NOTICE OF 2021 ANNUAL MEETING
OF SHAREHOLDERS, PROXY STATEMENT
AND 2020 ANNUAL REPORT
NOTICE OF 2021 ANNUAL MEETING
OF SHAREHOLDERS
Date and Time
Wednesday, May 19, 2021
12:30 p.m. EDT
Access*
Our Annual Meeting can be accessed virtually at:
www.virtualshareholdermeeting.com/HIG2021
Voting Items
Shareholders will vote of the following items of business:
1. Elect a Board of Directors for the coming year;
2. Ratify the appointment of Deloitte & Touche LLP
as our independent registered public accounting
firm for the fiscal year ending December 31, 2021;
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.
Board
Recommendation
Page
Reference
FOR
FOR
FOR
13
33
35
Record Date
You may vote if you were a shareholder of record at the close of business on
March 22, 2021.
The Hartford’s proxy materials are available via the internet at
http://ir.thehartford.com** and www.proxyvote.com, 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 at the virtual meeting or by voting through other means. For instructions on
voting, please refer to page 72 under “How do I vote my shares?”
We urge you to review the proxy statement carefully and exercise your right to
vote.
Dated: March 29, 2021
By order of the Board of Directors
VOTING
By internet
www.proxyvote.com
By toll-free telephone
1-800-690-6903
By mail
Follow the instructions on
your proxy card
At the Annual Meeting
Follow the instructions on
the virtual meeting site
IMPORTANT INFORMATION IF YOU
PLAN TO ATTEND THE ANNUAL
MEETING:
You are entitled to participate (i.e., submit
questions and/or vote) in the Annual
Meeting if you were a shareholder of
record at the close of business on
March 22, 2021, the record date, or hold a
legal proxy for the meeting provided by
your bank, broker, or nominee.
To participate, you will need the 16-digit
control number provided on your proxy
card, voting instruction form or notice.
Shareholders may also vote or submit
questions in advance of the meeting at
www.proxyvote.com using their 16-digit
control number.
If you are not a shareholder or do not
have a control number, you may still
access the meeting as a guest, but you will
not be able to participate.
If you have difficulty accessing the Annual
Meeting, please call the number on the
registration page of the virtual meeting
site. Technicians will be available to assist
you.
Donald C. Hunt
Corporate Secretary
* In light of the ongoing COVID-19 pandemic, to support the health and well-being of our shareholders, employees, partners and
communities, the Annual Meeting will be held in a virtual meeting format via audio webcast only, and will not be held at a physical
location.
**References in this proxy statement to our website address are provided only as a convenience and do not constitute, and should not be
viewed as, an incorporation by reference of the information contained on, or available through, the website. Therefore, such information
should not be considered part of this this proxy statement.
2021 Proxy Statement
1
LETTER FROM OUR CHAIRMAN &
CEO AND LEAD DIRECTOR
Dear fellow shareholders:
The year 2020, and all it brought, will not soon be forgotten. In last year’s letter to shareholders, we reported that the company was
in the midst of transitioning our workforce to nearly all-remote status because of the global pandemic. That unusual work
environment persists, with the health, safety and well-being of employees remaining paramount. At the same time, our dedication to
The Hartford’s core purpose – underwriting human achievement – has remained steadfast through the personal toll of hardship and
loss, market uncertainty, and the detours from normal life and work we have experienced during the last 12 months. Most of all, the
past year proved that, together, the team at The Hartford can overcome some of the greatest challenges we have seen in 100 years.
And working in our respective communities, across the United States and around the globe, we can positively impact all our
stakeholders.
The Hartford’s business fundamentals withstood the disruption of 2020 as we pursued our objective of creating long-term
shareholder value. The pillars of our business remain solid and our balance sheet is strong. The Small Commercial segment is more
robust than ever, with our next-generation Spectrum product leading the way. The Navigators acquisition has proven ideally timed
to allow Middle & Large Commercial and Global Specialty to unlock synergies; those lines are emerging from re-underwriting their
books of business, and pivoting to growth and margin expansion in an exceptional pricing environment. Group Benefits, with
integration work from the Aetna acquisition now complete, is also well positioned to sustain its performance post-pandemic and
succeed in the marketplace. Plans to implement new products and technology in Personal Lines also continue apace. Our Hartford
Next transformation initiative is expected to provide $500 million in expense savings across the enterprise by the end of 2022. In
light of overall economic uncertainty going into the pandemic, we prudently decided to suspend share repurchase activity in favor of
added liquidity and capital accumulation. Now that the economic landscape is stabilizing, we are acting to return capital to our
shareholders, marked by the Board’s authorization of a $1.5 billion share repurchase program in December and an 8% increase in
our common stock dividend in February. In sum, we believe The Hartford is poised to emerge from 2020 stronger than ever.
But the past year was not only about the business. In particular, the racial reckoning of 2020 deepened our dedication to the
American promise of equity. We have redoubled our existing internal commitment to racial equity with concrete steps and
transparent goals. For starters, today we disclosed EEO-1 data, reflecting the diversity of our workforce, and will set benchmarks
for diverse representation across our senior leadership ranks. Through our Compensation and Management Development
Committee, we have built diversity criteria into our long-term incentive metrics going forward. We intend to lead through action on
this vital front, internally and in the industry.
