2018 and 2017, the U.K. exposure
totals less than 2% of total invested assets and largely relates to
the industrial and financial services sector and has an average
credit rating of BBB+. The majority of the European investments
are U.S. dollar-denominated, and those securities that are British
pound or euro-denominated are hedged to U.S. dollars. 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, 2018
AAA
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
983
973
444
436
368
370
Total CMBS
2,634
2,610
204
210
77
521
79
515
1
369
1
371
1,508
1,486
—
—
—
—
611
610
167
167
—
31
—
32
10
72
10
73
2,150
2,128
249
250
111
4
211
326
109
5
217
331
Bonds
Interest
Only
RMBS
Agency
Non-
Agency
Alt-A
Sub-Prime
Total RMBS
Total CMBS
& RMBS
50
5
55
—
33
9
50
4
54
—
33
9
179
221
186
228
—
2
2
—
11
20
293
324
—
2
2
—
13
23
306
342
1,845
1,829
289
296
3,581
3,552
1,508
1,486
933
43
786
932
47
814
3,270
3,279
$
4,784 $ 4,738 $
770 $ 765 $
695 $ 702 $
276 $ 282 $
326 $ 344 $
6,851 $ 6,831
91
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Exposure to CMBS and RMBS as of December 31, 2017
AAA
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]
$
1,199 $ 1,201 $
— $
— $
— $
— $
— $
— $
— $
— $
1,199 $ 1,201
929
940
423
424
314
323
264
269
Total CMBS
2,392
2,410
104
527
106
530
—
15
5
74
94
—
14
5
75
94
1
315
—
56
4
249
309
1
324
—
56
4
255
315
1,530
1,536
122
123
2
35
3
36
1,689
1,698
Bonds
Interest
Only
RMBS
Agency
Non-
Agency
Alt-A
Sub-Prime
Total RMBS
Total CMBS
& RMBS
43
6
49
—
21
13
44
6
50
—
22
13
17
4
21
—
13
34
18
4
22
—
15
37
159
193
165
200
653
700
685
737
1,726
1,749
379
386
3,304
3,336
1,530
1,536
227
58
1,170
2,985
230
62
1,216
3,044
$
4,081 $ 4,108 $
621 $ 624 $
624 $ 639 $
242 $ 250 $
721 $ 759 $
6,289 $ 6,380
[1]Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.
The Company also has exposure to commercial mortgage loans.
These loans are collateralized by real estate properties that are
diversified both geographically throughout the United States and
by property type. These loans are originated by the Company as
high quality whole loans and are participated out to third parties.
Loan participations are loans where the Company has purchased
or retained a portion of an outstanding loan or package of loans
and participates on a pro-rata basis in collecting interest and
principal pursuant to the terms of the participation agreement.
As of December 31, 2018, commercial mortgage loans had an
amortized cost and carrying value of $3.7 billion, with a valuation
allowance of $1. As of December 31, 2017, commercial mortgage
loans had an amortized cost and carrying value of $3.2 billion with
a valuation allowance of $1.
The Company funded $664 of commercial whole loans with a
weighted average loan-to-value (“LTV”) ratio of 59% and a
weighted average yield of 4.4% during the twelve months ended
December 31, 2018. 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, 2018 or
December 31, 2017.
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.
92
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Available For Sale Investments in Municipal Bonds
General Obligation
Pre-refunded [1]
Revenue
Transportation
Health Care
Education
Water & Sewer
Leasing [2]
Sales Tax
Power
Housing
Other
Total Revenue
Total Municipal
December 31, 2018
December 31, 2017
Amortized
Cost
Fair Value
Weighted
Average
Credit Quality
Amortized
Cost
Fair Value
Weighted
Average
Credit Quality
$
1,222 $
1,845
1,449
1,270
941
816
772
507
308
33
809
1,275
1,904
1,537
1,304
953
847
799
541
328
35
823
6,905
9,972 $
7,167
10,346
$
AA
AAA
$
1,976 $
1,960
A+
AA-
AA
AA
AA-
AA
A+
A+
AA-
AA-
AA
1,638
1,278
1,079
1,069
809
537
442
79
876
7,807
$
11,743 $
2,087
2,067
1,790
1,359
1,130
1,131
858
590
478
82
913
8,331
12,485
AA
AAA
A+
AA-
AA
AA
AA-
AA
AA-
AA-
AA-
AA-
AA
[1]Pre-Refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to 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, 2018 and December 31, 2017, the
largest issuer concentrations were the New York City Transitional
Finance Authority, the New York Dormitory Authority, and the
Commonwealth 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 22% of the fair value of the Company's
investment portfolio. The Company has evaluated its portfolio
allocation to municipal bonds with respect to the changes in
corporate income tax rates that began in 2018 and has reduced
exposure through both asset sales and principal repayments. The
Company will continue to actively assess the sector’s relative
value over time.
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.
Limited Partnerships and Other Alternative Investments - Net Investment Income
Hedge funds
Real estate funds
Private equity funds
Other alternative investments [1]
Total
Year Ended December 31,
2018
2017
2016
Amount
Yield
Amount
Yield
Amount
Yield
$
4
58
144
9.3% $
12.0%
22.5%
(1)
(0.2%)
$
205
13.2%
$
3
43
122
6
174
23.6% $
9.1%
20.7%
1.6%
(4)
32
105
(5)
12.0% $
128
(5.5%)
7.2%
17.6%
(1.3%)
8.6%
93
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Investments in Limited Partnerships and Other Alternative Investments
Hedge funds
Real estate funds
Private equity and other funds
Other alternative investments [1]
December 31, 2018
December 31, 2017
Amount
Percent
Amount
Percent
$
51
499
788
385
3.0% $
29.0%
45.7%
22.3%
22
486
693
387
1.4%
30.6%
43.6%
24.4%
Total
[1]Consists of an insurer-owned life insurance policy which is invested in hedge funds and other investments.
$
1,723
100.0% $
1,588
100.0%
Available-for-sale Securities — Unrealized
Loss Aging
The total gross unrealized losses were $654 as of December 31,
2018, and have increased $524 from December 31, 2017, due to
widening of credit spreads and higher interest rates. As of
December 31, 2018, $631 of the gross unrealized losses were
associated with securities depressed less than 20% of cost or
amortized cost. The remaining $23 of gross unrealized losses
were associated with securities depressed greater than 20%. The
securities depressed more than 20% are primarily related to one
corporate issuer with declining credit fundamentals and
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, 2018
December 31, 2017
Cost or
Amortized
Cost
Items
Fair
Value
Unrealized
Loss
Items
Cost or
Amortized
Cost
Fair
Value
Unrealized
Loss
468 $
3,191 $ 3,153 $
(38) 1,286 $
4,315 $ 4,289 $
359
347
817
969
2,530
2,243
5,921
5,272
2,487
2,186
5,688
4,989
(43)
(57)
(233)
(283)
342
157
89
652
1,694
1,673
601
188
594
183
2,040
1,969
2,960 $
19,157 $18,503 $
(654) 2,526 $
8,838 $ 8,708 $
(26)
(21)
(7)
(5)
(71)
(130)
Consecutive Months
Three months or less
Greater than three to six months
Greater than six to nine months
Greater than nine to eleven months
Twelve months or more
Total
Unrealized Loss Aging for AFS Securities Continuously Depressed Over 20%
Consecutive Months
Three months or less
Greater than three to six months
Greater than six to nine months
Greater than nine to eleven months
Twelve months or more
Total
December 31, 2018
December 31, 2017
Cost or
Amortized
Cost
Items
Fair
Value
Unrealized
Loss
Items
Cost or
Amortized
Cost
Fair
Value
Unrealized
Loss
13 $
59 $
43 $
(16)
30 $
14 $
10 $
—
3
2
36
—
3
2
13
—
2
1
8
—
(1)
(1)
(5)
12
—
—
47
10
—
—
13
7
—
—
7
54 $
77 $
54 $
(23)
89 $
37 $
24 $
(4)
(3)
—
—
(6)
(13)
94
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
operating and growth needs over the next twelve months.
SUMMARY OF CAPITAL
RESOURCES AND LIQUIDITY
Capital available at the holding company
as of December 31, 2018:
•
•
•
•
•
$3.4 billion in fixed maturities, short-term investments,
and cash at HFSG Holding Company.
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 as of December 31, 2018.
Borrowings available under a commercial paper
program to a maximum of $750. As of December 31,
2018, there was no commercial paper outstanding.
The Hartford has an intercompany liquidity agreement
that allows for short-term advances of funds among the
HFSG Holding Company and certain affiliates of up to
$2 billion for liquidity and other general corporate
purposes.
The Company’s subsidiaries, Hartford Fire Insurance
Company (“Hartford Fire”) and Hartford Life and
Accident Insurance Company (“HLA”), are members of
the Federal Home Loan Bank of Boston (“FHLBB”) and
have access to collateralized advances of up to $1.1
billion and $0.6 billion, respectively, without prior
approval of the Connecticut Department of Insurance
(“CTDOI”).
2019 expected dividends and other
sources of capital:
•
P&C - The Company does not anticipate receiving net
dividends from its property and casualty insurance
subsidiaries in 2019.
• Group Benefits - Hartford Life and Accident Insurance
Company ("HLA") has $380 dividend capacity for 2019,
and anticipates paying $250 to $300 in dividends in
2019.
• Hartford Funds - Anticipates paying $100 to $125 of
dividends in 2019.
In addition, The Hartford Financial Services Group, Inc, ("HFSG
Holding Company") anticipates cash tax receipts of
approximately $600 to $700, including realization of net
operating losses and AMT credits.
Other-than-temporary Impairments
Recognized in Earnings by Security Type
For the years ended December 31,
2018
2017
2016
Credit Impairments
CMBS
Corporate
Equity Impairments
Intent-to-Sell Impairments
Corporate
US Treasuries
$
1 $
2 $
—
—
—
—
—
6
—
—
1
20
4
1
1
Total
$
1 $
8 $
27
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.
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 $6 for the year ended December 31, 2018.
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, 2017
For the year ended December 31, 2017, impairments recognized
in earnings were comprised of credit impairments of $2 related to
CMBS interest-only securities that were not expected to
generate enough cash flow for the Company to recover the
investment. Impairments of equity securities of $6 were
comprised of securities in an unrealized loss position that the
Company did not expect to recover.
Year ended December 31, 2016
For the year ended December 31, 2016, impairments recognized
in earnings were comprised of credit impairments of $21
primarily related to corporate securities due to changes in the
financial condition of the issuer, impairments on equity securities
of $4, and intent-to-sell impairments of $2.
CAPITAL RESOURCES
AND LIQUIDITY
The following section discusses the overall financial strength of
The Hartford 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
95
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Expected liquidity requirements for the
next twelve months as of December 31,
2018:
•
•
•
•
•
$413 maturing debt payment made in January of 2019.
$265 interest on debt.
$21 dividends on preferred stock, subject to the
discretion of the Board of Directors.
$440 common stockholders' dividends, subject to the
discretion of the Board of Directors and before share
repurchases and any change in common stockholder
dividend rate.
$2.2 billion of cash consideration including transaction
expenses to acquire all outstanding common shares of
Navigators Group, a global specialty underwriter.
Liquidity Requirements and
Sources of Capital
The Hartford Financial Services Group,
Inc. (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 from its subsidiaries,
principally its insurance operations, and tax receipts, including
realization of HFSG Holding Company net operating losses and
refunds of prior period AMT credits. 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.
As of December 31, 2018, HFSG Holding Company held fixed
maturities, short-term investments, and cash of $3.4 billion.
Expected liquidity requirements of the HFSG Holding Company
for the next twelve months include payment of the 6.0% senior
note of $413 at maturity in January 2019, interest payments on
debt of approximately $265, preferred stock dividends of
approximately $21 and common stockholder dividends of
approximately $440, subject to the discretion of the Board of
Directors, as well as $2.2 billion of cash consideration including
transaction expenses to acquire all outstanding common shares
of Navigators Group.
Expected sources of capital of the HFSG Holding Company for
the next twelve months include dividends from Group Benefits
(HLA) of $250 to $300 , dividends from Hartford Funds of $100
to $125 and cash tax receipts of approximately $600 to $700,
including realization of net operating losses and AMT credits.
Debt
On March 15, 2018, The Hartford issued $500 of 4.4% senior
notes ("4.4% Notes") due March 15, 2048 for net proceeds of
approximately $490, after deducting underwriting discounts and
expenses from the offering. The Hartford used a portion of the
net proceeds from this issuance to repay $320 principal amount
of its 6.3% senior notes due March 15, 2018, and the balance of
the proceeds will be used for general corporate purposes.
On June 15, 2018, The Hartford redeemed $500 aggregate
principal amount of its 8.125% Fixed-to-Floating Rate Junior
Subordinated Debentures due 2068.
On January 15, 2019, The Hartford repaid its $413, 6.0% senior
notes at maturity .
For further information regarding debt, see Note 13 - Debt of
Notes to Consolidated Financial Statements.
Equity
During the year ended December 31, 2018, the Company did not
repurchase any common shares. In February, 2019, the Company
announced a $1.0 billion share repurchase authorization by the
Board of Directors which is effective through December 31,
2020. Based on projected holding company resources, the
Company expects to use a portion of the authorization in 2019
but anticipates using the majority of the program in 2020. 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.
On November 6, 2018, the Company issued 13.8 million
depositary shares of the Company’s 6.0% Series G non-
cumulative perpetual preferred stock (the “Preferred Stock”) with
a liquidation preference of $25,000 per share (equivalent to
$25.00 per depositary share), for net proceeds of $334. The
Preferred Stock is perpetual and has no maturity date but is
redeemable at the Company's option in whole or in part, on or
after November 15, 2023 at a redemption price of $25,000 per
share, plus unpaid dividends attributable to the current dividend
period.
The Hartford used the net proceeds from this 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
On February 21, 2019, The Hartford’s Board of Directors
declared a quarterly dividend of $0.30 per common share payable
on April 1, 2019 to common stockholders of record as of March 4,
2019.
On February 21, 2019, The Hartford's Board of Directors
declared a dividend of $375.00 on each share of the Series G
preferred stock (equivalent to $0.3750 per depository share)
payable on May 15, 2019 to stockholders of record at the close of
business on May 1, 2019.
On December 13, 2018, The Hartford’s board of directors
declared a dividend of $412.50 on each share of the Series G
preferred stock (equivalent to $0.4125 per depository share)
which was paid on February 15, 2019, to stockholders of record
at the close of business on February 1, 2019.
There are no current restrictions on the HFSG Holding
Company's ability to pay dividends to its stockholders. For a
discussion of restrictions on dividends to the HFSG Holding
Company from its insurance subsidiaries, see "Dividends from
Insurance Subsidiaries" below. For a discussion of potential
limitations on the HFSG Holding Company's ability to pay
96
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 $101,
$280 and $300 in 2018, 2017 and 2016, respectively. No
contributions were made to the other postretirement plans in
2018, 2017 and 2016. The Company’s 2018, 2017 and 2016
required minimum funding contributions were immaterial. The
Company does not have a 2019 required minimum funding
contribution for the U.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 2019. The Company will monitor
the funded status of the U.S. qualified defined benefit pension
plan during 2019 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.
This change did not affect the measurement of the Company's
total benefit obligations as the change in the interest cost in net
income is completely offset in the actuarial (gain) loss reported
for the period in other comprehensive income. The change
resulted in a reduction of the interest cost component of net
periodic benefit cost for 2017 of $32 before tax. The discount
rate used to measure interest cost during 2017 was 3.58% for the
period from January 1, 2017 to June 30, 2017 and 3.37% for the
period from July 1, 2017 to December 31, 2017 for the qualified
pension plan, 3.55% for the non-qualified pension plan, and 3.13%
for the postretirement benefit plan. Under the Company's
historical estimation approach, the weighted average discount
rate for the interest cost component would have been 4.22% for
the period from January 1, 2017 to June 30, 2017 and 3.92% for
the period from July 1, 2017 to December 31, 2017 for the
qualified pension plan, 4.19% for the non-qualified pension plan
and 3.97% for the postretirement benefit plan. The Company
accounted for this change as a change in estimate, and
accordingly, recognized the effect prospectively beginning in
2017.
contract to transfer approximately $1.6 billion of the Company’s
outstanding pension benefit obligations related to certain U.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
after 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 the U.S. qualified
pension plan in order to maintain the plan’s pre-transaction
funded status.
Dividends from Insurance Subsidiaries
Dividends to the HFSG Holding Company from its insurance
subsidiaries are restricted by insurance regulation. The payment
of dividends by Connecticut-domiciled insurers is limited under
the insurance holding company laws of Connecticut. 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 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 a Connecticut-domiciled
insurer exceeds the insurer’s earned surplus, it requires the prior
approval of the Connecticut Insurance Commissioner. The
insurance holding company laws of the other jurisdictions in
which The Hartford’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.
Total dividends paid by P&C subsidiaries to HFSG holding
company in 2018 were $3.1 billion. This includes extraordinary
dividends of $3.0 billion comprised of a $1.9 billion principal
paydown on the intercompany note owed by Hartford Holdings,
Inc. ("HHI") to Hartford Fire Insurance Company related to the
life and annuity business sold in May 2018, $226 related to
interest payments on the note and $900 to fund near-term
obligations of the HFSG holding company. In addition, there was
$50 of ordinary P&C dividends that were paid to HFSG holding
company, and $110 of capital contributed by the HFSG holding
company to a run-off P&C subsidiary. Excluding the interest
payments on the intercompany note and dividends that were
subsequently contributed to a P&C subsidiary, net dividends paid
by P&C subsidiaries to HFSG holding company were $2.8 billion
during 2018.
Total net dividends received by HFSG holding company in 2018
were $2.9 billion, including the $2.8 billion from P&C subsidiaries
and $119 from Hartford Funds during the year. There were no
dividends received from Hartford Life and Accident in 2018.
2019 Dividend Capacity
On June 30, 2017, the Company purchased a group annuity
•
P&C - Under the formula described above, the Company’s
97
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
property and casualty insurance subsidiaries are permitted
to pay up to a maximum of approximately $1.2 billion in
dividends to HFSG Holding Company for 2019 without prior
approval from the applicable insurance commissioner,
though only $200 of this dividend capacity could be paid
before the fourth quarter of 2019. In 2019, HFSG Holding
Company does not anticipate receiving net dividends from
its property and casualty insurance subsidiaries, as planned
2019 dividends were received in the fourth quarter 2018.
The HFSG Holding Company generally expects to receive net
dividends of $850 to $900 a year from its property and
casualty insurance subsidiaries subject to the profitability of
those subsidiaries and their capital needs.
• Group Benefits - Hartford Life and Accident Insurance
Company ("HLA") has $380 dividend capacity for 2019, and
anticipates paying $250 to $300 dividends in 2019.
Other Sources of Capital for the HFSG
Holding Company
The Hartford 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
The Hartford filed an automatic shelf registration statement with
the Securities and Exchange Commission ("the SEC") on July 29,
2016 that permits it to offer and sell debt and equity securities
during the three-year life of the registration statement.
Revolving Credit Facility and Commercial
Paper
Revolving Credit Facilities
On March 29, 2018, the Company entered into an amendment to
its Five-Year Credit Agreement dated October 31, 2014. The
Amendment reset the level of the Company's minimum
consolidated net worth financial covenant to $9 billion, excluding
AOCI, from its former $13.5 billion (where net worth was defined
as stockholders' equity excluding AOCI and including junior
subordinated debt), among other updates. Among other changes,
under an amended and restated credit agreement that became
effective in June 2018, after the closing of the sale of the
Company's life and annuity business, the aggregate amount of
principal of the credit facility decreased from $1 billion to $750,
including a reduction to the amount available for letters of credit
from $250 to $100, the maturity date was extended to March 29,
2023, and the liens covenant and certain other covenants were
modified.
As of December 31, 2018, no borrowings were outstanding and
$3 in letters of credit were issued under the Credit Facility and
the Company was in compliance with all financial covenants.
For further information regarding revolving credit facilities, see
Note 13 - Debt of Notes to Consolidated Financial Statements.
Commercial Paper
The Hartford’s maximum borrowings available under its
commercial paper program are $750. As of December 31, 2018
there was no commercial paper outstanding.
For further information regarding commercial paper, see Note 13
- Debt of Notes to Consolidated Financial Statements.
Intercompany Liquidity Agreements
The Company has $2.0 billion available under an intercompany
liquidity agreement that allows for short-term advances of funds
among the HFSG Holding Company and certain affiliates of up to
$2 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 the HFSG Holding Company, as admitted assets for
statutory accounting purposes.
As of December 31, 2018, there were no amounts outstanding at
the HFSG Holding Company.
Collateralized Advances with Federal Home
Loan Bank of Boston
In August 2018, the Company’s subsidiaries, Hartford Fire
Insurance Company (“Hartford Fire”) and Hartford Life and
Accident Insurance Company (“HLA”), became members of the
Federal 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.
As of December 31, 2018, there were no advances outstanding
under either FHLBB facility.
For further information regarding collateralized advances with
Federal Home Loan Bank of Boston, see Note 13 - Debt of Notes
to Consolidated Financial Statements.
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, 2018 was $76. For this $76, the legal entities have
posted collateral of $71, in the normal course of business. Based
on derivative market values as of December 31, 2018, a
downgrade of one level below the current financial strength rates
by either Moody’s or S&P would not require additional assets to
98
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
be posted as collateral. Based on derivative market values as of
December 31, 2018, a downgrade of two levels below the current
financial strength ratings by either Moody’s or S&P would require
an additional $7 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 collateral that we would post, if required, would be primarily
in the form of U.S. Treasury bills, U.S. Treasury notes and
government agency securities.
As of December 31, 2018, 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 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
necessary to meet liquidity needs, for each of the Company’s
insurance operations.
Property & Casualty
Fixed maturities
Short-term investments
Cash
Less: Derivative collateral
Total
As of
December 31, 2018
$
$
24,779
1,081
91
58
25,893
Group Benefits Operations
As of
December 31, 2018
Fixed maturities
Short-term investments
Cash
Less: Derivative collateral
Total
$
$
9,882
398
18
18
10,280
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.
99
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Aggregate Contractual Obligations as of December 31, 2018
Property and casualty obligations [1]
Group life and disability obligations [2]
Operating lease obligations [3]
Long-term debt obligations [4]
Purchase obligations [5]
Other liabilities reflected on the balance sheet [6]
Payments due by period
Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
$
24,972 $
5,740 $
5,882 $
2,868 $
10,482
11,041
173
9,803
2,107
933
1,315
44
674
1,515
933
3,749
61
956
375
—
1,630
34
1,180
181
—
4,347
34
6,993
36
—
21,892
Total
[1]The following points are significant to understanding the cash flows estimated for obligations (gross of reinsurance) under property and casualty contracts:
49,029 $
10,221 $
11,023 $
$
5,893 $
•
•
•
•
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 U.S. GAAP, the Company is only permitted to discount reserves for 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,
2018, the total property and casualty reserves in the above table are gross of a reserve discount of $388.
Amounts shown do not consider $4.2 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, 2018, the total group life and disability obligations in
the above table are gross of a reserve discount of $1.5 billion.
[3]Includes future minimum lease payments on operating lease agreements. See Note 14 - Commitments and Contingencies 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 $954 in commitments to purchase investments including approximately $707 of limited partnership and other alternative investments, $163 of private debt and equity
securities, and $84 of mortgage loans. Of the $954 in commitments to purchase investments, $48 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 $688 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 $9 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. Also included in other long-term liabilities are net unrecognized tax benefits of
$14.
Capitalization
Capital Structure
December 31,
2018
December 31,
2017
Change
Short-term debt (includes current maturities of long-term debt)
$
413 $
Long-term debt
Total debt
Common stockholders' equity, excluding AOCI
Preferred stock
AOCI, net of tax
Total stockholders’ equity
Total capitalization
Debt to stockholders’ equity
Debt to capitalization
4,265
4,678
14,346
334
(1,579)
$
$
13,101 $
17,779 $
320
4,678
4,998
12,831
—
663
13,494
18,492
29%
(9%)
(6%)
12%
—%
(338%)
(3%)
(4%)
36%
26%
37%
27%
Total stockholders' equity decreased in 2018 primarily due to a
decrease in AOCI, partially offset by net income in excess of
stockholder dividends and the issuance of preferred stock in
2018. AOCI decreased mainly due to the removal of AOCI
related to the life and annuity business sold in May 2018, as well
as due to lower net unrealized capital gains on fixed maturities.
Total capitalization decreased $713, or 4%, as of December 31,
100
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2018 compared with December 31, 2017 primarily due to the
decrease in stockholders' equity and decrease in total debt.
For additional information regarding AOCI, net of tax, see Note
Cash Flow [1]
Net cash provided by operating activities
Net cash provided by (used for) investing activities
Net cash used for financing activities
Cash — end of year
17 - Changes in and Reclassifications From Accumulated Other
Comprehensive Income (Loss) of Notes to Consolidated Financial
Statements.
2018
2017
2016
$
$
$
$
2,843 $
(1,962) $
(1,467) $
121 $
2,186 $
(1,442) $
(979) $
180 $
2,066
949
(2,541)
328
[1] Cash activities include cash flows from Discontinued Operations; see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements
for information on cash flows from Discontinued Operations.
Year ended December 31, 2018 compared
to the year ended December 31, 2017
Cash provided by operating activities increased
in 2018 as compared to the prior year period primarily due to the
effect of a $650 payment in 2017 for the ADC reinsurance
agreement with NICO and the effect of an increase in premium
and fee income received, partially offset by an increase in
payments for benefits, losses, and loss adjustment expenses as
well as operating expenses that were mostly driven by the
acquisition of the Aetna U.S. group life and disability business.
Cash used for investing activities increased in 2018
compared to the prior year period primarily due to payments for
short term investments and an increase in net payments for
equity securities and mortgage loans, partially offset by proceeds
from the life and annuity business sold in May 2018 and an
increase in net proceeds from available for sale securities.
Cash used for financing activities increased from
the 2017 period primarily due to a change to a decrease in
securities loaned or sold under agreements to repurchase, as well
as an increase in debt repayments in 2018, partially offset by a
reduction in treasury stock acquired, proceeds raised from
preferred stock issued net of issuance costs and a decline in
separate account activity.
Year ended December 31, 2017 compared
to the year ended December 31, 2016
Cash provided by operating activities increased
in 2017 as compared to the prior year due, in part, to an increase
in fee income received, a decrease in taxes paid and a decrease in
Property & Casualty claim payments, largely offset by the $650
ceded premium paid to NICO for the asbestos and environmental
adverse development cover entered into in 2016.
Cash used for investing activities in 2017 primarily
relates to the acquisition of Aetna's U.S. group life and disability
business for $1.4 billion (net of cash acquired), net of $222 of net
proceeds from the sale of the Company's P&C U.K. run-off
business. Cash provided by investing activities in 2016 primarily
related to net proceeds from available-for-sale securities of $2.7
billion, partially offset by net payments for short-term
investments of $1.4 billion.
Cash used for financing activities in 2017 consists
primarily of net payments for deposits, transfers and withdrawals
for investments and universal life products of $991, the
101
repurchase of common shares outstanding and the payment of
common stock dividends, offset by an increase in cash from
securities loaned or sold under agreements to repurchase
securities and issuance of debt. Cash used for financing activities
in 2016 consisted primarily of repurchases of common shares
outstanding of $1.3 billion, net payments for deposits, transfers
and withdrawals for investments and universal life products of
$782 and repayment of debt of $275.
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.
Insurance Financial Strength Ratings as of
February 20, 2019
Hartford Fire Insurance
Company
Hartford Life and Accident
Insurance Company
Other Ratings:
The Hartford Financial
Services Group, Inc.:
Senior debt
Commercial paper
As of February 20, 2019
A.M. Best
Standard
& Poor's Moody's
A+
A
A+
A
A1
A2
a-
AMB-1
BBB+
A-2
Baa1
P-2
These ratings are not a recommendation to buy or hold any of The
Hartford’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
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
Statutory Capital
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.”
Statutory Capital Rollforward for the Company's Insurance Subsidiaries
Property and Casualty
Insurance Subsidiaries [1]
Group Benefits Insurance
Subsidiary
Total
U.S. statutory capital at January 1, 2018
Statutory income
Dividends to parent
Other items
Net change to U.S. statutory capital
U.S. statutory capital at December 31, 2018
$
$
7,396 $
1,114
(840)
(235)
39
7,435 $
2,029 $
390
—
(12)
378
2,407 $
9,425
1,504
(840)
(247)
417
9,842
[1]The statutory capital for property and casualty insurance subsidiaries in this table does not include the value of an intercompany note owed by HHI to Hartford Fire Insurance
Company. Accordingly, neither the $1.9 billion principal paydown of the note nor an associated $1.9 billion of dividends to the holding company during the year ended
December 31, 2018 are reflected in this table.
Stat to GAAP Differences
Significant differences between U.S. GAAP stockholders’ equity
and aggregate statutory capital prepared in accordance with U.S.
STAT include the following:
• U.S. STAT excludes equity of non-insurance and foreign
insurance subsidiaries not held by U.S. insurance subsidiaries.
•
•
•
•
Costs incurred by the Company to acquire insurance policies
are deferred under U.S. GAAP while those costs are
expensed immediately under U.S. STAT.
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 U.S. GAAP while those
amounts deferred are subject to limitations under U.S. STAT.
The assumptions used in the determination of Group
Benefits reserves (i.e. for Group Benefits contracts) are
prescribed under U.S. STAT, while the assumptions used
under U.S. GAAP are generally the Company’s best
estimates.
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 U.S. GAAP, while U.S. STAT
only records certain securities at fair value, such as equity
securities and certain lower rated bonds required by the
NAIC to be recorded at the lower of amortized cost or fair
value.
• U.S. STAT for life insurance companies like HLA establishes a
formula reserve for realized and unrealized losses due to
default and equity risks associated with certain invested
assets (the Asset Valuation Reserve), while U.S. GAAP does
not. Also, for those realized gains and losses caused by
changes in interest rates, U.S. STAT for life insurance
companies defers and amortizes 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 U.S. GAAP does not.
• Goodwill arising from the acquisition of a business is tested
for recoverability on an annual basis (or more frequently, as
necessary) for U.S. GAAP, while under U.S. STAT goodwill is
amortized over a period not to exceed 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) under U.S. STAT. U.S. GAAP
generally evaluates assets based on their recoverability.
Risk-Based Capital
The Company's U.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'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 by U.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 and the
potential impacts to the life insurance subsidiaries, see MD&A -
Enterprise Risk Management, Financial Risk on Statutory Capital.
102
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
Statutory capital at the property and casualty subsidiaries has
historically been maintained at or above the capital level required
to meet “AA level” ratings from rating agencies. Statutory capital
generated by the property and casualty subsidiaries in excess of
the capital level required to meet “AA level” 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 property and casualty 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 The
Hartford’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 The Hartford as an employer would be
consistent with other large employers. The Hartford’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 the U.S. tax code.
The major areas of interest to the company include 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. We continue to analyze Tax Reform for other
potential impacts. The U.S. Treasury and IRS are developing
guidance implementing Tax Reform, and Congress may consider
additional technical corrections to the legislation. Tax proposals
and regulatory initiatives which have been or are being
considered by Congress and/or the U.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
103
Part II - Item 9A. Controls and Procedures
Item 9A. CONTROLS AND PROCEDURES
Management’s annual report on internal control over
financial reporting
The management of The Hartford Financial Services Group, Inc. and its subsidiaries (“The Hartford”) is responsible for establishing and
maintaining adequate internal control over financial reporting for The Hartford as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally
accepted in the United States. A company's internal control over financial reporting includes policies and procedures that (1) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
The Hartford's management assessed its internal controls over financial reporting as of December 31, 2018 in relation to criteria for
effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on this assessment under those criteria, The Hartford's management
concluded that its internal control over financial reporting was effective as of December 31, 2018.
104
Part II - Item 9A. Controls and Procedures
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively,
the "Company") as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013)
issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report dated February 22, 2019,
expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 22, 2019
105
Part III - Item 10. Directors, and Executive Officers and Corporate Governance of the Hartford
Part III - Item 10. Directors, and Executive Officers and Corporate Governance of the Hartford
Item 10. DIRECTORS, AND EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
OF THE HARTFORD
Certain of the information called for by Item 10 will be set forth in
the definitive proxy statement for the 2019 annual meeting of
stockholders (the “Proxy Statement”) to be filed by The Hartford
with the Securities and Exchange Commission within 120 days
after the end of the fiscal year covered by this Form 10-K under
the captions and subcaptions “Board and Governance Matters”,
“Director Nominees" and "Section (16)(a) Beneficial Ownership
Reporting Compliance" and is incorporated herein by reference.
The Company has adopted a Code of Ethics and Business
Conduct, which is applicable to all employees of the Company,
including the principal executive officer, the principal financial
officer and the principal accounting officer. The Code of Ethics
and Business Conduct is available on the investor relations
section of the Company’s website at: http://ir.thehartford.com.
Any waiver of, or material amendment to, the Code of Ethics and
Business Conduct will be posted promptly to our web site in
accordance with applicable NYSE and SEC rules.
Executive Officers of The
Hartford
Information about the executive officers of The Hartford who are
also nominees for election as directors will be set forth in The
Hartford’s Proxy Statement. Set forth below is information about
the other executive officers of the Company as of February 15,
2019:
Name
Age
Position with The Hartford and Business Experience For the Past Five Years
William A. Bloom
55 Executive Vice President of Operations and Technology (August 2014 - present); President of Global
Client Services, EXL (July 2010-July 2014)
Kathleen M.
Bromage
61 Chief Marketing and Communications Officer (June 2015-present); Senior Vice President of Strategy
and Marketing, Small Commercial and Senior Vice President of Brand Marketing (July 2012-June 2015)
Beth A. Costello
51 Executive Vice President and Chief Financial Officer (July 2014-present); President of the life and
annuity business sold in May 2018 and formerly referred to as Talcott Resolution (July 2012-July 2014)
Douglas G. Elliot
58 President (July 2014-present); Executive Vice President and President of Commercial Lines (April 2011-
Martha Gervasi
57 Executive Vice President, Human Resources (May 2012-present)
July 2014)
Brion S. Johnson
59 Executive Vice President, Chief Investment Officer (May 2012-Present); President of the life and annuity
business sold in May 2018 and formerly referred to as Talcott Resolution (July 2014-May 2018)
Scott R. Lewis
56 Senior Vice President and Controller (May 2013-present); Senior Vice President and Chief Financial
Officer, Personal Lines (2009-May 2013)
Robert W. Paiano
57 Executive Vice President and Chief Risk Officer (June 2017-Present); Senior Vice President & Treasurer
(July 2010-May 2017)
David C. Robinson
53 Executive Vice President and General Counsel (June 2015-present); Senior Vice President and Director
of Commercial Markets Law (August 2014-May 2015); Senior Vice President and Head of Enterprise
Transformation, Strategy and Corporate Development (April 2012-August 2014)
106
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Description
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations — For the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) — For the Years Ended December 31, 2018, 2017 and 2016
Consolidated Balance Sheets — As of December 31, 2018 and 2017
Consolidated Statements of Changes in Stockholders’ Equity — For the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows — For the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Hartford Financial Services Group, Inc. and its subsidiaries
(collectively, the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income
(loss), changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related
notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of
America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the
Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22,
2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the
Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide
a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 22, 2019
We have served as the Company’s auditor since 2002.
F-2
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Operations
(In millions, except for per share data)
Revenues
Earned premiums
Fee income
Net investment income
Net realized capital gains (losses):
Total other-than-temporary impairment (“OTTI”) losses
OTTI losses recognized in other comprehensive income
Net OTTI losses recognized in earnings
Other net realized capital gains (losses)
Total net realized capital gains (losses)
Other revenues
Total revenues
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses
Amortization of deferred policy acquisition costs ("DAC")
Insurance operating costs and other expenses
Loss on extinguishment of debt
Loss on reinsurance transaction
Interest expense
Amortization of other intangible assets
Total benefits, losses and expenses
Income from continuing operations before income taxes
Income tax expense (benefit)
Income (loss) from continuing operations, net of tax
Income (loss) from discontinued operations, net of tax
Net income (loss)
Preferred stock dividends
Net income (loss) available to common stockholders
Income (loss) from continuing operations, net of tax, available to common stockholders per
common share
Basic
Diluted
Net income (loss) available to common stockholders per common share
Basic
Diluted
For the years ended December 31,
2018
2017
2016
$
15,869 $
14,141 $
13,697
1,313
1,780
(7)
6
(1)
(111)
(112)
105
1,168
1,603
(15)
7
(8)
173
165
85
1,041
1,577
(35)
8
(27)
(83)
(110)
86
18,955
17,162
16,291
11,165
1,384
4,281
6
—
298
68
10,174
1,372
4,563
—
—
316
14
9,961
1,377
3,525
—
650
327
4
17,202
16,439
15,844
1,753
268
1,485
322
1,807
6
723
985
(262)
(2,869)
(3,131)
—
1,801 $
(3,131) $
4.13 $
4.06 $
5.03 $
4.95 $
(0.72) $
(0.72) $
(8.61) $
(8.61) $
$
$
$
$
$
447
(166)
613
283
896
—
896
1.58
1.55
2.31
2.27
See Notes to Consolidated Financial Statements.
F-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
Net income (loss)
Other comprehensive income (loss):
Changes in net unrealized gain on securities
Changes in OTTI losses recognized in other comprehensive income
Changes in net gain on cash flow hedging instruments
Changes in foreign currency translation adjustments
Changes in pension and other postretirement plan adjustments
OCI, net of tax
Comprehensive income (loss)
For the years ended December 31,
2018
2017
2016
$
1,807 $
(3,131) $
896
(2,180)
(1)
(25)
(8)
(23)
655
—
(58)
28
375
(2,237)
1,000
(3)
4
(54)
61
(16)
(8)
$
(430) $
(2,131) $
888
See Notes to Consolidated Financial Statements.
F-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
(In millions, except for share and per share data)
Assets
Investments:
As of December 31,
2018
2017
Fixed maturities, available-for-sale, at fair value (amortized cost of $35,603 and $35,612)
$
35,652 $
36,964
Fixed maturities, at fair value using the fair value option
Equity securities, at fair value
Equity securities, available-for-sale, at fair value (cost of $0 and $907)
Mortgage loans (net of allowances for loan losses of $1 and $1)
Limited partnerships and other alternative investments
Other investments
Short-term investments
Total investments
Cash
Premiums receivable and agents’ balances, net
Reinsurance recoverables, net
Deferred policy acquisition costs
Deferred income taxes, net
Goodwill
Property and equipment, net
Other intangible assets, net
Other assets
Assets held for sale
Total assets
Liabilities
Unpaid losses and loss adjustment expenses
Reserve for future policy benefits
Other policyholder funds and benefits payable
Unearned premiums
Short-term debt
Long-term debt
Other liabilities
Liabilities held for sale
Total liabilities
Commitments and Contingencies (Note 14)
Stockholders’ Equity
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 13,800 shares issued as of December 31,
2018, aggregate liquidation preference of $345
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at December
31, 2018 and December 31, 2017
Additional paid-in capital
Retained earnings
Treasury stock, at cost — 25,772,238 and 28,088,186 shares
Accumulated other comprehensive income (loss), net of tax
Total stockholders' equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements.