The Hartford’s environmental sustainability mission also continued in 2020, with the Board’s guidance and oversight. Our TCFD
report articulates our public commitment to manage and mitigate the impacts of climate change. Additionally, we intend to publish
our first SASB report later this year. Our environmental goals are clear and we are on track to meet them. Across the company, we
are working to address the risks and opportunities presented by climate change in our risk management programs, strategic
business decisions and investment portfolio allocations. And, we have committed to enterprise benchmarks on reductions in
greenhouse gas emissions, water and energy use, and increased deployment of electric vehicles.
Our efforts across these and other critical issues continue to gain notice in the industry and beyond. In 2020, The Hartford was
recognized as the highest-ranked insurance company on Forbes’ list of Most “Just” Companies. We also received a perfect score on
the Human Rights Campaign Foundation’s Corporate Equality Index, we were named to Bloomberg’s Gender Equality Index, and
Forbes designated our company as one of America’s Best Employers for Diversity. Additionally, The Military Times named us a
Military Friendly Employer. We are honored by the recognition of our core values, and inspired to do more.
The Hartford’s deep, experienced, and active Board met the unforeseen challenges of 2020 with enhanced engagement. As Chair
and Lead Director, our direct collaboration was closer than ever. The Hartford’s leadership team provided weekly Board updates
addressing the market, regulatory, underwriting and operational impacts of COVID-19 on our business through the first wave of the
pandemic, and the Board increased its regular meeting cadence in that same time period to stay current. The Board’s committees
also focused on the challenges at hand. Our Finance, Investment and Risk Management Committee intently focused on the
pandemic’s potential consequences for the company’s risk profile, as well as the impact of ongoing market volatility on our
investments. Similarly, the Audit Committee continued to monitor the pandemic’s operational and financial impacts. Meanwhile, the
Nominating and Corporate Governance Committee’s ongoing work to optimize Board composition – by maximizing business
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leadership and corporate governance experience, substantive insurance and audit expertise, and ensuring diverse perspectives and
views – resulted in Donna James’ recent election to the Board. We are confident her addition will strengthen us further.
Finally, The Hartford expanded its shareholder outreach program to foster deeper dialogue on sustainability, compensation, and
governance innovations and issues. In a year as volatile as 2020, the program proved especially crucial to understanding
shareholder priorities, and key takeaways are reflected in the enhanced disclosures in this proxy statement. We continue to depend
on and value this annual touchpoint with shareholders, which informs our priorities as a Board. Due to ongoing public health risks,
The Hartford will again conduct our annual meeting virtually, offering the same transparency and participatory access for
shareholders that was provided for the 2020 virtual meeting.
Acting together, The Hartford’s senior leadership and Board met the challenges of 2020, with employees delivering on our purpose
and inspiring us at every turn. Throughout the past year, we all have stayed true to our objective of keeping The Hartford’s engine
running at full strength – relying on hard work, strong ethics and effective governance to inform our actions. We thank you for your
ongoing support of The Hartford in this endeavor.
Sincerely,
Christopher J. Swift
Chairman and Chief Executive Officer
Trevor Fetter
Lead Director
2021 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
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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18
20
23
25
25
26
33
33
33
34
34
35
35
36
36
42
51
51
53
54
54
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55
67
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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.
NAVIGATING THE CHALLENGES AND OPPORTUNITIES OF 2020
The COVID-19 pandemic and the increased focus on racial inequity in the U.S. greatly affected our employees, customers,
communities and shareholders. In the face of these challenges, the company took the following actions to support all of our
stakeholders:
Ensuring Business Resiliency and Employee Health, Safety & Well-being
•
•
•
•
Previous technology investments enabled approximately 95% of in-office staff to immediately go remote
Provided additional benefits and support services to employees (e.g., free COVID testing, telehealth visits, weekly
self-care guidance and remote work transition support)
Implemented appropriate safety measures (e.g., masks, distancing protocols, contact tracing and enhanced cleaning)
Increased focus on mental health
Offering Customer Support
•
•
•
•
•
Instituted a moratorium on cancellation of policies for non-payment of premium through May 31, 2020 and waived
late fees
Provided billing accommodations, including offering installment payment plans and deferred installment billing
Facilitated mid-term endorsements to commercial policies to adjust for changes in risk, reflecting reductions in
payroll, revenue, sales and miles driven
Provided personal auto insurance customers a 15% refund on April, May and June premiums
Provided leniency in enforcement of certain policy provisions (e.g., claim notice requirements and vacancy
provisions)
Giving to Communities
• Donated $1 million to national and local organizations focused on the pandemic
• Donated $1.5 million to aid in the recovery efforts to support U.S. small businesses – 50% of funding benefited
diverse-owned businesses
• Matched hospitals across the country with local restaurants to sponsor meals for their front-line workers
•
•
•
Supported more than 2,500 of our small business customers across the country by making multiple holiday shopping
guides and an internal shopping directory available to our 18,500 employees
Live-streamed fire safety and prevention education to more than 51,000 students, educators and parents in 750
cities and towns across the country as part of The Hartford’s first-ever National Junior Fire Marshal Day
Provided adaptive fitness kits to 750 individuals with physical disabilities to enable exercise and physical activity at
home
Reinforcing our Support for Racial Equity
• Utilized established courageous conversation framework and brand messaging to show support for our Black
colleagues, educate all employees, and demonstrate our commitment to fighting bias and racism
•
•
•
Reaffirmed our ongoing support of vital Black institutions including the National Museum of African American
History and Culture
Intensified CEO leadership internally through all-employee panel discussions and externally through the CEO Action
for Diversity & Inclusion, the CEO Action for Racial Equity, and the Corporate Call to Action convened by the
Connecticut State Treasurer
Fast tracked elements of our diversity and inclusion strategy, including adopting diversity and inclusion goals for
each business and functional area, with progress considered as part of the leadership performance and compensation
assessment processes
•
Released EEO-1 data at the end of the first quarter of 2021
2021 Proxy Statement
5
PROXY SUMMARY
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, Current Age
and Present or Most Recent Experience
Independent
Director
since
Current
Committees(1)
Other Current
Public Company Boards
Robert B. Allardice III, 74
Former regional CEO,
Deutsche Bank Americas
Larry D. De Shon, 61
Former President, CEO and COO,
Avis Budget Group
Carlos Dominguez, 62
Vice Chairman and Lead Evangelist,
Sprinklr
Trevor Fetter,(2) 61
Senior Lecturer,
Harvard Business School
Donna James, 63
President and CEO,
Lardon & Associates
Kathryn A. Mikells, 55
Chief Financial Officer
Diageo plc
Michael G. Morris, 74
Former Chairman, President and CEO,
American Electric Power Company
Teresa W. Roseborough, 62
Executive Vice President, General Counsel and
Corporate Secretary, The Home Depot
Virginia P. Ruesterholz, 59
Former Executive Vice President,
Verizon Communications
Christopher J. Swift, 60
Chairman and CEO,
The Hartford
Matthew E. Winter, 64
Former President,
The Allstate Corporation
Greig Woodring, 69
Former President and CEO,
Reinsurance Group of America
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
✓
2008
• Audit
• FIRMCo*
• Ellington Residential
Mortgage REIT
2020
2018
2007
• Audit
• FIRMCo
• NCG
• Comp
• FIRMCo
• NCG
• Comp
• FIRMCo
• PROS Holdings
2021
• FIRMCo
• Boston Scientific
• L Brands
2010
• Audit*
• FIRMCo
• Diageo plc
2004
2015
2013
• Audit
• FIRMCo
• NCG*
• Comp
• FIRMCo
• NCG
• Comp*
• FIRMCo
• NCG
• Alcoa
• L Brands
• Bed Bath & Beyond
2014
• FIRMCo
• Citizens Financial
Group
2020
• FIRMCo
• Comp
• ADT
• H&R Block
2017
• Audit
• FIRMCo
* Denotes committee chair.
(1) 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.
(2) Mr. Fetter serves as the Lead Director. For more details on the Lead Director’s role, see page 14.
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CURRENT BOARD COMPOSITION
PROXY SUMMARY
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
✓ All directors are independent, other than the CEO
✓ 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 with market terms
✓ 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 and individual
director evaluations conducted triennially
✓ Meaningful Board education and training on recent and emerging governance and industry trends
✓ Annual shareholder engagement program focused on sustainability, compensation and governance
issues
✓ Board diversity of experience, tenure, age, gender, race and ethnicity
✓ Mandatory retirement age of 75
✓ Diversity policy or "Rooney Rule" commitment to ensure diverse candidates are included in the pool
from which board and external CEO candidates are selected
✓ 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
Commitment to
Sustainability
✓ Sustainability Highlight Report published, tying enterprise commitments to tangible goals and
reporting progress; first TCFD report published in 2020; SASB report for 2020 expected to be
published in 2021
✓ Sustainability Governance Committee comprised of senior management charged with overseeing a
comprehensive sustainability strategy and ensuring the full Board is briefed at least annually
2021 Proxy Statement
7
7 Years Average Tenure5340-5 years5-10 years>10 years33% Women48WomenMen25% People of Color39Black, Latinx or AsianWhite
PROXY SUMMARY
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 environmental, social and governance ("ESG") impacts as highlighted in four key areas:
ENVIRONMENT
SOCIAL
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.
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) Standards Response, which offers greater detail
on our sustainability activities at: https://www.thehartford.com/about-us/corporate-sustainability.
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 2021.
✓ The Board recommends a vote "FOR" this item
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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 while maintaining a
commitment to the company’s ethics and values, (2) providing market-competitive compensation opportunities designed to
attract and retain talent needed for long-term success, and (3) appropriately aligning pay with short- and long-term performance.
✓ The Board recommends a vote "FOR" this item
STRATEGIC PRIORITIES
The Hartford’s strategy focuses on realizing the full potential of our product capabilities and underwriting expertise, becoming an
easier company to do business with, and attracting, retaining and developing the talent needed for long-term success. The company
endeavors to expand its insurance product offerings and distribution and capitalize on the strength of its brand. The company is also
working to increase efficiencies through investments in technology.
In 2020, we were focused on increasing shareholder value through a number of initiatives and investments:
•
•
•
•
•
Integrating the acquisition of The Navigators Group, Inc. ("Navigators Group") successfully, and maximizing our combined
potential by deepening our distribution relationships, capitalizing on a broader product portfolio and meeting a wider
array of customer needs.
Increasing the speed and ease of our interactions and business processes through data, digital technology and voice of
customer, including expanded use of robotics and continued enhancements to underwriting and quoting platforms.