F-5
22
1,214
—
3,704
1,723
192
4,283
46,790
121
3,995
4,357
670
1,248
1,290
1,006
657
2,173
41
—
1,012
3,175
1,588
96
2,270
45,146
180
3,910
4,061
650
1,164
1,290
1,034
659
2,230
—
164,936
62,307 $
225,260
33,029 $
32,287
$
$
642
767
5,282
413
4,265
4,808
—
49,206
334
4
4,378
11,055
(1,091)
(1,579)
13,101
713
816
5,322
320
4,678
5,188
162,442
211,766
—
4
4,379
9,642
(1,194)
663
13,494
$
62,307 $
225,260
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
(In millions, except for share data)
Preferred Stock
Preferred Stock, beginning of period
Issuance of preferred stock
Preferred Stock, end of period
Common Stock
Additional Paid-in Capital
Additional Paid-in Capital, beginning of period
Issuance of shares under incentive and stock compensation plans
Stock-based compensation plans expense
Tax benefit on employee stock options and share-based awards
Issuance of shares for warrant exercise
Treasury stock retired
Additional Paid-in Capital, end of period
Retained Earnings
Retained Earnings, beginning of period
Cumulative effect of accounting changes, net of tax
Adjusted balance beginning of period
Net income (loss)
Dividends declared on preferred stock
Dividends declared on common stock
Retained Earnings, end of period
Treasury Stock, at cost
Treasury Stock, at cost, beginning of period
Treasury stock acquired
Treasury stock retired
Issuance of shares under incentive and stock compensation plans
Net shares acquired related to employee incentive and stock compensation plans
Issuance of shares for warrant exercise
Treasury Stock, at cost, end of period
Accumulated Other Comprehensive Income (Loss), net of tax
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period
Cumulative effect of accounting changes, net of tax
Adjusted balance beginning of period
Total other comprehensive income (loss)
Accumulated Other Comprehensive (Loss) Income, net of tax, end of period
Total Stockholders’ Equity
Preferred Shares Outstanding
Preferred Shares Outstanding, beginning of period
Issuance of preferred shares
Preferred Shares Outstanding, end of period
Common Shares Outstanding
Common Shares Outstanding, beginning of period (in thousands)
Treasury stock acquired
Issuance of shares under incentive and stock compensation plans
Return of shares under incentive and stock compensation plans to treasury stock
Issuance of shares for warrant exercise
Common Shares Outstanding, end of period
Cash dividends declared per common share
See Notes to Consolidated Financial Statements.
F-6
For the years ended December 31,
2018
2017
2016
$
— $
— $
334
334
4
4,379
(110)
123
—
(14)
—
4,378
—
—
4
5,247
(76)
104
—
(67)
(829)
4,379
—
—
—
4
8,973
(143)
74
5
(16)
(3,646)
5,247
9,642
13,114
12,550
5
9,647
1,807
(6)
(393)
11,055
(1,194)
—
—
132
(43)
14
—
13,114
(3,131)
—
(341)
9,642
(1,125)
(1,028)
829
100
(37)
67
—
12,550
896
—
(332)
13,114
(3,557)
(1,330)
3,647
153
(54)
16
(1,091)
(1,194)
(1,125)
663
(5)
658
(2,237)
(1,579)
(337)
—
(337)
1,000
663
(329)
—
(329)
(8)
(337)
$
13,101 $
13,494 $
16,903
—
13,800
13,800
—
—
—
—
—
—
356,835
373,949
401,821
—
(20,218)
(30,782)
2,856
(849)
309
2,301
(747)
1,550
3,766
(1,243)
387
359,151
356,835
373,949
$
1.10 $
0.94 $
0.86
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
(In millions)
Operating Activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
For the years ended December 31,
2018
2017
2016
$
1,807 $
(3,131) $
896
Net realized capital losses (gains)
Amortization of deferred policy acquisition costs
Additions to deferred policy acquisition costs
Depreciation and amortization
Pension settlement expense
Loss on extinguishment of debt
Loss (gain) on sale of business
Other operating activities, net
Change in assets and liabilities:
Decrease (increase) in reinsurance recoverables
Increase (decrease) in accrued and deferred income taxes
Impact of tax reform on accrued and deferred income taxes
Increase (decrease) in insurance liabilities
Net change in other assets and other liabilities
Net cash provided by operating activities
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale
Fixed maturities, fair value option
Equity securities at fair value
Equity securities, available-for-sale
Mortgage loans
Partnerships
Payments for the purchase of:
Fixed maturities, available-for-sale
Fixed maturities, fair value option
Equity securities at fair value
Equity securities, available-for-sale
Mortgage loans
Partnerships
Net payments for derivatives
Net additions to property and equipment
Net (payments for) short-term investments
Other investing activities, net
Proceeds from businesses sold, net of cash transferred
Amounts paid for business acquired, net of cash acquired
Net cash provided by (used for) investing activities
Financing Activities
Deposits and other additions to investment and universal life-type contracts
Withdrawals and other deductions from investment and universal life-type contracts
Net transfers from separate accounts related to investment and universal life-type contracts
Repayments at maturity or settlement of consumer notes
Net increase (decrease) in securities loaned or sold under agreements to repurchase
Repayment of debt
Proceeds from the issuance of debt
Preferred stock issued, net of issuance costs
Net issuance (return) of shares under incentive and stock compensation plans
Treasury stock acquired
Dividends paid on common stock
Net cash used for financing activities
Foreign exchange rate effect on cash
Net increase (decrease) in cash, including cash classified as assets held for sale
Less: Net increase (decrease) in cash classified as assets held for sale
Net increase (decrease) in cash
Cash — beginning of period
Cash — end of period
Supplemental Disclosure of Cash Flow Information
Income tax received (paid)
Interest paid
See Notes to Consolidated Financial Statements.
F-7
165
1,442
(1,404)
467
—
6
(202)
408
(323)
(103)
—
493
87
2,843
24,700
23
1,230
—
483
433
(23,173)
—
(1,500)
—
(983)
(481)
(224)
(122)
(3,460)
(3)
1,115
—
(1,962)
1,814
(9,210)
6,949
(2)
(621)
(826)
490
334
(16)
—
(379)
(1,467)
(10)
(596)
(537)
(59)
(111)
1,417
(1,383)
399
747
—
3,257
408
(935)
170
877
1,648
(1,177)
2,186
31,646
148
—
810
734
274
(30,923)
—
—
(638)
(1,096)
(509)
(314)
(250)
(144)
21
222
(1,423)
(1,442)
4,602
(13,562)
7,969
(13)
1,320
(416)
500
—
(10)
(1,028)
(341)
(979)
70
(165)
(17)
(148)
180
121 $
9 $
292 $
328
180 $
6 $
322 $
$
$
$
187
1,523
(1,390)
398
—
—
81
178
272
(250)
—
322
(151)
2,066
24,486
238
—
709
647
779
(21,844)
(94)
—
(662)
(717)
(441)
(247)
(224)
(1,377)
(129)
—
(175)
949
4,186
(14,790)
9,822
(17)
188
(275)
—
—
9
(1,330)
(334)
(2,541)
(40)
434
249
185
143
328
(130)
336
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
1. BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
The Hartford Financial Services Group, Inc. is a holding company
for insurance and financial services subsidiaries that provide
property and casualty insurance, group life and disability
products and mutual funds and exchange-traded products to
individual and business customers in the United States
(collectively, “The Hartford”, the “Company”, “we” or “our”).
On August 22, 2018, the Company announced it entered into a
definitive agreement to acquire all outstanding common shares of
The Navigators Group, Inc. ("Navigators Group"), a global
specialty underwriter, for $70 a share, or $2.1 billion in cash. The
transaction is expected to close in late March or April 2019,
subject to customary closing conditions, including receipt of
regulatory approvals.
On May 31, 2018, Hartford Holdings, Inc., a wholly owned
subsidiary of the Company, completed the sale of the issued and
outstanding equity of Hartford Life, Inc. (“HLI”), a holding
company, for its life and annuity operating subsidiaries.
On November 1, 2017, Hartford Life and Accident Insurance
Company ("HLA"), a wholly owned subsidiary of the Company,
completed the acquisition of Aetna's U.S. group life and disability
business through a reinsurance transaction.
On May 10, 2017, the Company completed the sale of its United
Kingdom ("U.K.") property and casualty run-off subsidiaries.
On July 29, 2016, the Company completed the acquisition of
Northern Homelands Company, the holding company of Maxum
Specialty Insurance Group (collectively "Maxum"). On July 29,
2016, the Company completed the acquisition of Lattice
Strategies LLC ("Lattice").
For further discussion of these transactions, see Note 2 - Business
Acquisitions and Note 20 - Business Dispositions and
Discontinued Operations of Notes to Consolidated Financial
Statements.
The Consolidated Financial Statements have been prepared in
accordance with accounting principles generally accepted in the
United States of America (“U.S. GAAP”) which differ materially
from the accounting practices prescribed by various insurance
regulatory authorities.
Consolidation
The Consolidated Financial Statements include the accounts of
The Hartford Financial Services Group, Inc., and entities in which
the Company directly or indirectly has a controlling financial
interest. Entities in which the Company has significant influence
over the operating and financing decisions but does not control
are reported using the equity method. All intercompany
transactions and balances between The Hartford and its
subsidiaries and affiliates that are not held for sale have been
eliminated.
Discontinued Operations
The results of operations of a component of the Company are
reported in discontinued operations when certain criteria are met
as of the date of disposal, or earlier if classified as held-for-sale.
When a component is identified for discontinued operations
reporting, amounts for prior periods are retrospectively
reclassified as discontinued operations. Components are
identified as discontinued operations if they are a major part of an
entity's operations and financial results such as a separate major
line of business or a separate major geographical area of
operations.
Use of 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 the
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
from those estimates.
The most significant estimates include those used in determining
property and casualty and group long-term disability insurance
product reserves, net of reinsurance; evaluation of goodwill for
impairment; valuation of investments and derivative instruments;
valuation allowance on deferred tax assets; and contingencies
relating to corporate litigation and regulatory matters.
Reclassifications
Certain reclassifications have been made to prior year financial
information to conform to the current year presentation. In
particular:
• Distribution costs within the Hartford Funds segment that
were previously netted against fee income are presented
gross in insurance operating costs and other expenses. Refer
to the "Revenue Recognition" passage within the "Adoption
of New Accounting Standards" section below for further
information.
Adoption of New Accounting
Standards
Stock Compensation
On January 1, 2017 the Company adopted new stock
compensation guidance issued by the Financial Accounting
Standards Board ("FASB") on a prospective basis. The updated
guidance requires the excess tax benefit or tax deficiency on
vesting or settlement of stock-based awards to be recognized in
earnings as an income tax benefit or expense, respectively,
instead of as an adjustment to additional paid-in capital. The new
guidance also requires the related cash flows to be presented in
operating activities instead of in financing activities. The amount
of excess tax benefit or tax deficiency realized on vesting or
settlement of awards depends upon the difference between the
F-8
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
market value of awards at vesting or settlement and the grant
date fair value recognized through compensation expense. The
excess tax benefit or tax deficiency is a discrete item in the
reporting period in which it occurs and is not considered in
determining the annual estimated effective tax rate for interim
reporting. The excess tax benefit recognized in earnings for the
year ended December 31, 2018 and 2017 was $5 and $15,
respectively, and the excess tax benefit recognized in additional
paid-in capital for the year ended December 31, 2016 was $5.
Reclassification of Effect of Tax Rate
Change from AOCI to Retained
Earnings
On January 1, 2018, the Company adopted the FASB's new
guidance for the effect on deferred tax assets and liabilities
related to items recorded in accumulated other comprehensive
income ("AOCI") resulting from the Tax Cuts and Jobs Act of 2017
("Tax Reform") enacted on December 22, 2017. Tax Reform
reduced the federal tax rate applied to the Company’s deferred
tax balances from 35% to 21% on enactment. Under U.S. GAAP,
the Company recorded the total effect of the change in enacted
tax rates on deferred tax balances as a charge to income tax
expense within net income during the fourth quarter of 2017,
including the change in deferred tax balances related to
components of AOCI. The new accounting guidance permitted
the Company to reclassify the “stranded” tax effects out of AOCI
and into retained earnings that resulted from recording the tax
effects of unrealized investment gains, unrecognized actuarial
losses on pension and other postretirement benefit plans, and
cumulative translation adjustments at a 35% tax rate because the
14 point reduction in tax rate was recognized in net income
instead of other comprehensive income. On adoption, the
Company recorded a reclassification of $88 from AOCI to
retained earnings. As a result of the reclassification, in the first
quarter of 2018, the Company reduced the estimated loss on sale
recorded in income from discontinued operations by $193, net of
tax, for the increase in AOCI related to the assets held for sale.
The reduction in the loss on sale resulted in a corresponding
increase in assets held for sale and AOCI as of January 1, 2018
and the AOCI associated with assets held for sale was removed
from the balance sheet when the sale closed on May 31,
2018. Additionally, as of January 1, 2018, the Company
reclassified $105 of stranded tax effects related to continuing
operations which reduced AOCI and increased retained earnings.
Financial Instruments- Recognition
and Measurement
On January 1, 2018, the Company adopted updated guidance
issued by the FASB for the recognition and measurement of
financial instruments through a cumulative effect adjustment to
the opening balances of retained earnings and AOCI. The new
guidance requires investments in equity securities to be
measured at fair value with any changes in valuation reported in
net income except for investments that are consolidated or are
accounted for under the equity method of accounting. The new
guidance also requires a deferred tax asset resulting from net
unrealized losses on fixed maturities, available-for-sale that are
recognized in AOCI to be evaluated for recoverability in
combination with the Company’s other deferred tax assets.
Under prior guidance, the Company reported equity securities,
available-for-sale ("AFS"), at fair value with changes in fair value
reported in other comprehensive income. As of January 1, 2018,
the Company reclassified from AOCI to retained earnings net
unrealized gains of $83, after tax, related to equity securities
having a fair value of $1.0 billion. In addition, $10 of net
unrealized gains net of shadow DAC related to discontinued
operations were reclassified from AOCI to retained earnings of
the life and annuity business held for sale, which increased the
estimated loss on sale in 2018 by the same amount. Beginning in
2018, the Company reports equity securities at fair value with
changes in fair value reported in net realized capital gains and
losses.
Revenue Recognition
On January 1, 2018, the Company adopted the FASB’s updated
guidance for recognizing revenue from contracts with customers,
which excludes insurance contracts and financial instruments.
Revenue subject to the guidance is recognized when, or as, goods
or services are transferred to customers in an amount that
reflects the consideration that an entity is expected to receive in
exchange for those goods or services. For all but certain revenues
associated with our Hartford Funds business, the updated
guidance is consistent with previous guidance for the Company’s
transactions and did not have an effect on the Company’s
financial position, cash flows or net income. The updated
guidance also updated criteria for determining when the
Company acts as a principal or an agent. The Company
determined that it is the principal for some of its mutual fund
distribution service contracts and, upon adoption, reclassified
distribution costs of $188 and $184 for the years ended
December 31, 2017, and 2016, respectively, that were previously
netted against fee income to insurance operating costs and other
expenses.
Information about the nature, amount, timing of recognition and
cash flows for the Company’s revenues subject to the updated
guidance follows.
F-9
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue from Non-Insurance Contracts with Customers
Commercial Lines
Installment billing fees
Personal Lines
Installment billing fees
Insurance servicing revenues
Group Benefits
Administrative services
Hartford Funds
Advisor, distribution and other management fees
Other fees
Corporate
Investment management and other fees
Transition service revenues
Total revenues subject to updated guidance
Installment fees are charged on property and casualty insurance
contracts for billing the insurance customer in installments over
the policy term. These fees are recognized in fee income as
earned on collection.
Insurance servicing revenues within Personal Lines consist of up-
front commissions earned for collecting premiums and processing
claims on insurance policies for which The Hartford does not
assume underwriting risk, predominantly related to the National
Flood Insurance Plan program. These insurance servicing
revenues are recognized over the period of the flood program's
policy terms.
Group Benefits products earn fee income from employers for the
administration of underwriting, implementation and claims
processing for employer self-funded plans and for leave
management services. Fees are recognized as services are
provided and collected monthly.
Hartford Funds provides investment management, administrative
and distribution services to mutual funds and exchange-traded
products. The Company assesses investment advisory,
distribution and other asset management fees primarily based on
the average daily net asset values from mutual funds and
exchange-traded products, which are recorded in the period in
which the services are provided and collected monthly.
Fluctuations in domestic and international markets and related
investment performance, volume and mix of sales and
redemptions of mutual funds or exchange-traded products, and
other changes to the composition of assets under management
are all factors that ultimately have a direct effect on fee income
earned.
Hartford Funds other fees primarily include transfer agent fees,
generally assessed as a charge per account, and are recognized as
fee income in the period in which the services are provided with
payments collected monthly.
Corporate investment management and other fees are primarily
for managing third party invested assets, including management
of the invested assets of Talcott Resolution Life, Inc. and its
subsidiaries ("Talcott Resolution"). Talcott Resolution is the new
F-10
Revenue Line Item
2018
2017
2016
Year ended December 31,
Fee income
$
34 $
37 $
Fee income
Other revenues
Fee income
Fee income
Fee income
Fee income
Other revenues
40
84
175
947
85
32
21
44
85
91
897
95
4
—
39
39
86
75
797
88
3
—
$
1,418 $
1,253 $
1,127
holding company of the life and annuity business the Company
sold in May 2018. These fees, calculated based on the average
quarterly net asset values, are recorded in the period in which the
services are provided and are collected quarterly. Fluctuations in
markets and interest rates and other changes to the composition
of assets under management are all factors that ultimately have a
direct effect on fee income earned.
Corporate transition service revenues consist of operational
services provided to The Hartford’s former life and annuity
business that will be provided for a period up to twenty-four
months from the May 31, 2018 sale date. The transition service
revenues are recognized as other revenues in the period in which
the services are provided with payments collected monthly.
Future Adoption of New
Accounting Standards
Hedging Activities
The FASB issued updated guidance on hedge accounting. The
updates allow hedge accounting for new types of interest rate
hedges of financial instruments and simplify documentation
requirements to qualify for hedge accounting. In addition, any
gain or loss from hedge ineffectiveness will be reported in the
same income statement line with the effective hedge results and
the hedged transaction. For cash flow hedges, the ineffectiveness
will be recognized in earnings only when the hedged transaction
affects earnings; otherwise, the ineffectiveness gains or losses
will remain in AOCI. Under current accounting, total hedge
ineffectiveness is reported separately in realized gains and losses
apart from the hedged transaction. The Company will adopt the
guidance effective January 1, 2019 through a cumulative effect
adjustment of less than $1 to reclassify cumulative
ineffectiveness on open cash flow hedges from retained earnings
to AOCI. The adoption will not affect the Company’s financial
position or cash flows or have a material effect on net income.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill
The FASB issued updated guidance on testing goodwill for
impairment. The updated guidance requires recognition and
measurement of goodwill impairment based on the excess of the
carrying value of the reporting unit compared to its estimated fair
value, with the amount of the impairment not to exceed the
carrying value of the reporting unit’s goodwill. Under existing
guidance, if the reporting unit’s carrying value exceeds its
estimated fair value, the Company allocates the fair value of the
reporting unit to all of the assets and liabilities of the reporting
unit to determine an implied goodwill value. An impairment loss is
then recognized for the excess, if any, of the carrying value of the
reporting unit’s goodwill compared to the implied goodwill value.
The Company expects to adopt the updated guidance January 1,
2020 on a prospective basis as required, although earlier
adoption is permitted. While the Company would not have
recognized a goodwill impairment loss for the years presented,
the impact of the adoption will depend on the estimated fair value
of the Company’s reporting units compared to the carrying value
at adoption.
Financial Instruments - Credit Losses
The FASB issued updated guidance for recognition and
measurement of credit losses on financial instruments. The new
guidance will replace the “incurred loss” approach with an
“expected loss” model for recognizing credit losses for financial
instruments carried at other than fair value, which will initially
result in the recognition of greater allowances for losses. The
allowance will be an estimate of credit losses expected over the
life of financial instruments carried at other than fair value, such
as mortgage loans, reinsurance recoverables and receivables.
Credit losses on fixed maturities AFS carried at fair value will
continue to be measured like other-than-temporary impairments
("OTTI"); however, the losses will be recognized through an
allowance and no longer as an adjustment to the cost basis.
Recoveries of impairments on fixed maturities AFS will be
recognized as reversals of valuation allowances and no longer
accreted as investment income through an adjustment to the
investment yield. The allowance on fixed maturities AFS cannot
cause the net carrying value to be below fair value and,
therefore, it is possible that future increases in fair value due to
decreases in market interest rates could cause the reversal of a
valuation allowance and increase net income. The new guidance
also requires purchased financial assets with a more-than-
insignificant amount of credit deterioration since original
issuance to be recorded based on contractual amounts due and
an initial allowance recorded at the date of purchase. The
Company will adopt the guidance effective January 1, 2020,
through a cumulative-effect adjustment to retained earnings for
the change in the allowance for credit losses for financial
instruments carried at other than fair value. No allowance will be
recognized at adoption for fixed maturities AFS; rather, their cost
basis will be evaluated for an allowance for credit losses
prospectively. The Company has not yet determined the effect
on the Company’s consolidated financial statements and the
ultimate impact of the adoption will depend on the composition
of the financial instruments and market conditions at the
adoption date. Significant implementation matters yet to be
addressed include estimating lifetime expected losses on
financial instruments carried at other than fair value,
determining the impact of valuation allowances on net
investment income from fixed maturities AFS, and updating our
investment accounting system functionality to maintain
F-11
adjustable valuation allowances on fixed maturities AFS, subject
to a fair value floor.
Leases
The FASB issued updated guidance on lease accounting. Under
the new guidance, effective January 1, 2019, lessees with
operating leases are required to recognize a liability for the
present value of future minimum lease payments with a
corresponding asset for the right of use of the property. Under
guidance effective through December 31, 2018, future minimum
lease payments on operating leases are commitments that are not
recognized as liabilities on the balance sheet. Under the new
guidance, leases will be classified as financing or operating leases.
Where the lease is economically similar to a purchase because
The Hartford obtains control of the underlying asset, the lease
will be a financing lease and the Company will recognize
amortization of the right of use asset and interest expense on the
liability. Where the lease provides The Hartford with only the
right to control the use of the underlying asset over the lease
term and the lease term is greater than one year, the lease will be
an operating lease and the lease costs will be recognized as rental
expense over the lease term on a straight-line basis. Leases with a
term of one year or less will also be expensed over the lease term
but will not be recognized on the balance sheet. The Company will
adopt the guidance as of the January 1, 2019, effective date with
no change to comparative periods and record a lease payment
obligation of approximately $160 for outstanding leases and a
right of use asset of approximately $150, which is net of $10 in
lease incentives received. The Hartford will elect to apply the
package of practical expedients and not reassess expired or
existing contracts that are or contain leases; all operating leases
will remain classified as operating leases on adoption; and initial
direct costs on existing leases will not be reassessed to determine
if deferred costs should be written-off or recorded on adoption.
The adoption will not impact net income or cash flows.
Reserve for Future Policy Benefits
The FASB issued new guidance on accounting for long-duration
insurance contracts. The Company’s long-duration insurance
contracts include paid-up life insurance and whole-life insurance
policies resulting from conversion from group life policies and
run-off structured settlement and terminal funding agreement
liabilities with total future policy benefit reserves of $642 as of
December 31, 2018. Under existing guidance, a reserve for future
policy benefits is calculated as the present value of future
benefits and related expenses less the present value of any future
premiums using assumptions “locked in” at the time the policies
were issued, including discount rate, lapse rate, mortality, and
expense assumptions. Under existing guidance, assumptions are
only updated if there is an expected premium deficiency. The new
guidance will require that underlying cash flow assumptions (such
as for lapse rate, mortality and expenses) be reviewed and
updated at least annually in the same quarter each year. The new
guidance also requires that the discount rate assumption be
updated each quarter and be based on an upper-medium grade
(low-credit-risk) fixed-income investment yield. The change in the
reserve estimate as a result of updating cash flow assumptions
will be recognized in net income. The change in the reserve
estimate as a result of updating the discount rate assumption will
be recognized in other comprehensive income. Because reserves
will be based on updated assumptions and no longer locked in at
contract inception, there will no longer be a test for premium
deficiency. The new guidance will be effective January 1, 2021,
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and will be applied to balances in place as of the earliest period
presented. Early adoption is permitted. The Company has not yet
determined the method or timing for adoption or estimated the
effect on the Company’s financial statements.
Significant Accounting Policies
The Company’s significant accounting policies are as follows:
Revenue Recognition
Property and casualty insurance premiums are earned on a pro
rata basis over the policy period and include accruals for ultimate
premium revenue anticipated under auditable and
retrospectively rated policies. Unearned premiums represent the
premiums applicable to the unexpired terms of policies in force.
An estimated allowance for doubtful accounts is recorded on the
basis of periodic evaluations of balances due from insureds,
management’s experience and current economic conditions. The
Company charges off any balances that are determined to be
uncollectible. The allowance for doubtful accounts included in
premiums receivable and agents’ balances in the Consolidated
Balance Sheets was $135 and $132 as of December 31, 2018 and
2017, respectively.
Group life, disability and accident premiums are generally due
from policyholders and recognized as revenue on a pro rata basis
over the period of the contracts.
Revenue from non-insurance contracts with customers is
discussed above in "Adoption of New Accounting Standards,
Revenue Recognition."
Dividends to Policyholders
Policyholder dividends are paid to certain property and casualty
policyholders. Policies that receive dividends are referred to as
participating policies. Participating dividends to policyholders are
accrued and reported in insurance operating costs and other
expenses and other liabilities using an estimate of the amount to
be paid based on underlying contractual obligations under
policies and applicable state laws.
Net written premiums for participating property and casualty
insurance policies represented 10%, 10% and 9% of total net
written premiums for the years ended December 31, 2018, 2017
and 2016, respectively. Participating dividends to property and
casualty policyholders were $23, $35 and $15 for the years
ended December 31, 2018, 2017 and 2016, respectively.
There were no additional amounts of income allocated to
participating policyholders.
Investments
Overview
The Company’s investments in fixed maturities include bonds,
structured securities, redeemable preferred stock and
commercial paper. Most of these investments are classified as
available-for-sale ("AFS") and are carried at fair value. The after
tax difference between fair value and cost or amortized cost is
reflected in stockholders’ equity as a component of AOCI.
Effective January 1, 2018, equity securities are measured at fair
value with any changes in valuation reported in net income. For
further information, see Financial Instruments - Recognition and
Measurement discussion above. Fixed maturities for which the
Company elected the fair value option are classified as FVO,
generally certain securities that contain embedded credit
derivatives, and are carried at fair value with changes in value
recorded in realized capital gains and losses. Mortgage loans are
recorded at the outstanding principal balance adjusted for
amortization of premiums or discounts and net of valuation
allowances. Short-term investments are carried at amortized
cost, which approximates fair value. Limited partnerships and
other alternative investments are reported at their carrying value
and are primarily accounted for under the equity method with the
Company’s share of earnings included in net investment income.
Recognition of income related to limited partnerships and other
alternative investments is delayed due to the availability of the
related financial information, as private equity and other funds
are generally on a three-month delay and hedge funds on a one-
month delay. Accordingly, income for the years ended
December 31, 2018, 2017, and 2016 may not include the full
impact of current year changes in valuation of the underlying
assets and liabilities of the funds, which are generally obtained
from the limited partnerships. Other investments primarily
consist of investments of consolidated investment funds and
derivative instruments which are carried at fair value. The
Company has provided seed money for investment funds and
reports the underlying investments at fair value with changes in
the fair value recognized in income consistent with accounting
requirements for investment companies.
Net Realized Capital Gains and Losses
Net realized capital gains and losses from investment sales are
reported as a component of revenues and are determined on a
specific identification basis. Net realized capital gains and losses
also result from fair value changes in fixed maturities, FVO, equity
securities, and derivatives contracts that do not qualify, or are not
designated, as a hedge for accounting purposes as well as
ineffectiveness on derivatives that qualify for hedge accounting
treatment. Impairments and mortgage loan valuation allowances
are recognized as net realized capital losses in accordance with
the Company’s impairment and mortgage loan valuation
allowance policies as discussed in Note 6 - Investments of Notes
to Consolidated Financial Statements. Foreign currency
transaction remeasurements are also included in net realized
capital gains and losses.
Net Investment Income
Interest income from fixed maturities and mortgage loans is
recognized when earned on the constant effective yield method
based on estimated timing of cash flows. Most premiums and
discounts on fixed maturities are amortized to the maturity date.
Premiums on callable bonds may be amortized to call dates based
on call prices. For securitized financial assets subject to
prepayment risk, yields are recalculated and adjusted periodically
to reflect historical and/or estimated future prepayments using
the retrospective method; however, if these investments are
impaired and for certain other asset-backed securities, any yield
adjustments are made using the prospective method. Prepayment
fees and make-whole payments on fixed maturities and mortgage
loans are recorded in net investment income when earned. For
equity securities, dividends are recognized as investment income
on the ex-dividend date. Limited partnerships and other
alternative investments primarily use the equity method of
accounting to recognize the Company’s share of earnings. For
impaired debt securities, the Company accretes the new cost
basis to the estimated future cash flows over the expected
remaining life of the security by prospectively adjusting the
security’s yield, if necessary. The Company’s non-income
F-12
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
producing investments were not material for the years ended
December 31, 2018, 2017 and 2016.
Derivative Instruments
Overview
The Company utilizes a variety of over-the-counter ("OTC")
derivatives, derivatives cleared through central clearing houses
("OTC-cleared") and exchange traded derivative instruments as
part of its overall risk management strategy as well as to enter
into replication transactions. The types of instruments may
include swaps, caps, floors, forwards, futures and options to
achieve one of four Company-approved objectives:
•
•
•
•
to hedge risk arising from interest rate, equity market,
commodity market, credit spread and issuer default, price or
currency exchange rate risk or volatility;
to manage liquidity;
to control transaction costs;
to enter into synthetic replication transactions.
Interest rate and credit default swaps involve the periodic
exchange of cash flows with other parties, at specified intervals,
calculated using agreed upon rates or other financial variables
and notional principal amounts. Generally, little to no cash or
principal payments are exchanged at the inception of the
contract. Typically, at the time a swap is entered into, the cash
flow streams exchanged by the counterparties are equal in value.
The Company clears certain interest rate swap and credit default
swap derivative transactions through central clearing houses.
OTC-cleared derivatives require initial collateral at the inception
of the trade in the form of cash or highly liquid securities, such as
U.S. Treasuries and government agency investments. Central
clearing houses also require additional cash as variation margin
based on daily market value movements. For information on
collateral, see the derivative collateral arrangements section in
Note 7 - Derivatives of Notes to Consolidated Financial
Statements. In addition, OTC-cleared transactions include price
alignment amounts either received or paid on the variation
margin, which are reflected in realized capital gains and losses or,
if characterized as interest, in net investment income.
Forward contracts are customized commitments that specify a
rate of interest or currency exchange rate to be paid or received
on an obligation beginning on a future start date and are typically
settled in cash.
Financial futures are standardized commitments to either
purchase or sell designated financial instruments, at a future date,
for a specified price and may be settled in cash or through
delivery of the underlying instrument. Futures contracts trade on
organized exchanges. Margin requirements for futures are met by
pledging securities or cash, and changes in the futures’ contract
values are settled daily in cash.
Option contracts grant the purchaser, for a premium payment,
the right to either purchase from or sell to the issuer a financial
instrument at a specified price, within a specified period or on a
stated date. The contracts may reference commodities, which
grant the purchaser the right to either purchase from or sell to
the issuer commodities at a specified price, within a specified
period or on a stated date. Option contracts are typically settled
in cash.
Foreign currency swaps exchange an initial principal amount in
two currencies, agreeing to re-exchange the currencies at a future
date, at an agreed upon exchange rate. There may also be a
periodic exchange of payments at specified intervals calculated
using the agreed upon rates and exchanged principal amounts.
The Company’s derivative transactions conducted in insurance
company subsidiaries are used in strategies permitted under the
derivative use plans required by the State of Connecticut, the
State of Illinois and the State of New York insurance departments.
Accounting and Financial Statement
Presentation of Derivative Instruments and
Hedging Activities
Derivative instruments are recognized on the Consolidated
Balance Sheets at fair value and are reported in Other
Investments and Other Liabilities. For balance sheet presentation
purposes, the Company has elected to offset the fair value
amounts, income accruals, and related cash collateral receivables
and payables of OTC derivative instruments executed in a legal
entity and with the same counterparty or under a master netting
agreement, which provides the Company with the legal right of
offset.
On the date the derivative contract is entered into, the Company
designates the derivative as (1) a hedge of the fair value of a
recognized asset or liability (“fair value” hedge), (2) a hedge of the
variability in cash flows of a forecasted transaction or of amounts
to be received or paid related to a recognized asset or liability
(“cash flow” hedge), (3) a hedge of a net investment in a foreign
operation (“net investment” hedge) or (4) held for other
investment and/or risk management purposes, which primarily
involve managing asset or liability related risks and do not qualify
for hedge accounting. The Company currently does not designate
any derivatives as fair value or net investment hedges.
Cash Flow Hedges - Changes in the fair value of a derivative
that is designated and qualifies as a cash flow hedge, including
foreign-currency cash flow hedges, are recorded in AOCI and are
reclassified into earnings when the variability of the cash flow of
the hedged item impacts earnings. Gains and losses on derivative
contracts that are reclassified from AOCI to current period
earnings are included in the line item in the Consolidated
Statements of Operations in which the cash flows of the hedged
item are recorded. Any hedge ineffectiveness is recorded
immediately in current period earnings as net realized capital
gains and losses. Periodic derivative net coupon settlements are
recorded in the line item of the Consolidated Statements of
Operations in which the cash flows of the hedged item are
recorded. Cash flows from cash flow hedges are presented in the
same category as the cash flows from the items being hedged in
the Consolidated Statement of Cash Flows.
Other Investment and/or Risk Management
Activities - The Company’s other investment and/or risk
management activities primarily relate to strategies used to
reduce economic risk or replicate permitted investments and do
not receive hedge accounting treatment. Changes in the fair
value, including periodic derivative net coupon settlements, of
derivative instruments held for other investment and/or risk
management purposes are reported in current period earnings as
net realized capital gains and losses.
F-13
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hedge Documentation and Effectiveness
Testing
To qualify for hedge accounting treatment, a derivative must be
highly effective in mitigating the designated changes in fair value
or cash flow of the hedged item. At hedge inception, the Company
formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management
objective and strategy for undertaking each hedge transaction.
The documentation process includes linking derivatives that are
designated as fair value, cash flow, or net investment hedges to
specific assets or liabilities on the balance sheet or to specific
forecasted transactions and defining the effectiveness and
ineffectiveness testing methods to be used. The Company also
formally assesses both at the hedge’s inception and ongoing on a
quarterly basis, whether the derivatives that are used in hedging
transactions have been and are expected to continue to be highly
effective in offsetting changes in fair values, cash flows or net
investment in foreign operations of hedged items. Hedge
effectiveness is assessed primarily using quantitative methods as
well as using qualitative methods. Quantitative methods include
regression or other statistical analysis of changes in fair value or
cash flows associated with the hedge relationship. Qualitative
methods may include comparison of critical terms of the
derivative to the hedged item. Hedge ineffectiveness of the hedge
relationships are measured each reporting period using the
“Change in Variable Cash Flows Method”, the “Change in Fair
Value Method”, the “Hypothetical Derivative Method”, or the
“Dollar Offset Method”.
Discontinuance of Hedge Accounting
The Company discontinues hedge accounting prospectively when
(1) it is determined that the qualifying criteria are no longer met;
(2) the derivative is no longer designated as a hedging instrument;
or (3) the derivative expires or is sold, terminated or exercised.
When hedge accounting is discontinued because it is determined
that the derivative no longer qualifies as an effective fair value
hedge, the derivative continues to be carried at fair value on the
balance sheet with changes in its fair value recognized in current
period earnings. Changes in the fair value of the hedged item
attributable to the hedged risk is no longer adjusted through
current period earnings and the existing basis adjustment is
amortized to earnings over the remaining life of the hedged item
through the applicable earnings component associated with the
hedged item.
When cash flow hedge accounting is discontinued because the
Company becomes aware that it is not probable that the
forecasted transaction will occur, the derivative continues to be
carried on the balance sheet at its fair value, and gains and losses
that were accumulated in AOCI are recognized immediately in
earnings.
In other situations in which hedge accounting is discontinued,
including those where the derivative is sold, terminated or
exercised, amounts previously deferred in AOCI are reclassified
into earnings when earnings are impacted by the hedged item.
Embedded Derivatives
The Company purchases investments that contain embedded
derivative instruments. When it is determined that (1) the
embedded derivative possesses economic characteristics that are
not clearly and closely related to the economic characteristics of
the host contract and (2) a separate instrument with the same
terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host for measurement purposes.
The embedded derivative, which is reported with the host
instrument in the Consolidated Balance Sheets, is carried at fair
value with changes in fair value reported in net realized capital
gains and losses.
Credit Risk of Derivative Instruments
Credit risk is defined as the risk of financial loss due to
uncertainty of an obligor’s or counterparty’s ability or willingness
to meet its obligations in accordance with agreed upon terms.
Credit exposures are measured using the market value of the
derivatives, resulting in amounts owed to the Company by its
counterparties or potential payment obligations from the
Company to its counterparties. The Company generally requires
that OTC derivative contracts, other than certain forward
contracts, be governed by International Swaps and Derivatives
Association ("ISDA") agreements which are structured by legal
entity and by counterparty, and permit right of offset. Some
agreements require daily collateral settlement based upon
agreed upon thresholds. For purposes of daily derivative
collateral maintenance, credit exposures are generally quantified
based on the prior business day’s market value and collateral is
pledged to and held by, or on behalf of, the Company to the extent
the current value of the derivatives is greater than zero, subject
to minimum transfer thresholds. The Company also minimizes the
credit risk of derivative instruments by entering into transactions
with high quality counterparties primarily rated A or better,
which are monitored and evaluated by the Company’s risk
management team and reviewed by senior management. OTC-
cleared derivatives are governed by clearing house rules.
Transactions cleared through a central clearing house reduce risk
due to their ability to require daily variation margin and act as an
independent valuation source. In addition, the Company monitors
counterparty credit exposure on a monthly basis to ensure
compliance with Company policies and statutory limitations.
Cash
Cash represents cash on hand and demand deposits with banks or
other financial institutions.
Reinsurance
The Company cedes insurance to affiliated and unaffiliated
insurers in order to limit its maximum losses and to diversify its
exposures and provide statutory surplus relief. Such
arrangements do not relieve the Company of its primary liability
to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company. The Company also assumes
reinsurance from other insurers and is a member of and
participates in reinsurance pools and associations. Assumed
reinsurance refers to the Company’s acceptance of certain
insurance risks that other insurance companies or pools have
underwritten.
Reinsurance accounting is followed for ceded and assumed
transactions that provide indemnification against loss or liability
relating to insurance risk (i.e. risk transfer). To meet risk transfer
requirements, a reinsurance agreement must include insurance
risk, consisting of underwriting and timing risk, and a reasonable
possibility of a significant loss to the reinsurer. If the ceded and
assumed transactions do not meet risk transfer requirements, the
Company accounts for these transactions as financing
transactions.
Premiums, benefits, losses and loss adjustment expenses reflect
the net effects of ceded and assumed reinsurance transactions.
F-14
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Included in other assets are prepaid reinsurance premiums, which
represent the portion of premiums ceded to reinsurers applicable
to the unexpired terms of the reinsurance contracts. Reinsurance
recoverables are balances due from reinsurance companies for
paid and unpaid losses and loss adjustment expenses and are
presented net of an allowance for uncollectible reinsurance.
Changes in the allowance for uncollectible reinsurance are
reported in benefits, losses and loss adjustment expenses in the
Company's Consolidated Statements of Operations.
The Company evaluates the financial condition of its reinsurers
and concentrations of credit risk. Reinsurance is placed with
reinsurers that meet strict financial criteria established by the
Company.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs ("DAC") represent costs that are
directly related to the acquisition of new and renewal insurance
contracts and incremental direct costs of contract acquisition
that are incurred in transactions with independent third parties
or in compensation to employees. Such costs primarily include
commissions, premium taxes, costs of policy issuance and
underwriting, and certain other expenses that are directly related
to successfully issued contracts.
For property and casualty insurance products and group life,
disability and accident contracts, costs are deferred and
amortized ratably over the period the related premiums are
earned. Deferred acquisition costs are reviewed to determine if
they are recoverable from future income, and if not, are charged
to expense. Anticipated investment income is considered in the
determination of the recoverability of DAC.
Income Taxes
The Company recognizes taxes payable or refundable for the
current year and deferred taxes for the tax consequences of
temporary differences between the financial reporting and tax
basis of assets and liabilities. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to
taxable income in the years the temporary differences are
expected to reverse. A deferred tax provision is recorded for the
tax effects of differences between the Company's current taxable
income and its income before tax under generally accepted
accounting principles in the Consolidated Statements of
Operations. For deferred tax assets, the Company records a
valuation allowance that is adequate to reduce the total deferred
tax asset to an amount that will more likely than not be realized.
Goodwill
Goodwill represents the excess of the cost to acquire a business
over the fair value of net assets acquired. Goodwill is not
amortized but is 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. 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
include small commercial within the Commercial Lines segment,
Group Benefits, Personal Lines and Hartford Funds. 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.
Management’s determination of the 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 required to support the business,
future business growth, earnings projections and, for the
Hartford Funds segment, assets under management 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 impairments.
Intangible Assets
Acquired intangible assets on the Consolidated Balance Sheets
include purchased customer relationship and agency or other
distribution rights and licenses measured at fair value at
acquisition. The Company amortizes finite-lived other intangible
assets over their useful lives generally on a straight-line basis over
the period of expected benefit, ranging from 1 to 15 years.
Management revises amortization periods if it believes there has
been a change in the length of time that an intangible asset will
continue to have value. Indefinite-lived intangible assets are not
subject to amortization. Intangible assets are assessed for
impairment generally when events or circumstances indicate a
potential impairment and at least annually for indefinite-lived
intangibles. If the carrying amount is not recoverable from
undiscounted cash flows, the impairment is measured as the
difference between the carrying amount and fair value.
Property and Equipment
Property and equipment, which includes capitalized software, is
carried at cost net of accumulated depreciation. Depreciation is
based on the estimated useful lives of the various classes of
property and equipment and is determined principally on the
straight-line method. Accumulated depreciation was $1.6 billion
and $2.6 billion as of December 31, 2018 and 2017, respectively,
with the decrease due to the removal of fully depreciated assets
in 2018. Depreciation expense was $232, $197, and $186 for the
years ended December 31, 2018, 2017 and 2016, respectively.
Unpaid Losses and Loss Adjustment
Expenses
For property and casualty and group life and disability insurance
products, the Company establishes reserves for unpaid losses and
loss adjustment expenses to provide for the estimated costs of
paying claims under insurance policies written by the Company.
These reserves include estimates for both claims that have been
reported and those that have been incurred but not reported
("IBNR"), and include estimates of all losses and loss adjustment
expenses associated with processing and settling these claims.
Estimating the ultimate cost of future losses and loss adjustment
expenses is an uncertain and complex process. This estimation
process is based significantly on the assumption that past
developments are an appropriate predictor of future events, and
involves a variety of actuarial techniques that analyze experience,
trends and other relevant factors. The effects of inflation are
F-15
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
implicitly considered in the reserving process. A number of
complex factors influence the uncertainties involved with the
reserving process including social and economic trends and
changes in the concepts of legal liability and damage awards.
Accordingly, final claim settlements may vary from the present
estimates, particularly when those payments may not occur until
well into the future. The Company regularly reviews the
adequacy of its estimated losses and loss adjustment expense
reserves by reserve line within the various reporting segments.
Adjustments to previously established reserves are reflected in
the operating results of the period in which the adjustment is
determined to be necessary. Such adjustments could possibly be
significant, reflecting any variety of new and adverse or favorable
trends.
Most of the Company’s property and casualty insurance products
reserves are not discounted. However, the Company has
discounted to present value certain reserves for indemnity
payments that are due to permanently disabled claimants under
workers’ compensation policies because the payment pattern and
the ultimate costs are reasonably fixed and determinable on an
individual claim basis. The discount rate is based on the risk free
rate for the expected claim duration as determined in the year the
claims were incurred. The Company also has discounted liabilities
for run-off structured settlement agreements that provide fixed
periodic payments to claimants. These structured settlements
include annuities purchased to fund unpaid losses for
permanently disabled claimants. These structured settlement
liabilities are discounted to present value using the rate implicit in
the purchased annuities and the purchased annuities are
accounted for within reinsurance recoverables.
2. BUSINESS ACQUISITIONS
Aetna Group Insurance
On November 1, 2017, The Hartford acquired Aetna's U.S. group
life and disability business through a reinsurance transaction for
total consideration of $1.452 billion, comprised of cash of $1.450
billion and share-based awards of $2, and recorded provisional
estimates of the fair value of the assets acquired and liabilities
assumed. The acquisition enables the Company to increase its
market share in the group life and disability industry. In 2018, The
Hartford and Aetna agreed on the final assets acquired and
liabilities assumed as of the acquisition date and The Hartford
Group life and disability contracts with 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 discount rates are estimated based on investment
yields expected to be earned on the cash flows net of investment
expenses and expected credit losses. The Company establishes
discount rates for these reserves in the year the claims are
incurred (the incurral year) which is when the estimated
settlement pattern is determined. The discount rate for life and
disability reserves acquired from Aetna's U.S. group life and
disability business were based on interest rates in effect at the
acquisition date of November 1, 2017.
For further information about how unpaid losses and loss
adjustment expenses are established, see Note 11 - Reserve for
Unpaid Losses and Loss Adjustment Expenses of Notes to
Consolidated Financial Statements.
Foreign Currency
Foreign currency translation gains and losses are reflected in
stockholders’ equity as a component of AOCI. The Company’s
foreign subsidiaries’ balance sheet accounts are translated at the
exchange rates in effect at each year end and income statement
accounts are translated at the average rates of exchange
prevailing during the year. The national currencies of the
international operations are generally their functional currencies.
Gains and losses resulting from the remeasurement of foreign
currency transactions are reflected in earnings in realized capital
gains (losses) in the period in which they occur.
finalized its provisional estimates with a final cash settlement
within the one year measurement period allowed under U.S.
GAAP ("GAAP"). As a result, in the third quarter of 2018, The
Hartford recorded additional assets and liabilities at fair value of
$80 and $80, respectively, with no change in goodwill. The
following table presents the preliminary allocation of the
purchase price to the assets acquired and liabilities assumed as of
the acquisition date, the measurement period adjustments
recorded, and the final purchase price allocation.
F-16
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
Assets
Cash and invested assets
Premiums receivable
Deferred income taxes, net
Other intangible assets
Property and equipment
Reinsurance recoverables
Other assets
Total Assets Acquired
Liabilities
Unpaid losses and loss adjustment expenses
Reserve for future policy benefits payable
Other policyholder funds and benefits payable
Unearned premiums
Other liabilities
Total Liabilities Assumed
Net identifiable assets acquired
Goodwill [1]
Net Assets Acquired
[1]Approximately $610 is deductible for income tax purposes.
Preliminary Value as of
November 1, 2017 (as
previously reported as
of December 31, 2017)
Measurement Period
Adjustments
As Adjusted Value as of
November 1, 2017
$
3,360 $
45 $
3,405
96
56
629
68
—
16
4,225
2,833
346
245
3
69
3,496
729
723
7
13
—
—
31
(16)
80
71
1
1
1
6
80
—
—
$
1,452 $
— $
103
69
629
68
31
—
4,305
2,904
347
246
4
75
3,576
729
723
1,452
The effect of measurement period adjustments on the
Consolidated Statements of Operations for the year ended
December 31, 2018 was immaterial and was determined as if the
accounting had been completed as of the acquisition date.
Property and equipment represents an internally developed
integrated absence management software acquired that was
valued based on estimated replacement cost. The software is
amortized over 5 years on a straight-line basis.
Intangible Assets Recorded in Connection
with the Acquisition
Asset
Value of in-force contracts
Customer relationships
Marketing agreement with Aetna
Total
Amount
Estimated
Useful Life
$
$
23
590
16
629
1 year
15 years
15 years
The value of in-force contracts represents the estimated profits
relating to the unexpired contracts in force at the acquisition date
through expiry of the contracts. The value of customer
relationships was estimated using net cash flows expected to
come from the renewals of in-force contracts acquired less costs
to service the related policies. The value of the marketing
agreement with Aetna was estimated using net cash flows
expected to come from incremental new business written during
the three-year duration of the agreement, less costs to service
the related contracts. The value for each of the identifiable
intangible assets was estimated using a discounted cash flow
method. Significant inputs to the valuation models include
estimates of expected premiums, persistency rates, investment
returns, claim costs, expenses and discount rates based on a
weighted average cost of capital.
Unpaid losses and loss adjustment expenses acquired were
recorded at estimated fair value equal to the present value of
expected future unpaid loss and loss adjustment expense
payments discounted using the net investment yield estimated as
of the acquisition date plus a risk margin. The fair value
adjustment for the risk margin is amortized over 12 years based
on the payout pattern of losses and loss expenses as estimated as
of the acquisition date.
The revenues and earnings of the business acquired are included
in the Company's Consolidated Statements of Operations in the
Group Benefits reporting segment and were $370 and $(37) in
the year of acquisition, respectively.
The $723 of goodwill recognized is largely attributable to the
acquired employee workforce, expected expense synergies,
economies of scale, and tax benefits not included within the value
of identifiable intangibles. Goodwill is allocated to the Company's
Group Benefits reporting segment.
The Company recognized $17 of acquisition related costs in the
year of acquisition. These costs are included in insurance
operating costs and other expenses in the Consolidated
Statement of Operations.
The following table presents supplemental pro forma amounts of
revenue and net income for the Company in 2016 and 2017 as
though the business was acquired on January 1, 2016.
F-17
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Lattice
On July 29, 2016, an indirect wholly-owned subsidiary of the
Company acquired 100% of the membership interests
outstanding of Lattice Strategies LLC, an investment management
firm and provider of strategic beta exchange-traded products
("ETP") with approximately $200 of assets under management
("AUM") at the acquisition date.
Fair Value of the Consideration Transferred at
the Acquisition Date
Cash
Contingent consideration
Total
$
$
19
23
42
Fair Value of Assets Acquired and Liabilities
Assumed at the Acquisition Date
Assets
Intangible assets [1]
Cash
Total assets acquired
Liabilities
Goodwill [2]
Net assets acquired
As of
July 29, 2016
Total liabilities assumed
Net identifiable assets acquired
As of
July 29, 2016
$
$
11
1
12
1
11
31
42
[1]Comprised of indefinite lived intangibles of $10 related to customer relationships
and $1 of other intangibles, which are amortized over 5 to 8 years.
[2]Deductible for federal income tax purposes.
Lattice's revenues and earnings since the acquisition date are
included in the Company's Consolidated Statements of
Operations in the Hartford Funds reporting segment.
In addition to the initial cash consideration, the Company is
required to make future payments to the former owners of
Lattice of up to $60 based upon growth in ETP AUM over four
years beginning on the date of acquisition. The contingent
consideration was measured at fair value at the acquisition date
by projecting future ETP AUM and discounting expected
payments back to the valuation date. The projected ETP AUM and
risk-adjusted discount rate are significant unobservable inputs to
fair value.
The goodwill recognized is attributable to the fact that the
acquisition of Lattice enables the Company to offer ETPs which
are expected to be a significant source of future revenue and
earnings growth. Goodwill is allocated to the Hartford Funds
reporting segment.
The Company recognized $1 of acquisition related costs for the
year ended December 31, 2016. These costs are included in
insurance operating costs and other expenses in the Consolidated
Statement of Operations.
Pro Forma Results (Unaudited)
Twelve months
ended
December 31,
2017 [1]
Twelve months
ended
December 31,
2016 [1]
$
$
18,899 $
(3,077) $
18,348
953
Total Revenue
Net Income
[1]Pro forma adjustments include the revenue and earnings of the Aetna U.S. group
life and disability business as well as amortization of identifiable intangible assets
acquired and the fair value adjustment to acquired insurance reserves. Pro forma
adjustments do not include retrospective adjustments to defer and amortize
acquisition costs as would be recorded under the Company’s accounting policy.
Maxum
On July 29, 2016, the Company acquired 100% of the
outstanding shares of Northern Homelands Company, the holding
company of Maxum Specialty Insurance Group headquartered in
Alpharetta, Georgia in a cash transaction for approximately $169.
The acquisition adds excess and surplus lines capability to the
Company's small commercial line of business. Maxum is
maintaining its brand and limited wholesale distribution model.
Maxum's revenues and earnings since the acquisition date are
included in the Company's Consolidated Statements of
Operations in the Commercial Lines reporting segment.
Fair Value of Assets Acquired and Liabilities
Assumed at the Acquisition Date
Assets
Cash and investments (including cash of $12)
$
Reinsurance recoverables
Intangible assets [1]
Other assets
Total assets acquired
Liabilities
Unpaid losses
Unearned premiums
Other liabilities
Total liabilities assumed
Net identifiable assets acquired
Goodwill [2]
Net assets acquired
$
274
113
11
79
477
235
77
34
346
131
38
169
[1]Comprised of indefinite lived intangibles of $4 related to state insurance licenses
acquired and other intangibles of $7 related to agency distribution relationships
of Maxum which are amortized over 10 years.
[2]Non-deductible for income tax purposes.
The goodwill recognized is attributable to expected growth from
the opportunity to sell both existing products and excess and
surplus lines coverage to a broader customer base and has been
allocated to the small commercial reporting unit within the
Commercial Lines reporting segment.
The Company recognized $1 of acquisition related costs for the
year ended December 31, 2016. These costs are included in
insurance operating costs and other expenses in the Consolidated
Statement of Operations.
F-18
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. EARNINGS (LOSS) PER COMMON SHARE
Computation of Basic and Diluted Earnings per Common Share
(In millions, except for per share data)
Earnings
For the years ended December 31,
2018
2017
2016
Income (loss) from continuing operations, net of tax
$
1,485 $
(262) $
Less: Preferred stock dividends
Income (loss) from continuing operations, net of tax, available to common stockholders
Income (loss) from discontinued operations, net of tax, available to common stockholders
Net income (loss) available to common stockholders
Shares
Weighted average common shares outstanding, basic
Dilutive effect of warrants
Dilutive effect of stock-based awards under compensation plans
6
1,479
322
1,801
—
(262)
(2,869)
(3,131)
613
—
613
283
896
358.4
363.7
387.7
1.9
3.8
—
—
3.6
3.5
Weighted average common shares outstanding and dilutive potential common shares [1]
364.1
363.7
394.8
Earnings per common share
Basic
Income (loss) from continuing operations, net of tax, available to common stockholders
Income (loss) from discontinued operations, net of tax, available to common stockholders
Net income (loss) available to common stockholders
Diluted
Income (loss) from continuing operations, net of tax, available to common stockholders
Income (loss) from discontinued operations, net of tax, available to common stockholders
Net income (loss) available to common stockholders
$
$
$
$
4.13 $
(0.72) $
0.90
(7.89)
5.03 $
(8.61) $
4.06 $
(0.72) $
0.89
(7.89)
4.95 $
(8.61) $
1.58
0.73
2.31
1.55
0.72
2.27
[1]For additional information, see Note 15 - Equity and Note 19 - Stock Compensation Plans of Notes to Consolidated Financial Statements.
Basic earnings per common share is computed based on the
weighted average number of common shares outstanding during
the year. Diluted earnings per common share includes the
dilutive effect of assumed exercise or issuance of warrants and
stock-based awards under compensation plans.
ended December 31, 2017, the Company was required to use
basic weighted average common shares outstanding in the
diluted calculations, since the inclusion of 4.3 million shares for
stock compensation plans and 2.5 million shares for warrants
would have been antidilutive to the calculations.
In periods where a loss from continuing operations available to
common stockholders or net loss available to common
stockholders is recognized, inclusion of incremental dilutive
shares would be antidilutive. Due to the antidilutive impact, such
shares are excluded from the diluted earnings per share
calculation of income (loss) from continuing operations, net of tax,
available to common stockholders and net income (loss) available
to common stockholders in such periods. As a result, for the year
4. SEGMENT INFORMATION
The Company currently conducts business principally in five
reporting segments including Commercial Lines, Personal Lines,
Property & Casualty ("P&C") Other Operations, Group Benefits
and Hartford Funds (previously referred to as "Mutual 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 debt financing and related
interest expense), purchase accounting adjustments related to
goodwill and other expenses not allocated to the reporting
Under the treasury stock method, for warrants and stock-based
awards, shares are assumed to be issued and then reduced for the
number of shares repurchaseable with theoretical proceeds at
the average market price for the period. Contingently issuable
shares are included for the number of shares issuable assuming
the end of the reporting period was the end of the contingency
period, if dilutive.
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. In
addition, Corporate includes a 9.7% ownership interest in the
legal entity that acquired the life and annuity business sold. For
further discussion of continued involvement in the life and
annuity business sold in May 2018, see Note 20 - Business
Dispositions and Discontinued Operations of Notes to
Consolidated Financial Statements.
The Company’s reporting segments, as well as the Corporate
category, are as follows:
F-19
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Lines
Commercial Lines provides workers’ compensation, property,
automobile, marine, livestock, liability and umbrella coverages
primarily throughout the U.S., along with a variety of customized
insurance products and risk management services including
professional liability, bond, surety, and specialty casualty
coverages.
Personal Lines
Personal Lines provides standard automobile, homeowners and
personal umbrella coverages to individuals across the U.S.,
including a special program designed exclusively for members of
AARP.
Property & Casualty Other Operations
Property & Casualty Other Operations includes certain property
and casualty operations, managed by the Company, that have
discontinued writing new business and includes substantially all
of the Company’s asbestos and environmental exposures.
Group Benefits
Group Benefits provides employers, associations and financial
institutions with group life, accident and disability coverage, along
with other products and services, including voluntary benefits,
and group retiree health.
Hartford Funds
Hartford Funds offers investment products for retail and
retirement accounts as well as ETPs and provides investment
management and administrative services such as product design,
implementation and oversight. This business also manages a
portion of the mutual funds which support the variable annuity
products within the life and annuity business sold in May 2018.
Corporate
The Company includes in the Corporate category investment
management fees and expenses related to managing third party
business, including management of the invested assets of Talcott
Resolution, 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 debt financing and related
interest expense), purchase accounting adjustments related to
goodwill and other expenses not allocated to the reporting
segments. In addition, Corporate includes a 9.7% ownership
interest in the legal entity that acquired the life and annuity
business sold in May 2018.
Financial Measures and Other
Segment Information
Certain transactions between segments occur during the year
that primarily relate to tax settlements, insurance coverage,
expense reimbursements, services provided, investment transfers
and capital contributions. In addition, certain inter-segment
transactions occur that relate to interest income on allocated
surplus. Consolidated net investment income is unaffected by
such transactions.
Revenues
For the years ended
December 31,
2018
2017
2016
Earned premiums and fee income:
Commercial Lines
Workers’ compensation
$ 3,341 $ 3,287 $ 3,187
Liability
Package business
Property
Professional liability
Bond
Automobile
653
604
585
1,364
1,301
1,249
618
254
241
610
604
246
230
630
577
231
218
643
Total Commercial Lines
7,081
6,902
6,690
Personal Lines
Automobile
Homeowners
Total Personal Lines [1]
Property & Casualty Other
Operations
Group Benefits
Group disability
Group life
Other
2,398
1,041
3,439
2,617
1,117
3,734
2,749
1,188
3,937
—
—
—
2,746
2,611
241
1,718
1,745
214
1,506
1,512
205
Total Group Benefits
5,598
3,677
3,223
Hartford Funds
Mutual fund and Exchange-
Traded Products ("ETP")
Talcott Resolution life and
annuity separate accounts [3]
Total Hartford Funds [2]
Corporate
Total earned premiums and fee
income
932
888
779
100
1,032
32
104
992
4
106
885
3
17,182
15,309
14,738
Total net investment income
1,780
1,603
1,577
Net realized capital gains (losses)
Other revenues
Total revenues
(112)
105
165
85
(110)
86
$18,955 $17,162 $16,291
[1]For 2018, 2017 and 2016, AARP members accounted for earned premiums of
$3.0 billion, $3.2 billion and $3.3 billion, respectively.
[2]Excludes distribution costs of $188 and $184 for the years ended December
31, 2017, and 2016, respectively, that were previously netted against fee income
and are now presented gross in insurance operating costs and other expenses.
[3]Represents revenues earned on the life and annuity separate account AUM sold in
May 2018 that is still managed by the Company's Hartford Funds segment.
F-20
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Income (Loss)
Amortization of Other Intangible Assets
For the years ended
December 31,
2018
2017
2016
Commercial Lines
$
4 $
1 $
Personal Lines
Group Benefits
4
60
4
9
Total amortization of other
intangible assets
$
68 $
14 $
—
4
—
4
Income Tax Expense (Benefit)
Commercial Lines
Personal Lines
Property & Casualty Other
Operations
Group Benefits
Hartford Funds
Corporate
For the years ended
December 31,
2018
2017
2016
$
267
(19)
(7)
84
38
377
26
24
38
63
415
(23)
(355)
83
43
(95)
457
(329)
Total income tax expense
(benefit)
$
268 $
985 $
(166)
Assets
Commercial Lines
Personal Lines
Property & Casualty Other
Operations
Group Benefits
Hartford Funds
Corporate
Total assets
As of December 31,
2018
2017
$
31,693 $
31,281
6,180
6,251
3,351
14,114
583
6,386
3,568
14,478
547
169,135
$
62,307 $
225,260
Commercial Lines
Personal Lines
Property & Casualty Other
Operations
Group Benefits
Hartford Funds
Corporate
For the years ended
December 31,
2018
2017
2016
$ 1,212 $
865 $
994
(32)
(9)
(9)
15
340
148
124
69
294
106
(4,456)
(529)
230
78
132
896
—
Net income (loss)
$ 1,807 $ (3,131) $
Preferred stock dividends
6
—
Net income (loss) available to
common stockholders
$ 1,801 $ (3,131) $
896
Net Investment Income
For the years ended
December 31,
2018
2017
2016
$
997 $
949 $
155
90
474
5
59
141
106
381
3
23
917
135
127
366
1
31
Commercial Lines
Personal Lines
Property & Casualty Other
Operations
Group Benefits
Hartford Funds
Corporate
Net investment income
$ 1,780 $ 1,603 $ 1,577
Amortization of Deferred Policy Acquisition
Costs
For the years ended
December 31,
2018
2017
2016
Commercial Lines
$ 1,048 $ 1,009 $
Personal Lines
Group Benefits
Hartford Funds
Corporate
275
309
45
16
—
33
21
—
973
348
31
24
1
Total amortization of
deferred policy acquisition
costs
$ 1,384 $ 1,372 $ 1,377
5. FAIR VALUE MEASUREMENTS
The Company carries certain financial assets and liabilities at
estimated fair value. Fair value is defined as the price that would
be received to sell an asset or paid to transfer a liability in the
principal or most advantageous market in an orderly transaction
between market participants. Our fair value framework includes a
hierarchy that gives the highest priority to the use of quoted
prices in active markets, followed by the use of market observable
inputs, followed by the use of unobservable inputs. The fair value
hierarchy levels are as follows:
F-21
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Level 1
Level 2
Level 3
Fair values based primarily on unadjusted quoted
prices for identical assets, or liabilities, in active
markets that the Company has the ability to access
at the measurement date.
Fair values primarily based on observable inputs,
other than quoted prices included in Level 1, or
based on prices for similar assets and liabilities.
Fair values derived when one or more of the
significant inputs are unobservable (including
assumptions about risk). With little or no
observable market, the determination of fair values
uses considerable judgment and represents the
Company’s best estimate of an amount that could
be realized in a market exchange for the asset or
liability. Also included are securities that are traded
within illiquid markets and/or priced by
independent brokers.
The Company will classify the financial asset or liability by level
based upon the lowest level input that is significant to the
determination of the fair value. In most cases, both observable
inputs (e.g., changes in interest rates) and unobservable inputs
(e.g., changes in risk assumptions) are used to determine fair
values that the Company has classified within Level 3.
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2018
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
Asset backed securities ("ABS")
Collateralized loan obligations ("CLOs")
Commercial mortgage-backed securities ("CMBS")
Corporate
Foreign government/government agencies
Municipal
Residential mortgage-backed securities ("RMBS")
U.S. Treasuries
Total fixed maturities
Fixed maturities, FVO
Equity securities, at fair value
Derivative assets
Credit derivatives
Equity derivatives
Foreign exchange derivatives
Interest rate derivatives
Total derivative assets [1]
Short-term investments
$
1,276 $
— $
1,266 $
1,437
3,552
13,398
847
10,346
3,279
1,517
35,652
22
1,214
5
3
(2)
1
7
4,283
—
—
—
—
—
—
330
330
—
1,093
—
—
—
—
—
1,337
3,540
12,878
844
10,346
2,359
1,187
33,757
22
44
5
—
(2)
1
4
1,039
2,462 $
3,244
37,071 $
Total assets accounted for at fair value on a recurring basis
$
41,178 $
Liabilities accounted for at fair value on a recurring basis
Derivative liabilities
Credit derivatives
Equity derivatives
Foreign exchange derivatives
Interest rate derivatives
Total derivative liabilities [2]
Contingent consideration [3]
(2)
1
(5)
(62)
(68)
(35)
—
—
—
—
—
—
(2)
1
(5)
(63)
(69)
—
Total liabilities accounted for at fair value on a recurring basis
$
(103) $
— $
(69) $
[1]Includes derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed
by agreements and applicable law. See footnote 2 to this table for derivative liabilities.
[2]Includes derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements
which may be imposed by agreements and applicable law.
[3]For additional information see the Contingent Consideration section below.
F-22
10
100
12
520
3
—
920
—
1,565
—
77
—
3
—
—
3
—
1,645
—
—
—
1
1
(35)
(34)
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2017
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
Asset-backed-securities ("ABS")
Collateralized loan obligations ("CLOs")
Commercial mortgage-backed securities ("CMBS")
Corporate
Foreign government/government agencies
Municipal
Residential mortgage-backed securities ("RMBS")
U.S. Treasuries
Total fixed maturities
Fixed maturities, FVO
Equity securities, AFS
Derivative assets
Credit derivatives
Foreign exchange derivatives
Equity derivatives
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
1,126 $
— $
1,107 $
1,260
3,336
12,804
1,110
12,485
3,044
1,799
36,964
41
1,012
9
(1)
1
—
—
—
—
—
—
333
333
—
887
—
—
—
1,165
3,267
12,284
1,108
12,468
1,814
1,466
34,679
41
49
9
(1)
—
19
95
69
520
2
17
1,230
—
1,952
—
76
—
—
1
1
10
2,270
40,297 $
Interest rate derivatives
Total derivative assets [1]
Short-term investments
Total assets accounted for at fair value on a recurring basis
Liabilities accounted for at fair value on a recurring basis
Derivative liabilities
—
Credit derivatives
—
Foreign exchange derivatives
1
Interest rate derivatives
1
Total derivative liabilities [2]
(29)
Contingent consideration [3]
(28)
Total liabilities accounted for at fair value on a recurring basis
[1]Includes derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed
(3)
(13)
(85)
(101)
—
(101) $
(3)
(13)
(84)
(100)
(29)
(129) $
1
9
1,172
35,950 $
—
—
1,098
2,318 $
—
—
—
—
—
— $
—
1
—
2,029
$
$
by agreements and applicable law. See footnote 2 to this table for derivative liabilities.
[2]Includes derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements
which may be imposed by agreements and applicable law.
[3]For additional information see the Contingent Consideration section below.
Fixed Maturities, Equity
Securities, Short-term
Investments, and Derivatives
Valuation Techniques
The 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 and techniques, which
are listed in priority order:
• Quoted prices, unadjusted, for identical assets or liabilities in
active markets, which are classified as Level 1.
•
Prices from third-party pricing services, which primarily
utilize a combination of techniques. These services utilize
recently reported trades of identical, similar, or benchmark
securities making adjustments for market observable inputs
available through the reporting date. If there are no recently
reported trades, they may use a discounted cash flow
technique to develop a price using expected cash flows based
upon the anticipated future performance of the underlying
collateral discounted at an estimated market rate. Both
techniques develop prices that consider the time value of
future cash flows and provide a margin for risk, including
liquidity and credit risk. Most prices provided by third-party
pricing services are classified as Level 2 because the inputs
used in pricing the securities are observable. However, some
F-23
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
•
•
securities that are less liquid or trade less actively are
classified as Level 3. Additionally, certain long-dated
securities, such as municipal securities and bank loans,
include benchmark interest rate or credit spread
assumptions that are not observable in the marketplace and
are thus classified as Level 3.
Internal matrix pricing, which is a valuation process
internally developed for private placement securities for
which the Company is unable to obtain a price from a third-
party pricing service. Internal pricing matrices determine
credit spreads that, when combined with risk-free rates, are
applied to contractual cash flows to develop a price. The
Company develops credit spreads using market based data
for public securities adjusted for credit spread differentials
between public and private securities, which are obtained
from a survey of multiple private placement brokers. The
market-based reference credit spread considers the issuer’s
financial strength and term to maturity, using an
independent public security index and trade information,
while the credit spread differential considers the non-public
nature of the security. Securities priced using internal matrix
pricing are classified as Level 2 because the inputs are
observable or can be corroborated with observable data.
Independent broker quotes, which are typically non-binding,
use inputs that can be difficult to corroborate with
observable market based data. Brokers may use present
value techniques using assumptions specific to the security
types, or they may use recent transactions of similar
securities. Due to the lack of transparency in the process that
brokers use to develop prices, valuations that are based on
independent broker quotes are classified as Level 3.
The fair value of derivative instruments is 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 and OTC-cleared derivatives
may be used and in other cases independent broker quotes may
be used. The pricing valuation models primarily use inputs that
are observable in the market or can be corroborated by
observable market data. The valuation of certain derivatives may
include significant inputs that are unobservable, such as volatility
levels, and reflect the Company’s view of what other market
participants would use when pricing such instruments.
Valuation Controls
The fair value process for investments is monitored by the
Valuation Committee, which is a cross-functional group of senior
management within the Company that meets at least quarterly.
The purpose of the committee is to oversee the pricing policy and
procedures, as well as to approve changes to valuation
methodologies and pricing sources. Controls and procedures
used to assess third-party pricing services are reviewed by the
Valuation Committee, including the results of annual due-
diligence reviews.
There are also two working groups under the Valuation
Committee: a Securities Fair Value Working Group (“Securities
Working Group”) and a Derivatives Fair Value Working Group
("Derivatives Working Group"). The working groups, which
include various investment, operations, accounting and risk
management professionals, meet monthly to review market data
trends, pricing and trading statistics and results, and any
proposed pricing methodology changes.
The Securities Working Group reviews prices received from third
parties to ensure that the prices represent a reasonable estimate
of the fair value. The group considers trading volume, new
issuance activity, market trends, new regulatory rulings and other
factors to determine whether the market activity is significantly
different than normal activity in an active market. A dedicated
pricing unit follows up with trading and investment sector
professionals and challenges prices of third-party pricing services
when the estimated assumptions used differ from what the unit
believes a market participant would use. If the available evidence
indicates that pricing from third-party pricing services or broker
quotes is based upon transactions that are stale or not from
trades made in an orderly market, the Company places little, if
any, weight on the third party service’s transaction price and will
estimate fair value using an internal process, such as a pricing
matrix.
The Derivatives Working Group reviews the inputs, assumptions
and methodologies used to ensure that the prices represent a
reasonable estimate of the fair value. A dedicated pricing team
works directly with investment sector professionals to
investigate the impacts of changes in the market environment on
prices or valuations of derivatives. New models and any changes
to current models are required to have detailed documentation
and are validated to a second source. The model validation
documentation and results of validation are presented to the
Valuation Committee for approval.
The Company conducts other monitoring controls around
securities and derivatives pricing including, but not limited to, the
following:
•
Review of daily price changes over specific thresholds and
new trade comparison to third-party pricing services.
• Daily comparison of OTC derivative market valuations to
counterparty valuations.
•
Review of weekly price changes compared to published bond
prices of a corporate bond index.
• Monthly reviews of price changes over thresholds, stale
prices, missing prices, and zero prices.
• Monthly validation of prices to a second source for securities
in most sectors and for certain derivatives.
In addition, the Company’s enterprise-wide Operational Risk
Management function, led by the Chief Risk Officer, is responsible
for model risk management and provides an independent review
of the suitability and reliability of model inputs, as well as an
analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are
considered Level 1 and consist of on-the-run U.S. Treasuries,
money market funds, exchange-traded equity securities, open-
ended mutual funds, certain short-term investments, and
exchange traded futures and option contracts.
F-24
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
Level 2
Primary Observable Inputs
Level 3
Primary Unobservable Inputs
Fixed Maturity Investments
Structured securities (includes ABS, CLOs CMBS and RMBS)
• Benchmark yields and spreads
• Monthly payment information
• Collateral performance, which varies by vintage year and includes
delinquency rates, loss severity rates and refinancing assumptions
• Credit default swap indices
Other inputs for ABS and RMBS:
• Estimate of future principal prepayments, derived from the
characteristics of the underlying structure
• Prepayment speeds previously experienced at the interest rate
levels projected for the collateral
Corporates
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for less liquid securities or those that trade less
actively, including subprime RMBS:
• Estimated cash flows
• Credit spreads, which include illiquidity premium
• Constant prepayment rates
• Constant default rates
• Loss severity
• Benchmark yields and spreads
• Reported trades, bids, offers of the same or similar securities
• Issuer spreads and credit default swap curves
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for investment grade privately placed securities that
utilize internal matrix pricing :
• Credit spreads for public securities of similar quality, maturity, and
sector, adjusted for non-public nature
Other inputs for below investment grade privately placed
securities:
• Independent broker quotes
• Credit spreads for public securities of similar quality, maturity,
and sector, adjusted for non-public nature
U.S Treasuries, Municipals, and Foreign government/government agencies
• Benchmark yields and spreads
• Issuer credit default swap curves
• Political events in emerging market economies
• Municipal Securities Rulemaking Board reported trades and material
event notices
• Issuer financial statements
Equity Securities
• Quoted prices in markets that are not active
Short Term Investments
• Benchmark yields and spreads
• Reported trades, bids, offers
• Issuer spreads and credit default swap curves
• Material event notices and new issue money market rates
Derivatives
Credit derivatives
• Swap yield curve
• Credit default swap curves
Equity derivatives
• Equity index levels
• Swap yield curve
Foreign exchange derivatives
• Swap yield curve
• Currency spot and forward rates
• Cross currency basis curves
Interest rate derivatives
• Swap yield curve
F-25
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
• For privately traded equity securities, internal discounted cash
flow models utilizing earnings multiples or other cash flow
assumptions that are not observable
Not applicable
Not applicable
• Independent broker quotes
• Equity volatility
Not applicable
• Independent broker quotes
• Interest rate volatility
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Significant Unobservable Inputs for Level 3 - Securities
Assets accounted
for at fair value on
a recurring basis
Fair
Value
Predominant
Valuation
Technique
Significant Unobservable Input
Minimum Maximum
As of December 31, 2018
Impact of
Increase in
Input
on Fair
Value [2]
Weighted
Average
[1]
CMBS [3]
Corporate [4]
RMBS [3]
$
2 Discounted
cash flows
Spread (encompasses prepayment,
default risk and loss severity)
9 bps
1,040 bps
182 bps
Decrease
274 Discounted
cash flows
815 Discounted
cash flows
Spread
145 bps
1,175 bps
263 bps
Decrease
Spread [6]
12 bps
215 bps
86 bps
Decrease
Constant prepayment rate [6]
Constant default rate [6]
Loss severity [6]
1%
1%
—%
15%
8%
6%
3%
Decrease
[5]
Decrease
100%
61%
Decrease
CMBS [3]
Corporate [4]
Municipal
RMBS [3]
$
56 Discounted
cash flows
Spread (encompasses prepayment,
default risk and loss severity)
As of December 31, 2017
251 Discounted
cash flows
17 Discounted
cash flows
1,215 Discounted
cash flows
Spread
Spread
Spread [6]
9 bps
1,040 bps
400 bps
103 bps
1,000 bps
242 bps
192 bps
250 bps
219 bps
24 bps
351 bps
74 bps
Constant prepayment rate [6]
Constant default rate [6]
Loss severity [6]
1%
—%
—%
25%
9%
6%
4%
100%
66%
Decrease
Decrease
Decrease
Decrease
Decrease
Decrease
[5]
Decrease
[1]The weighted average is determined based on the fair value of the securities.
[2]Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[3]Excludes securities for which the Company bases fair value on broker quotations.
[4]Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the
Company receives spread and yield information to corroborate the fair value.
[5]Decrease for above market rate coupons and increase for below market rate coupons.