Continuing investment in new products and business models such as Spectrum, our next-generation package offering for
small businesses, which offers customers tailored coverage recommendations as well as the ability to customize their own
coverage, including real-time quote pricing. We are investing to maintain market leadership in small commercial as existing
competitors and new entrants increase their focus on this business. Through a planned roll out of new automobile and
homeowners insurance products for AARP members, we are investing in our Personal Lines segment to return that
business to top line growth.
Improving the employee experience by investing in our workforce and striving to attract, retain and develop the best
talent in the industry, enhance our industry-leading position in diversity and inclusion, and sustain our ethical culture. We
see the benefits of this commitment in our sustained top-decile employee engagement scores.
Becoming more cost efficient and competitive along with enhancing the experience we provide to agents and customers
through an operational transformation and cost reduction plan we commenced in July 2020 called Hartford Next. Relative
to 2019, we expect to achieve a reduction in annual insurance operating costs and other expenses of approximately $500
million by 2022, reducing the Property & Casualty ("P&C") expense ratio by 2.0 to 2.5 points, the Group Benefits expense
ratio by 1.5 to 2.0 points and the claims expense ratio by approximately 0.5 points.
2020 FINANCIAL RESULTS
Like all companies, we faced unprecedented challenges in 2020, but through extraordinary team efforts, we persevered and
delivered strong results. Full year 2020 net income available to common stockholders and core earnings* were $1.7 billion ($4.76
per diluted share) and $2.1 billion ($5.78 per diluted share), respectively. Net income and core earnings return on equity ("ROE")*†
were 10.0% and 12.7%, respectively.
* 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 available to common stockholders ROE.
2021 Proxy Statement
9
PROXY SUMMARY
Highlighted below are year-over-year comparisons of our net income available to common stockholders and core earnings
performance and our net income ROE and core earnings ROE results for each of the past three years. Core earnings is the primary
determinant of our annual incentive plan ("AIP") funding, as described on page 42, 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 45 (in each case, as adjusted for compensation purposes).
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 and our 2020 Corporate Peer Group (provided on page 52).
Includes reinvestment of dividends.
COMPONENTS OF COMPENSATION AND PAY MIX
NEO compensation is heavily weighted towards variable compensation (annual and long-term incentives), where actual amounts
earned may differ from target 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.
10 www.thehartford.com
$ (Millions)Net IncomeAvailable toCommonStockholders$2,064$1,71620192020$ (Millions)Core Earnings$2,062$2,08620192020Net Income ROE13.7%14.4%10.0%201820192020Core Earnings ROE11.6%13.6%12.7%201820192020(17)%(6)%(3)%8%0%14%7%28%18%49%The Hartford (HIG)2020 Corporate Peer GroupS&P 500 Insurance CompositeS&P 500 Property and CasualtyS&P 500ONE-YEAR (2020)THREE-YEAR (2018-2020)
PROXY SUMMARY
Compensation Component Description
Base Salary
• Fixed level of cash compensation based on market data, internal pay equity, experience,
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 goals aligned with
the company's strategic priorities.
Long-Term Incentive Plan
• Variable awards granted based on individual performance, potential and market data.
• Designed to drive long-term performance, align senior executive interests with shareholders,
and foster retention.
• Award mix (50% performance shares and 50% stock options) reflects stock price performance,
peer-relative shareholder returns (stock price and dividends) and 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:
Target Pay Mix — CEO
Salary
9%
Annual Incentive
24%
Long-Term Incentive
67%
Variable with Performance: 91%
Target Pay Mix — Other NEOs
Salary
16%
Annual Incentive
30%
Long-Term Incentive
54%
Variable with Performance: 84%
2020 COMPENSATION DECISIONS
2020 Compensation Decisions
Rationale
The Compensation Committee
updated the payout curves for
2020 AIP and 2020-2022
performance share awards.
As a result of shareholder feedback received in 2019, the Compensation Committee made the
following changes for 2020 awards:
• Updated the AIP curve for 2020 awards to expand the range from +/- 15% to +/-20% of
target, requiring greater outperformance to achieve above target awards. (page 42)
• Updated the TSR payout curve for performance share awards granted in 2020 to target the
55th percentile. (pages 45-46)
The Compensation Committee
approved an AIP funding level
of 80% of target.
Performance against the pre-established Compensation Core Earnings target produced a
formulaic AIP funding level of 80% of target. The Compensation Committee undertook its
qualitative review of performance and concluded that the formulaic AIP funding level
appropriately reflected 2020 performance. Accordingly, no adjustments were made. (page 43)
The Compensation Committee
certified a 2018-2020
performance share award
payout at 75% of target.
The company's average annual Compensation Core ROE during the performance period was
12.8%, resulting in a payout of 151% 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 46)
The Compensation Committee (and, in the case of the CEO, the independent directors) approved the following compensation for
each active NEO:
Base Salary
AIP Award
LTI Award
Total Compensation
NEO
2020
Change
from 2019
2020
Change
from 2019
2020
Change
from 2019
2020
Change
from 2019
Christopher Swift $ 1,150,000
Beth Costello
$ 725,000
Douglas Elliot
$ 950,000
William Bloom
$ 625,000
0%
0%
0%
0%
$ 2,400,000
(45.9)%
$ 8,500,000
$ 1,000,000
(45.9)%
$ 1,850,000
$ 1,520,000
(45.9)%
$ 5,310,000
$ 800,000
(46.7)%
$ 1,300,000
David Robinson
$ 600,000
NA*
$ 580,000
NA*
$ 1,300,000
3.0%
4.2%
3.1%
4.0%
NA*
$ 12,050,000
(12.9) %
$ 3,575,000
$ 7,780,000
$ 2,725,000
$ 2,480,000
(17.8) %
(12.7) %
(19.3) %
NA*
*Mr. Robinson was not previously an NEO.