[6]Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss
severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads.
Significant Unobservable Inputs for Level 3 - Derivatives
Fair
Value
Predominant
Valuation
Technique
Significant
Unobservable Input Minimum Maximum
As of December 31, 2018
Weighted
Average [1]
Impact of
Increase in Input
on Fair Value [2]
Interest rate swaptions [3]
1 Option model
Interest rate volatility
Equity options
3 Option model
Equity volatility
As of December 31, 2017
Interest rate swaptions [3]
1 Option model
Interest rate volatility
Equity options
1 Option model
Equity volatility
3%
19%
2%
18%
3%
21%
2%
22%
3%
20%
2%
20%
Increase
Increase
Increase
Increase
[1]The weighted average is determined based on the fair value of the derivatives.
[2]Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise
noted. Changes in fair value will be inversely impacted for short positions.
[3]The swaptions presented are purchased options that have the right to enter into a pay-fixed swap.
F-26
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tables above exclude securities for which fair values are
predominately based on independent broker quotes. While the
Company does not have access to the significant unobservable
inputs that independent brokers may use in their pricing process,
the Company believes brokers likely use inputs similar to those
used by the Company and third-party pricing services to price
similar instruments. As such, in their pricing models, brokers likely
use estimated loss severity rates, prepayment rates, constant
default rates and credit spreads. Therefore, similar to non-broker
priced securities, increases in these inputs would generally cause
fair values to decrease. For the year ended December 31, 2018,
no significant adjustments were made by the Company to broker
prices received.
Contingent Consideration
The acquisition of Lattice Strategies LLC ("Lattice") on July 29,
2016 requires the Company to make payments to former owners
of Lattice of up to $60 contingent upon growth in exchange-
traded products ("ETP") AUM over a period of four years
beginning on the date of acquisition. The contingent
consideration is measured at fair value on a quarterly basis by
projecting future eligible ETP AUM over the contingency period
to estimate the amount of expected payout. The future expected
payout is discounted back to the valuation date using a risk-
adjusted discount rate of 16.6%. The risk-adjusted discount rate
is an internally generated and significant unobservable input to
fair value.
The contingency period for ETP AUM growth ends July 29, 2020
and management adjusts the fair value of the contingent
consideration when it revises its projection of ETP AUM for the
acquired business. Before discounting to fair value, the Company
has accrued consideration payable of $40 assuming ETP AUM for
the acquired business grows to approximately $4 billion over the
contingency period. This contingent consideration payable
included $10 payable in the first quarter of 2019 given that ETP
AUM reached $1 billion in the fourth quarter of 2018.
Level 3 Assets and Liabilities
Measured at Fair Value on a
Recurring Basis Using
Significant Unobservable
Inputs
The Company uses derivative instruments to manage the risk
associated with certain assets and liabilities. However, the
derivative instrument may not be classified with the same fair
value hierarchy level as the associated asset or liability.
Therefore, the realized and unrealized gains and losses on
derivatives reported in the Level 3 rollforward may be offset by
realized and unrealized gains and losses of the associated assets
and liabilities in other line items of the financial statements.
F-27
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended
December 31, 2018
Total realized/
unrealized gains
(losses)
Fair value
as of
January 1,
2018
Included in
net income
[1]
Included
in OCI [2] Purchases
Settlements
Sales
Transfers
into Level
3 [3]
Transfers
out of
Level 3 [3]
Fair value
as of
December
31, 2018
Assets
Fixed Maturities, AFS
ABS
CLOs
CMBS
Corporate
Foreign Govt./Govt. Agencies
Municipal
RMBS
Total Fixed Maturities, AFS
Equity Securities, at fair value
Derivatives, net [4]
Equity
Interest rate
Total Derivatives, net [4]
Total Assets
Liabilities
$
19 $
— $
— $
90 $
(5) $
(4) $
12 $
(102) $
95
69
520
2
17
1,230
1,952
76
1
1
2
2,030
—
(1)
1
—
—
—
—
29
3
—
3
32
—
—
(18)
—
(1)
(16)
(35)
—
—
—
—
330
25
197
1
—
273
916
12
1
—
1
—
(14)
(36)
—
—
(319)
(374)
—
—
—
—
(13)
(8)
(52)
—
(1)
(52)
(130)
(40)
(2)
—
(2)
(35)
929
(374)
(172)
—
—
31
—
—
4
47
—
—
—
—
47
10
100
12
520
3
—
920
1,565
77
3
1
4
(312)
(59)
(123)
—
(15)
(200)
(811)
—
—
—
—
(811)
1,646
Contingent Consideration [5]
Total Liabilities
(29)
(29) $
$
(6)
(6) $
—
— $
—
— $
—
— $
—
— $
—
— $
—
— $
(35)
(35)
[1]Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes.
[2]All amounts are before income taxes.
[3]Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.
[4]Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other
liabilities.
[5]For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the
acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
F-28
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended
December 31, 2017
Total realized/
unrealized gains
(losses)
Fair value
as of
January 1,
2017
Included in
net income
[1]
Included
in OCI [2] Purchases
Settlements
Sales
Transfers
into Level
3 [3]
Transfers
out of
Level 3 [3]
Fair value
as of
December
31, 2017
Assets
Fixed Maturities, AFS
ABS
CLOs
CMBS
Corporate
Foreign Govt./Govt. Agencies
Municipal
RMBS
Total Fixed Maturities, AFS
Fixed Maturities, FVO
Equity Securities, AFS
Derivatives, net [4]
Equity
Interest rate
Other contracts
Total Derivatives, net [4]
Total Assets
Liabilities
$
45 $
— $
— $
56 $
(6) $
(6) $
27 $
(97) $
154
59
514
47
46
1,261
2,126
11
55
—
9
1
10
2,202
18
(2)
1
—
4
—
21
—
—
(4)
(8)
(1)
(13)
8
(13)
—
19
3
1
36
46
—
(3)
—
—
—
—
43
214
76
232
12
1
209
800
4
24
5
—
—
5
(101)
(9)
(76)
(1)
—
(268)
(461)
(2)
—
—
—
—
—
(24)
(10)
(157)
(2)
(35)
(7)
(241)
(13)
—
—
—
—
—
833
(463)
(254)
—
—
71
—
—
—
98
—
—
—
—
—
—
98
(153)
(45)
(84)
(57)
—
(1)
(437)
—
—
—
—
—
—
19
95
69
520
2
17
1,230
1,952
—
76
1
1
—
2
(437)
2,030
Contingent Considerations [5]
Total Liabilities
(25)
(25) $
$
(4)
(4) $
—
— $
—
— $
—
— $
—
— $
—
— $
—
— $
(29)
(29)
[1]Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes.
[2]All amounts are before income taxes.
[3]Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.
[4]Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other
liabilities.
[5]For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the
acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses).
F-29
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as Level 3 Still Held at
Year End
December 31,
2018
2017
Changes in Unrealized Gain/
(Loss) included in Net
Income [1] [2]
Changes in Unrealized Gain/
(Loss) included in OCI [3]
Changes in Unrealized Gain/
(Loss) included in Net
Income [1] [2]
Assets
Fixed Maturities, AFS
ABS
CMBS
Corporate
Municipal
RMBS
Total Fixed Maturities, AFS
Derivatives, net
Equity
Interest rate
Total Derivatives, net
Total Assets
Liabilities
Contingent Consideration [4]
Total Liabilities
$
$
— $
1 $
(1)
—
—
—
(1)
1
—
1
—
(6)
(6) $
28
(42)
24
17
28
—
—
28
— $
—
(2)
—
—
—
(2)
(5)
(7)
(12)
(14)
(4)
(4)
[1]All amounts in these rows are reported in net realized capital gains (losses). All amounts are before income taxes.
[2]Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
[3]Changes in unrealized gain/(loss) on fixed maturities, AFS are reported in changes in net unrealized gain on securities in the Consolidated Statements of Comprehensive Income.
Changes in interest rate derivatives are reported in changes in net gain on cash flow hedging instruments in the Consolidated Statements of Comprehensive Income.
[4]For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements for discussion of the contingent consideration in connection with the
acquisition of Lattice.
Fair Value Option
The Company has elected the fair value option for certain
securities that contain embedded credit derivatives with
underlying credit risk primarily related to residential real estate,
and these securities are included within fixed maturities, FVO on
the Consolidated Balance Sheets. The Company reports changes
in the fair value of these securities in net realized capital gains
and losses.
As of December 31, 2018 and December 31, 2017, the fair value
of assets and liabilities using the fair value option was $22 and
$41, respectively, within the residential real estate sector.
The Company also previously elected the fair value option for
certain equity securities in order to align the accounting with
total return swap contracts that hedged the risk associated with
the investments. The swaps did not qualify for hedge accounting
and the change in value of both the equity securities and the total
return swaps were recorded in net realized capital gains and
losses. These equity securities were classified within equity
securities, AFS on the Consolidated Balance Sheets. Income
earned from FVO securities was recorded in net investment
income and changes in fair value were recorded in net realized
capital gains and losses.
For the year-ended December 31, 2018, the realized capital gains
(losses) related to the fair value of assets using the fair value
option were $(1) within the residential real estate sector. For the
year-ended December 31, 2017, the income earned from FVO
and the changes recorded in net realized capital gains (losses)
were driven by corporate bond and equity securities of $(1) and
$1, respectively. For the year-ended December 31, 2016 the
realized capital gains (losses) related to the fair value of assets
using the fair value option were $5 and $(1) within the residential
real estate and foreign government sectors.
F-30
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial Instruments Not Carried at Fair Value
Financial Assets and Liabilities Not Carried at Fair Value
Assets
Mortgage loans
Liabilities
December 31, 2018
December 31, 2017
Fair Value
Hierarchy
Level
Carrying
Amount
Fair Value
Fair Value
Hierarchy
Level
Carrying
Amount
Fair Value
Level 3 $
3,704 $
3,746
Level 3 $
3,175 $
3,220
Other policyholder funds and benefits payable
Senior notes [1]
Junior subordinated debentures [1]
Level 3 $
774 $
Level 2 $
3,589 $
Level 2 $
1,089 $
775
3,887
1,052
Level 3 $
825 $
Level 2 $
3,415 $
Level 2 $
1,583 $
827
4,054
1,699
[1]Included in long-term debt in the Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
6. INVESTMENTS
Net Investment Income
Net Realized Capital Gains (Losses)
(Before tax)
2018
2017
2016
(Before tax)
2018
2017
2016
For the years ended December 31,
For the years ended December 31,
Fixed maturities [1]
$
1,459 $
1,303 $
1,319
Gross gains on sales
$
114 $
275 $
Equity securities
Mortgage loans
Limited partnerships and
other alternative
investments
Other investments [2]
Investment expenses
Total net investment
income
32
141
205
20
(77)
24
124
174
49
(71)
22
116
128
51
(59)
$
1,780 $
1,603 $
1,577
[1]Includes net investment income on short-term investments.
[2]Includes income from derivatives that hedge fixed maturities and qualify for
hedge accounting.
Gross losses on sales
Equity securities [1]
Net OTTI losses
recognized in earnings
Valuation allowances on
mortgage loans
Transactional foreign
currency revaluation
Non-qualifying foreign
currency derivatives
Other, net [2]
(172)
(48)
(1)
—
1
3
(9)
(113)
—
(8)
(1)
14
(14)
12
Net realized capital gains
(losses)
$
(112) $
165 $
222
(159)
—
(27)
—
(78)
83
(151)
(110)
[1]Effective January 1, 2018, with adoption of new accounting guidance for equity
securities at fair value, includes all changes in fair value and trading gains and
losses for equity securities.
[2]Includes gains (losses) on non-qualifying derivatives, excluding foreign currency
derivatives, of $(15), $8, and $(9), respectively for 2018, 2017 and 2016. Also
included for the year ended December 31, 2016, is a loss related to the write-
down of investments in solar energy partnerships, which generated tax benefits,
and a loss related to the sale of the Company's U.K. property and casualty run-off
subsidiaries.
Net realized capital gains (losses) from investment sales are
reported as a component of revenues and are determined on a
specific identification basis. Before tax, net gains (losses) on sales
and impairments previously reported as unrealized gains or
losses in AOCI were $(80), $152, and $36 for the years ended
December 31, 2018, 2017, and 2016, respectively. Effective
January 1, 2018, with adoption of new accounting guidance for
equity securities, the proceeds from sales of AFS securities no
longer includes equity securities.
F-31
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The net unrealized gain (loss) on equity securities included in net
realized capital gains (losses) related to equity securities still held
as of December 31, 2018, was $(80) for the year-ended
December 31, 2018. Prior to January 1, 2018, changes in net
unrealized gains (losses) on equity securities were included in
AOCI.
Sales of AFS Securities
For the years ended December 31,
2018
2017
2016
Fixed maturities, AFS
Sale proceeds
$ 21,327 $ 17,614 $
9,984
Gross gains
Gross losses
Equity securities, AFS
Sale proceeds
Gross gains
Gross losses
90
(169)
204
(90)
$
607 $
69
(23)
196
(138)
359
26
(20)
Sales of AFS securities in 2018 were primarily a result of duration
and liquidity management as well as tactical changes to the
portfolio as a result of changing market conditions.
Recognition and Presentation of
Other-Than-Temporary Impairments
The Company will record an other-than-temporary impairment
(“OTTI”) for fixed maturities if the Company intends to sell or it is
more likely than not that the Company will be required to sell the
security before a recovery in value. A corresponding charge is
recorded in net realized capital losses equal to the difference
between the fair value and amortized cost basis of the security.
The Company will also record an OTTI for those fixed maturities
for which the Company does not expect to recover the entire
amortized cost basis. For these securities, the excess of the
amortized cost basis over its fair value is separated into the
portion representing a credit OTTI, which is recorded in net
realized capital losses, and the remaining non-credit amount,
which is recorded in OCI. The credit OTTI amount is the excess of
its amortized cost basis over the Company’s best estimate of
discounted expected future cash flows. The non-credit amount is
the excess of the best estimate of the discounted expected future
cash flows over the fair value. The Company’s best estimate of
discounted expected future cash flows becomes the new cost
basis and accretes prospectively into net investment income over
the estimated remaining life of the security.
Developing the Company’s best estimate of expected future cash
flows is a quantitative and qualitative process that incorporates
information received from third-party sources along with certain
internal assumptions regarding the future performance. The
Company's considerations include, but are not limited to, (a)
changes in the financial condition of the issuer and the underlying
collateral, (b) whether the issuer is current on contractually
obligated interest and principal payments, (c) credit ratings, (d)
payment structure of the security and (e) the extent to which the
fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not
limited to, economic and industry-specific trends and
F-32
fundamentals, security-specific developments, industry earnings
multiples and the issuer’s ability to restructure and execute asset
sales.
For structured securities, assumptions include, but are not limited
to, various performance indicators such as historical and
projected default and recovery rates, credit ratings, current and
projected delinquency rates, loan-to-value ("LTV") ratios, average
cumulative collateral loss rates that vary by vintage year,
prepayment speeds, and property value declines. These
assumptions require the use of significant management judgment
and include the probability of issuer default and estimates
regarding timing and amount of expected recoveries which may
include estimating the underlying collateral value.
Prior to January 1, 2018, the Company recorded an OTTI for
certain equity securities with debt-like characteristics if the
Company intended to sell or it was more likely than not that the
Company was required to sell the security before a recovery in
value as well as for those equity securities for which the Company
did not expect to recover the entire amortized cost basis. The
Company also recorded an OTTI for equity securities where the
decline in the fair value was deemed to be other-than-temporary.
Impairments in Earnings by Type
For the years ended December 31,
2018
2017
2016
Credit impairments
Impairments on equity
securities
Intent-to-sell impairments
Total impairments
$
$
1 $
2 $
—
1 $
6
—
8 $
21
4
2
27
Cumulative Credit Impairments
(Before tax)
2018
2017
2016
For the years ended December 31,
Balance as of beginning of
period
$
Additions for credit
impairments recognized
on [1]:
(25) $
(110) $
(113)
Securities not
previously impaired
Securities previously
impaired
Reductions for credit
impairments previously
recognized on:
Securities that
matured or were sold
during the period
Securities due to an
increase in expected
cash flows
Balance as of end of
period
—
(1)
7
—
(1)
(1)
76
11
(16)
(5)
15
9
$
(19) $
(25) $
(110)
[1]These additions are included in the net OTTI losses recognized in earnings in the
Consolidated Statements of Operations.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Available-for-Sale Securities
AFS Securities by Type
December 31, 2018
December 31, 2017
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-
Credit
OTTI
[1]
Cost or
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-
Credit
OTTI
[1]
$
1,272 $
5 $
(1) $ 1,276 $ — $
1,119 $
9 $
(2) $ 1,126 $ —
—
(5)
—
—
—
—
—
(5)
—
(5)
ABS
CLOs
CMBS
Corporate
Foreign govt./govt.
agencies
Municipal
RMBS
U.S. Treasuries
Total fixed maturities,
AFS
Equity securities, AFS [2]
1,455
3,581
13,696
866
9,972
3,270
1,491
35,603
2
35
148
7
421
44
41
703
(20)
(64)
1,437
3,552
(446)
13,398
(26)
(47)
(35)
(15)
847
10,346
3,279
1,517
—
(5)
—
—
—
—
—
1,257
3,304
12,370
1,071
11,743
2,985
1,763
3
58
490
43
754
63
46
—
(26)
(56)
1,260
3,336
12,804
(4)
1,110
(12)
12,485
(4)
(10)
3,044
1,799
(654)
35,652
(5)
35,612
907
1,466
121
(114)
36,964
(16)
1,012
Total AFS securities
$ 35,603 $
703 $
(654) $ 35,652 $
(5) $ 36,519 $
1,587 $
(130) $ 37,976 $
[1]Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses
as of December 31, 2018 and 2017.
[2]Effective January 1, 2018, with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value and
are excluded from the table above as of December 31, 2018.
Fixed maturities, AFS, by Contractual Maturity Year
One year or less
Over one year through five years
Over five years through ten years
Over ten years
Subtotal
Mortgage-backed and asset-backed securities
Total fixed maturities, AFS
Estimated maturities may differ from contractual maturities due
to security call or prepayment provisions. Due to the potential for
variability in payment speeds (i.e. prepayments or extensions),
mortgage-backed and asset-backed securities are not categorized
by contractual maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio
including issuer, sector and geographic stratification, where
applicable, and has established certain exposure limits,
diversification standards and review procedures to mitigate
credit risk. The Company had no investment exposure to any
credit concentration risk of a single issuer greater than 10% of
the Company's stockholders' equity, other than the U.S.
government and certain U.S. government agencies as of
December 31, 2018 or December 31, 2017. As of December 31,
2018, other than U.S. government and certain U.S. government
F-33
December 31, 2018
December 31, 2017
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
999 $
1,002 $
1,507 $
5,786
6,611
12,629
26,025
9,578
5,791
6,495
12,820
26,108
9,544
5,007
6,505
13,928
26,947
8,665
$
35,603 $
35,652 $
35,612 $
1,513
5,119
6,700
14,866
28,198
8,766
36,964
agencies, the Company’s three largest exposures by issuer were
the New York State Dormitory Authority, Commonwealth of
Massachusetts and the New York City Transitional Finance
Authority which each comprised less than 1% of total invested
assets. As of December 31, 2017, other than U.S. government and
certain U.S. government agencies, the Company’s three largest
exposures by issuer were New York City Transitional Finance
Authority, New York State Dormitory Authority and the
Commonwealth of Massachusetts which each comprised less
than 1% of total invested assets. The Company’s three largest
exposures by sector as of December 31, 2018 were the municipal
securities, CMBS and the financial services sector which
comprised approximately 22%, 8% and 7%, respectively, of total
invested assets. The Company’s three largest exposures by sector
as of December 31, 2017 were municipal securities, CMBS and
RMBS which comprised approximately 28%, 7% and 7%,
respectively, of total invested assets.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrealized Losses on AFS Securities
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2018
Less Than 12 Months
Fair
Value
Unrealized
Losses
Amortized
Cost
12 Months or More
Fair
Value
Unrealized
Losses
Amortized
Cost
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
ABS
CLOs
CMBS
Corporate
Foreign govt./govt. agencies
Municipal
RMBS
U.S. Treasuries
Total fixed maturities, AFS in an
unrealized loss position
$
566 $
566 $
— $
1,358
896
7,174
407
1,643
1,344
497
1,338
882
6,903
391
1,613
1,329
492
(20)
(14)
(271)
(16)
(30)
(15)
(5)
113 $
7
1,129
2,541
203
292
648
339
112 $
7
1,079
2,366
193
275
628
329
(1) $
—
(50)
(175)
(10)
(17)
(20)
(10)
679 $
678 $
1,365
2,025
9,715
610
1,935
1,992
836
1,345
1,961
9,269
584
1,888
1,957
821
(1)
(20)
(64)
(446)
(26)
(47)
(35)
(15)
$ 13,885 $ 13,514 $
(371) $
5,272 $ 4,989 $
(283) $ 19,157 $ 18,503 $
(654)
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2017
Less Than 12 Months
Fair
Value
Unrealized
Losses
Amortized
Cost
12 Months or More
Fair
Value
Unrealized
Losses
Amortized
Cost
Amortized
Cost
Total
Fair
Value
Unrealized
Losses
ABS
CLOs
CMBS
Corporate
Foreign govt./govt. agencies
Municipal
RMBS
U.S. Treasuries
Total fixed maturities, AFS in an
unrealized loss position
Equity securities, AFS [1]
Total securities in an unrealized
loss position
$
461 $
359
1,178
2,322
244
511
889
658
460 $
359
1,167
2,302
242
507
887
652
(1) $
—
(11)
(20)
(2)
(4)
(2)
(6)
30 $
1
243
1,064
51
236
137
254
29 $
1
228
1,028
49
228
135
250
(1) $
—
(15)
(36)
(2)
(8)
(2)
(4)
491 $
360
1,421
3,386
295
747
1,026
912
489 $
360
1,395
3,330
291
735
1,022
902
(2)
—
(26)
(56)
(4)
(12)
(4)
(10)
6,622
6,576
176
163
(46)
(13)
2,016
1,948
24
21
(68)
(3)
8,638
8,524
200
184
(114)
(16)
$
6,798 $ 6,739 $
(59) $
2,040 $ 1,969 $
(71) $
8,838 $ 8,708 $
(130)
[1]Effective January 1, 2018 , with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value and
are excluded from the table above as of December 31, 2018.
As of December 31, 2018, AFS securities in an unrealized loss
position consisted of 2,960 securities, primarily in the corporate
and commercial real estate sectors, which were depressed
primarily due to widening of credit spreads and an increase in
interest rates since the securities were purchased. As of
December 31, 2018, 98% of these securities were depressed less
than 20% of cost or amortized cost. The increase in unrealized
losses during 2018 was primarily attributable to widening of
credit spreads and higher interest rates.
Most of the securities depressed for twelve months or more
relate to corporate securities and structured securities with
exposure to commercial real estate. Corporate securities and
commercial real estate securities were primarily depressed
because current market spreads are wider and interest rates are
higher than at the securities' respective purchase dates. The
Company neither has an intention to sell nor does it expect to be
required to sell the securities outlined in the preceding
discussion.
Mortgage Loans
Mortgage Loan Valuation Allowances
Mortgage loans are considered to be impaired when management
estimates that, based upon current information and events, it is
probable that the Company will be unable to collect amounts due
according to the contractual terms of the loan agreement. The
Company reviews mortgage loans on a quarterly basis to identify
potential credit losses. Among other factors, management
reviews current and projected macroeconomic trends, such as
unemployment rates and property-specific factors such as rental
rates, occupancy levels, LTV ratios and debt service coverage
ratios (“DSCR”). In addition, the Company considers historical,
current and projected delinquency rates and property values.
Estimates of collectibility require the use of significant
management judgment and include the probability and timing of
borrower default and loss severity estimates. In addition, cash
flow projections may change based upon new information about
the borrower's ability to pay and/or the value of underlying
collateral such as changes in projected property value estimates.
For mortgage loans that are deemed impaired, a valuation
allowance is established for the difference between the carrying
F-34
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
amount and estimated fair value. The mortgage loan's estimated
fair value is most frequently the Company's share of the fair value
of the collateral but may also be the Company’s share of either
(a) the present value of the expected future cash flows discounted
at the loan’s effective interest rate or (b) the loan’s observable
market price. A valuation allowance may be recorded for an
individual loan or for a group of loans that have an LTV ratio of
90% or greater, a low DSCR or have other lower credit quality
characteristics. Changes in valuation allowances are recorded in
net realized capital gains and losses. Interest income on impaired
loans is accrued to the extent it is deemed collectible and the
borrowers continue to make payments under the original or
restructured loan terms. The Company stops accruing interest
income on loans when it is probable that the Company will not
receive interest and principal payments according to the
contractual terms of the loan agreement. The Company resumes
accruing interest income when it determines that sufficient
collateral exists to satisfy the full amount of the loan principal and
interest payments and when it is probable cash will be received in
the foreseeable future. Interest income on defaulted loans is
recognized when received.
As of December 31, 2018 and December 31, 2017 mortgage
loans had an amortized cost and carrying value of $3.7 billion and
$3.2 billion, respectively, with a valuation allowance of $1 for
both periods.
As of December 31, 2018 the carrying value of mortgage loans
that had a valuation allowance was $23. There were no mortgage
loans held-for-sale as of both December 31, 2018 and December
31, 2017. As of December 31, 2018, the Company had no
mortgage loans that have had extensions or restructurings other
than what is allowable under the original terms of the contract.
The following table presents the activity within the Company’s
valuation allowance for mortgage loans. These loans have been
evaluated both individually and collectively for impairment. Loans
evaluated collectively for impairment are immaterial.
Valuation Allowance Activity
For the years ended December 31,
2018
2017
2016
Balance as of January 1
$
(1) $
— $
Reversals/(Additions)
Deductions
Balance as of December
31
—
—
(1)
—
$
(1) $
(1) $
(4)
—
4
—
The weighted-average LTV ratio of the Company’s mortgage loan
portfolio was 52% as of December 31, 2018, while the weighted-
average LTV ratio at origination of these loans was 61%. LTV
ratios compare the loan amount to the value of the underlying
property collateralizing the loan. The loan collateral values are
updated no less than annually through reviews of the underlying
properties. Factors considered in estimating property values
include, among other things, actual and expected property cash
flows, geographic market data and the ratio of the property's net
operating income to its value. DSCR compares a property’s net
operating income to the borrower’s principal and interest
payments. As of December 31, 2018 and December 31, 2017, the
Company held no delinquent commercial mortgages loan past
due by 90 days or more.
Mortgage Loans Credit Quality
December 31, 2018 December 31, 2017
Avg.
Debt-
Service
Coverage
Ratio
Avg.
Debt-
Service
Coverage
Ratio
Carrying
Value
0.00x $
1.60x
2.59x
18
265
2,892
1.27x
1.95x
2.76x
Carrying
Value
$
—
386
3,318
$ 3,704
2.49x $ 3,175
2.69x
Loan-to-value
Greater than
80%
65% - 80%
Less than 65%
Total mortgage
loans
Mortgage Loans by Region
December 31,
2018
December 31,
2017
Carrying
Value
Percent
of Total
Carrying
Value
Percent
of Total
East North Central
$
Middle Atlantic
Mountain
New England
Pacific
South Atlantic
West North Central
West South Central
Other [1]
250
270
30
330
917
712
148
420
627
6.8% $
7.3%
0.8%
8.9%
24.8%
19.2%
4.0%
11.3%
16.9%
251
272
31
293
760
710
149
278
431
7.9%
8.6%
1.0%
9.2%
23.9%
22.4%
4.7%
8.7%
13.6%
Total mortgage loans $ 3,704
[1]Primarily represents loans collateralized by multiple properties in various regions.
100.0% $ 3,175
100.0%
Mortgage Loans by Property Type
December 31, 2018
December 31, 2017
Carrying
Value
Percent
of Total
Carrying
Value
Percent
of Total
Commercial
Industrial
Multifamily
Office
Retail
Single Family
Other
Total mortgage
loans
1,108
1,138
708
392
82
276
29.9%
30.7%
19.1%
10.6%
2.2%
7.5%
817
1,006
751
367
—
234
25.7%
31.7%
23.7%
11.5%
—%
7.4%
$
3,704
100.0% $
3,175
100.0%
Mortgage Servicing
The Company originates, sells and services commercial mortgage
loans on behalf of third parties and recognizes servicing fees
income over the period that services are performed. As of
December 31, 2018, under this program, the Company serviced
mortgage loans with a total outstanding principal of $6.0 billion,
of which $3.6 billion was serviced on behalf of third parties and
$2.4 billion was retained and reported in total investments on the
F-35
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company's Consolidated Balance Sheets. As of December 31,
2017, the Company serviced mortgage loans with a total
outstanding principal balance of $1.3 billion, of which $402 was
serviced on behalf of third parties, $566 was retained and
reported in total investments and $356 was reported in assets
held for sale on the Company's Consolidated Balance Sheets.
Servicing rights are carried at the lower of cost or fair value and
were zero as of December 31, 2018 and 2017, because servicing
fees were market-level fees at origination and remain adequate to
compensate the Company for servicing the loans.
Variable Interest Entities
The Company is engaged with various special purpose entities
and other entities that are deemed to be VIEs primarily as an
investor through normal investment activities but also as an
investment manager.
A VIE is an entity that either has investors that lack certain
essential characteristics of a controlling financial interest, such as
simple majority kick-out rights, or lacks sufficient funds to finance
its own activities without financial support provided by other
entities. The Company performs ongoing qualitative assessments
of its VIEs to determine whether the Company has a controlling
financial interest in the VIE and therefore is the primary
beneficiary. The Company is deemed to have a controlling
financial interest when it has both the ability to direct the
activities that most significantly impact the economic
performance of the VIE and the obligation to absorb losses or
right to receive benefits from the VIE that could potentially be
significant to the VIE. Based on the Company’s assessment, if it
determines it is the primary beneficiary, the Company
consolidates the VIE in the Company’s Consolidated Financial
Statements.
Consolidated VIEs
As of December 31, 2018 and December 31, 2017, the Company
did not hold any securities for which it is the primary beneficiary.
Non-Consolidated VIEs
The Company, through normal investment activities, makes
passive investments in limited partnerships and other alternative
investments. For these non-consolidated VIEs, the Company has
determined it is not the primary beneficiary as it has no ability to
direct activities that could significantly affect the economic
performance of the investments. The Company’s maximum
exposure to loss as of December 31, 2018 and 2017 is limited to
the total carrying value of $1 billion and $920, respectively, which
are included in limited partnerships and other alternative
investments in the Company's Consolidated Balance Sheets. As of
December 31, 2018 and 2017, the Company has outstanding
commitments totaling $718 and $787, respectively, whereby the
Company is committed to fund these investments and may be
called by the partnership during the commitment period to fund
the purchase of new investments and partnership expenses.
These investments are generally of a passive nature in that the
Company does not take an active role in management.
In addition, the Company makes passive investments in
structured securities issued by VIEs for which the Company is not
the manager. These investments are included in ABS, CLOs,
CMBS and RMBS in the Available-for-Sale Securities table and
fixed maturities, FVO, in the Company’s Consolidated Balance
Sheets. The Company has not provided financial or other support
with respect to these investments other than its original
F-36
investment. For these investments, the Company determined it is
not the primary beneficiary due to the relative size of the
Company’s investment in comparison to the principal amount of
the structured securities issued by the VIEs, the level of credit
subordination which reduces the Company’s obligation to absorb
losses or right to receive benefits and the Company’s inability to
direct the activities that most significantly impact the economic
performance of the VIEs. The Company’s maximum exposure to
loss on these investments is limited to the amount of the
Company’s investment.
Securities Lending, Repurchase
Agreements and Other
Collateral Transactions
The Company enters into securities financing transactions as a
way to earn additional income or manage liquidity, primarily
through securities lending and repurchase agreements.
Securities Lending
Under a securities lending program, the Company lends certain
fixed maturities within the corporate, foreign government/
government agencies, and municipal sectors as well as equity
securities to qualifying third-party borrowers in return for
collateral in the form of cash or securities. For domestic and non-
domestic loaned securities, respectively, borrowers provide
collateral of 102% and 105% of the fair value of the securities lent
at the time of the loan. Borrowers will return the securities to the
Company for cash or securities collateral at maturity dates
generally of 90 days or less. Security collateral on deposit from
counterparties in connection with securities lending transactions
may not be sold or re-pledged, except in the event of default by
the counterparty, and is not reflected on the Company’s
Consolidated Balance Sheets. Additional collateral is obtained if
the fair value of the collateral falls below 100% of the fair value of
the loaned securities. The agreements are continuous and do not
have stated maturity dates and provide the counterparty the
right to sell or re-pledge the securities loaned. If cash, rather than
securities, is received as collateral, the cash is typically invested in
short-term investments or fixed maturities and is reported as an
asset on the Company's Consolidated Balance Sheets. Income
associated with securities lending transactions is reported as a
component of net investment income in the Company’s
Consolidated Statements of Operations.
Repurchase Agreements
From time to time, the Company enters into repurchase
agreements to manage liquidity or to earn incremental income. A
repurchase agreement is a transaction in which one party
(transferor) agrees to sell securities to another party (transferee)
in return for cash (or securities), with a simultaneous agreement
to repurchase the same securities at a specified price at a later
date. These transactions have a remaining maturity of ninety days
or less. Repurchase agreements include master netting provisions
that provide both counterparties the right to offset claims and
apply securities held by them with respect to their obligations in
the event of a default. Although the Company has the contractual
right to offset claims, the Company's current positions do not
meet the specific conditions for net presentation.
Under repurchase agreements, the Company transfers collateral
of U.S. government and government agency securities and
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
receives cash. For repurchase agreements, the Company obtains
cash in an amount equal to at least 95% of the fair value of the
securities transferred. The agreements require additional
collateral to be transferred when necessary and provide the
counterparty the right to sell or re-pledge the securities
transferred. The cash received from the repurchase program is
typically invested in short-term investments or fixed maturities
and is reported as an asset on the Company's Consolidated
Balance Sheets. The Company accounts for the repurchase
agreements as collateralized borrowings. The securities
transferred under repurchase agreements are included in fixed
maturities, AFS with the obligation to repurchase those securities
recorded in other liabilities on the Company's Consolidated
Balance Sheets.
From time to time, the Company enters into reverse repurchase
agreements where the Company purchases securities and
simultaneously agrees to resell the same or substantially the
same securities. The agreements require additional collateral to
be transferred to the Company when necessary and the Company
has the right to sell or re-pledge the securities received. The
Company accounts for reverse repurchase agreements as
collateralized financing. The receivable for reverse repurchase
agreements is included within short-term investments in the
Company's Consolidated Balance Sheets.
Securities Lending and Repurchase
Agreements
Securities Lending Transactions:
Gross amount of securities on loan
Gross amount of associated liability for
collateral received [1]
Repurchase agreements:
Gross amount of recognized liabilities for
repurchase agreements
Gross amount of collateral pledged related to
repurchase agreements [2]
Gross amount of recognized receivables for
reverse repurchase agreements
December
31, 2018
December
31, 2017
Fair Value
Fair Value
$
$
$
$
$
820 $
922
840 $
945
72 $
174
73 $
176
64 $
—
[1]Cash collateral received is reinvested in fixed maturities, AFS and short term
investments which are included in the Consolidated Balance Sheets. Amount
includes additional securities collateral received of $3 and $0 million which are
excluded from the Company's Consolidated Balance Sheets as of December 31,
2018 and December 31, 2017, respectively.
[2]Collateral pledged is included within fixed maturities, AFS and short term
investments in the Company's Consolidated Balance Sheets.
Other Collateral Transactions
The Company is required by law to deposit securities with
government agencies in certain states in which it conducts
business. As of December 31, 2018 and December 31, 2017, the
fair value of securities on deposit was $2.2 billion and $2.5 billion,
respectively.
As of December 31, 2018 and December 31, 2017, the Company
pledged collateral of $47 and $104, respectively, of U.S.
government securities and government agency securities or cash
primarily related to certain bank loan participations committed to
through a limited partnership agreement. These amounts also
include collateral related to letters of credit.
For disclosure of collateral in support of derivative transactions,
refer to the Derivative Collateral Arrangements section in Note 7
- Derivatives of Notes to Consolidated Financial Statements.
Equity Method Investments
The majority of the Company's investments in limited
partnerships and other alternative investments, including hedge
funds, real estate funds, and private equity funds (collectively,
“limited partnerships”), are accounted for under the equity
method of accounting. The remainder of investments in limited
partnerships and other alternative investments consists of
investments in insurer-owned life insurance accounted for at cash
surrender value. The Company's investment in Hopmeadow
Holdings LP is reported in other assets on the Company's
Consolidated Balance Sheets and is accounted for under the
equity method of accounting. For further discussion on
Hopmeadow Holdings LP, refer to Sale of Life and Annuity
Business within Note 20 - Business Dispositions and
Discontinued Operations of Notes to the Consolidated Financial
Statements. The Company recognized total equity method
income of $214, $168, and $137 for the periods ended
December 31, 2018, 2017 and 2016, respectively. Equity method
income is reported in net investment income except amounts
related to strategic investments classified in other assets are
reported in other revenues. For investments accounted for under
the equity method, the Company’s maximum exposure to loss as
of December 31, 2018 is limited to the total carrying value of $1.5
billion. In addition, the Company has outstanding commitments
totaling $741 to fund limited partnership investments as of
December 31, 2018. The Company’s investments accounted for
under the equity method are generally of a passive nature in that
the Company does not take an active role in the management. In
2018, aggregate investment income from investments accounted
for under the equity method exceeded 10% of the Company’s
pre-tax consolidated net income (loss). Accordingly, the Company
is disclosing aggregated summarized financial data for the
Company’s investments accounted for under the equity method.
This aggregated summarized financial data does not represent
the Company’s proportionate share of investees' assets or
earnings. Aggregate total assets of the investees totaled $311
billion and $165.9 billion as of December 31, 2018 and 2017,
respectively. Aggregate total liabilities of the investees totaled
$187.7 billion and $47.8 billion as of December 31, 2018 and
2017, respectively. Aggregate net investment income of the
investees totaled $773, $1.9 billion, and $844 for the periods
ended December 31, 2018, 2017 and 2016, respectively.
Aggregate net income excluding net investment income of the
investees totaled $12.3 billion, $9.8 billion and $7.7 billion for the
periods ended December 31, 2018, 2017 and 2016, respectively.
As of, and for the period ended, December 31, 2018, the
aggregated summarized financial data reflects the latest available
financial information.
F-37
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. DERIVATIVES
The Company utilizes a variety of OTC, OTC-cleared and
exchange traded derivative instruments as a part of its overall risk
management strategy as well as to enter into replication
transactions. Derivative instruments are used to manage risk
associated with interest rate, equity market, credit spread, issuer
default, price, and currency exchange rate risk or volatility.
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.
Strategies that Qualify for
Hedge Accounting
Some of the Company's derivatives satisfy hedge accounting
requirements as outlined in Note 1 - Basis of Presentation and
Significant Accounting Policies of Notes to Consolidated Financial
Statements. Typically, these hedging instruments include interest
rate swaps and, to a lesser extent, foreign currency swaps where
the terms or expected cash flows of the hedged item closely
match the terms of the swap. The interest rate swaps are typically
used to manage interest rate duration of certain fixed maturity
securities. The hedge strategies by hedge accounting designation
include:
Cash Flow Hedges
Interest rate swaps are predominantly used to manage portfolio
duration and better match cash receipts from assets with cash
disbursements required to fund liabilities. These derivatives
primarily convert interest receipts on floating-rate fixed maturity
securities to fixed rates. The Company has also entered into
interest rate swaps to convert the variable interest payments on
3 month Libor + 2.125% junior subordinated debt to fixed
interest payments. For further information, see the Junior
Subordinated Debentures section within Note 13 - Debt of Notes
to Consolidated Financial Statements.
Foreign currency swaps are used to convert foreign currency-
denominated cash flows related to certain investment receipts
and liability payments to U.S. dollars in order to reduce cash flow
fluctuations due to changes in currency rates.
The Company also previously entered into forward starting swap
agreements to hedge the interest rate exposure related to the
future purchase of fixed-rate securities, primarily to hedge
interest rate risk inherent in the assumptions used to price
certain group benefits liabilities.
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting
(“non-qualifying strategies”) primarily include hedging and
replication strategies that utilize credit default swaps. In addition,
hedges of interest rate, foreign currency and equity risk of certain
fixed maturities and equities do not qualify for hedge accounting.
The non-qualifying strategies include:
Credit Contracts
Credit default swaps are used to purchase credit protection on an
individual entity or referenced index to economically hedge
F-38
against default risk and credit-related changes in the value of
fixed maturity securities. Credit default swaps are also used to
assume credit risk related to an individual entity or referenced
index as a part of replication transactions. These contracts
require the Company to pay or receive a periodic fee in exchange
for compensation from the counterparty should the referenced
security issuers experience a credit event, as defined in the
contract. In addition, the Company enters into credit default
swaps to terminate existing credit default swaps, thereby
offsetting the changes in value of the original swap going forward.
Interest Rate Swaps, Swaptions and
Futures
The Company uses interest rate swaps, swaptions and futures to
manage interest rate duration between assets and liabilities in
certain investment portfolios. In addition, the Company enters
into interest rate swaps to terminate existing swaps, thereby
offsetting the changes in value of the original swap going forward.
As of December 31, 2018 and 2017, the notional amount of
interest rate swaps in offsetting relationships was $7.1 billion and
$7.3 billion, respectively.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the
foreign currency exposures of certain foreign currency-
denominated fixed maturity investments to U.S. dollars. The
Company may at times enter into foreign currency forwards to
hedge non-U.S. dollar denominated cash and, previously, equity
securities. The Company previously entered into foreign currency
forwards to hedge currency impacts on changes in equity of the
U.K. property and casualty run-off subsidiaries that were sold in
May 2017. For further information on the disposition, see Note
20 - Business Dispositions and Discontinued Operations of Notes
to Consolidated Financial Statements.
Equity Index Options
The Company enters into equity index options to hedge the
impact of a decline in the equity markets on the investment
portfolio. The Company also enters into call options on equity
securities to generate additional return. The Company previously
entered into total return swaps to hedge equity risk of specific
common stock investments which were accounted for using fair
value option in order to align the accounting treatment within net
realized capital gains (losses). The Company has not held these
total return swaps since January 2016.
Contingent Capital Facility Put Option
The Company previously entered into a put option agreement
that provided the Company the right to require a third-party trust
to purchase, at any time, The Hartford’s junior subordinated
notes in a maximum aggregate principal amount of $500. On
February 8, 2017, The Hartford exercised the put option resulting
in the issuance of $500 in junior subordinated notes with
proceeds received on February 15, 2017. Under the put option
agreement, The Hartford had been paying premiums on a periodic
basis and had agreed to reimburse the trust for certain fees and
ordinary expenses.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Balance Sheet
Classification
For reporting purposes, the Company has elected to offset within
assets or liabilities based upon the net of the fair value amounts,
income accruals, and related cash collateral receivables and
payables of OTC derivative instruments executed in a legal entity
and with the same counterparty under a master netting
agreement, which provides the Company with the legal right of
offset. The following fair value amounts do not include income
accruals or related cash collateral receivables and payables,
which are netted with derivative fair value amounts to determine
balance sheet presentation. The Company’s derivative
instruments are held for risk management purposes, unless
otherwise noted in the following table. The notional amount of
derivative contracts represents the basis upon which pay or
receive amounts are calculated and is presented in the table to
quantify the volume of the Company’s derivative activity.
Notional amounts are not necessarily reflective of credit risk.
Derivative Balance Sheet Presentation
Net Derivatives
Notional Amount
Fair Value
Asset Derivatives
[1]
Fair Value
Liability Derivatives
[1]
Fair Value
Dec 31,
2018
Dec 31,
2017
Dec 31,
2018
Dec 31,
2017
Dec 31,
2018
Dec 31,
2017
Dec 31,
2018
Dec 31,
2017
$ 2,040 $ 2,190 $
153
2,193
153
2,343
1 $
(6)
(5)
— $
(13)
(13)
2 $
2
4
1 $
—
1
(1) $
(8)
(9)
(1)
(13)
(14)
Hedge Designation/ Derivative Type
Cash flow hedges
Interest rate swaps
Foreign currency swaps
Total cash flow hedges
Non-qualifying strategies
Interest rate contracts
Interest rate swaps and futures
Foreign exchange contracts
8,451
7,986
(62)
(83)
Foreign currency swaps and forwards
287
213
(1)
(1)
Credit contracts
Credit derivatives that purchase credit protection
Credit derivatives that assume credit risk [2]
Credit derivatives in offsetting positions
6
1,102
41
61
823
1,046
—
3
—
1
3
2
Equity contracts
Equity index swaps and options
Total non-qualifying strategies
Total cash flow hedges and non-qualifying strategies
Balance Sheet Location
Fixed maturities, available-for-sale
Other investments
Other liabilities
Total derivatives
211
10,098
258
10,387
$ 12,291 $ 12,730 $
4
(56)
(61) $
1
(77)
(90) $
$
153 $
153 $
9,864
2,274
9,957
2,620
— $
7
(68)
— $
10
(100)
$ 12,291 $ 12,730 $
(61) $
(90) $
[1]Certain prior year amounts have been restated to conform to the current year presentation for OTC-cleared derivatives.
[2]The derivative instruments related to this strategy are held for other investment purposes.
8
—
—
8
6
5
27
31 $
— $
23
8
31 $
7
—
2
3
11
1
24
25 $
— $
16
9
25 $
(70)
(90)
(1)
—
(5)
(6)
(1)
(1)
—
(9)
(1)
(83)
(92) $
—
(101)
(115)
— $
(16)
(76)
—
(6)
(109)
(92) $
(115)
Offsetting of Derivative Assets/
Liabilities
The following tables present the gross fair value amounts, the
amounts offset, and net position of derivative instruments eligible
for offset in the Company's Consolidated Balance Sheets.
Amounts offset include fair value amounts, income accruals and
related cash collateral receivables and payables associated with
derivative instruments that are traded under a common master
netting agreement, as described in the preceding discussion. Also
included in the tables are financial collateral receivables and
payables, which are contractually permitted to be offset upon an
event of default, although are disallowed for offsetting under U.S.
GAAP.
F-39
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Offsetting Derivative Assets and Liabilities
(i)
(ii)
(iii) = (i) - (ii)
(iv)
(v) = (iii) - (iv)
Net Amounts Presented in the
Statement of Financial Position
Collateral
Disallowed for
Offset in the
Statement of
Financial Position
Gross Amounts
of Recognized
Assets
(Liabilities) [1]
Gross Amounts
Offset in the
Statement of
Financial Position
Derivative
Assets [2]
(Liabilities) [3]
Accrued
Interest and
Cash
Collateral
(Received) [4]
Pledged [3]
Financial Collateral
(Received) Pledged
[5]
Net Amount
$
$
$
$
31 $
(92) $
25 $
(115) $
26 $
(20) $
22 $
(10) $
7 $
(68) $
10 $
(100) $
(2) $
(4) $
(7) $
(5) $
2 $
(65) $
1 $
(96) $
3
(7)
2
(9)
As of December 31, 2018
Other investments
Other liabilities
As of December 31, 2017
Other investments
Other liabilities
[1]For amounts shown as of December 31, 2017, certain amounts have been restated to conform to the current year presentation for OTC-cleared derivatives.
[2]Included in other investments in the Company's Consolidated Balance Sheets.
[3]Included in other liabilities in the Company's Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty.
[4]Included in other investments in the Company's Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty.
[5]Excludes collateral associated with exchange-traded derivative instruments.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash
flow hedges, the effective portion of the gain or loss on the
derivative is reported as a component of OCI and reclassified into
earnings in the same period or periods during which the hedged
transaction affects earnings. Gains and losses on the derivative
representing hedge ineffectiveness are recognized in current
period earnings. All components of each derivative’s gain or loss
were included in the assessment of hedge effectiveness.
Derivatives in Cash Flow Hedging
Relationships
Interest rate swaps
Foreign currency swaps
Total
Interest rate swaps
Net realized capital gain/
(loss)
Net investment income
Total
Gain (Loss) Recognized in OCI
on Derivative (Effective Portion)
2018
2017
2016
$
$
5 $
7
8 $
(14)
12 $
(6) $
—
1
1
Gain Reclassified from AOCI
into Income (Effective Portion)
2018
2017
2016
$
$
6 $
5 $
30
37
36 $
42 $
10
37
47
During the years ended December 31, 2018, 2017, and 2016 the
Company had no ineffectiveness recognized in income within net
realized capital gains (losses).
As of December 31, 2018, the before tax deferred net gains on
derivative instruments recorded in AOCI that are expected to be
reclassified to earnings during the next twelve months are $23.
This expectation is based on the anticipated interest payments on
hedged investments in fixed maturity securities that will occur
over the next twelve months, at which time the Company will
recognize the deferred net gains (losses) as an adjustment to net
investment income over the term of the investment cash flows.
During the years ended December 31, 2018, 2017, and 2016, the
Company had no net reclassifications from AOCI to earnings
resulting from the discontinuance of cash-flow hedges due to
forecasted transactions that were no longer probable of
occurring.
Non-Qualifying Strategies
For non-qualifying strategies, including embedded derivatives
that are required to be bifurcated from their host contracts and
accounted for as derivatives, the gain or loss on the derivative is
recognized currently in earnings within net realized capital gains
(losses).
F-40
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Non-Qualifying Strategies Recognized within Net Realized Capital Gains (Losses)
Foreign exchange contracts
Foreign currency swaps and forwards
Other non-qualifying derivatives
Interest rate contracts
Interest rate swaps, swaptions and futures
Credit contracts
Credit derivatives that purchase credit protection
Credit derivatives that assume credit risk
Equity contracts
Equity options
Other
Contingent capital facility put option
Total other non-qualifying derivatives
Total [1]
For the Year Ended December 31,
2018
2017
2016
$
3 $
(14) $
83
(3)
—
(14)
2
—
(15)
(5)
28
(7)
(7)
(1)
8
$
(12) $
(6) $
1
(17)
28
(15)
(6)
(9)
74
[1]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section
in Note 5 - Fair Value Measurements of Notes to Consolidated Financial Statements.
Credit Risk Assumed through Credit
Derivatives
The Company enters into credit default swaps that assume credit
risk of a single entity or referenced index in order to synthetically
replicate investment transactions that are permissible under the
Company's investment policies. The Company will receive
periodic payments based on an agreed upon rate and notional
amount and will only make a payment if there is a credit event. A
credit event payment will typically be equal to the notional value
of the swap contract less the value of the referenced security
issuer’s debt obligation after the occurrence of the credit event. A
credit event is generally defined as a default on contractually
obligated interest or principal payments or bankruptcy of the
referenced entity. The credit default swaps in which the Company
assumes credit risk primarily reference investment grade single
corporate issuers and baskets, which include standard diversified
portfolios of corporate and CMBS issuers. The diversified
portfolios of corporate issuers are established within sector
concentration limits and may be divided into tranches that
possess different credit ratings.
F-41
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Credit Risk Assumed Derivatives by Type
Underlying Referenced
Credit Obligation(s) [1]
Notional
Amount
[2]
Fair
Value
Weighted
Average
Years to
Maturity
Average
Credit
Rating
Offsetting
Notional
Amount
[3]
Offsetting
Fair Value
[3]
Type
As of December 31, 2018
—
—
—
—
6
6
—
—
(2)
—
—
7
5
—
—
2
19
21 $
— $
9
$
$
Single name credit default swaps
Investment grade risk exposure
$
169 $
2
4 years
Corporate Credit/
Foreign Gov.
A
$
— $
Basket credit default swaps [4]
Investment grade risk exposure
Below investment grade risk
exposure
Investment grade risk exposure
Below investment grade risk
exposure
799
125
11
19
Total [5]
$
1,123 $
Single name credit default swaps
(1) 6 years
Corporate Credit
BBB+
2
5 years
— 5 years
Less than
1 year
(6)
(3)
As of December 31, 2017
Corporate Credit
CMBS Credit
B+
A-
CMBS Credit
CCC
Investment grade risk exposure
$
130 $
3
5 years
Below investment grade risk
exposure
Basket credit default swaps [4]
9
Less than
1 year
—
Investment grade risk exposure
1,137
Below investment grade risk
exposure
Investment grade risk exposure
Below investment grade risk
exposure
27
13
30
Total [5]
$
1,346 $
2
2
3 years
3 years
(1) 5 years
Less than
1 year
(6)
—
Corporate Credit/
Foreign Gov.
Corporate Credit
A-
B
Corporate Credit
BBB+
454
Corporate Credit
CMBS Credit
B+
A
CMBS Credit
CCC
27
3
30
$
523 $
[1]The average credit ratings 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.
[2]Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and applicable law which include collateral posting
requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
[3]The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid
related to, the original swap.
[4]Comprised of swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently
valued based upon the observable standard market index.
[5]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section
in Note 5 - Fair Value Measurements. of Notes to Consolidated Financial Statements.
Derivative Collateral
Arrangements
The Company enters into various collateral arrangements in
connection with its derivative instruments, which require both
the pledging and accepting of collateral. As of December 31, 2018
and 2017, the Company pledged cash collateral with a fair value
of $4 and $1 associated with derivative instruments. The
collateral receivable has been recorded in other assets or other
liabilities on the Company's Consolidated Balance Sheets as
determined by the Company's election to offset on the balance
sheet. As of December 31, 2018 and 2017, the Company also
pledged securities collateral associated with derivative
instruments with a fair value of $67 and $101, respectively, which
have been included in fixed maturities on the Consolidated
Balance Sheets. In addition, as of December 31, 2018 and 2017 ,
the Company has also pledged initial margin of securities related
to OTC-cleared and exchange traded derivatives with a fair value
of $89 and $96, respectively, which are included within fixed
maturities on the Company's Consolidated Balance Sheets. The
counterparties generally have the right to sell or re-pledge these
securities.
As of December 31, 2018 and 2017, the Company accepted cash
collateral associated with derivative instruments of $9 and $11,
respectively, which was invested and recorded in the
Consolidated Balance Sheets in fixed maturities and short-term
investments with corresponding amounts recorded in other
investments or other liabilities as determined by the Company's
election to offset on the balance sheet. The Company also
F-42
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accepted securities collateral as of December 31, 2018 and 2017
with a fair value of $5 and $2, respectively, none of which the
Company has the ability to sell or repledge. As of December 31,
2018 and 2017, the Company had no repledged securities and did
not sell any securities held as collateral. In addition, as of
December 31, 2018 and 2017, non-cash collateral accepted was
held in separate custodial accounts and was not included in the
Company’s Consolidated Balance Sheets.
8. REINSURANCE
The Company cedes insurance risk to reinsurers to enable the
Company to manage capital and risk exposure. Such
arrangements do not relieve the Company of its primary liability
to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company. The Company's procedures
include carefully selecting its reinsurers, structuring agreements
to provide collateral funds where necessary, and regularly
monitoring the financial condition and ratings of its reinsurers.
On December 31, 2016, the Company entered into an asbestos
and environmental adverse development cover (“ADC”)
reinsurance agreement with National Indemnity Company
(“NICO”), a subsidiary of Berkshire Hathaway Inc. (“Berkshire”), to
reduce uncertainty about potential adverse development of
asbestos and environmental reserves. Under the ADC, the
Company paid a reinsurance premium of $650 for NICO to
assume adverse net loss reserve development up to $1.5 billion
above the Company’s existing net asbestos and environmental
(“A&E”) reserves as of December 31, 2016 of approximately $1.7
billion. The $650 reinsurance premium was placed into a
collateral trust account as security for NICO’s claim payment
obligations to the Company. As of December 31, 2016, other
liabilities included $650 for the accrued reinsurance premium
paid in January, 2017. 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 ADC
covers substantially all the Company’s A&E reserve development
up to the reinsurance limit.
The ADC has been accounted for as retroactive reinsurance and
the Company reported the $650 cost as a loss on reinsurance
transaction in 2016 in the Consolidated Statements of
Operations. For segment reporting, the loss on reinsurance was
reported in Property and Casualty Other Operations. Under
retroactive reinsurance accounting, net adverse A&E reserve
development after December 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 direct losses incurred.
Cumulative ceded losses exceeding the $650 reinsurance
premium paid would result in a deferred gain. The deferred gain
would be recognized over the claim 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 asbestos and environmental claims after
December 31, 2016 in excess of $650 may result in significant
charges against earnings. As of December 31, 2018, the Company
has incurred $523 in cumulative adverse development on
asbestos and environmental reserves that have been ceded under
the ADC treaty with NICO.
Reinsurance Recoverables
Reinsurance recoverables include balances due from reinsurance
companies and are presented net of an allowance for
uncollectible reinsurance. Reinsurance recoverables include an
estimate of the amount of gross losses and loss adjustment
expense reserves that may be ceded under the terms of the
reinsurance agreements, including incurred but not reported
unpaid losses. The Company’s estimate of losses and loss
adjustment expense reserves ceded to reinsurers is based on
assumptions that are consistent with those used in establishing
the gross reserves for amounts the Company owes to its
claimants. The Company estimates its ceded reinsurance
recoverables based on the terms of any applicable facultative and
treaty reinsurance, including an estimate of how incurred but not
reported losses will ultimately be ceded under reinsurance
agreements. Accordingly, the Company’s estimate of reinsurance
recoverables is subject to similar risks and uncertainties as the
estimate of the gross reserve for unpaid losses and loss
adjustment expenses.
Reinsurance Recoverables
Property and Casualty Insurance Products
Paid loss and loss adjustment expenses
Unpaid loss and loss adjustment expenses
Gross reinsurance recoverables
Allowance for uncollectible reinsurance
Net P&C reinsurance recoverables
Group Benefits net reinsurance recoverables [1]
Recoverable related to reserves in Corporate
Reinsurance recoverables, net
[1]No allowance for uncollectible reinsurance was required as of December 31, 2018 and 2017.
F-43
December 31, 2018
December 31, 2017
As of
$
$
127 $
3,773
3,900
(126)
3,774
251
332
4,357 $
84
3,496
3,580
(104)
3,476
236
349
4,061
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The allowance for uncollectible reinsurance reflects
management’s best estimate of reinsurance cessions that may be
uncollectible in the future due to reinsurers’ unwillingness or
inability to pay. The Company analyzes recent developments in
commutation activity between reinsurers and cedants, recent
trends in arbitration and litigation outcomes in disputes between
reinsurers and cedants and the overall credit quality of the
Company’s reinsurers. Based on this analysis, the Company may
adjust the allowance for uncollectible reinsurance or charge off
reinsurer balances that are determined to be uncollectible.
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.
Due to the inherent uncertainties as to collection and the length
of time before reinsurance recoverables become due, it is possible
that future adjustments to the Company’s reinsurance
recoverables, net of the allowance, could be required, which could
have a material adverse effect on the Company’s consolidated
results of operations or cash flows in a particular quarter or
annual period.
Insurance Revenues
The effect of reinsurance on insurance revenues is as follows:
Property and Casualty Insurance Revenue
Premiums Written
Direct
Assumed
Ceded
Net
Premiums Earned
Direct
Assumed
Ceded
Net
For the years ended December 31,
2018
2017
2016
10,784 $
10,865 $
10,906
217
(593)
223
(571)
253
(591)
10,408 $
10,517 $
10,568
10,824 $
10,923 $
10,871
221
(599)
232
(600)
261
(583)
10,446 $
10,555 $
10,549
$
$
$
$
Ceded losses, which reduce losses and loss adjustment expenses
incurred, were $661, $901 and $388 for the years ended
December 31, 2018, 2017 and 2016, respectively.
Group Benefits Revenue
Gross earned premiums, fees and other considerations
Reinsurance assumed
Reinsurance ceded
Net earned premiums, fees and other considerations
For the years ended December 31,
2018
2017
2016
$
$
3,615 $
3,281 $
3,160
2,044
(61)
446
(50)
107
(44)
5,598 $
3,677 $
3,223
For its group benefits products, the Company reinsures certain of
its risks to other reinsurers under yearly renewable term and
coinsurance arrangements and variations thereto. Yearly
renewable term and coinsurance arrangements result in passing a
portion of the risk to the reinsurer. Generally, the reinsurer
receives a proportionate amount of the premiums less an
allowance for commissions and expenses and is liable for a
corresponding proportionate amount of all benefit payments. The
increase in premiums assumed in 2018 and 2017 was primarily
due to premiums related to Aetna's U.S. group life and disability
business acquired by the Company effective November 1, 2017
whereby Aetna is fronting the business for a period of time.
F-44
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9. DEFERRED POLICY ACQUISITION COSTS
Changes in the DAC Balance
Balance, beginning of period
Deferred costs
Amortization — DAC
Add: Maxum acquisition
Balance, end of period
For the years ended December 31,
2018
2017
2016
$
$
650 $
645 $
1,404
(1,384)
—
670 $
1,377
(1,372)
—
650 $
636
1,378
(1,377)
8
645
10. GOODWILL & OTHER INTANGIBLE ASSETS
Goodwill Carrying Value as of December 31, 2018
Balance at December 31, 2016
Goodwill related to acquisitions [2]
Balance at December 31, 2017
Goodwill related to acquisitions
Balance at December 31, 2018
Commercial
Lines
Personal
Lines
Hartford
Funds
Group
Benefits
Corporate [1]
Total
$
$
$
38 $
—
38 $
—
38 $
119 $
180 $
—
—
119 $
180 $
—
—
— $
723
723 $
—
230 $
—
567
723
230 $
1,290
—
—
119 $
180 $
723 $
230 $
1,290
[1]The Corporate category includes goodwill that was acquired at a holding company level and not pushed down to a subsidiary within a reportable segment. Carrying value of
goodwill within Corporate as of December 31, 2018, 2017, and 2016 includes $138 and $92 for the Group Benefits and Hartford Funds reporting units, respectively.
[2]For further discussion on goodwill related to the acquisition of Aetna's U.S. group life and disability business, refer to Note 2 - Business Acquisitions to Consolidated Financial
Statements.
The annual goodwill assessment for The Hartford's reporting
units was completed as of October 31, 2018, 2017, and 2016,
which resulted in no write-downs of goodwill in the respective
years then ended. In 2018, all reporting units passed the first step
of their annual impairment test with a significant margin.
Other Intangible Assets
As of December 31, 2018
As of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Weighted
Average
Expected
Life
Amortized Intangible Assets:
Value of in-force contracts
Customer relationships [1]
Marketing agreement with Aetna
Distribution Agreement
Agency relationships & Other [2]
Total Finite Life Intangibles
Total Indefinite Life Intangible Assets
$
23 $
(23) $
— $
23 $
(3) $
636
16
79
21
775
14
(49)
(1)
(56)
(3)
(132)
—
587
15
23
18
643
14
590
16
70
9
708
14
(6)
—
(52)
(2)
(63)
—
Total Other Intangible Assets
$
789 $
(132) $
657 $
722 $
(63) $
20
584
16
18
7
645
14
659
1
15
15
15
13
14
[1]On February 16, 2018, The Company entered into a renewal rights agreement with Farmers Exchanges of the Farmers Group of Companies to acquire its Foremost-branded small
commercial business sold through independent agents. In connection with the renewal rights agreement, the Company recorded a customer relationships intangible asset of $46
which will be amortized over 10 years.
[2]On December 1, 2018, the Company acquired Y-Risk LLC and recorded an agency relationships intangible asset of $12 which will be amortized over 15 years.
F-45
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Expected Pre-tax Amortization Expense
For the years ended December 31,
2019
2020
2021
2022
2023
$
$
$
$
$
53
53
53
52
47
11. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT
EXPENSES
Property and Casualty Insurance Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the years ended December 31,
2018
2017
2016
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$
23,775 $
22,545 $
Reinsurance and other recoverables
Beginning liabilities for unpaid losses and loss adjustment expenses, net
Add: Maxum acquisition
Provision for unpaid losses and loss adjustment expenses
Current accident year
Prior accident year development
Total provision for unpaid losses and loss adjustment expenses
Less: payments
Current accident year
Prior accident years
Total payments
Less: net reserves transferred to liabilities held for sale
Ending liabilities for unpaid losses and loss adjustment expenses, net
Reinsurance and other recoverables
3,957
19,818
—
7,107
(167)
6,940
2,452
3,954
6,406
—
20,352
4,232
3,488
19,057
—
7,381
(41)
7,340
2,751
3,828
6,579
—
19,818
3,957
Ending liabilities for unpaid losses and loss adjustment expenses, gross
$
24,584 $
23,775 $
22,568
3,625
18,943
122
6,990
457
7,447
2,749
4,219
6,968
487
19,057
3,488
22,545
Property and Casualty Insurance Products Reserves, Net of Reinsurance, that are Discounted
For the years ended December 31,
2018
2017
2016
Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts $
1,331 $
1,387 $
Less: amount of discount
Carrying value of liability for unpaid losses and loss adjustment expenses
Discount accretion included in losses and loss adjustment expenses
$
$
Weighted average discount rate
Range of discount rates
388
943 $
40 $
2.98%
410
977 $
30 $
3.06%
1,504
483
1,021
29
3.11%
1.77% - 14.15% 1.77% - 14.15% 1.77% - 14.15%
The current accident year benefit from discounting property and
casualty insurance product reserves was $12 in 2018, $15 in
2017 and $27 in 2016. Reserves are discounted at rates in effect
at the time claims were incurred, ranging from 1.77% for accident
year 2012 to 14.15% for accident year 1981.
The reserves recorded for the Company’s property and casualty
insurance products at December 31, 2018 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
F-46
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
uncertainties surrounding reserves it is possible that
management’s estimate of the ultimate liabilities for these claims
may change and that the required adjustment to recorded
reserves could exceed the currently recorded reserves by an
amount that could be material to the Company’s results of
operations or cash flows.
Losses and loss adjustment expenses are also impacted by trends
including frequency and severity as well as changes in the
legislative and regulatory environment. In the case of the
reserves for asbestos exposures, factors contributing to the high
degree of uncertainty in the ultimate settlement of the liabilities
gross of reinsurance include inadequate loss development
patterns, plaintiffs’ expanding theories of liability, the risks
inherent in major litigation, and inconsistent emerging legal
doctrines. In the case of the reserves for environmental
exposures before reinsurance, factors contributing to the high
degree of uncertainty in gross reserves include expanding
theories of liabilities and damages, the risks inherent in major
litigation, inconsistent decisions concerning the existence and
scope of coverage for environmental claims, and uncertainty as to
the monetary amount being sought by the claimant from the
insured.
(Favorable) Unfavorable Prior Accident Year
Development
For the years ended
December 31,
2018 2017 2016
Workers’ compensation
$ (164) $ (79) $ (119)
Workers’ compensation discount
accretion
General liability
Package business
Commercial property
Professional liability
Bond
Automobile liability - Commercial Lines
Automobile liability - Personal Lines
Homeowners
Net asbestos reserves
Net environmental reserves
Catastrophes
Uncollectible reinsurance
Other reserve re-estimates, net
40
52
(26)
(12)
(12)
2
(15)
(18)
(25)
—
—
(49)
22
38
28
11
(25)
(8)
1
32
17
—
28
65
65
1
(37)
(8)
57
160
(14)
(10)
—
—
(16)
(15)
27
197
71
(7)
(30)
24
Total prior accident year development
$ (167) $ (41) $ 457
2018 re-estimates of prior accident year
reserves
• Workers’ compensation reserves were reduced
in small commercial and middle market, primarily for
accident years 2014 and 2015, as claim severity has emerged
favorably compared to previous reserve estimates. Also
contributing was a reduction in estimated reserves for
unallocated loss adjustment expense ("ULAE").
• General liability reserves were increased,
primarily due to an increase in reserves for higher hazard
general liability exposures in middle market for accident
years 2009 to 2017, partially offset by a decrease in reserves
for other lines within middle market, including premises and
operations, umbrella and products liability, principally for
accident years 2015 and prior. Contributing to the increase
in reserves for higher hazard general liability exposures was
an increase in average claim severity, including from large
losses and, in more recent accident years, an increase in
claim frequency. Contributing to the reduction in reserves
for other middle market lines were more favorable outcomes
due to initiatives to reduce legal expenses. In addition,
reserve increases for claims with lead paint exposure were
offset by reserve decreases for other mass torts and extra-
contractual liability claims.
• Package business reserves were reduced,
primarily due to lower reserve estimates for both liability
and property for accident years 2010 and prior, including a
recovery of loss adjustment expenses for the 2005 accident
year.
• Commercial property reserves were reduced,
driven by an increase in estimated reinsurance recoverables
on middle market property losses from the 2017 accident
year.
• Professional liability reserves were reduced,
principally for accident years 2014 and prior, for directors
and officers liability claims principally due to a number of
older claims closing with limited or no payment.
• Automobile liability reserves were reduced,
primarily driven by reduced estimates of loss adjustment
expenses in small commercial for recent accident years and
favorable development in personal automobile liability for
accident years 2014 to 2017, principally due to lower
severity, including with uninsured and underinsured motorist
claims.
• Homeowners reserves were reduced, primarily in
accident years 2013 to 2017, driven by lower than expected
severity across multiple perils.
• Asbestos and environmental reserves were
unchanged as $238 of adverse development arising from the
fourth quarter 2018 comprehensive annual review was
offset by a $238 recoverable from NICO. For additional
information related to the adverse development cover with
NICO, see Note 8 - Reinsurance and Note 14 - Commitments
and Contingencies of Notes to Consolidated Financial
Statements.
• Catastrophe reserves were reduced, primarily as a
result of lower estimated net losses from 2017 catastrophes,
principally related to hurricanes Harvey and Irma. Before
reinsurance, estimated losses for 2017 catastrophe events
decreased by $133, resulting in a decrease in reinsurance
recoverables of $90 as the Company no longer expects to
recover under the 2017 Property Aggregate reinsurance
treaty as aggregate ultimate losses for 2017 catastrophe
events are now projected to be less than $850.
F-47
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• Uncollectible reinsurance reserves were
increased due to lower anticipated recoveries related to
older accident years.
• Other reserve re-estimates, net, primarily
represents an increase in ULAE reserves in Property &
Casualty Other Operations that was principally driven by an
increase in expected claim handling costs associated with
asbestos and environmental and mass tort claims.
2017 re-estimates of prior accident year
reserves
• Workers’ compensation reserves were reduced
in small commercial and middle market, given the continued
emergence of favorable frequency, primarily for accident
years 2013 to 2015, as well as a reduction in estimated
reserves for unallocated loss adjustment expenses, partially
offset by strengthening reserves for captive programs within
specialty commercial.
• General liability reserves were increased for the
2013 to 2016 accident years on a class of business that
insures service and maintenance contractors. This increase
was partially offset by a decrease in recent accident year
reserves for other middle market general liability reserves.
• Package business reserves were reduced for
accident years 2013 and prior largely due to reducing the
Company’s estimate of allocated loss adjustment expenses
incurred to settle the claims.
• Bond business reserves increased for customs
bonds written between 2000 and 2010 which was partly
offset by a reduction in reserves for recent accident years as
reported losses for commercial and contract surety have
emerged favorably.
• Automobile liability reserves within Commercial
Lines were increased in small commercial and large national
accounts for the 2013 to 2016 accident years, driven by
higher frequency of more severe accidents, including
litigated claims
• Asbestos and environmental reserves were
unchanged as $285 of adverse development arising from the
fourth quarter 2017 comprehensive annual review was
offset by a $285 recoverable from NICO. For additional
information related to the adverse development cover with
NICO, see Note 8 - Reinsurance and Note 14 - Commitments
and Contingencies of Notes to Consolidated Financial
Statements.
• Catastrophes reserves were reduced primarily due
to lower estimates of 2016 wind and hail event losses and a
decrease in losses on a 2015 wildfire.
• Uncollectible reinsurance reserves decreased
as a result of giving greater weight to favorable collectibility
experience in recent calendar periods in estimating future
collections.
2016 re-estimates of prior accident year
reserves
• Workers' compensation reserves consider
favorable emergence on reported losses for recent accident
years as well as a partially offsetting adverse impact related
to two recent Florida Supreme Court rulings that have
increased the Company’s exposure to workers’
compensation claims in that state. The favorable emergence
has been driven by lower frequency and, to a lesser extent,
lower medical severity and management has placed
additional weight on this favorable experience as it becomes
more credible.
• General liability reserves increased for accident
years 2012 - 2015 primarily due to higher severity losses
incurred on a class of business that insures service and
maintenance contractors and increased for accident years
2008 and 2010 primarily due to indemnity losses and legal
costs associated with a litigated claim.
• Package business reserves increased due to
higher than expected severity on liability claims, principally
for accident years 2013 - 2015. Severity for these accident
years has developed unfavorably and management has
placed more weight on emerged experience.
• Professional liability reserves decreased for
claims made years 2008 - 2013, primarily for large accounts,
including on non-securities class action cases. Claim costs
have emerged favorably as these years have matured and
management has placed more weight on the emerged
experience.
• Automobile liability reserves increased due to
increases in both commercial lines automobile and personal
lines automobile. Commercial automobile liability reserves
increased, predominately for the 2015 accident year,
primarily due to increased frequency of large claims.
Personal automobile liability reserves increased, primarily
related to increased bodily injury frequency and severity for
the 2015 accident year, including for uninsured and under-
insured motorist claims, and increased bodily injury severity
for the 2014 accident year. Increases in automobile liability
loss costs were across both the direct and agency
distribution channels.
• Asbestos and environmental reserves were
increased during the period as a result of the second quarter
2016 comprehensive annual review.
• Uncollectible reinsurance reserves decreased
as a result of giving greater weight to favorable collectibility
experience in recent calendar periods in estimating future
collections.
F-48
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reconciliation of Loss Development to Liability for Unpaid Losses and Loss Adjustment Expenses
As of December 31, 2018
Losses and Allocated Loss Adjustment
Expenses, Net of Reinsurance
Cumulative
Incurred for
Accident
Years
Displayed in
Triangles
Cumulative
Paid for
Accident
Years
Displayed in
Triangles
Unpaid for
Accident
Years not
Displayed in
Triangles [1]
Unpaid
Unallocated
Loss
Adjustment
Expenses,
Net of
Reinsurance Discount
Subtotal
Unpaid
Losses and
Loss
Adjustment
Expenses,
Net of
Reinsurance
Liability for
Unpaid
Losses and
Loss
Adjustment
Expenses
Reinsurance
and Other
Recoverables
Reserve Line
Workers' compensation
$
18,685 $
(10,965) $
2,316 $
341 $
(372) $
10,005 $
2,160 $
12,165
General liability
Package business
Commercial property
Commercial automobile
liability
Commercial automobile
physical damage
Professional liability
Bond
3,605
6,600
3,124
(1,840)
(5,128)
(2,763)
3,442
(2,604)
221
1,491
598
(210)
(973)
(356)
Personal automobile liability
12,262
(10,703)
1,752
7,714
(1,716)
(7,110)
Personal automobile physical
damage
Homeowners
Other ongoing business
Asbestos and environmental [2]
Other operations [2]
Total P&C
417
43
14
17
2
41
28
21
1
2
197
1,254
413
94
94
9
23
—
19
20
72
3
36
—
—
—
—
—
—
—
—
—
—
(1)
—
138
(16)
—
—
2,276
1,609
384
878
13
578
290
1,652
40
642
180
1,254
551
234
44
41
43
—
306
12
25
—
83
297
1,032
(45)
2,510
1,653
425
921
13
884
302
1,677
40
725
477
2,286
506
$
59,494 $
(44,368) $
4,766 $
848 $
(388) $
20,352 $
4,232 $
24,584
[1]Amounts represent reserves for claims that were incurred more than ten years ago for long-tail lines and more than three years ago for short-tail lines.
[2]Asbestos and environmental and other operations include asbestos, environmental and other latent exposures not foreseen when coverages were written, including, but not limited
to, potential liability for pharmaceutical products, silica, talcum powder, head injuries, lead paint, construction defects, molestation and other long-tail liabilities. These reserve
lines do not have significant paid or incurred loss development for the most recent ten accident years and therefore do not have loss development displayed in triangles.
The reserve lines in the above table and the loss triangles that
follow represent the significant lines of business for which the
Company regularly reviews the appropriateness of reserve levels.
These reserve lines differ from the reserve lines reported on a
statutory basis, as prescribed by the National Association of
Insurance Commissioners ("NAIC").
The following loss triangles present historical loss development
for incurred and paid claims by accident year. Triangles are limited
to the number of years for which claims incurred typically remain
outstanding, not exceeding ten years. Short-tail lines, which
represent claims generally expected to be paid within a few years,
have three years of claim development displayed. IBNR reserves
shown in loss triangles include reserve for incurred but not
reported claims as well as reserves for expected development on
reported claims.