2021 Proxy Statement
11
PROXY SUMMARY
This table provides a concise picture of compensation decisions made in 2020, and highlights changes from 2019. In each case,
Total 2020 Compensation was lower than 2019 compensation due to the lower AIP awards for 2020. Another view of 2020
compensation for the NEOs is available in the Summary Compensation Table on page 55.
COMPENSATION BEST PRACTICES
Our current compensation best practices include the following:
WHAT WE DO
✓ Compensation heavily weighted toward variable pay
✓ Senior Executives generally receive the same benefits as other 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
✓ Claw-back provisions in compensation and severance plans
✓ 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
* Double-trigger vesting for equity awards applies if the awards are assumed or replaced with substantially equivalent awards.
WHAT WE DON'T DO
û No Senior Executive tax gross-ups for perquisites or excise taxes on severance payments
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 or dividend equivalents on equity awards until vesting
SAY-ON-PAY RESULTS
At our 2020 annual meeting, we received 96% support on Say-on-Pay. The Compensation Committee considered the vote to be an
endorsement of The Hartford’s executive compensation programs and policies, and recent program changes. They took this strong
level of support into account in their ongoing review of those programs and policies. Management also discussed the vote, along
with aspects of its executive compensation, diversity and inclusion and corporate governance practices, during our annual
shareholder outreach program to gain a deeper understanding of shareholders’ perspectives. Feedback regarding the compensation
program was generally positive, with many shareholders expressing support for the Compensation Committee's changes to the
payout curves for 2020 AIP and 2020-2022 performance share awards. For further discussion of our shareholder outreach
program, see pages 20-21.
12 www.thehartford.com
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 16-17 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 27, 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
Good
Governance
✓ All directors are independent, other than the CEO
✓ 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 with market terms
✓ 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 and individual
director evaluations conducted triennially
✓ Meaningful Board education and training on recent and emerging governance and industry trends
✓ Annual shareholder engagement program focused on sustainability, compensation and governance
issues
✓ Board diversity of experience, tenure, age, gender, race and ethnicity
✓ Mandatory retirement age of 75
✓ Diversity policy or "Rooney Rule" commitment to ensure diverse candidates are included in the pool
from which board and external CEO candidates are selected
✓ 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
Commitment to
Sustainability
✓ Sustainability Highlight Report published, tying enterprise commitments to tangible goals and
reporting progress; first TCFD report published in 2020; SASB report for 2020 expected to be
published in 2021
✓ Sustainability Governance Committee comprised of senior management charged with overseeing a
comprehensive sustainability strategy and ensuring the full Board is briefed at least annually
2021 Proxy Statement
13
BOARD AND GOVERNANCE MATTERS
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)
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 73 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 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 executive session
without the CEO and Chairman present (six such
meetings in 2020).
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 they are
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.
14 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 and to inform the Board's succession planning. In addition to the full Board
evaluation process, the standing committees of the Board undertake separate self-assessments on an annual basis.
As part of a multi-year effort to enhance the evaluation process, the Board has adopted the following changes:
•
•
•
2016 - Adopted individual director interviews led by the Lead Director and a mid-year review of progress against formal
Board goals;
2018 - Adopted third-party facilitated evaluations every three years, commencing in 2019, to promote more candid
conversations, provide a neutral perspective, and help the Board benchmark its corporate governance practices; and
2020 - Adopted individual director evaluations every three years, commencing in 2022, as part of the third-party
facilitated Board evaluation.
In each case, the Board sought and considered shareholder feedback on the merits of these changes prior to adoption.
Board Evaluation and
Development of Goals
(May)
Annual Corporate
Governance Review /
Shareholder
Engagement Program
(October to December)
Interim Review of Goals
(December)
Board Self-Assessment
Questionnaires
(February)
The Lead Director, or third-party evaluator, leads a Board evaluation discussion in an
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.
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.
One-on-One Discussions
(February to May)
The Lead Director, or third-party evaluator, meets individually with each independent
director on Board effectiveness, dynamics and areas for improvement. Beginning in 2022,
third-party led discussions will also include directors' evaluations of their peers.
When the Lead Director led the Board evaluation session in May 2020, there was agreement that the Board is effectively
overseeing the strategy and risks of the company, and that the Board made several improvements as a result of its 2019-2020 goals,
including the appointment of two new directors with CEO or President experience, successful oversight of management succession
planning, and more Board time devoted to discussions and questions rather than presentation of pre-read materials. At the same
time, the Board identified opportunities for continued improvement and heightened focus in the 2020-2021 Board year as the
company continues to navigate the COVID-19 crisis, including continued focus on management succession plans (which led to the
internal promotion of a new President of HIMCO and the combination of the Claims and Operations organizations — two of The
Hartford's largest customer-facing teams — under common leadership); heightened oversight of the implementation of new
Personal Lines products and technology; and continued oversight of the Navigators Group integration.