F-49
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Workers' Compensation
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $ 1,462 $ 1,455 $ 1,478 $ 1,493 $ 1,504 $ 1,504 $ 1,519 $ 1,529 $ 1,522 $ 1,534 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
1,560
1,775
2,013
1,814
2,099
2,185
1,858
2,204
2,207
2,020
1,857
2,206
2,207
1,981
1,869
1,882
2,221
2,181
1,920
1,838
1,873
1,881
2,224
2,168
1,883
1,789
1,835
1,772
1,878
2,232
2,169
1,861
1,761
1,801
1,772
1,862
1,892
2,242
2,154
1,861
1,713
1,724
1,780
1,869
1,916
$18,685
168
236
342
385
451
532
613
787
1,061
1,363
135,804
156,747
177,819
171,219
151,153
125,840
113,493
111,190
109,982
109,842
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
265 $
587 $
792 $
937 $ 1,042 $ 1,115 $ 1,170 $ 1,208 $ 1,242 $ 1,263
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
316
709
371
970
841
359
1,154
1,156
809
304
1,287
1,368
1,106
675
275
1,374
1,518
1,313
917
598
261
1,439
1,622
1,436
1,071
811
576
255
1,489
1,690
1,529
1,175
960
778
579
261
1,522
1,746
1,587
1,260
1,041
909
779
575
283
$10,965
F-50
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
General Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $
382 $
398 $
394 $
382 $
359 $
348 $
347 $
346 $
341 $
351 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
355
362
353
352
343
321
355
323
315
318
343
316
310
321
317
345
315
295
332
318
316
376
320
304
352
336
346
352
377
318
298
344
342
345
351
363
393
326
304
352
351
364
380
385
399
$ 3,605
39
46
52
69
80
112
164
241
289
352
20,714
18,949
16,854
11,761
9,906
10,358
10,805
11,960
10,965
10,023
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
22 $
63 $
124 $
181 $
227 $
256 $
277 $
287 $
297 $
304
337
264
215
242
195
139
79
48
17
$ 1,840
14
51
11
115
181
47
8
93
39
7
224
154
75
35
11
259
198
124
95
31
7
314
234
167
152
88
32
8
331
252
198
207
142
80
32
12
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
F-51
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Package Business
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $
587 $
584 $
584 $
572 $
578 $
577 $
576 $
576 $
574 $
569 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
657
662
810
654
792
736
652
790
725
579
652
800
728
565
566
651
808
731
573
578
582
653
814
736
585
601
588
655
651
813
735
586
602
585
638
695
649
812
739
592
603
583
632
702
719
$ 6,600
15
19
31
39
46
70
94
170
257
335
50,413
52,410
60,967
59,715
43,415
42,928
41,678
43,129
44,709
38,034
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
227 $
351 $
411 $
463 $
503 $
527 $
539 $
547 $
550 $
551
625
772
687
522
507
445
410
372
237
$ 5,128
270
414
377
487
555
286
539
621
486
225
570
684
560
339
226
601
727
616
414
345
212
613
748
652
467
416
332
225
618
762
673
504
468
383
353
235
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
F-52
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Property
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $
267 $
264 $
259 $
258 $
251 $
257 $
257 $
257 $
257 $
258 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
286
283
357
279
356
329
282
356
301
234
284
362
301
218
268
284
361
305
219
260
264
284
360
306
220
262
264
328
284
359
305
216
264
268
331
515
284
359
305
215
263
270
327
440
403
$ 3,124
—
—
—
1
—
—
—
5
62
86
28,286
28,515
29,110
25,789
20,289
19,758
19,061
19,945
20,703
17,839
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
179 $
247 $
252 $
256 $
256 $
257 $
257 $
257 $
257 $
257
284
360
303
215
262
265
310
334
173
$ 2,763
198
266
231
276
332
171
281
350
279
157
283
355
294
208
168
284
358
300
216
243
172
284
359
304
218
258
239
188
284
360
303
215
264
255
285
210
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
F-53
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Automobile Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $
306 $
292 $
287 $
287 $
297 $
301 $
302 $
302 $
302 $
302 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
277
280
272
296
310
311
319
356
376
309
323
356
390
314
306
328
366
401
329
314
302
327
365
394
336
328
353
372
324
362
390
335
333
368
380
346
322
362
387
333
337
351
376
358
314
$ 3,442
—
4
4
6
18
23
43
90
165
205
38,703
38,153
39,293
35,999
31,918
29,260
28,079
28,154
24,587
20,675
Cumulative Paid Losses & Allocated Loss Adjustment Expense, Net of
Reinsurance
For the years ended December 31
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
56 $
115 $
175 $
237 $
274 $
291 $
298 $
300 $
301 $
301
316
352
371
306
295
264
222
123
54
$ 2,604
55
125
62
188
133
65
252
211
142
61
289
273
233
128
58
300
315
306
199
129
61
308
339
345
255
195
141
62
313
348
358
289
249
204
140
55
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
F-54
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Automobile Physical Damage
Incurred Losses & Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Accident
Year
2016
2017
2018
IBNR
Reserves
Claims
Reported
2016 $
79 $
78 $
78 $
2017
2018
Total
85
81
62
$
221
—
3
2
26,367
24,275
19,167
Cumulative Paid Losses &
Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Accident
Year
2016
2017
2018
2016 $
71 $
78 $
2017
2018
Total
74
77
79
54
$
210
F-55
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Professional Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Claims
Made
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $
254 $
251 $
244 $
266 $
257 $
263 $
255 $
257 $
257 $
259 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
202
211
226
212
228
174
205
232
172
136
201
226
168
136
116
200
219
149
123
123
104
195
219
146
110
118
113
106
199
220
144
103
114
113
106
107
192
215
139
99
109
114
125
113
126
$ 1,491
20
22
38
18
27
33
32
71
75
107
5,115
4,894
4,708
3,734
2,791
2,891
2,957
3,133
3,111
2,971
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Claims
Made
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
17 $
69 $
127 $
177 $
194 $
226 $
225 $
226 $
235 $
238
169
176
109
66
72
63
46
26
8
$
973
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
22
62
11
103
57
11
137
100
41
4
148
128
60
19
4
157
163
89
31
21
4
162
170
97
39
40
23
4
166
173
107
55
64
49
25
6
F-56
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Bond
Accident
Year
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $
71 $
71 $
69 $
58 $
57 $
51 $
49 $
49 $
49 $
49 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
71
75
72
80
76
69
79
76
69
63
73
75
60
58
69
69
70
53
54
65
65
70
70
48
48
65
65
59
90
69
48
48
66
62
59
61
71
69
43
38
58
59
58
88
65
$
598
5
3
9
9
18
13
23
37
38
59
3,321
2,674
2,134
1,720
1,456
1,373
1,368
1,272
1,204
1,040
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
9 $
32 $
45 $
46 $
44 $
43 $
44 $
44 $
44 $
43
67
59
33
18
42
31
13
45
5
$
356
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
13
46
12
59
39
12
58
51
25
3
59
56
26
9
18
63
57
24
17
31
9
66
59
25
18
40
19
2
66
59
25
18
43
23
11
5
F-57
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Personal Automobile Liability
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $ 1,351 $ 1,305 $ 1,280 $ 1,255 $ 1,256 $ 1,260 $ 1,259 $ 1,257 $ 1,257 $ 1,257 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
1,346
1,321
1,181
1,293
1,170
1,141
1,287
1,180
1,149
1,131
1,282
1,173
1,146
1,145
1,146
1,275
1,166
1,142
1,144
1,153
1,195
1,265
1,154
1,133
1,153
1,198
1,340
1,407
1,265
1,154
1,130
1,152
1,200
1,338
1,402
1,277
1,264
1,153
1,130
1,153
1,199
1,330
1,393
1,275
1,108
$12,262
3
3
5
7
8
15
38
103
276
510
254,555
248,944
221,886
210,750
205,462
208,942
216,707
215,126
185,716
146,845
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
492 $
888 $ 1,083 $ 1,171 $ 1,223 $ 1,240 $ 1,246 $ 1,250 $ 1,251 $ 1,251
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
496
915
447
1,108
826
441
1,202
1,006
818
442
1,239
1,088
986
816
430
1,251
1,126
1,067
1,002
843
475
1,256
1,140
1,104
1,091
1,032
935
505
1,258
1,145
1,114
1,121
1,125
1,142
968
441
1,260
1,146
1,120
1,135
1,165
1,243
1,188
836
359
$10,703
F-58
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Personal Automobile Physical Damage
Incurred Losses & Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Accident
Year
2016
2017
2018
IBNR
Reserves
Claims
Reported
2016 $
665 $
656 $
655 $
2017
2018
Total
598
588
509
$ 1,752
3
(3)
3
406,588
361,857
288,993
Cumulative Paid Losses &
Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Accident
Year
2016
2017
2018
2016 $
634 $
653 $
2017
2018
Total
574
651
591
474
$ 1,716
F-59
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Homeowners
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
2009 $
757 $
777 $
776 $
772 $
772 $
772 $
772 $
769 $
768 $
768 $
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
838
850
955
838
920
774
840
919
741
673
840
916
741
638
710
840
914
741
637
707
690
836
911
739
634
702
703
669
834
908
738
632
700
690
673
866
834
907
738
630
698
684
663
889
903
$ 7,714
—
—
—
1
1
1
3
7
45
89
149,799
161,590
179,389
142,828
113,518
121,863
119,888
119,441
123,426
94,946
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2009 $
559 $
727 $
749 $
759 $
763 $
765 $
766 $
766 $
767 $
599
789
709
815
871
547
825
891
696
467
829
899
719
590
526
832
903
727
611
663
487
833
905
731
622
684
645
481
833
908
734
626
691
665
621
538
767
834
907
735
627
695
674
640
747
484
2010
2011
2012
2013
2014
2015
2016
2017
2018
Total
Property and casualty reserves, including
IBNR reserves
The Company estimates ultimate losses and allocated loss
adjustment expenses by accident year. IBNR represents the
excess of estimated ultimate loss reserves over case reserves. The
process to estimate ultimate losses and loss adjustment expenses
is an integral part of the Company's reserve setting. Reserves for
allocated and unallocated loss adjustment expenses are generally
established separate from the reserves for losses.
Reserves for losses are set by line of business within the reporting
segments. 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. 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
F-60
$ 7,110
referred to as short-tail lines of business. The Company’s shortest
tail lines of business are homeowners, commercial property and
automobile physical damage. The longest tail lines of business
include workers’ compensation, general liability and professional
liability. 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.
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. While actuarial
methods used and judgments change depending on the age of the
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accident year, in 2018, there were no new methods or types of
judgments introduced or changes in how those methods and
judgments were applied. 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.
For both short-tail and long-tail lines of business, an expected loss
ratio is used to record initial reserves. 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. For certain short-tailed lines
of business, IBNR amounts in the above loss development
triangles are negative due to anticipated salvage and subrogation
recoveries on paid losses.
As losses for a given accident year emerge or develop in
subsequent periods, 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 weight 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 as the “actuarial indication”.
Paid development and reported development techniques are
used for most lines of business though more weight is given to the
reported development method for some of the long-tailed lines
like general liability. In addition, for long-tailed lines of business,
the Company relies on the expected loss ratio method for
immature accident years. Frequency/severity techniques are used
predominantly for professional liability and are also used for
automobile liability. For most lines, reserves for allocated loss
adjustment expenses ("ALAE", or those expenses related to
specific claims) are analyzed using paid development techniques
and an analysis of the relationship between ALAE and loss
payments. Reserves for unallocated loss adjustment expenses
("ULAE") are determined using the expected cost per claim year
and the anticipated claim closure pattern as well as the ratio of
paid ULAE to paid losses.
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.
Cumulative number of reported claims
For property and casualty, claim counts represent the number of
claim features on a reported claim where a claim feature is each
separate coverage for each claimant affected by the claim event.
For example, one car accident that results in two bodily injury
claims and one automobile damage liability claim would be
counted as three claims within the personal automobile liability
triangle. Similarly, a fire that impacts one commercial building
may result in multiple claim features due to the potential for
claims related to business interruption, structural damage, and
loss of the physical contents of the building. Claim features that
result in no paid losses are included in the reported claim counts.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
(Unaudited)
Reserve Line
1st
Year
2nd
Year
3rd
Year
4th
Year
5th
Year
6th
Year
7th
Year
8th
Year
9th
Year
10th
Year
Workers' compensation
15.8% 19.5% 12.9%
9.0%
6.1%
General liability
Package business
Commercial property
3.3%
8.7% 14.9%
16.5% 13.7%
38.1% 21.3% 10.3%
60.8% 27.6%
4.9%
8.7%
1.9%
5.8%
0.3%
Commercial automobile liability
17.2% 20.5% 20.7%
18.1% 11.6%
Commercial automobile physical damage
90.0%
7.1% (0.5%)
Professional liability
Bond
Personal automobile liability
5.7% 18.6% 18.1%
16.2%
15.4% 30.8% 13.9%
36.9% 33.0% 15.6%
3.3%
7.4%
9.8%
0.3%
3.3%
Personal automobile physical damage
95.9%
2.8% (0.3%)
4.6%
9.7%
3.5%
0.1%
4.8%
7.6%
1.5%
1.1%
3.2%
7.8%
1.9%
0.1%
2.7%
2.5%
3.6%
1.1%
—%
1.1%
2.0%
2.1%
0.7%
—%
0.6%
1.4%
2.1%
0.3%
—%
0.1%
1.3%
1.4%
2.5%
1.1%
6.1% (0.1%)
1.0% (1.9%)
0.5%
0.2%
0.1%
—%
Homeowners
70.4% 21.1%
3.0%
1.2%
0.5%
0.3%
0.1%
0.1%
—%
—%
F-61
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Life, Disability and Accident Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the years ended December 31,
2018
2017
2016
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$
8,512 $
5,772 $
Reinsurance recoverables
Beginning liabilities for unpaid losses and loss adjustment expenses, net
Add: Aetna U.S. group life and disability business acquisition [1]
Provision for unpaid losses and loss adjustment expenses
Current incurral year
Prior year's discount accretion
Prior incurral year development [2]
Total provision for unpaid losses and loss adjustment expenses [3]
Less: payments
Current incurral year
Prior incurral years
Total payments
Ending liabilities for unpaid losses and loss adjustment expenses, net
Reinsurance recoverables
209
8,303
42
4,470
227
(324)
4,373
2,377
2,135
4,512
8,206
239
208
5,564
2,833
2,868
202
(185)
2,885
1,528
1,451
2,979
8,303
209
Ending liabilities for unpaid losses and loss adjustment expenses, gross
$
8,445 $
8,512 $
5,889
218
5,671
—
2,562
202
(162)
2,602
1,327
1,382
2,709
5,564
208
5,772
[1]Amount recognized in 2018 represents an adjustment to Aetna U.S. group life and disability business reserves, net of reinsurance as of the acquisition date, upon finalization of the
opening balance sheet.
[2]Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
[3]Includes unallocated loss adjustment expenses of $194, $111 and $100 for the years ended December 31, 2018, 2017 and 2016, respectively, that are recorded in insurance
operating costs and other expenses in the Consolidated Statements of Operations.
Group Life, Disability and Accident Products Reserves, Net of Reinsurance, that are Discounted
Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts
Less: amount of discount
Carrying value of liability for unpaid losses and loss adjustment expenses
Weighted average discount rate
Range of discount rate
For the years ended December 31,
2018
2017
2016
$
$
8,957 $
9,071 $
1,505
1,536
7,452 $
7,535 $
3.4%
3.5%
2.1% - 8.0% 2.1% -
8.0% 3.0% -
6,382
1,303
5,079
4.3%
8.0%
Reserves are discounted at rates in effect at the time claims were
incurred, ranging from 2.1% for life and disability reserves
acquired from Aetna based on interest rates in effect at the
acquisition date of November 1, 2017, to 8.0% for the Company’s
pre-acquisition reserves for incurral year 1990, and vary by
product. Prior year's discount accretion has been calculated as
the average reserve balance for the year times the weighted
average discount rate. The decrease in the weighted average
discount rate from 2016 to 2017 was primarily due to the fact
that reserves for the Aetna U.S. group life and disability business
are discounted at market rates in effect as of the acquisition date.
Re-estimates of prior incurral years
reserves in 2018 was driven by the
following:
• Group disability- Prior period reserve estimates
decreased by approximately $230 largely driven by group
long-term disability claim recoveries higher than prior
reserve assumptions and, primarily for the 2017 incurral
year, claim incidence lower than prior assumptions. Short-
term disability also experienced favorable claim recoveries.
F-62
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• Group life and accident (including group
life premium waiver)- Prior period reserve
estimates decreased by approximately $90 largely driven by
lower-than-previously expected claim incidence inclusive of
group life, group life premium waiver, and group accidental
death & dismemberment, principally for the 2017 incurral
year.
Re-estimates of prior incurral years
reserves in 2017 was driven by the
following:
• Group disability- Prior period estimates decreased by
approximately $125 driven by group long-term disability
favorable claim incidence for incurral year 2016 and claim
recoveries higher than prior reserve assumptions.
• Group life and accident (including group
life premium waiver)- Contributing to an
approximately $60 decrease in prior period reserve
estimates was favorable claim incidence on group life
premium waiver for incurral year 2016
Re-estimates of prior incurral years
reserves in 2016 was driven by the
following:
• Group disability- Prior period estimates decreased by
approximately $90 largely driven by group long-term
disability claim recoveries higher than prior reserve
assumptions, particularly in the older incurral years. This
favorability was partially offset by lower Social Security
Disability approvals driven by lower approval rates and
backlogs in the Social Security Administration.
• Group life and accident (including group
life premium waiver-Contributing to an
approximately $75 decrease in prior period reserve
estimates was favorable claim incidence on group life
premium waiver for incurral year 2015.
Reconciliation of Loss Development to Liability for Unpaid Losses and Loss Adjustment Expenses
as of December 31, 2018
Losses and Allocated Loss Adjustment
Expenses, Net of Reinsurance
Cumulative
Incurred for
Incurral
Years
Displayed in
Triangles
Cumulative
Paid for
Incurral
Years
Displayed in
Triangles
Unpaid for
Incurral
Years not
Displayed in
Triangles
Unpaid
Unallocated
Loss
Adjustment
Expenses,
Net of
Reinsurance Discount
Subtotal
Unpaid
Losses and
Loss
Adjustment
Expenses,
Net of
Reinsurance
Liability for
Unpaid
Losses and
Loss
Adjustment
Expenses
Reinsurance
and Other
Recoverables
Reserve Line
Group long-term disability
$
11,934 $
(6,217) $
2,243 $
171 $ (1,364) $
6,767 $
235 $
7,002
Group life and accident,
excluding premium waiver
Group short-term disability
Group life premium waiver
Group supplemental health
5,820
(5,367)
139
113
818
43
2
5
7
—
(19)
—
(122)
—
575
118
703
43
2
—
2
—
577
118
705
43
Total Group Benefits
$
17,754 $
(11,584) $
3,356 $
185 $ (1,505) $
8,206 $
239 $
8,445
The following loss triangles present historical loss development
for incurred and paid claims by the year the insured claim
occurred, referred to as the incurral year. Triangles are limited to
the number of years for which claims incurred typically remain
outstanding. For group long-term disability, the Company has
provided seven incurral years of claims data as data for earlier
periods was not available with respect to the U.S. group life and
disability business acquired from Aetna. Short-tail lines, which
represent claims generally expected to be paid within a few years,
have three years of claim development displayed.
F-63
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Long-Term Disability
Undiscounted Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
2011
2012
2013
2014
2015
2016
2017
2018
IBNR
Reserves
Claims
Reported
1,917
1,761
1,829
1,660
1,605
1,660
1,659
1,539
1,479
1,636
1,669
1,532
1,429
1,473
1,595
1,660
1,530
1,429
1,430
1,442
1,651
1,649
1,515
1,416
1,431
1,422
1,481
1,597
1,638
1,504
1,413
1,431
1,420
1,468
1,413
1,647
$ 11,934
1
1
1
3
5
12
36
810
39,097
37,343
31,755
32,970
33,541
34,259
31,135
19,386
Incurral
Year
2011
2012
2013
2014
2015
2016
2017
2018
Total
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Incurral
Year
2011
2012
2013
2014
2015
2016
2017
2018
Total
2011
2012
2013
2014
2015
2016
2017
2018
118
508
108
743
483
102
886
708
443
103
996
835
664
448
108
1,087
933
791
675
460
112
1,167
1,014
1,231
1,080
881
801
687
479
109
954
884
806
705
452
105
$
6,217
F-64
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Life and Accident, excluding
Premium Waiver
Undiscounted Incurred Losses & Allocated
Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December
31,
(Unaudited)
Incurral
Year
2016
2017
2018
IBNR
Reserves
Claims
Reporte
d
45,206
44,539
5
20
376
41,876
2016 $ 1,974 $ 1,919 $ 1,915 $
2017
2018
Total
1,999
1,953
1,952
$ 5,820
Cumulative Paid Losses &
Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Incurral
Year
2016
2017
2018
2016 $ 1,529 $ 1,888 $ 1,906
2017
2018
Total
1,551
1,929
1,532
$ 5,367
Group life, disability and accident reserves,
including IBNR
The majority of Group Benefits’ reserves are for long-term
disability ("LTD") claimants who are known to be disabled and are
currently receiving benefits. A Disabled Life Reserve ("DLR") is
calculated for each LTD claim. The DLR for each claim is the
expected present value of all estimated future benefit payments
and includes estimates of claim recovery, investment yield, and
offsets from other income, including offsets from Social Security
benefits and workers’ compensation. 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. The DLR also includes a
liability for payments to claimants who have not yet been
approved for LTD either because they have not yet satisfied the
waiting (or elimination) period or because the approval or denial
decision has not yet been made. In these cases, the present value
of future benefits is reduced for the likelihood of claim denial
based on Company experience. For claims recently closed due to
F-65
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.
For incurral years with IBNR claims, estimates of ultimate losses
are made by applying completion factors to the dollar amount of
claims reported or expected depending on the market segment.
IBNR represents estimated ultimate losses less both DLR and
cumulative paid amounts for all reported claims. Completion
factors are derived using 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 IBNR includes 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 market
segment, where emerged claim information for an incurral year is
not yet credible enough to be a basis for an IBNR projection. In
these cases, the ultimate losses and allocated loss adjustment
expenses are estimated using earned premium multiplied by an
expected loss ratio.
The Company also records reserves for future death benefits
under group term life policies that provide for premiums to be
waived in the event the insured is unable to work due to disability
and has satisfied an elimination period, which is typically nine
months ("premium waiver reserves"). The death benefit reserve
for these group life premium waiver claims is estimated for a
known disabled claimant equal to the present value of expected
future cash outflows (typically a lump sum face amount payable at
death plus claim expenses) with separate estimates for claimant
recovery (when no death benefit is payable) and for death before
recovery or benefit expiry (when death benefit is payable). The
IBNR for premium waiver death benefits is estimated with
standard actuarial development methods.
In addition, the Company also records reserves for group term
life, accidental death & dismemberment, short term disability, and
other group products that have short claim payout periods. For
these products, reserves are determined using paid or reported
actuarial development methods. The resulting claim triangles
produce a completion pattern and estimate of ultimate loss. IBNR
for these lines of business equals the estimated ultimate losses
and loss adjustment expenses less the amount of paid or reported
claims depending on whether the paid or reported development
method was used. Estimates are reviewed for reasonableness and
are adjusted for current trends or other factors that affect the
development pattern.
Cumulative number of reported claims
For group life, disability and accident coverages, claim counts
include claims that are approved, pending approval and
terminated and exclude denied claims. Due to the nature of the
claims, one claimant represents one event.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
(Unaudited)
Group long-term disability
7.3%
24.4%
15.4%
8.7%
6.3%
5.4%
4.6%
3.9%
1st Year 2nd Year
3rd Year
4th Year
5th Year
6th Year
7th Year
8th Year
Group life and accident, excluding premium
waiver
79.3%
19.0%
0.9%
12. RESERVE FOR FUTURE POLICY BENEFITS
Changes in Reserves for Future Policy Benefits [1]
Liability Balance, as of January 1, 2018
Incurred
Paid
Change in unrealized investment gains and losses
Liability Balance, as of December 31, 2018
Reinsurance recoverable asset, as of January 1, 2018
Incurred
Paid
Reinsurance recoverable asset, as of December 31, 2018
Liability Balance, as of January 1, 2017
Acquired [2]
Incurred
Paid
Change in unrealized investment gains and losses
Liability Balance, as of December 31, 2017
Reinsurance recoverable asset, as of January 1, 2017
Incurred
Paid
Reinsurance recoverable asset, as of December 31, 2017
$
$
$
$
$
$
$
$
713
72
(101)
(42)
642
26
1
—
27
322
346
86
(50)
9
713
28
(1)
(1)
26
[1]Reserves for future policy benefits includes paid-up life insurance and whole-life policies resulting from conversion from group life policies included within the Group Benefits
segment and reserves for run-off structured settlement and terminal funding agreement liabilities which are in the Corporate category.
[2]Represents reserves, net, related to the U.S. group life and disability business acquired from Aetna, as of the acquisition date. For additional information. see Note 2 - Business
Acquisitions of Notes to Consolidated Financial Statements.
13. DEBT
The Company’s long-term debt securities are issued by HFSG
Holding Company, and are unsecured obligations of HFSG
Holding Company, and rank on a parity with all other unsecured
and unsubordinated indebtedness of HFSG Holding Company.
Debt is carried net of discount and issuance cost.
Interest expense on debt is included in the corporate category for
segment reporting.
F-66
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-term and Long-term Debt by Issuance
Revolving Credit Facilities
$
— $
—
Senior Notes and Debentures
As of December 31,
2018
2017
6.3% Notes, due 2018
6.0% Notes, due 2019
5.5% Notes, due 2020
5.125% Notes, due 2022
5.95% Notes, due 2036
6.625% Notes, due 2040
6.1% Notes, due 2041
6.625% Notes, due 2042
4.4% Notes, due 2048
4.3% Notes, due 2043
Junior Subordinated Debentures
7.875% Notes, due 2042
3 month Libor + 2.125% Notes, due
2067 [1]
8.125% Notes, due 2068
—
413
500
800
300
295
409
178
500
300
600
500
—
320
413
500
800
300
295
409
178
—
300
600
500
500
Total Notes and Debentures
4,795
5,115
Unamortized discount and debt issuance
cost [2]
Total Debt
Less: Current maturities
Long-Term Debt
(117)
(117)
4,678
413
4,998
320
$
4,265 $
4,678
[1]In April 2017, the Company entered into an interest rate swap agreement
expiring February 15, 2027 to effectively convert the variable interest payments
for this debenture into fixed interest payments of approximately 4.39%.
[2]The amount primarily consists of $78 and $79 as of December 31, 2018 and
2017, respectively, on the 6.1% Notes, due 2041.
The effective interest rate on the 6.1% senior notes due 2041 is
7.9%. The effective interest rate on the remaining notes does not
differ materially from the stated rate. The Company incurred
interest expense of $298, $316 and $327 on debt for the years
ended December 31, 2018, 2017 and 2016, respectively.
Senior Notes
On March 15, 2018, The Hartford issued $500 of 4.4% senior
notes ("4.4% Notes") due March 15, 2048 for net proceeds of
approximately $490, after deducting underwriting discounts and
expenses from the offering. Interest is payable semi-annually in
arrears on March 15 and September 15, commencing
September 15, 2018. The Hartford, at its option, can redeem the
4.4% Notes at any time, in whole or in part, at a redemption price
equal to the greater of 100% of the principal amount being
redeemed or a make-whole amount based on a comparable
maturity US Treasury plus 25 basis points, plus any accrued and
unpaid interest, except the option of a make-whole payment is
not applicable within the final six months before maturity.
On March 15, 2018, The Hartford repaid at maturity the
$320 principal amount of its 6.3% senior notes.
Junior Subordinated
Debentures
Junior Subordinated Debentures by Issuance
Issue
Face Value
Interest Rate [1]
Call Date
Interest Rate Subsequent to Call
Date [2]
Final Maturity
7.875%
Debentures
3 Month
Libor +
2.125%
$
600 $
7.875% [2] N/A
500
[3]
April 15,
2022
3 Month
Libor +
5.596%
April 15,
2042
February
15, 2022 [4]
3 Month
Libor +
2.125% [5]
February 12,
2067
[1]Interest rate in effect until call date.
[2]Payable quarterly in arrears.
[3]Debentures were issued on call date.
[4]The original call date was February 15, 2017. Replacement Capital Covenant
associated with the debenture prohibits the Company from redeeming all or any
portion of the notes on or prior to February 15, 2022.
[5]In April, 2017 the company entered into an interest rate swap agreement expiring
February 15, 2027 to effectively convert the interest payments for the 3 month
Libor + 2.125% debenture into fixed interest payments of approximately 4.39%.
The debentures are unsecured, subordinated and junior in right of
payment and upon liquidation to all of the Company’s existing and
future senior indebtedness. In addition, the debentures are
effectively subordinated to all of the Company’s subsidiaries’
existing and future indebtedness and other liabilities, including
obligations to policyholders. The debentures do not limit the
Company’s or the Company’s subsidiaries’ ability to incur
additional debt, including debt that ranks senior in right of
payment and upon liquidation to the debentures.
The Company has the right to defer interest payments for up to a
consecutive ten years without giving rise to an event of default.
Deferred interest will continue to accrue and will accrue
additional interest at the then applicable interest rate. If the
Company defers interest payments, the Company generally may
not make payments on or redeem or purchase any shares of its
capital stock or any of its debt securities or guarantees that rank
upon liquidation, dissolution or winding up equally with or junior
to the debentures, subject to certain limited exceptions.
On June 15, 2018, The Hartford redeemed $500 aggregate
principal amount of its 8.125% Fixed-to-Floating Rate Junior
Subordinated Debentures due 2068. During the initial offering of
the 8.125% debentures, the Company entered into a replacement
capital covenant ("RCC"), and under the terms of the RCC, if the
Company redeemed the 8.125% debentures at any time prior to
June 15, 2048 it could only do so with the proceeds from the sale
of certain qualifying replacement securities. The 3 month Libor
plus 2.125% debentures issued February 15, 2017 are qualifying
replacement securities within the definition of RCC. In
connection with this redemption, the Company recognized a $6
loss on extinguishment of debt for unamortized deferred debt
issuance costs.
The 7.875% and 3 month Libor plus 2.125% debentures may be
redeemed in whole prior to the call date upon certain tax or rating
agency events, at a price equal to the greater of 100% of the
principal amount being redeemed and the applicable make-whole
F-67
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
amount plus any accrued and unpaid interest. The Company may
elect to redeem the 7.875% and 3 month Libor plus 2.125%
debentures in whole or in part on or after the call date for the
principal amount being redeemed plus accrued and unpaid
interest to the date of redemption.
In connection with the offering of the three month LIBOR plus
2.125% debenture, the Company entered into a RCC for the
benefit of holders of one or more designated series of the
Company's indebtedness, initially the Company's 4.3% notes due
2043. Under the terms of the RCC, if the Company redeems the
debenture any time prior to February 12, 2047 (or such earlier
date on which the RCC terminates by its terms) it can only do so
with the proceeds from the sale of certain qualifying replacement
securities. The RCC also prohibits the Company from redeeming
all or any portion of the notes on or prior to February 15, 2022.
In April, 2017 the company entered into an interest rate swap
agreement expiring February 15, 2027 to effectively convert the
variable interest payments for the 3 month Libor plus 2.125%
debenture into fixed interest payments of approximately 4.39%.
Long-Term Debt
Long-term Debt Maturities (at par value) as of
December 31, 2018
2019 - Current maturities
2020
2021
2022
2023
Thereafter
$
$
$
$
$
$
413
500
—
800
—
3,082
Shelf Registrations
On July 29, 2016, the Company filed with the Securities and
Exchange Commission (the “SEC”) an automatic shelf registration
statement (Registration No. 333-212778) for the potential
offering and sale of debt and equity securities. The registration
statement allows for the following types of securities to be
offered: debt securities, junior subordinated debt securities,
preferred stock, common stock, depositary shares, warrants,
stock purchase contracts, and stock purchase units. In that The
Hartford is a well-known seasoned issuer, as defined in Rule 405
under the Securities Act of 1933, the registration statement went
effective immediately upon filing and The Hartford may offer and
sell an unlimited amount of securities under the registration
statement during the three-year life of the registration
statement.
Revolving Credit Facilities
On March 29, 2018, the Company entered into an amendment
(the "Amendment") to its Five-Year Credit Agreement dated
October 31, 2014. The Amendment reset the level of the
Company's minimum consolidated net worth financial covenant
to $9 billion, excluding AOCI, from its former $13.5 billion (where
net worth was defined as stockholders' equity excluding AOCI
and including junior subordinated debt), among other updates.
Among other changes, under an amended and restated credit
agreement that became effective in June 2018 after the closing of
the sale of the Company's life and annuity business, the aggregate
amount of principal of the credit facility decreased from $1 billion
to $750, including a reduction to the amount available for letters
of credit from $250 to $100, the maturity date was extended to
March 29, 2023, and the liens covenant and certain other
covenants were modified.
Revolving loans from the Credit Facility may be in multiple
currencies. U.S. dollar loans will bear interest at a floating rate
equivalent to an indexed rate depending on the type of borrowing
and a basis point spread based on The Hartford's credit rating and
will mature no later than March 29, 2023. Letters of credit issued
from the Credit Facility bear a fee based on The Hartford's credit
rating and expire no later than March 29, 2024. The Credit
Facility requires the Company to maintain a minimum
consolidated net worth, excluding AOCI, of $9 billion, limit the
ratio of senior debt to capitalization, excluding AOCI, at 35% and
meet other customary covenants. The Credit Facility is for
general corporate purposes.
As of December 31, 2018, no borrowings were outstanding, $3 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, 2018, the Hartford's maximum borrowings
available under its commercial paper program was $750 and
there was no commercial paper outstanding. The Company is
dependent upon market conditions to access short-term
financing through the issuance of commercial paper to investors.
On July 19, 2018, the Board of Directors revised the Company's
commercial paper issuance authorization from $1 billion to $750
to align the program with the Company's $750 five year revolving
credit facility which became effective on June 11, 2018.
Collateralized Advances with
Federal Home Loan Bank of
Boston
In August 2018, the Company’s subsidiaries, Hartford Fire
Insurance Company (“Hartford Fire”) and Hartford Life and
Accident Insurance Company (“HLA”), became members of the
Federal 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. FHLBB
membership required the purchase of member stock and requires
additional member stock ownership of 3% or 4% of any amount
borrowed. Acceptable forms of collateral include real estate
backed fixed maturities and mortgage loans and the amount of
advances that can be taken is limited to a percentage of the fair
value of the assets that ranges from a high of 97% for US
government-backed fixed maturities maturing within 3 years to a
low of 40% for A-rated commercial mortgage-backed fixed
maturities maturing in 5 years or more. In its consolidated
balance sheets, The Hartford would present the liability for
advances taken based on use of the funds with advances for
general corporate purposes presented in short- or long-term debt
and advances to earn incremental investment income presented
in other liabilities, consistent with other collateralized financing
transactions such as securities lending and repurchase
agreements. The Connecticut Department of Insurance
(“CTDOI”) permits Hartford Fire and HLA to pledge up to $1.1
billion and $0.6 billion in qualifying assets, respectively, without
prior approval, to secure FHLBB advances in 2019. The pledge
F-68
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
limit is determined annually based on statutory admitted assets
and capital and surplus of Hartford Fire and HLA, respectively. As
of December 31, 2018, there were no advances outstanding
under the FHLBB facility.
14. COMMITMENTS AND CONTINGENCIES
Management evaluates each contingent matter separately. A loss
is recorded if probable and reasonably estimable. Management
establishes liabilities 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 liability at the low end of the range of losses.
The Company wrote several different categories of insurance
contracts that may cover asbestos and environmental claims.
First, the Company wrote primary policies providing the first
layer of coverage in an insured’s liability program. Second, the
Company wrote excess and umbrella policies providing higher
layers of coverage for losses that exhaust the limits of underlying
coverage. Third, the Company acted as a reinsurer assuming a
portion of those risks assumed by other insurers writing primary,
excess, umbrella and reinsurance coverages. Fourth, subsidiaries
of the Company participated in the London Market, writing both
direct insurance and assumed reinsurance business.
Significant uncertainty limits the ability of insurers and reinsurers
to estimate the ultimate reserves necessary for unpaid gross
losses and expenses related to environmental and particularly
asbestos claims. The degree of variability of gross reserve
estimates for these exposures is significantly greater than for
other more traditional exposures.
In the case of the reserves for asbestos exposures, factors
contributing to the high degree of uncertainty include inadequate
loss development patterns, plaintiffs’ expanding theories of
liability, the risks inherent in major litigation, and inconsistent
emerging legal doctrines. Furthermore, over time, insurers,
including the Company, have experienced significant changes in
the rate at which asbestos claims are brought, the claims
experience of particular insureds, and the value of claims, making
predictions of future exposure from past experience uncertain.
Plaintiffs and insureds also have sought to use bankruptcy
proceedings, including “pre-packaged” bankruptcies, to
accelerate and increase loss payments by insurers. In addition,
some policyholders have asserted new classes of claims for
coverages to which an aggregate limit of liability may not apply.
Further uncertainties include insolvencies of other carriers and
unanticipated developments pertaining to the Company’s ability
to recover reinsurance for asbestos and environmental claims.
Management believes these issues are not likely to be resolved in
the near future.
In the case of the reserves for environmental exposures, factors
contributing to the high degree of uncertainty include expanding
theories of liability and damages, the risks inherent in major
litigation, inconsistent decisions concerning the existence and
scope of coverage for environmental claims, and uncertainty as to
the monetary amount being sought by the claimant from the
insured.
The reporting pattern for assumed reinsurance claims, including
those related to asbestos and environmental claims, is much
longer than for direct claims. In many instances, it takes months
or years to determine that the policyholder’s own obligations
have been met and how the reinsurance in question may apply to
such claims. The delay in reporting reinsurance claims and
exposures adds to the uncertainty of estimating the related
reserves.
Litigation
The Hartford is involved in claims litigation arising in the ordinary
course of business, both as a liability insurer defending or
providing indemnity for third-party claims brought against
insureds and as an insurer defending coverage claims brought
against it. The Hartford accounts for such activity through the
establishment of unpaid loss and loss adjustment expense
reserves. Subject to the uncertainties in the following discussion
under the caption “Asbestos and Environmental Claims,”
management expects that the ultimate liability, if any, with
respect to such ordinary-course claims litigation, after
consideration of provisions made for potential losses and costs of
defense, will not be material to the consolidated financial
condition, results of operations or cash flows of The Hartford.
The Hartford is also involved in other kinds of legal actions, some
of which assert claims for substantial amounts. These actions
include, among others, and in addition to the matters in the
following discussion, putative state and federal class actions
seeking certification of a state or national class. Such putative
class actions have alleged, for example, underpayment of claims
or improper underwriting practices in connection with various
kinds of insurance policies, such as personal and commercial
automobile, property, disability, life and inland marine. The
Hartford also is involved in individual actions in which punitive
damages are sought, such as claims alleging bad faith in the
handling of insurance claims or other allegedly unfair or improper
business practices. Like many other insurers, The Hartford also
has been joined in actions by asbestos plaintiffs asserting, among
other things, that insurers had a duty to protect the public from
the dangers of asbestos and that insurers committed unfair trade
practices by asserting defenses on behalf of their policyholders in
the underlying asbestos cases. 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 Hartford.
Nonetheless, given the large or indeterminate amounts sought in
certain of these actions, and the inherent unpredictability of
litigation, the outcome in certain matters could, from time to time,
have a material adverse effect on the Company's results of
operations or cash flows in particular quarterly or annual periods.
Asbestos and Environmental Claims
The Company continues to receive asbestos and environmental
claims. Asbestos claims relate primarily to bodily injuries asserted
by people who came in contact with asbestos or products
containing asbestos. Environmental claims relate primarily to
pollution and related clean-up costs.
F-69
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
It is also not possible to predict changes in the legal and legislative
environment and their effect on the future development of
asbestos and environmental claims.
Given the factors described above, the Company believes the
actuarial tools and other techniques it employs to estimate the
ultimate cost of claims for more traditional kinds of insurance
exposure are less precise in estimating reserves for asbestos and
environmental exposures. For this reason, the Company
principally relies on exposure-based analysis to estimate the
ultimate costs of these claims, both gross and net of reinsurance,
and regularly evaluates new account information in assessing its
potential asbestos and environmental exposures. The Company
supplements this exposure-based analysis with evaluations of the
Company’s historical direct net loss and expense paid and
reported experience, and net loss and expense paid and reported
experience by calendar and/or report year, to assess any
emerging trends, fluctuations or characteristics suggested by the
aggregate paid and reported activity.
While the Company believes that its current asbestos and
environmental reserves are appropriate, significant uncertainties
limit the ability of insurers and reinsurers to estimate the ultimate
reserves necessary for unpaid losses and related expenses. The
ultimate liabilities, thus, could exceed the currently recorded
reserves, and any such additional liability, while not estimable
now, could be material to The Hartford's consolidated operating
results and liquidity.
As of December 31, 2018, the Company reported $1.1 billion of
net asbestos reserves and $203 of net environmental reserves.
While the Company believes that its current A&E reserves are
appropriate, significant uncertainties limit our ability to estimate
the ultimate reserves necessary for unpaid losses and related
expenses. The ultimate liabilities, thus, could exceed the currently
recorded reserves, and any such additional liability, while not
reasonably estimable now, could be material to The Hartford's
consolidated operating results and liquidity.
Effective December 31, 2016, the Company entered into an A&E
ADC reinsurance agreement with NICO, a subsidiary of Berkshire
Hathaway Inc., to reduce uncertainty about potential adverse
development of asbestos and environmental reserves. Under the
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 asbestos and environmental reserves as of December
31, 2016 of approximately $1.7 billion. The $650 reinsurance
premium was placed into a collateral trust account as security for
NICO’s claim payment obligations to the Company. Under
retroactive reinsurance accounting, net adverse asbestos and
environmental reserve development after December 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 direct
losses incurred. Cumulative ceded losses exceeding the $650
reinsurance premium paid would result in a deferred gain. The
deferred gain would be recognized over the claim 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 asbestos and environmental claims after
December 31, 2016 in excess of $650 may result in significant
charges against earnings. Furthermore, cumulative adverse
development of asbestos and environmental claims could
ultimately exceed the $1.5 billion treaty limit in which case any
adverse development in excess of the treaty limit would be
absorbed as a charge to earnings by the Company. In these
scenarios, the effect of these charges could be material to the
Company’s consolidated operating results and liquidity. As of
December 31, 2018, the Company has incurred cumulative $523
in adverse development on asbestos and environmental reserves
that have been ceded under the ADC treaty with NICO, leaving
approximately $977 of coverage available for future adverse
reserve development, if any.
Lease Commitments
The total rental expense on operating leases was $56, $57, and
$53 in 2018, 2017, and 2016, respectively, which excludes
sublease rental income of $4, $3, and $2 in 2018, 2017 and 2016,
respectively.
Future minimum lease commitments as of
December 31, 2018
2019
2020
2021
2022
2023
Thereafter
$
Operating
Leases
44
36
25
18
16
34
Total minimum lease payments [1]
$
173
[1]Excludes expected future minimum sublease income of approximately $2, $1, $1,
$0, $0 and $0 in 2019, 2020, 2021, 2022, 2023 and thereafter respectively.
The Company’s lease commitments consist primarily of lease
agreements for office space, automobiles, and office equipment
that expire at various dates.
Unfunded Commitments
As of December 31, 2018, the Company has outstanding
commitments totaling $954, of which $707 is committed to fund
limited partnership and other alternative investments, which may
be called by the partnership during the commitment period to
fund the purchase of new investments and partnership expenses.
Additionally, $163 of the outstanding commitments relate to
various funding obligations associated with private debt and
equity securities. The remaining outstanding commitments of
$84 relate to mortgage loans. Of the $954 in total outstanding
commitments, $48 are related to mortgage loan commitments
which the Company can cancel unconditionally.
Guaranty Funds and Other
Insurance-Related
Assessments
In all states, insurers licensed to transact certain classes of
insurance are required to become members of a guaranty fund. In
most states, in the event of the insolvency of an insurer writing
any such class of insurance in the state, the guaranty funds may
assess its members to pay covered claims of the insolvent
insurers. Assessments are based on each member's proportionate
F-70
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
share of written premiums in the state for the classes of insurance
in which the insolvent insurer was engaged. Assessments are
generally limited for any year to one or two percent of the
premiums written per year depending on the state. Some states
permit member insurers to recover assessments paid through
surcharges on policyholders or through full or partial premium
tax offsets, while other states permit recovery of assessments
through the rate filing process.
Liabilities for guaranty fund and other insurance-related
assessments are accrued when an assessment is probable, when it
can be reasonably estimated, and when the event obligating the
Company to pay an imposed or probable assessment has
occurred. Liabilities for guaranty funds and other insurance-
related assessments are not discounted and are included as part
of other liabilities in the Consolidated Balance Sheets. As of
December 31, 2018 and 2017 the liability balance was $97 and
$113, respectively. As of December 31, 2018 and 2017 amounts
related to premium tax offsets of $2 and $6, respectively, were
included in other assets.
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, 2018 was $76, of which the legal entities have
15. EQUITY
Capital Purchase Program
("CPP") Warrants
As of December 31, 2018 and 2017, respectively, the Company
has 1.9 million and 2.2 million CPP warrants outstanding and
exercisable. The CPP warrants were issued in 2009 as part of a
program established by the U.S. Department of the Treasury
under the Emergency Economic Stabilization Act of 2008. The
CPP warrants expire in June 2019.
CPP warrant exercises were 0.3 million, 1.8 million and 0.4 million
during the years ended December 31, 2018, 2017 and 2016,
respectively.
The declaration of common stock dividends by the Company in
excess of a threshold triggers a provision in the Company's
warrant agreement with The Bank of New York Mellon resulting
in adjustments to the CPP warrant exercise price and the number
of shares deliverable for each warrant exercised (the “Warrant
posted collateral of $71 in the normal course of business. Based
on derivative market values as of December 31, 2018, a
downgrade of one level below the current financial strength rates
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, 2018, a downgrade of two levels below the current
financial strength ratings by either Moody’s or S&P would require
an additional $7 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 collateral that we post, if required, is primarily in the form of
U.S. Treasury bills, U.S. Treasury notes and government agency
securities.
Guarantees
In the ordinary course of selling businesses or entities to third
parties, the Company has agreed to indemnify purchasers for
losses arising subsequent to the closing due to breaches of
representations and warranties with respect to the business or
entity being sold or with respect to covenants and obligations of
the Company and/or its subsidiaries. These obligations are
typically subject to various time limitations, defined by the
contract or by operation of law, such as statutes of limitation. In
some cases, the maximum potential obligation is subject to
contractual limitations, while in other cases such limitations are
not specified or applicable. The Company does not expect to
make any payments on these guarantees and is not carrying any
liabilities associated with these guarantees.
The Hartford has guaranteed the obligations of certain life,
accident and health and annuity contracts of the life and annuity
business written by Hartford Life Insurance Company between
1990 and 1997 and written by Hartford Life and Annuity
Insurance Company between 1993 and 2009. After the sale of
this business in May 2018, the purchaser indemnified the
Company for any liability arising under the guarantees. The
guarantees have no limitation as to maximum potential future
payments. The Hartford has not recorded a liability and the
likelihood for any payments under these guarantees is remote.
Share Number”). Accordingly, the CPP warrant exercise price was
$8.836, $8.999 and $9.126 and the Warrant Share Number was
1.1, 1.0 and 1.0 as of December 31, 2018, 2017 and 2016,
respectively. The exercise price will be settled by the Company
withholding the number of common shares issuable upon exercise
of the warrants equal to the value of the aggregate exercise price
of the warrants so exercised determined by reference to the
closing price of the Company's common stock on the trading day
on which the warrants are exercised and notice is delivered to the
warrant agent.
Equity Repurchase Program
During the year ended December 31, 2018, the Company did not
repurchase any common shares. In February, 2019, the Company
announced a 1.0 billion share repurchase authorization by the
Board of Directors which is effective through December 31,
2020. Based on projected holding company resources, the
Company expects to use a portion of the authorization in 2019
F-71
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
but anticipates using the majority of the program in 2020. Any
repurchase of shares under the equity repurchase program is
dependent on market conditions and other factors.
as "statutory capital". Life insurance subsidiaries include the
Group Benefits insurance subsidiary and, for periods up until the
sale date, the life and annuity business sold in May 2018.
Preferred Stock
On November 6, 2018, the Company issued 13.8 million
depositary shares each representing 1/1000th interest in a share
of the Company’s 6.0% Series G non-cumulative perpetual
preferred stock (the “Preferred Stock”) with a liquidation
preference of $25,000 per share (equivalent to $25.00 per
depositary share), for net cash proceeds of $334. The Preferred
Stock is perpetual and has no maturity date. Dividends will be
payable, if declared, quarterly in arrears on the 15th day of
February, May, August and November of each year, commencing
on February 15, 2019. If a dividend is not declared before the
dividend payment date for any dividend period, The Hartford will
have no obligation to pay dividends otherwise attributable to
such dividend period. If a dividend is not declared and paid or
made payable on all outstanding shares of the Preferred Stock for
the latest completed dividend period, no dividends may be paid or
declared on The Hartford’s common stock and The Hartford may
not purchase, redeem, or otherwise acquire its common stock.
The Preferred Stock is redeemable at the Company’s option in
whole or in part, on or after November 15, 2023 at a redemption
price of $25,000 per share, plus unpaid dividends attributable to
the current dividend period. Prior to November 15, 2023, the
Preferred Stock is redeemable at the Company’s option, in whole
but not in part, within 90 days of the occurrence of (a) a rating
agency event at a redemption price equal to $25,500 per share,
plus unpaid dividends attributable to the current dividend period
in circumstances where a rating agency changes its criteria used
to assign equity credit to securities like the Preferred Stock; or (b)
a regulatory capital event at a redemption price equal to $25,000
per share, plus unpaid dividends attributable to the current
dividend period in circumstances where a capital regulator such
as a state insurance regulator changes or proposes to change
capital adequacy rules.
On December 13, 2018, The Hartford’s board of directors
declared a dividend of $412.50 on each share of the Series G
preferred stock (equivalent to $0.4125 per depository share)
payable on February 15, 2019, to stockholders of record at the
close of business on February 1, 2019.
Statutory Results
The domestic insurance subsidiaries of The Hartford prepare
their statutory financial statements in conformity with statutory
accounting practices prescribed or permitted by the applicable
state insurance department which vary materially from U.S.
GAAP. Prescribed statutory accounting practices include
publications of the National Association of Insurance
Commissioners (“NAIC”), as well as state laws, regulations and
general administrative rules. The differences between statutory
financial statements and financial statements prepared in
accordance with U.S. GAAP vary between domestic and foreign
jurisdictions. The principal differences are that statutory financial
statements do not reflect deferred policy acquisition costs and
limit deferred income taxes, predominately use interest rate and
mortality assumptions prescribed by the NAIC for life benefit
reserves, generally carry bonds at amortized cost, and present
reinsurance assets and liabilities net of reinsurance. For reporting
purposes, statutory capital and surplus is referred to collectively
Statutory Net Income (Loss)
For the years ended
December 31,
2018
2017
2016
Group Benefits Insurance
Subsidiary
Property and Casualty Insurance
Subsidiaries
Life and annuity business sold in
May, 2018
Total
$
390 $ (1,066) $
208
1,114
950
304
196
369
$ 1,700 $
253 $
349
861
Statutory Capital
As of December 31,
2018
2017
Group Benefits Insurance
Subsidiary
Property and Casualty Insurance
Subsidiaries
Total
$
$
2,407 $
2,029
7,435
9,842 $
7,396
9,425
Regulatory Capital
Requirements
The Company's U.S. insurance companies' states of domicile
impose risk-based capital (“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'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 by U.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.
Dividend Restrictions
Dividends to the HFSG Holding Company from its insurance
subsidiaries are restricted by insurance regulation. The payment
of dividends by Connecticut-domiciled insurers is limited under
the insurance holding company laws of Connecticut. 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 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
F-72
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 a Connecticut-domiciled
insurer exceeds the insurer’s earned surplus, it requires the prior
approval of the Connecticut Insurance Commissioner. The
insurance holding company laws of the other jurisdictions in
which The Hartford’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.
Total dividends paid by P&C subsidiaries to HFSG holding
company in 2018 were $3.1 billion. This includes extraordinary
dividends of $3.0 billion, comprised of a $1.9 billion principal
paydown on the intercompany note owed by Hartford Holdings,
Inc. ("HHI") to Hartford Fire Insurance Company related to the
life and annuity business sold in May 2018, $226 related to
interest payments on the note and $900 to fund near-term
obligations of the HFSG holding company. In addition, there was
$50 of ordinary P&C dividends that were paid to HFSG holding
company, and $110 of capital contributed by the HFSG holding
company to a run-off P&C subsidiary. Excluding the interest
payments on the intercompany note and dividends that were
subsequently contributed to a P&C subsidiary, net dividends paid
by P&C subsidiaries to HFSG holding company were $2.8 billion
during 2018.
16. INCOME TAXES
Tax Reform
On December 22, 2017, the U.S. government enacted
comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (“Tax Reform”). Tax Reform establishes new tax
laws effective January 1, 2018, including, but not limited to, (1)
reduction of the U.S. federal corporate income tax rate from 35%
to 21%; (2) elimination of the corporate alternative minimum tax
(AMT) and changing how existing AMT credits can be realized, (3)
limitations on the deductibility of certain executive
compensation, (4) changes to the discounting of statutory
reserves for tax purposes, and (5) limitations on net operating
losses (NOLs) generated after December 31, 2017 though there
is no impact to the Company’s current NOL carryforwards.
Related to Tax Reform, the Company recorded a provisional net
income tax expense of $877 in the period ending December 31,
2017. This net expense consisted of an $821 reduction of the
Company’s deferred tax assets primarily due to the reduction in
the U.S. federal corporate income tax rate and a $56
sequestration fee payable associated with refundable AMT
credits.
During 2018, the Company recorded income tax expense of $17
as measurement period adjustments related to Tax Reform due to
the filing of the Company's 2017 federal income tax return and
completion of the Aetna Group Benefits acquisition. In addition,
the Company recorded an income tax benefit of $56, reflecting
the elimination of the sequestration fee payable. In total, the
F-73
Total net dividends received by HFSG holding company in 2018
were $2.9 billion, including the $2.8 billion from P&C subsidiaries
and $119 from Hartford Funds during the year. There were no
dividends received from Hartford Life and Accident in 2018.
Under the formula described above, in 2019, the Company’s
property and casualty insurance subsidiaries are permitted to pay
up to a maximum of approximately $1.2 billion in dividends to
HFSG Holding Company without prior approval from the
applicable insurance commissioner, though only $200 of this
dividend capacity could be paid before the fourth quarter of
2019. In 2019, HFSG Holding Company does not anticipate
receiving net dividends from its property and casualty insurance
subsidiaries, as planned 2019 dividends were received in the
fourth quarter 2018. The HFSG Holding Company generally
expects to receive net dividends of $850 to $900 a year from its
property and casualty insurance subsidiaries subject to the
profitability of those subsidiaries and their capital needs.
Hartford Life and Accident Insurance Company ("HLA") has $380
dividend capacity for 2019 and anticipates paying $250 to $300
dividends in 2019.
There are no current restrictions on the HFSG Holding
Company's ability to pay dividends to its stockholders.
Restricted Net Assets
The Company's insurance subsidiaries had net assets of $10.1
billion, determined in accordance with U.S. GAAP, that were
restricted from payment to the HFSG Holding Company, without
prior regulatory approval at December 31, 2018.
Company recorded a net income tax benefit from Tax Reform of
$39 in 2018.
As of December 31, 2018, the Company had AMT carryovers of
$841 which are reflected as a current income tax receivable
within Other Assets in the accompanying consolidated balance
sheet. AMT credits may be used to offset a regular tax liability for
any taxable year beginning after December 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 the
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.
Income Tax Expense
The Company and its subsidiaries file income tax returns in the
U.S. federal jurisdiction, and various state and foreign
jurisdictions, as applicable. Income (loss) from continuing
operations before income taxes included income from domestic
operations of $1,753, $704 and $521 for the years ended
December 31, 2018, 2017 and 2016, and income (losses) from
foreign operations of $0, $19 and $(74) for the years ended
December 31, 2018, 2017 and 2016.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income Tax Expense (Benefit)
For the years ended
December 31,
2018
2017
2016
Income Tax Expense (Benefit)
Current - U.S. Federal
$ (18) $ 116 $
International
Total current
Deferred - U.S. Federal
International
Total deferred
—
(18)
286
—
286
10
—
10
(173)
(3)
1
117
866
2
868
(176)
Total income tax expense
(benefit)
$ 268 $ 985 $ (166)
Income Tax Rate Reconciliation
For the years ended
December 31,
2018
2017
2016
$
368 $
253 $
157
(66)
(123)
(124)
—
11
(5)
—
—
(39)
(1)
—
—
(15)
—
5
877
(12)
(79)
—
—
(79)
(37)
—
(4)
Tax provision at U.S. federal
statutory rate [1]
Tax-exempt interest
Decrease in deferred tax
valuation allowance
Executive Compensation
Stock-based compensation
Solar credits
Sale of the U.K. property &
casualty run-off subsidiaries and
foreign rate differential
Tax Reform
Other
Provision (benefit) for income
taxes
[1] Due to the passage of Tax Reform on December 22, 2017, current and prior
period federal statutory rates are reflected at 21% and 35% respectively.
In addition to the effect of tax-exempt interest, the Company's
effective tax rate for the year ended December 31, 2018 reflects
a federal income tax expense of $11 related to non-deductible
executive compensation and a benefit of $5 related to a
deduction for stock-based compensation that vested at a fair
value per share greater than the fair value on the date of grant.
Included in 2018 is a benefit of $39 related to Tax Reform,
primarily due to the elimination of the sequestration fee on AMT
credits.
Included in 2017 is an expense of $877 due to the effects of Tax
Reform, primarily due to the reduction in net deferred tax assets
as a result of the reduction in the federal corporate income tax
rate from 35% to 21%.
Included in 2016 is a benefit of $79 due to the investment in solar
energy partnerships. The total tax benefit from the transaction
was $113, which included the tax effects of the related financial
statement realized loss from writing down the investment in
partnerships.
Also included in 2016 is a tax benefit primarily due to the sale of
the Company's U.K. property and casualty run-off subsidiaries.
The tax benefit of $37 relates to the difference between the tax
basis and book basis of the Company's investment in the
subsidiaries net of additional foreign tax rate differentials. The
total estimated tax benefit recognized in 2016 related to the sale
of the U.K. property and casualty run-off subsidiaries was $76.
For discussion of this transaction, see Note 20 - Business
Dispositions and Discontinued Operations of Notes to
Consolidated Financial Statements.
Deferred Taxes
Deferred tax assets and liabilities on the consolidated balance
sheets represent the tax consequences of differences between
the financial reporting and tax basis of assets and liabilities. The
deferred tax assets and liabilities as of December 31, 2018 and
2017 shown in the table below reflect the lower corporate
Federal income tax rate as a result of Tax Reform. Deferred tax
balances for the year ended December 31, 2017 related to the
life and annuity business sold in May 2018 are not included in the
table below as they were included in assets held for sale as of
December 31, 2017. In lieu of recording a benefit of the tax
capital loss on the sale of the life and annuity business, the
Company elected to retain tax net operating loss carryovers with
an estimated benefit of $477 as of December 31, 2018.
Deferred Tax Assets (Liabilities)
As of December 31,
2018
2017
Deferred Tax Assets
Loss reserves and tax discount
$
150 $
104
Unearned premium reserve and
other underwriting related
reserves
Investment-related items
Employee benefits
Net operating loss carryover
Foreign tax credit carryover
Other
355
183
287
1
521
—
—
352
194
313
3
710
26
1
Total Deferred Tax Assets
1,497
1,703
Deferred Tax Liabilities
Deferred acquisition costs
Net unrealized gains on
investments
Other depreciable and
amortizable assets
Other
Total Deferred Tax Liabilities
(104)
(7)
(135)
(3)
(249)
(103)
(306)
(130)
—
(539)
Net Deferred Tax Asset
$
1,248 $
1,164
A deferred tax valuation allowance has not been recorded
because the Company believes the deferred tax assets will more
likely than not be realized. 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
F-74
$
268 $
985 $
(166)
General business credit carryover
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The entire amount of unrecognized tax benefits, if recognized,
would affect the effective tax rate in the period of the release.
In addition, for the year ended December 31, 2018 the Company
recorded a receivable of $5 related to a tax indemnification
agreement associated with the life and annuity business sold in
May 2018. The receivable is separate from the tax liability and is
classified as an other asset on the balance sheet.
Other Tax Matters
The federal audits have been completed through 2013, and the
Company is not currently under examination for any open years.
Management believes that adequate provision has been made in
the consolidated financial statements for any potential
adjustments that may result from tax examinations and other tax
related matters for all open tax years.
The Company classifies interest and penalties (if applicable) as
income tax expense in the consolidated financial statements. The
Company recognized no interest expense for the years ended
December 31, 2018, 2017 and 2016. The Company had no
interest payable as of December 31, 2018 and 2017. The
Company does not believe it would be subject to any penalties in
any open tax years and, therefore, has not recorded any accrual
for penalties.
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.
As shown in the deferred tax assets (liabilities) table above,
included in net deferred income taxes are the future tax benefits
associated with U.S. net operating loss carryover and general
business credit carryovers. Net operating loss carryovers, if
unused, would expire between 2026 and 2036. General business
credits would expire between 2026 and 2027.
U.S. NOLs reflected above arose in taxable years prior to 2017
and are still subject to prior tax law which allows for carryback
and limits the period over which carryforwards may be used to
offset taxable income. Utilization of the Company's loss
carryovers is dependent upon the generation of sufficient future
taxable income. Although the Company projects there will be
sufficient future taxable income to fully recover the remainder of
the loss carryover, the Company's estimate of the likely
realization may change over time.
Uncertain Tax Positions
Rollforward of Unrecognized Tax Benefits
For the years ended
December 31,
2018
2017
2016
Balance, beginning of period
$
9 $
12 $
12
Gross increases - tax positions in
prior period
Gross decreases - tax positions in
prior period
Gross decreases - tax reform
5
—
—
3
—
(6)
—
—
—
Balance, end of period
$
14 $
9 $
12
F-75
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. CHANGES IN AND RECLASSIFICATIONS FROM
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in AOCI, Net of Tax for the Year Ended December 31, 2018
Changes in
Net
Unrealized
Gain on
Securities
OTTI
Losses in
OCI
Net Gain
(Loss) on
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Adjustments
Pension and
Other
Postretirement
Plan
Adjustments
AOCI,
net of tax
Beginning balance
$
1,931 $
(3) $
18 $
34 $
(1,317) $
663
Cumulative effect of accounting changes, net of
tax [1]
Adjusted balance, beginning of period
OCI before reclassifications [2]
Amounts reclassified from AOCI
OCI, net of tax
Ending balance
273
2,204
(2,245)
65
(2,180)
—
(3)
—
(1)
(1)
2
20
8
(33)
(25)
4
38
(8)
—
(8)
(284)
(1,601)
(61)
38
(23)
(5)
658
(2,306)
69
(2,237)
$
24 $
(4) $
(5) $
30 $
(1,624) $
(1,579)
[1]Includes reclassification to retained earnings of $88 of stranded tax effects and $93 of net unrealized gains, after tax, related to equity securities. Refer to Note 1 - Basis of
Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements for further information.
[2]The reduction in AOCI included the effect of removing $758 of AOCI from the balance sheet when the life and annuity business was sold in May 2018.
Changes in AOCI, Net of Tax for the Year Ended December 31, 2017
Changes in
Net
Unrealized
Gain on
Securities
OTTI
Losses in
OCI
Net Gain on
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Adjustments
Pension and
Other
Postretirement
Plan
Adjustments
AOCI,
net of tax
Beginning balance
$
1,276 $
(3) $
76 $
6 $
(1,692) $
(337)
OCI before reclassifications
Amounts reclassified from AOCI
OCI, net of tax
Ending balance
857
(202)
655
—
—
—
(8)
(50)
(58)
28
—
28
(146)
521
375
$
1,931 $
(3) $
18 $
34 $
(1,317) $
731
269
1,000
663
Changes in AOCI, Net of Tax for the Year ended December 31, 2016
Changes in
Net
Unrealized
Gain on
Securities
OTTI
Losses in
OCI
Net Gain on
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Adjustments
Pension and
Other
Postretirement
Plan
Adjustments
AOCI,
net of tax
Beginning balance
$
1,279 $
(7) $
130 $
OCI before reclassifications
Amounts reclassified from AOCI
OCI, net of tax
Ending balance
83
(86)
(3)
1
3
4
(8)
(46)
(54)
(55) $
(37)
98
61
(1,676) $
(52)
36
(16)
(329)
(13)
5
(8)
$
1,276 $
(3) $
76 $
6 $
(1,692) $
(337)
F-76
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reclassifications from AOCI
AOCI
Amount Reclassified from AOCI
For the year
ended
December 31,
2018
For the year
ended
December 31,
2017
For the year
ended
December 31,
2016
Affected Line Item in the
Consolidated Statement of
Operations
Net Unrealized Gain on Securities
Available-for-sale securities
OTTI Losses in OCI
Other than temporary impairments
Net Gain on Cash Flow Hedging Instruments
Interest rate swaps
Interest rate swaps
Foreign Currency Translation Adjustments
Currency translation adjustments [1]
Pension and Other Postretirement Plan
Adjustments
Amortization of prior service credit
Amortization of actuarial loss
Settlement loss
$
$
$
$
$
$
$
$
$
(80) $
152 $
36 Net realized capital gains (losses)
(80)
(17)
(2)
152
53
103
36 Total before tax
13 Income tax expense (benefit)
63
Income (loss) from discontinued
operations, net of tax
(65) $
202 $
86 Net income (loss)
— $
— $
(2) Net realized capital gains (losses)
—
—
1
1
—
—
—
—
(2) Total before tax
(1) Income tax expense (benefit)
Income (loss) from discontinued
operations, net of tax
(2)
(3) Net income (loss)
6 $
5 $
10 Net realized capital gains (losses)
30
36
8
5 $
33 $
— $
—
—
— $
37
42
15
23 $
50 $
37 Net investment income
47 Total before tax
17 Income tax expense (benefit)
16
Income (loss) from discontinued
operations, net of tax
46 Net income (loss)
— $
(118) Net realized capital gains (losses)
—
—
— $
(118) Total before tax
(20) Income tax expense (benefit)
(98) Net income (loss)
7 $
7 $
(55)
—
(48)
(10)
(38)
(61)
(747)
(801)
(280)
(521)
Insurance operating costs and
other expenses
Insurance operating costs and
other expenses
Insurance operating costs and
other expenses
6
(61)
—
(55) Total before tax
(19) Income tax expense (benefit)
(36) Net income (loss)
Total amounts reclassified from AOCI
$
(69) $
(269) $
(5) Net income (loss)
[1]Amount in 2016 relates to the sale of the U.K. property and casualty.
18. EMPLOYEE BENEFIT PLANS
Investment and Savings Plan
Substantially all U.S. employees of the Company are eligible to
participate in The Hartford Investment and Savings Plan under
which designated contributions may be invested in a variety of
investments, including up to 10% in a fund consisting largely of
common stock of The Hartford. The Company's contributions
include a non-elective contribution of 2.0% of eligible
F-77
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
compensation and a dollar-for-dollar matching contribution of up
to 6.0% of eligible compensation contributed by the employee
each pay period. The Company also maintains a non-qualified
savings plan, The Hartford Excess Savings Plan, with the dollar-
for-dollar matching contributions of employee compensation in
excess of the amount that can be contributed under the tax-
qualified Investment and Savings Plan. An employee's eligible
compensation includes overtime and bonuses but for the
Investment and Savings Plan and Excess Savings Plan combined, is
limited to $1 annually. The total cost to The Hartford for these
plans was approximately $134, $113 and $115 for the years
ended December 31, 2018, 2017 and 2016, respectively.
Additionally, The Hartford has established defined contribution
pension plans for certain employees of the Company’s
international subsidiaries. The cost to The Hartford for the years
ended December 31, 2018, 2017 and 2016 for these plans was
immaterial.
Post Retirement Benefit Plans
Defined Benefit Pension Plan- The Company maintains
The Hartford Retirement Plan for U.S. Employees, a U.S. qualified
defined benefit pension plan (the “Plan”) that covers substantially
all U.S. employees hired prior to January 1, 2013. The Company
also maintains non-qualified pension plans to provide retirement
benefits previously accrued that are in excess of Internal Revenue
Code limitations.
The Plan includes two benefit formulas, both of which are frozen:
a final average pay formula (for which all accruals ceased as of
December 31, 2008) and a cash balance formula for which benefit
accruals ceased as of December 31, 2012, although interest will
continue to accrue to existing cash balance formula account
balances. Employees who were participants as of December 31,
2012 continue to earn vesting credit with respect to their frozen
accrued benefits if they continue to work. The interest crediting
rate on the cash balance plan is the greater of the average annual
yield on 10-year U.S. Treasury Securities or 3.3%. The Hartford
Excess Pension Plan II, the Company's non-qualified excess
pension benefit plan for certain highly compensated employees, is
also frozen.
Group Retiree Health Plan- The Company provides certain
health care and life insurance benefits for eligible retired
employees. The Company’s contribution for health care benefits
will depend upon the retiree’s date of retirement and years of
service. In addition, the plan has a defined dollar cap for certain
retirees which limits average Company contributions. The
Hartford has prefunded a portion of the health care obligations
through a trust fund where such prefunding can be accomplished
on a tax effective basis. Beginning January 1, 2017, for retirees 65
and older who were participating in the Retiree PPO Medical
Plan, the Company funds the cost of medical and dental health
care benefits through contributions to a Health Reimbursement
Account and covered individuals can access a variety of insurance
plans from a health care exchange. Effective January 1, 2002,
Company-subsidized retiree medical, retiree dental and retiree
life insurance benefits were eliminated for employees with
original hire dates with the Company on or after January 1, 2002.
The Company also amended its postretirement medical, dental
and life insurance coverage plans to no longer provide subsidized
coverage for employees who retired on or after January 1, 2014.
Assumptions
Pursuant to accounting principles related to the Company’s
pension and other postretirement obligations to employees
under its various benefit plans, the Company is required to make
a significant number of assumptions in order to calculate the
related liabilities and expenses each period. The two economic
assumptions that have the most impact on pension and other
postretirement expense under the defined benefit pension plan
and group retiree health plan are the discount rate and the
expected long-term rate of return on plan assets. The assumed
discount rates and yield curve is based on high-quality fixed
income investments consistent with the maturity profile of the
expected liability cash flows. Based on all available market and
industry information, it was determined that 4.35% and 4.23%
were the appropriate discount rates as of December 31, 2018 to
calculate the Company’s pension and other postretirement
obligations, respectively.
The expected long-term rate of return considers the actual
compound rates of return earned over various historical time
periods. The Company also considers the investment volatility,
duration and total returns for various time periods related to the
characteristics of the pension obligation, which are influenced by
the Company's workforce demographics. In addition, the
Company considers long-term market return expectations for an
investment mix that generally anticipates 60% fixed income
securities and 40% non fixed income securities (global equities,
hedge funds and private market alternatives) to derive an
expected long-term rate of return. Based upon these analyses,
management determined the long-term rate of return assumption
to be 6.60% and 6.60% for the years ended December 31, 2018
and 2017, respectively. To determine the Company's 2019
expense, the Company is currently assuming an expected long-
term rate of return on plan assets of 6.45% and 6.00% for the
Company's pension and other post retirement obligations,
respectively.
Weighted Average Assumptions Used in
Calculating the Benefit Obligations and the
Net Amount Recognized
Pension Benefits
Other
Postretirement
Benefits
For the years ended December 31,
2018
2017
2018
2017
Discount rate
4.35%
3.73%
4.23%
3.55%
Weighted Average Assumptions Used in
Calculating the Net Periodic Benefit Cost for
Pension Plans
Discount rate
Expected long-term rate of
return on plan assets
For the years ended
December 31,
2018
2017
2016
3.73%
4.22%
4.25%
6.60%
6.60%
6.70%
F-78
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Weighted Average Assumptions Used in
Calculating the Net Periodic Benefit Cost for
Other Postretirement Plans
Discount rate
Expected long-term rate of
return on plan assets
For the years ended
December 31,
2018
2017
2016
3.55%
3.97%
4.00%
6.60%
6.60%
6.60%
Assumed Health Care Cost Trend Rates
Pre-65 health care cost trend
rate
Post-65 health care cost trend
rate
Rate to which the cost trend rate
is assumed to decline (the
ultimate trend rate)
Year that the rate reaches the
ultimate trend rate
For the years ended
December 31,
2018
2017
2016
6.50%
6.75%
6.90%
N/A
N/A
N/A
4.50%
4.50%
5.00%
2028
2028
2024
Obligations and Funded Status
The following tables set forth a reconciliation of beginning and
ending balances of the benefit obligation and fair value of plan
assets, as well as the funded status of the Company's defined
benefit pension and postretirement health care and life insurance
benefit plans. International plans represent an immaterial
percentage of total pension assets, liabilities and expense and, for
reporting purposes, are combined with domestic plans.
Change in Benefit Obligation
Pension Benefits
Other
Postretirement
Benefits
For the years ended December 31,
2018
2017
2018
2017
$ 4,376 $ 5,650 $
256 $
272
4
142
—
(6)
4
170
—
139
— (1,647)
—
7
11
—
—
(329)
332
(11)
—
8
11
5
—
10
(186)
(273)
(45)
(51)
—
(1)
—
1
2
—
1
—
$ 4,000 $ 4,376 $
220 $
256
Benefit obligation —
beginning of year
Service cost
Interest cost
Plan participants’
contributions
Actuarial (gain) loss
Settlements
Changes in
assumptions
Benefits and expenses
paid
Retiree drug subsidy
Foreign exchange
adjustment
Benefit obligation —
end of year
Changes in assumptions in 2018 primarily included a $281
decrease in the benefit obligation for pension benefits as a result
of an increase in the discount rate from 3.73% as of the
December 31, 2017 valuation to 4.35% as of the December 31,
2018 valuation. Changes in assumptions in 2017 included a $350
increase in the benefit obligation for pension benefits as a result
of a decline in the discount rate from 4.22% as of the December
31, 2016 valuation to 3.73% as of the December 31, 2017
valuation.
The cash balance plan pension benefit obligation was $412 and
$443 as of December 31, 2018 and 2017, respectively. The
interest crediting rate was 3.30% in 2018, 2017, and 2016.
On June 30, 2017, the Company transferred invested assets and
cash from plan assets to purchase a group annuity contract that
transferred approximately $1.6 billion of the Company's
outstanding pension obligations related to certain U.S. retirees,
terminated vested participants and beneficiaries. As a result of
this transaction, the Company recognized a pre-tax settlement
charge of $750. The settlement charge was included in the
corporate category for segment reporting.
F-79
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Change in Plan Assets
Pension Benefits
Other
Postretirement
Benefits
For the years ended December 31,
2018
2017
2018
2017
Amounts Recognized in the Consolidated
Balance Sheets
Pension Benefits
Other
Postretirement
Benefits
As of December 31,
2018
2017
2018
2017
$ 3,592 $ 4,678 $
114 $
138
Other liabilities
$
656 $
784 $
135 $
142
Fair value of plan
assets — beginning of
year
Actual return on plan
assets
Employer
contributions
Benefits paid [1]
Expenses paid
Settlements
Foreign exchange
adjustment
Fair value of plan
assets — end of year
Funded status — end
of year
(172)
549
(2)
11
103
280
(161)
(248)
(17)
(21)
— (1,647)
(1)
1
—
(27)
—
—
—
—
(35)
—
—
—
$ 3,344 $ 3,592 $
85 $
114
$
(656) $
(784) $
(135) $
(142)
[1]Other postretirement benefits paid represent non-key employee postretirement
medical benefits paid from the Company's prefunded trust fund.
The fair value of assets for pension benefits, and hence the
funded status, presented in the table above excludes assets of
$139 and $144 as of December 31, 2018 and 2017, respectively,
held in rabbi trusts and designated for the non-qualified pension
plans. The assets do not qualify as plan assets; however, the assets
are available to pay benefits for certain retired, terminated and
active participants. Such assets are available to the Company’s
general creditors in the event of insolvency. The rabbi trust assets
consist of equity and fixed income investments. To the extent the
fair value of these rabbi trusts were included in the table above,
pension plan assets would have been $3,483 and $3,736 as of
December 31, 2018 and 2017, respectively, and the funded status
of pension benefits would have been $(517)and $(640) as of
December 31, 2018 and 2017, respectively.
Defined Benefit Pension Plans with an
Accumulated Benefit Obligation in Excess of
Plan Assets
As of December 31,
2018
2017
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$
$
$
4,000 $
4,000 $
3,344 $
4,376
4,376
3,592
Components of Net Periodic Benefit
Cost (Benefit) and Other Amounts
Recognized in Other Comprehensive
Income (Loss)
As a result of the pension settlement, in 2017, the Company
recognized a pre-tax settlement charge of $750 ($488 after 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 the U.S. qualified
pension plan in order to maintain the plan's pre-transaction
funded status.
Beginning with the first quarter of 2017, the Company adopted
the 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 has
been 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.
This change does not affect the measurement of the Company's
total benefit obligations as the change in the interest cost in net
income is completely offset in the actuarial (gain) loss reported
for the period in other comprehensive income. The change
reduced the before tax interest cost component of net periodic
benefit cost by $32 for the year ended December 31, 2017. The
discount rate being used to measure interest cost was 3.58% for
the period from January 1, 2017 to June 30, 2017 and 3.37% for
the period from July 1, 2017 to December 31, 2017 for the
qualified pension plan, 3.55% for the non-qualified pension plan,
and 3.13% for the postretirement benefit plan. Under the
Company's historical estimation approach, the weighted average
discount rate for the interest cost component would have been
4.22% for the period from January 1, 2017 to June 30, 2017 and
3.92% for the period from July 1, 2017 to December 31, 2017 for
the qualified pension plan, 4.19% for the non-qualified pension
plan and 3.97% for the postretirement benefit plan. The
Company accounted for this change as a change in estimate, and
accordingly, has recognized the effect prospectively beginning in
2017.