2021 Proxy Statement
15
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, and each July devotes a session to board succession planning over a
longer-term (generally three-year) period. 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 policy (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 search culminated in the election of Donna James, who brings extensive
insurance industry experience gained during a 25-year career as a senior executive at Nationwide Insurance, as well as significant
corporate governance experience by virtue of her service on several major public company boards. Ms. James’ election made her
the fourth female member, and third member of color, of the current Board. She joined the Board in February 2021.
The graphic below illustrates 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.
Overview of Director Search Process
Development of
Candidate
Specification
• Develop skills matrix to
identify desired skills
and attributes,
including diversity
•
Target areas of
expertise aligned with
our strategy
Screening of
Candidates
Meeting With
Candidates
Decision and
Nomination
•
•
Select outside search
firms to lead process
and/or consider
internal or shareholder
recommendations
Screen candidates for
each specification
identified
•
•
Top candidates are
interviewed by
Nominating
Committee members,
other directors, and
management
Finalist candidates
undergo background
and conflicts checks
• Nominating Committee
recommendation of
candidates and
committee assignments
to full Board
•
Board consideration
and adoption of
recommendation
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. In
2019, we enhanced our onboarding program for new directors with the goal of reducing the learning curve for new members and
enabling them to provide meaningful contributions to the oversight of the company as early in their tenures as possible. Our
enhanced onboarding program consists of two phases. Phase one is designed to provide a solid foundation on our businesses,
financial performance, strategy, risk and governance. New directors devote numerous briefing sessions with senior management to
review key functional areas of the company and their committee assignment responsibilities. Phase two is an opportunity for new
directors to continue learning about the business at their discretion after they have been on the Board for six to twelve months.
Directors are afforded time to familiarize themselves with the company so they can identify areas for additional education and
development. In addition, we have formalized our board mentorship program to help integrate members with experienced
directors. New directors are also encouraged to attend all committee meetings during their first year to help accelerate their
understanding of the company and the Board.
Our Board members also participate in company activities and engage directly with our employees at a variety of events throughout
the year, including typically an annual dinner with employees working on key strategic business priorities or engaged with our
employee resource groups ("ERGs"). Although the pandemic prevented in-person involvement in 2020, directors participated in
virtual town hall meetings and ERG events.
DIRECTOR TENURE
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.
16 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
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 solely due to Board tenure. Previously, the Board had a tenure policy
that provided an independent director may not stand for reelection after serving as a director for 15 years. In 2020, after discussion
with shareholders during our annual shareholder engagement program, the Board eliminated this policy in conjunction with its
adoption of individual director evaluations (described above). The Board believes that its rigorous self-evaluation process,
combined with its mandatory retirement policy at age 75, are effective in promoting Board renewal, as demonstrated by the
addition of seven new directors since 2015, none of whom were added as a result of the tenure policy.
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 appointed five women and three people of color as directors;
The Board's Audit and Compensation Committees are both chaired by women;
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; and
In 2021, Donna James joined the Board, increasing the current representation on the Board to four female directors and
three directors of color.
CURRENT BOARD COMPOSITION
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
2021. To nominate a candidate at our 2022 Annual Meeting, notice must be received by our Corporate Secretary at the address
below by February 18, 2022 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 2022 proxy statement must be received by our Corporate Secretary at the
address below no earlier than October 30, 2021 and no later than November 29, 2021.
In each case, submissions must be delivered or mailed to Donald C. Hunt, Corporate Secretary, The Hartford Financial Services
Group, Inc., One Hartford Plaza, Hartford, CT 06155.
2021 Proxy Statement
17
7 Years Average Tenure5340-5 years5-10 years>10 years33% Women48WomenMen25% People of Color39Black, Latinx or AsianWhite
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
L. De Shon
K. Mikells (Chair)
M. Morris
G. Woodring
“The Audit Committee assessed the financial and operational impacts of the COVID-19 pandemic on the
company, including its ability to maintain operations in a remote work environment and its exposure to
insured losses arising from the pandemic. The Committee also continued to assess processes and controls
over managing the risk of cyber-attacks and conducted deep reviews of the risk and control environment for
several lines of business and functional areas."
ROLES AND RESPONSIBILITIES
Kathryn Mikells, Committee Chair since 2019
MEETINGS IN 2020: 9
• 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 operational risk, business resiliency and cybersecurity.
• 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.
* 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.
COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE
CURRENT MEMBERS:
C. Dominguez
T. Fetter
T. Roseborough
V. Ruesterholz (Chair)
M. Winter
MEETINGS IN 2020: 6
“In 2020, the Committee focused substantial attention on understanding the impact of the COVID-19
pandemic and widespread social unrest on our employees, customers and businesses. In addition, the
Committee monitored the responsive actions taken by the company to sustain full operations, build on our
inclusive culture and expand our Diversity and Inclusion programs. In that context, the Committee carefully
reviewed our compensation programs, including 2020 annual incentive funding, and introduced a Diversity
and Inclusion measure in the 2021 long-term incentive program.”
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.
• Reviews annually the diversity of the company’s workforce, the company’s diversity programs,
and the company’s process and analysis for assessing pay equity.
• Reviews succession and continuity plans for the CEO and each member of the executive
leadership team that reports to the CEO.
• 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.