F-80
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Periodic Cost (Benefit)
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Amortization of actuarial loss
Settlements
Net periodic cost (benefit)
Pension Benefits
Other Postretirement Benefits
For the years ended December 31,
2018
2017
2016
2018
2017
2016
$
4 $
4 $
2 $
— $
— $
142
(227)
—
49
—
170
(267)
—
56
750
237
(311)
—
56
—
7
(7)
(7)
6
—
8
(8)
(7)
5
—
$
(32) $
713 $
(16) $
(1) $
(2) $
—
11
(10)
(6)
5
—
—
Amounts Recognized in Other Comprehensive Income (Loss)
Amortization of actuarial loss
Settlement loss
Amortization of prior service credit
Net loss arising during the year
Total
Pension Benefits
Other Postretirement Benefits
For the years ended December 31,
2018
2017
2016
2018
2017
2016
$
$
49 $
56 $
56 $
6 $
5 $
—
—
(91)
(42) $
750
—
(209)
597 $
—
—
(66)
(10) $
—
(6)
3
3 $
—
(7)
(12)
(14) $
5
—
(6)
(4)
(5)
Amounts in Accumulated Other Comprehensive Income (Loss), Before Tax, not yet Recognized as
Components of Net Periodic Benefit Cost
Net loss
Prior service credit
Total
Pension Benefits
Other Postretirement Benefits
As of December 31,
2018
2017
2016
2018
2017
2016
$
$
(2,008) $
(1,966) $
(2,563) $
(120) $
(129) $
(122)
—
—
—
72
78
(2,008) $
(1,966) $
(2,563) $
(48) $
(51) $
85
(37)
The pension settlement transaction resulted in a decrease to
unrecognized net loss of $750 in 2017.
Plan Assets
Investment Strategy and Target Allocation
The overall investment strategy of the Plan is to maximize total
investment returns to provide sufficient funding for present and
anticipated future benefit obligations within the constraints of a
prudent level of portfolio risk and diversification. With respect to
asset management, the oversight responsibility of the Plan rests
with The Hartford’s Pension Fund Trust and Investment
Committee composed of individuals whose responsibilities
include establishing overall objectives and the setting of
investment policy; selecting appropriate investment options and
ranges; reviewing the asset allocation mix and asset allocation
targets on a regular basis; and monitoring performance to
determine whether or not the rate of return objectives are being
met and that policy and guidelines are being followed. The
Company believes that the asset allocation decision will be the
single most important factor determining the long-term
performance of the Plan.
Target Asset Allocation
Pension Plans
Other
Postretirement Plans
Minimum Maximum Minimum Maximum
Equity securities
Fixed income
securities
Alternative
assets
5%
50%
—%
35%
70%
45%
15%
55%
—%
45%
85%
—%
Divergent market performance among different asset classes
may, from time to time, cause the asset allocation to deviate from
the desired asset allocation ranges. The asset allocation mix is
reviewed on a periodic basis. If it is determined that an asset
allocation mix rebalancing is required, future portfolio additions
and withdrawals will be used, as necessary, to bring the allocation
within tactical ranges.
The Plan invests in commingled funds and partnerships managed
by unaffiliated managers to gain exposure to emerging markets,
equity, hedge funds and other alternative investments. These
portfolios encompass multiple asset classes reflecting the current
F-81
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
needs of the Plan, the investment preferences and risk tolerance
of the Plan and the desired degree of diversification. These asset
classes include publicly traded equities, bonds and alternative
investments and are made up of individual investments in cash
and cash equivalents, equity securities, debt securities, asset-
backed securities, mortgage loans and hedge funds. Hedge fund
investments represent a diversified portfolio of partnership
investments in a variety of strategies.
In addition, the Company uses U.S. Treasury bond futures
contracts and U.S. Treasury STRIPS in a duration overlay program
to adjust the duration of Plan assets to better match the duration
of the benefit obligation.
Investment Valuation
Pension Plan Assets at Fair Value as of
December 31, 2018
Asset Category
Level 1
Level 2
Level 3
Total
Short-term
investments:
Fixed Income
Securities:
Corporate
RMBS
U.S. Treasuries
Foreign government
CMBS
Other fixed income
[1]
Mortgage Loans
Equity Securities:
Domestic
International
Total pension plan
assets at fair value,
in the fair value
hierarchy [2]
Other Investments, at
net asset value [3]:
Private Market
Alternatives
Hedge funds
Total pension plan
assets at fair value.
$
50 $
60 $
— $
110
—
—
10
—
—
—
—
376
303
1,663
14
1,677
62
120
15
22
52
—
3
—
1
—
2
—
1
133
—
—
63
130
17
22
53
133
379
303
$
739 $ 1,997 $
151 $ 2,887
272
186
$
739 $ 1,997 $
151 $ 3,345
[1]Includes ABS, municipal bonds, and CDOs.
[2]Excludes approximately $1 of investment payables net of investment receivables
that are excluded from this disclosure requirement because they are trade
receivables in the ordinary course of business where the carrying amount
approximates fair value.
[3]Investments that are measured at net asset value per share or an equivalent and
have not been classified in the fair value hierarchy.
Pension Plan Assets at Fair Value as of
December 31, 2017
Asset Category
Level 1
Level 2
Level 3
Total
Short-term
investments:
Fixed Income
Securities:
Corporate
RMBS
U.S. Treasuries
Foreign government
CMBS
Other fixed income
[1]
Mortgage Loans
Equity Securities:
Large-cap domestic
Mid-cap domestic
International
Total pension plan
assets at fair value,
in the fair value
hierarchy [2]
Other Investments, at
net asset value [3]:
Private Market
Alternatives
Hedge funds
Total pension plan
assets at fair value.
$
21 $
168 $
— $
189
—
—
3
—
—
—
—
595
11
343
1,549
28
74
16
28
97
—
89
—
—
14
2
—
1
2
2
140
—
—
—
1,563
30
77
17
30
99
140
684
11
343
$
973 $ 2,049 $
161 $ 3,183
168
212
$
973 $ 2,049 $
161 $ 3,563
[1]Includes ABS, municipal bonds, and CDOs.
[2]Excludes approximately $1 of investment payables net of investment receivables
that are excluded from this disclosure requirement because they are trade
receivables in the ordinary course of business where the carrying amount
approximates fair value. Also excludes approximately $30 of interest receivable.
[3]Investments that are measured at net asset value per share or an equivalent and
have not been classified in the fair value hierarchy.
The tables below provide fair value level 3 rollforwards for the
Pension Plan Assets for which significant unobservable inputs
(Level 3) are used in the fair value measurement on a recurring
basis. The Plan classifies the fair value of financial instruments
within Level 3 if there are no observable markets for the
instruments or, in the absence of active markets, if one or more of
the significant inputs used to determine fair value are based on
the Plan’s own assumptions. Therefore, the gains and losses in the
tables below include changes in fair value due to both observable
and unobservable factors.
F-82
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2018 Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Assets
Fair Value as of January 1, 2018
Realized gains,net
Changes in unrealized gains (losses), net
Purchases
Settlements
Sales
Transfers into Level 3
Transfers out of Level 3
Corporate
RMBS
Foreign
government
Mortgage
loans
Other [1]
Totals
$
14 $
2 $
1 $
140 $
4 $
161
—
(1)
5
—
(4)
—
—
—
—
—
—
(1)
—
—
—
—
1
—
—
—
—
—
(1)
—
—
(6)
—
—
—
—
—
—
(3)
—
—
—
(2)
6
—
(14)
—
—
Fair Value as of December 31, 2018
$
14 $
1 $
2 $
133 $
1 $
151
[1]"Other" includes U.S. Treasuries, Other fixed income and CMBS investments.
During the year ended December 31, 2018, transfers into and
(out) of Level 3 are primarily attributable to the appearance of or
lack thereof of market observable information and the re-
evaluation of the observability of pricing inputs.
2017 Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Assets
Fair Value as of January 1, 2017
Realized gains,net
Changes in unrealized gains, net
Purchases
Settlements
Sales
Transfers into Level 3
Transfers out of Level 3
Corporate
RMBS
Foreign
government
Mortgage
loans
Other [1]
Totals
$
13 $
10 $
1 $
121 $
22 $
167
—
2
11
—
(12)
—
—
—
—
1
(5)
(4)
—
—
—
—
—
—
—
—
—
—
2
17
—
—
—
—
2
2
7
(1)
(19)
2
(11)
2
6
36
(6)
(35)
2
(11)
161
Fair Value as of December 31, 2017
$
14 $
2 $
1 $
140 $
4 $
[1]"Other" includes U.S. Treasuries, Other fixed income and CMBS investments.
During the year ended December 31, 2017, transfers in and/or
(out) of Level 3 are primarily attributable to the availability of
market observable information and the re-evaluation of the
observability of pricing inputs.
There was less than $1 in Company common stock included in the
Plan’s assets as of December 31, 2018 and 2017.
F-83
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
There was no Company common stock included in the other
postretirement benefit plan assets as of December 31, 2018 and
2017.
Concentration of Risk
In order to minimize risk, the Plan maintains a listing of
permissible and prohibited investments. In addition, the Plan has
certain concentration limits and investment quality requirements
imposed on permissible investment options. Permissible
investments include U.S. equity, international equity, alternative
asset and fixed income investments including derivative
instruments. Permissible derivative instruments include futures
contracts, options, swaps, currency forwards, caps or floors and
may be used to control risk or enhance return but will not be used
for leverage purposes.
Securities specifically prohibited from purchase include, but are
not limited to: shares or fixed income instruments issued by The
Hartford, short sales of any type within long-only portfolios, non-
derivative securities involving the use of margin, leveraged
floaters and inverse floaters, including money market obligations,
natural resource real properties such as oil, gas or timber and
precious metals.
Other than U.S. government and certain U.S. government
agencies backed by the full faith and credit of the U.S.
government, the Plan does not have any material exposure to any
concentration risk of a single issuer.
Cash Flows
Company Contributions
Employer Contributions
2018
2017
Pension
Benefits
Other
Postretirement
Benefits
$
$
103 $
281 $
—
—
In 2018, the Company, at its discretion, made $101 in
contributions to the U.S. qualified defined benefit pension plan.
The Company does not have a 2019 required minimum funding
contribution for the U.S. qualified defined benefit pension plan.
The Company has not determined whether, and to what extent,
contributions may be made to the U. S. qualified defined benefit
pension plan in 2019. The Company will monitor the funded
status of the U.S. qualified defined benefit pension plan during
2019 to make this determination.
Employer contributions in 2018 and 2017 were made in cash and
did not include contributions of the Company’s common stock.
Other Postretirement Plan Assets
at Fair Value as of December 31, 2018
Asset Category
Level 1
Level 2
Level 3
Total
$
4 $
— $
— $
4
Short-term
investments
Fixed Income
Securities:
Corporate
RMBS
U.S. Treasuries
Foreign government
CMBS
Other fixed income
Equity Securities:
Large-cap
Total other
postretirement plan
assets at fair value [1] $
—
—
6
—
—
—
23
19
15
13
1
2
2
—
—
—
—
—
—
—
—
19
15
19
1
2
2
23
33 $
52 $
— $
85
[1]Excludes approximately $1 of investment receivables net of investment payables
that are excluded from this disclosure requirement because they are trade
receivables in the ordinary course of business where the carrying amount
approximates fair value.
Other Postretirement Plan Assets
at Fair Value as of December 31, 2017
Asset Category
Level 1
Level 2
Level 3
Total
$
4 $
— $
— $
4
Short-term
investments
Fixed Income
Securities:
Corporate
RMBS
U.S. Treasuries
Foreign government
CMBS
Other fixed income
Equity Securities:
Large-cap
Total other
postretirement plan
assets at fair value [1] $
—
—
1
—
—
—
30
25
17
25
1
5
4
—
—
—
—
—
—
1
—
25
17
26
1
5
5
30
35 $
77 $
1 $
113
[1]Excludes approximately $0 of investment payables net of investment receivables
that are excluded from this disclosure requirement because they are trade
receivables in the ordinary course of business where the carrying amount
approximates fair value. Also excludes approximately $1 of interest receivable.
For other postretirement plan assets measured using significant
unobservable inputs (level 3), the fair value for other fixed income
securities decreased from $1 as of December 31, 2017 to $0 as of
December 31, 2018 due to $1 in sales.
For other postretirement plan level 3 assets, the fair value of
corporate securities decreased from $1 as of December 31, 2016
to $0 as of December 31, 2017 due to $1 in purchases and $2 in
sales. RMBS decreased from $1 to $0 due to $1 in settlements.
Other fixed income remained at $1 from 2016 to 2017 due to $1
in purchases and $1 transfers out of level 3.
F-84
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Benefit Payments
Amounts of Benefits Expected to be Paid
over the next Ten Years from Pension and
other Postretirement Plans as of
December 31, 2018
Pension
Benefits
Other
Postretirement
Benefits
2019
2020
2021
2022
2023
$
239 $
239
246
251
250
2024 - 2028
Total
1,263
2,488 $
$
27
24
22
20
18
67
178
19. STOCK COMPENSATION PLANS
The Company's stock-based compensation plans are described
below. Shares issued in satisfaction of stock-based compensation
may be made available from authorized but unissued shares,
shares held by the Company in treasury or from shares purchased
in the open market. In 2018, 2017 and 2016, the Company issued
shares from treasury in satisfaction of stock-based compensation.
Stock-based compensation expense, included in insurance
operating costs and other expenses in the consolidated statement
of operations, was as follows:
Stock-Based Compensation Expense
For the years ended
December 31,
2018
2017
2016
Stock-based compensation plans
expense [1]
$
130 $
116 $
Income tax benefit
(27)
(41)
81
(29)
Excess tax benefit on awards
vested, exercised and expired
Total stock-based
compensation plans expense,
after tax [2]
(5)
(15)
—
$
98 $
60 $
52
[1]The increase in stock-based compensation plans expense in 2018 and 2017 was
largely due to a change made in 2017 to provide accelerated vesting of newly
issued restricted stock unit and performance share awards to retirement eligible
employees.
[2]The increase in stock-based compensation plans expense, after-tax in 2018 is
primarily related to the reduction of the U.S. federal corporate tax rate from 35%
to 21%.
The Company did not capitalize any cost of stock-based
compensation. As of December 31, 2018, the total compensation
cost related to non-vested awards not yet recognized was $64,
which is expected to be recognized over a weighted average
period of 1.9 years.
In the second quarter of 2018, The Hartford modified the terms
of the portion of its outstanding 2016 and 2017 performance
share awards that are based on actual versus targeted return on
equity over the performance period. The modification eliminated
the benefit to return on equity that arose from the charge against
earnings in 2017 driven by the effect of the lower corporate
income tax rate on the carrying value of net deferred tax assets.
This modification had no impact on compensation cost
recognized over the vesting period since compensation cost
based on the original performance share conditions is projected
to be higher than what the cost would be based on the
performance share conditions as modified.
Stock Plan
Future stock-based awards may be granted under The Hartford's
2014 Incentive Stock Plan (the "Incentive Stock Plan") other than
the Subsidiary Stock Plan and the Employee Stock Purchase Plan
described below. The Incentive Stock Plan provides for awards to
be granted in the form of non-qualified or incentive stock options
qualifying under Section 422 of the Internal Revenue Code, stock
appreciation rights, performance shares, restricted stock or
restricted stock units, or any other form of stock-based award.
The maximum number of shares, subject to adjustments set forth
in the Incentive Stock Plan, that may be issued to Company
employees and third party service providers during the 10-year
duration of the Incentive Stock Plan is 12,000,000 shares. If any
award under an earlier incentive stock plan is forfeited,
terminated, surrendered, exchanged, expires unexercised, or is
settled in cash in lieu of stock (including to effect tax withholding)
or for the net issuance of a lesser number of shares than the
number subject to the award, the shares of stock subject to such
award (or the relevant portion thereof) shall be available for
awards under the Incentive Stock Plan and such shares shall be
added to the maximum limit. As of December 31, 2018, there
were 7,294,481 shares available for future issuance.
The fair values of awards granted under the Incentive Stock Plan
are measured as of the grant date and expensed ratably over the
awards’ vesting periods, generally 3 years. For stock option
awards to retirement-eligible employees the Company recognizes
the expense over a period shorter than the stated vesting period
F-85
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
because the employees receive accelerated vesting upon
retirement and therefore the vesting period is considered non-
substantive. Beginning with awards granted in 2017, employees
with restricted stock units and performance shares receive
accelerated vesting upon meeting certain retirement eligibility
criteria.
Stock Option Awards
Under the Incentive Stock Plan, options granted have an exercise
price at least equal to the market price of the Company’s common
stock on the date of grant, and an option’s maximum term is not to
exceed 10 years. Options generally become exercisable over a
period of three years commencing one year from the date of
grant. Certain other options become exercisable at the later of
three years from the date of grant or upon specified market
appreciation of the Company's common shares.
The Company uses a hybrid lattice/Monte-Carlo based option
valuation model (the “valuation model”) that incorporates the
possibility of early exercise of options into the valuation. The
valuation model also incorporates the Company’s historical
termination and exercise experience to determine the option
value.
The valuation model incorporates ranges of assumptions for
inputs, and those ranges are disclosed below. The term structure
of volatility is generally constructed utilizing implied volatilities
from exchange-traded options, CPP warrants related to the
Company’s stock, historical volatility of the Company’s stock and
other factors. The Company uses historical data to estimate
option exercise and employee termination within the valuation
model, and accommodates variations in employee preference and
risk-tolerance by segregating the grantee pool into a series of
behavioral cohorts and conducting a fair valuation for each
cohort individually. The expected term of options granted is
derived from the output of the option valuation model and
represents, in a mathematical sense, the period of time that
options are expected to be outstanding. The risk-free rate for
periods within the contractual life of the option is based on the
U.S. Constant Maturity Treasury yield curve in effect at the time
of grant.
Stock Options Valuation Assumptions
Expected dividend yield
Expected annualized spot volatility
Weighted average annualized volatility
Risk-free spot rate
Expected term
For the years ended December 31,
2018
1.8%
2017
1.9%
2016
2.0%
20.8% -36.5%
21.8% -37.9%
27.3% -41.3%
29.0%
29.5%
34.1%
1.5% -2.9%
0.4% -2.4%
0.3% -1.8%
5.7 years
5.0 years
5.0 years
Non-qualified Stock Option Activity Under the Incentive Stock Plan
Outstanding at beginning of year
Granted
Exercised
Forfeited
Expired
Outstanding at end of year
Outstanding, fully vested and expected to vest
Exercisable at end of year
Number of
Options
(in
thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
For the year ended December 31, 2018
5,212 $
876 $
(571) $
— $
(27) $
5,490 $
5,240 $
3,737 $
37.25
53.81
26.43
—
74.88
40.84
42.79
36.30
6.1 years $
6.1 years $
4.9 years $
32
30
32
Aggregate intrinsic value represents the value of the Company's
closing stock price on the last trading day of the period in excess
of the exercise price multiplied by the number of options
outstanding or exercisable. The aggregate intrinsic value excludes
the effect of stock options that have a zero or negative intrinsic
value. The weighted average grant-date fair value per share of
options granted during the years ended December 31, 2018,
2017, and 2016 was $14.04, $12.38 and $12.14, respectively. The
total intrinsic value of options exercised during the years ended
December 31, 2018, 2017 and 2016 was $14, $8, and $1,
respectively.
Share Awards
Share awards granted under the Incentive Stock Plan and
outstanding include restricted stock units and performance
shares.
Restricted Stock and Restricted Stock
Units
Restricted stock units are share equivalents that are credited
with dividend equivalents. Dividend equivalents are accumulated
and paid in incremental shares when the underlying units vest.
F-86
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted stock are shares of The Hartford's common stock with
restrictions as to transferability until vested. Restricted stock
units and restricted stock awards are valued equal to the market
price of the Company’s common stock on the date of grant.
Generally, restricted stock units vest at the end of or over three
years; certain restricted stock units vest at the end of five years.
Beginning in 2017, restricted stock units vest at the earlier of
employees retirement eligibility date or three years. Equity
awards granted to non-employee directors generally vest in one
year and were made in the form of restricted stock units in 2018,
2017 and 2016.
Performance Shares
Performance shares become payable within a range of 0% to
200% of the number of shares initially granted based upon the
attainment of specific performance goals achieved at the end of
or over three years. While most performance shares vest at the
end of or over three years, certain performance shares vest at the
end of five years. Beginning in 2017, performance shares vest at
the earlier of employees retirement eligibility date or three years.
Performance share awards that are not dependent on market
conditions are valued equal to the market price of the Company's
common stock on the date of grant less a discount for the absence
of dividends. Stock-compensation expense for these performance
share awards without market conditions is based on a current
estimate of the number of awards expected to vest based on the
performance level achieved and, therefore, may change during
the performance period as new estimates of performance are
available.
Other performance share awards or portions thereof have a
market condition based upon the Company's total stockholder
return relative to a group of peer companies within a period of
three years from the date of grant. Stock compensation expense
for these performance share awards is based on the number of
awards expected to vest as estimated at the grant date and,
therefore, does not change for changes in estimated
performance. The Company uses a risk neutral Monte-Carlo
valuation model that incorporates time to maturity, implied
volatilities of the Company and the peer companies, and
correlations between the Company and the peer companies and
interest rates.
Assumptions for Total Shareholder Return Performance Shares
Volatility of common stock
Average volatility of peer companies
Average correlation coefficient of peer companies
Risk-free spot rate
Term
Total Share Awards
For the years ended December 31,
2018
20.8%
2017
20.3%
2016
22.2%
17.0% -25.0%
15.0% -25.0%
15.0% -26.0%
54.0%
2.4%
60.0%
1.5%
56.0%
1.0%
3.0 years
3.0 years
3.0 years
Non-vested Share Award Activity Under the Incentive Stock Plan
Non-vested shares
Non-vested at beginning of year
Granted
Performance based adjustment
Vested
Forfeited
Non-vested at end of year
Restricted Stock and
Restricted Stock Units
Performance Shares
Number of
Shares
(in
thousands)
Weighted-
Average
Grant-Date
Fair Value
Number of
Shares
(in
thousands)
Weighted-
Average
Grant date
Fair Value
For the year ended December 31, 2018
4,444 $
1,359 $
(1,721) $
(636) $
3,446 $
43.94
53.11
41.52
46.07
48.43
795 $
372 $
188 $
(539) $
(81) $
735 $
45.16
50.26
43.59
43.59
44.45
49.56
The weighted average grant-date fair value per share of
restricted stock units and restricted stock granted during the
years ended December 31, 2018, 2017, and 2016 was $53.11,
$48.90 and $42.87, respectively. The weighted average grant-
date fair value per share of performance shares granted during
the years ended December 31, 2018, 2017, and 2016 was $50.26,
$48.89 and $41.50, respectively.
The total fair value of shares vested during the years ended
December 31, 2018, 2017 and 2016 was $114, $94 and $128,
respectively, based on actual or estimated performance factors.
The Company did not make cash payments in settlement of stock
compensation during the years ended December 31, 2018, 2017
and 2016.
Subsidiary Stock Plan
In 2013 the Company established a subsidiary stock-based
compensation plan similar to The Hartford Incentive Stock Plan
except that it awards non-public subsidiary stock as
F-87
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
compensation. The Company recognized stock-based
compensation plan expense of $9, $9 and $7 in the years ended
December 31, 2018, 2017 and 2016, respectively, for the
subsidiary stock plan. Upon employee vesting of subsidiary stock,
the Company recognizes a noncontrolling equity interest.
Employees are restricted from selling vested subsidiary stock to
anyone other than the Company and the Company has discretion
on the amount of stock to repurchase. Therefore, the subsidiary
stock is classified as equity because it is not mandatorily
redeemable. For the year ended December 31, 2018, the
Company repurchased $4 in subsidiary stock.
Employee Stock Purchase Plan
The Company sponsors The Hartford Employee Stock Purchase
Plan (“ESPP”). Under this plan, eligible employees of The Hartford
purchase common stock of the Company at a discount rate of 5%
of the market price per share on the last trading day of the
offering period. Accordingly, the plan is a non-compensatory plan.
Employees purchase a variable number of shares of stock through
payroll deductions elected as of the beginning of the offering
period. The Company may sell up to 15,400,000 shares of stock to
eligible employees under the ESPP. As of December 31, 2018,
there were 4,297,972 shares available for future issuance. During
the years ended December 31, 2018, 2017 and 2016, 219,661
shares, 204,533 shares, and 222,113 shares were sold,
respectively. The weighted average per share fair value of the
discount under the ESPP was $2.56, $2.63 and $2.26 during the
years ended December 31, 2018, 2017 and 2016, respectively.
The fair value is estimated based on the 5% discount off the
market price per share on the last trading day of the offering
period.
20. BUSINESS DISPOSITIONS AND DISCONTINUED
OPERATIONS
Sale of U.K. business
On May 10, 2017, the Company completed the sale of its U.K.
property and casualty run-off subsidiaries, Hartford Financial
Products International Limited and Downlands Liability
Management Limited, in a cash transaction to Catalina Holdings
U.K. Limited ("buyer"), for approximately $272, net of transaction
costs. The Company's U.K. property and casualty run-off
subsidiaries are included in the P&C Other Operations reporting
segment. Revenues and earnings are not material to the
Company's consolidated results of operations for the years ended
December 31, 2017 and 2016.
The sale resulted in an after tax capital loss from the transaction
of $5 on the sale for the year ended December 31, 2016.
Major Classes of Assets and Liabilities
Transferred by the Company to the Buyer in
Connection with the Sale
Carrying Value as of
Closing
December 31,
2016 [2]
Assets
Cash and investments
$
669 $
Reinsurance recoverables and
other [1]
Total assets held for sale
Liabilities
Reserve for future policy
benefits and unpaid loss and
loss adjustment expenses
Other liabilities
268
937
653
12
Total liabilities held for sale
$
665 $
[1]Includes intercompany reinsurance recoverables of $71 as of December 31,
2016, settled in cash at closing.
[2]Classified as assets and liabilities held for sale.
657
213
870
600
11
611
Sale of life and annuity
business
On May 31, 2018, the Company’s wholly-owned subsidiary,
Hartford Holdings, Inc. (HHI), completed the sale of its life and
annuity business to a group of investors led by Cornell Capital
LLC, Atlas Merchant Capital LLC, TRB Advisors LP, Global Atlantic
Financial Group, Pine Brook and J. Safra Group. Under the terms
of the sale agreement signed December 3, 2017, the investor
group formed a limited partnership, Hopmeadow Holdings LP,
that acquired Hartford Life, Inc. (HLI), and its life and annuity
operating subsidiaries, for cash of approximately $1.4 billion after
a pre-closing dividend to The Hartford of $300. The Hartford
received a 9.7% ownership interest in the limited partnership,
valued at a cost of $164 as of the sale date. In addition, as part of
the terms of the sale agreement, The Hartford reduced its long-
term debt by $142 because the debt, which was issued by HLI,
was included as part of the sale. Including cash proceeds and the
retained equity interest and net of transaction costs, net
proceeds for the sale were approximately $1.5 billion. The life and
annuity operations met the criteria for reporting as discontinued
operations and are reported in the Corporate category through
the date of sale.
The Company recognized a loss on sale within discontinued
operations of approximately $3.3 billion in 2017 and a reduction
in loss on sale of $202 in 2018. The reduction in loss on sale in
2018 primarily resulted from the reclassification to retained
earnings of $193 of tax effects stranded in AOCI due to the
accounting for Tax Reform and a $141 increase in estimated
retained tax benefits, primarily net operating loss carryovers,
partially offset by $104 of operating income from discontinued
operations during the period up until the closing date and a
reclassification of $10 of net unrealized capital gains from AOCI
to retained earnings. See Note 1 - Adoption of New Accounting
Standards within Basis of Presentation and Significant
Accounting Policies, for additional information about the
reclassifications from AOCI to retained earnings. The estimated
amount of retained net operating loss carryovers depends on the
estimated tax basis of the business sold which increased
subsequent to the date the Company entered into the sale
F-88
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
agreement. At closing, stockholders’ equity was further reduced
for the amount of AOCI of the life and annuity business, which
was approximately $758, largely consisting of net unrealized
gains on investments, net of shadow DAC. The AOCI balance was
$1 billion as of December 31, 2017.
Cash inflows and outflows from and to the life and annuity
business after closing were immaterial to the overall inflows and
outflows of the Company. Additionally, the revenues and
expenses presented in continuing operations related to pre-
disposal operations were immaterial.
The Company will continue to manage invested assets of the life
and annuity business sold in May 2018 for an initial term of five
years and provide transition services for up to 24 months.
The Hartford reported its 9.7% ownership interest in
Hopmeadow Holdings LP, which is accounted for under the equity
method, in other assets in the Consolidated Balance Sheet. The
Hartford recognizes its share of income in other revenues in the
Consolidated Statement of Operations on a three month delay,
when financial information from the investee becomes available.
The Company recognized $8 of income for 2018.
Major Classes of Assets and Liabilities
Transferred to the Buyer in Connection with
the Sale
Carrying Value as of
Closing
December 31,
2017 [2]
Assets
Cash and investments
$
27,058 $
Reinsurance recoverables
Loss accrual [1]
Other assets
Separate account assets
20,718
(3,044)
2,907
110,773
Total assets held for sale
$
158,412 $
30,135
20,785
(3,257)
1,439
115,834
164,936
Liabilities
Reserve for future policy benefits
and unpaid loss and loss
adjustment expenses
Other policyholder funds and
benefits payable
Long-term debt
Other liabilities
Separate account liabilities
$
14,308 $
14,482
28,680
142
2,222
110,773
29,228
142
2,756
115,834
162,442
Total liabilities held for sale
$
156,125 $
[1]Represents the estimated accrued loss on sale of the Company's life and annuity
business.
[2]Classified as assets and liabilities held for sale.
Reconciliation of the Major Line Items
Constituting Pretax Profit (Loss) of
Discontinued Operations
For the years ended December 31,
2018
2017
2016
Revenues
Earned premiums
$
39 $
106 $
Fee income and other
Net investment income
Net realized capital losses
Total revenues
Benefits, losses and
expenses
Benefits, losses and loss
adjustment expenses
Amortization of DAC
Insurance operating costs
and other expenses [1]
Total benefits, losses and
expenses
Income before income
taxes
Income tax expense
(benefit)
Income from operations
of discontinued
operations, net of tax
Net realized capital gain
(loss) on disposal, net of
tax
Income (loss) from
discontinued operations,
net of tax
912
1,289
(53)
2,254
114
931
1,384
(158)
2,271
1,416
45
1,390
146
368
378
1,829
1,914
425
37
357
74
382
519
(68)
872
535
58
157
750
122
2
120
388
283
202
(3,257)
—
$
322 $
(2,869) $
283
[1]Corporate allocated overhead has been included in continuing operations.
Cash Flows from Discontinued Operations
included in the Consolidated Statement of
Cash Flows
Year Ended December 31,
2018
2017
2016
Net cash provided by
operating activities from
discontinued operations
Net cash provided by
investing activities from
discontinued operations
Net cash used in financing
activities from discontinued
operations [1]
Cash paid for interest
$
$
$
$
603 $
797 $
784
463 $ 1,466 $
864
(737) $
(884) $
(647)
— $
11 $
11
[1]Excludes return of capital to parent of $619, $1,396, and $752 for 2018, 2017
and 2016, respectively.
F-89
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. QUARTERLY RESULTS (UNAUDITED)
Current and Historical Quarterly Results of the Company
Three months ended
March 31,
June 30,
September 30,
December 31,
2018
2017
2018
2017
2018
2017
2018
2017
Revenues
$ 4,691 $ 4,169 $ 4,789 $ 4,214 $ 4,842 $ 4,192 $ 4,633 $ 4,587
Benefits, losses and expenses
4,172
3,768
4,252
4,495
4,312
4,011
4,466
4,165
Income (loss) from continuing operations, net of tax
428
303
434
(152)
427
145
196
(558)
Income (loss) from discontinued operations, net of tax
169
75
148
112
5
89
— (3,145)
Net income (loss)
Less: Preferred stock dividends
$ 597 $ 378 $ 582 $
(40) $ 432 $ 234 $ 196 $ (3,703)
—
—
—
—
—
—
6
—
Net income (loss) available to common stockholders
$ 597 $ 378 $ 582 $
(40) $ 432 $ 234 $ 190 $ (3,703)
Basic
Income (loss) from continuing operations, net of tax,
available to common stockholders per share
Income (loss) from discontinued operations, net of tax per
share
Net income (loss) per common share available to common
stockholders
Diluted
Income (loss) from continuing operations, net of tax,
available to common stockholders per share
Income (loss) from discontinued operations, net of tax per
share
Net income (loss) per common share available to common
stockholders
$ 1.20 $ 0.82 $ 1.21 $ (0.42) $ 1.19 $ 0.40 $ 0.53 $ (1.56)
$ 0.47 $ 0.20 $ 0.41 $ 0.31 $ 0.01 $ 0.25 $
— $ (8.81)
$ 1.67 $ 1.02 $ 1.62 $ (0.11) $ 1.20 $ 0.65 $ 0.53 $ (10.37)
$ 1.18 $ 0.80 $ 1.19 $ (0.42) $ 1.17 $ 0.40 $ 0.52 $ (1.56)
$ 0.46 $ 0.20 $ 0.41 $ 0.31 $ 0.02 $ 0.24 $
— $ (8.81)
$ 1.64 $ 1.00 $ 1.60 $ (0.11) $ 1.19 $ 0.64 $ 0.52 $ (10.37)
Weighted average common shares outstanding, basic
357.5
371.4
358.3
366.0
358.6
360.2
359.1
357.0
Weighted average shares outstanding and dilutive potential
common shares [1]
363.9
378.6
364.2
366.0
364.1
367.0
364.0
357.0
[1]In periods where a loss from continuing operations, net of tax, available to common stockholders or net loss available to common stockholders is recognized, inclusion of
incremental dilutive shares would be antidilutive. Due to the antidilutive impact, such shares are excluded from the diluted earnings per share calculation of income (loss) from
continuing operations, net of tax, available to common stockholders and net income (loss) available to common stockholders in such periods.
F-90
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Corporate Information
Corporate Headquarters
The Hartford Financial Services Group, Inc.
One Hartford Plaza
Hartford, CT 06155
Internet Address
www.thehartford.com
Investor Relations
The Hartford Financial Services Group, Inc.
Investor Relations
One Hartford Plaza (TA1-1)
Hartford, CT 06155
860-547-2537
E-mail: investorrelations@thehartford.com
Transfer Agent/Shareholder Record
Shareholder correspondence should be mailed to:
Computershare Trust Company, N.A.
P.O. Box 505000
Louisville, KY 40233
Overnight correspondence should be mailed to:
Computershare Trust Company, N.A.
462 South 4th Street, Suite 1600
Louisville, KY, 40202
Shareholder website:
www.computershare.com/investor
Shareholder online inquiries:
https://www-us.computershare.com/investor/Contact
Annual Report on Form 10-K
Shareholders may receive without charge a copy of The Hartford’s Annual Report on Form 10-K as filed with the U.S.
Securities and Exchange Commission upon request to:
Donald C. Hunt
Vice President and Corporate Secretary
The Hartford Financial Services Group, Inc.
One Hartford Plaza
Hartford, CT 06155
EQUIPPING PEOPLE TO ACHIEVE ALL THEIR POSSIBILITIES.
As a leading provider of disability insurance, The Hartford
has a long-held belief that sports are an important part of
physical rehabilitation following a disabling illness or injury.
Today, 40 million1 Americans have a disability and often
face greater obstacles to healthy living and employment
than the general population. We believe people are capable
of achieving amazing things with the right encouragement
and support.
That’s why The Hartford has been sponsoring athletes
with disabilities for 25 years, and became a Founding
Partner and the Official Disability Insurance Sponsor
of U.S. Paralympics in 2003.
Now, through our new Ability Equipped program, we are
broadening our support and celebrating human achievement.
40
million1 Americans have
a disability and often face
greater obstacles to healthy living
and employment than the general
population.
About Ability Equipped
Developed in partnership with Disabled Sports USA (DSUSA)
in 2018, our Ability Equipped program is designed to improve
access to adaptive sports and provide adaptive sports
equipment for youth and adults with disabilities across
the country.
Through this program, we’re:
Encouraging people and athletes to achieve – by providing
them the equipment they need to make it happen.
Supporting the Paralympic Movement in the United
States – by partnering with 20 DSUSA Chapters across
the country to make adaptive sports programs and
equipment more accessible.
Bringing people of all abilities together – by sponsoring
The Hartford Ski Spectacular and the Angel City Games.
Inspiring the next generation – to believe what’s possible.
With Ability Equipped, we’re providing people with the
right equipment and support they need to achieve all
the possibilities life has to offer.
Learn more at TheHartford.com/ability
ABOVE: Michael O’Hearn, Alpine Skier, receives
adaptive sports equipment from The Hartford.
ON THE COVER: From right: Lia “Rui Rui”
Bleifuss, cross-country Nordic sit skier, and her
coach, Hudson Van Slooten.
A longstanding partner of Disabled Sports USA,
The Hartford celebrated its 25th year as the title
sponsor of The Hartford Ski Spectacular in 2018,
one of the nation’s largest winter sports festivals
for people with disabilities. During the event, nine
young athletes received adaptive sports equipment
from The Hartford.
Photos by Joe Kusumoto Photography.
WE DO THE RIGHT THING AND HOLD OURSELVES
TO THE HIGHEST ETHICAL STANDARDS.
It’s fundamental to our culture: Doing the right thing every day and in every situation. And while our efforts do
award us recognition, the real reward is the impact we make on our employees, our customers and our communities.
World’s Most Ethical Companies®, Ethisphere Institute (2019)
Best Place to Work for Lesbian, Gay, Bisexual and Transgender (LGBT)
Equality, Human Rights Campaign, Corporate Equality Index (2018)
Military Friendly Employer, Military Times (2018)
2018 Bloomberg Financial Services Gender-Equality Index (BFGEI)
The Hartford Named A Best Employer For Healthy Lifestyles®,
National Business Group (2018)
100% Disability Equality Index, Best Place to Work (2018)
Named to the Dow Jones Sustainability Indices (2018)
LEARN MORE AT TheHartford.com/our-company
FOLLOW THE HARTFORD ON
1 U.S. Census Bureau, 2015 American Community Survey One-Year Estimates.
The Hartford® is The Hartford Financial Services Group, Inc. and its subsidiaries, including issuing companies, Hartford Fire Insurance
Company, and Hartford Life and Accident Insurance Company. Its headquarters is in Hartford, CT.
19-0020 © February 2019 The Hartford 36USC220506