18 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
FINANCE, INVESTMENT AND RISK MANAGEMENT COMMITTEE
CURRENT MEMBERS:
R. Allardice (Chair)
L. De Shon
C. Dominguez
T. Fetter
D. James
K. Mikells
M. Morris
T. Roseborough
V. Ruesterholz
C. Swift
M. Winter
G. Woodring
“In 2020, FIRMCo devoted substantial time to reviewing the COVID-19 pandemic’s impact on the risk
profile of the company’s businesses, including insurance coverages, as well as the impact on the economy and
financial markets caused by the pandemic on the company’s investments. The Committee also focused its
oversight on risks associated with the legal and regulatory environment shaped by the COVID-19
pandemic.”
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 climate change.
• 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.
MEETINGS IN 2020: 5
• Provides a forum for discussion among management and the entire Board of key financial,
investment, and risk management matters.
NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
Current Members:
L. De Shon
C. Dominguez
M. Morris (Chair)
T. Roseborough
V. Ruesterholz
“In 2020, the Nominating Committee continued its focus on board composition and effectiveness. As a result
of Committee recommendations, the Board appointed Donna James as a director, bringing extensive
insurance-industry experience to the Board, while also increasing the representation of women and people of
color.”
ROLES AND RESPONSIBILITIES
• Advises and makes recommendations to the Board on corporate governance matters.
Michael G. Morris, Committee Chair since 2018
MEETINGS IN 2020: 5
• Makes recommendations on the organization, size and composition of the Board and its
• Considers potential nominees to the Board.
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.
2021 Proxy Statement
19
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 and sets forth the company's risk preferences, tolerances, and limits. Throughout 2020 and
into 2021, the Board has been focused on the risks arising from the COVID-19 pandemic. As discussed in the letter from our
Chairman & CEO and Lead Director on pages 2-3, our leadership team provided weekly updates to the Board on the market,
regulatory, underwriting and operational impacts of COVID on the business through the first crest of the pandemic, and the Board
increased its regular meeting cadence in that same time period to stay current. The Board’s committees, too, were focused on the
risks and challenges arising from the pandemic, including its impact on insurance coverages, investments, and the legal and
regulatory environment (FIRMCo); operational and financial impacts (Audit); and impacts on employees (Compensation).
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
• Operational risk
• Cybersecurity
• Legal and regulatory
compliance
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
• Climate risk
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 provided detailed, regular reports on cybersecurity matters in 2020 (including assessments conducted by,
or in conjunction with, third parties) to the full Board; FIRMCo; and the Audit Committee, which oversees controls for the
company's major risk exposures, and has principal responsibility for oversight of cybersecurity risk. 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, 2020.
BOARD AND SHAREHOLDER MEETING ATTENDANCE
The Board met ten times during 2020 and each of the incumbent directors attended 75% or more of the aggregate number of
meetings of the Board and the committees on which they served. We encourage our directors to attend the Annual Meeting of
Shareholders, and all directors attended the virtual Annual Meeting of Shareholders held on May 20, 2020.
SHAREHOLDER ENGAGEMENT
Our Board and management value shareholder views and engage with shareholders in different ways throughout the year to solicit
feedback. 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 addition, management and our Lead Director engage with
shareholders on governance, compensation and sustainability issues to understand their concerns and ensure alignment on our
20 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
practices in these areas. In the fall of 2020, management reached out to shareholders representing approximately 57% of shares
outstanding and had discussions with shareholders representing approximately 37% of shares outstanding.
What we heard from shareholders
Actions taken
Interest in additional transparency on
diversity, equity and inclusion metrics and
goals
• Released EEO-1 data at the end of the first quarter in 2021
• Adopted clear benchmarks for diverse representation in management
• Expanded existing Board diversity policy to require that candidates with a
diversity of race, gender and ethnicity are included in the pool of candidates from
which external CEO candidates are considered
Support for existing board composition,
refreshment, and evaluation practices
Further enhanced Board evaluation processes to include triennial assessments of
individual directors as part of third-party Board evaluation
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 2019, we strengthened existing emergency succession plan processes for
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 twelve times, including in 2020, 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”). 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 and directors. The PACs support candidates for federal and state
office who are willing to listen to and understand our priorities, and promote practical, reasonable solutions to key public policy
challenges. In light of events in early 2021, the PACs decided to pause political contributions to all federal candidates through the
end of March. During this time we are reviewing our contribution criteria and processes, and considering potential changes and
enhancements. 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 2020 Political Activities Report, at https://ir.thehartford.com/corporate-
governance/political-engagement.
2021 Proxy Statement
21
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 environmental, social and governance ("ESG") impacts as highlighted in four key areas:
ENVIRONMENT
SOCIAL
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.
We have a proud history of uncompromising commitment to sustainability, delivering on an ESG strategy built around measurable
goals and actions intended to both create long-term shareholder value and contribute positively to society at large. We continue to
make progress on ESG matters, which in 2020 included the following highlights:
•
Continuing to increase transparency in our sustainability-related disclosures by:
◦
◦
Publishing our first Task Force on Climate-related Financial Disclosures (TCFD) report, a global standard for
helping investors understand the most material climate-related risks a company faces and how it manages those
risks, and
Developing our first Sustainability Accounting Standards Board (SASB) report to be published in 2021,
communicating financially-material sustainability information to stakeholders;
• Donating $1 million in support of organizations combating the COVID-19 crisis including the Centers for Disease Control
and Prevention Foundation Emergency Response Fund, the Center for Disaster Philanthropy COVID-19 Response Fund,
Hartford Foundation for Public Giving COVID-19 Community Fund, and Feeding America;
•
•
Selecting two employees to participate in the CEO Action for Racial Equity Public Policy Fellowship to work on public
policy issues in the areas of health care, education, economic empowerment and public safety, in support of social justice;
and
Achieving gender pay equity and driving toward our other published 2022 sustainability goals to achieve top quartile
industry representation in leadership roles for women and people of color, reduce greenhouse gas emissions by at least
2.1% each year, and positively impact the lives of 10 million people through our philanthropic programs.
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) Standards 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 at least one ESG topic annually. The 2020 briefing provided a
progress report of the company's actions in three priority areas: climate change and environmental stewardship, pay equity and
representation, and data protection and customer privacy.
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 from across the enterprise 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 to the full Board at least annually. In 2020, the Sustainability Governance Committee met four times.
22 www.thehartford.com
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 2019-2020 Board service year, non-management directors received a $100,000 annual cash retainer and a $160,000
annual equity grant of restricted stock units (“RSUs”). In September 2019, following a market assessment, the Board increased the
annual cash retainer to $110,000 and the annual equity grant to $180,000 for the 2020-2021 Board service year, the first such
increase since 2014.
ANNUAL CASH FEES
Cash compensation for the 2020-2021 Board service year beginning on May 20, 2020, the date of the 2020 Annual Meeting of
Shareholders, and ending on May 19, 2021, the date of the 2021 Annual Meeting, is set forth below. 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 Cash Compensation
Annual Retainer
Committee Chair Retainer
Director Compensation Program
$110,000
$35,000 – Audit
$25,000 – FIRMCO, Compensation
$20,000 – Nominating
Lead Director Retainer
$40,000
ANNUAL EQUITY GRANT
In 2020, directors received an annual equity grant of $180,000, payable solely in RSUs pursuant to The Hartford 2020 Stock
Incentive Plan. Directors may not sell, exchange, transfer, pledge, or otherwise dispose of the RSUs.
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. 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; (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 2020 Stock Incentive 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 $750,000 of accidental death and dismemberment
and permanent total disability coverage while they serve on the Board. We also reimburse directors for travel and related expenses
they incur in connection with their Board and committee service.
STOCK OWNERSHIP GUIDELINES AND RESTRICTIONS ON TRADING
The Board has established stock ownership guidelines for each director to obtain, by the third anniversary of the director’s
appointment to the Board, an ownership position in our common stock equal to five times the total annual cash retainer (including
cash retainers paid for committee chair or Lead Director responsibilities). All directors with at least three years of Board service met
the stock ownership guidelines as of December 31, 2020.
Our insider trading policy prohibits all hedging activities by directors, and permits directors to engage in transactions involving The
Hartford's equity securities only through: (1) a pre-established trading plan pursuant to Rule 10b5-1 of the Securities Exchange Act
of 1934; or (2) during “trading windows” of limited duration following: (a) the filing with the SEC of our periodic reports on Forms
10-K and 10-Q, and (b) a determination by the company that the director is not in possession of material non-public information.
Even if pre-clearance is granted, directors must make an independent determination that they do not possess material non-public
information. In addition, our insider trading policy grants us the ability to suspend trading of our equity securities by directors.
2021 Proxy Statement
23
BOARD AND GOVERNANCE MATTERS
DIRECTOR SUMMARY COMPENSATION TABLE
We paid the following compensation to directors for the fiscal year ended December 31, 2020.
Name
Robert Allardice
Larry D. De Shon(3)
Carlos Dominguez
Trevor Fetter
Kathryn A. Mikells
Michael G. Morris
Teresa W. Roseborough
Virginia P. Ruesterholz
Matthew E. Winter(3)
Greig Woodring
Fees Earned or
Paid in Cash
($)(1)
135,000
Stock Awards
($)(2)
180,000
135,000
110,000
150,000
145,000
130,000
110,000
135,000
135,000
110,000
220,000
180,000
180,000
180,000
180,000
180,000
180,000
220,000
180,000
All Other
Compensation
($)
2,971
1,184
1,291
1,291
1,015
2,971
1,291
1,015
1,172
2,023
Total
($)
317,971
356,184
291,291
331,291
326,015
312,971
291,291
316,015
356,172
292,023
(1) Directors Fetter, Mikells and Morris each elected to receive vested RSUs in lieu of cash compensation. Mr. De Shon and Mr.
Winter each received a pro-rated annual cash retainer of $25,000 upon their appointment to the Board on February 19, 2020
and February 24, 2020, respectively; Mr. Winter elected to receive this amount in 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,
2020.
(3) Mr. De Shon and Mr. Winter each received a pro-rated restricted stock unit award valued at $40,000 on February 25, 2020, the
first day of the company’s scheduled trading window following the filing of the company’s 2019 annual report on Form 10-K.
The number of RSUs subject to the award was determined by dividing the grant value of $40,000 by $55.27, the closing market
price per share of The Hartford common stock on the grant date. These awards fully vested on May 20, 2020, the last day of the
2019-2020 Board year.
DIRECTOR COMPENSATION TABLE—OUTSTANDING EQUITY
The following table shows the number and value of unvested equity awards outstanding as of December 31, 2020. The value of
these unvested awards is calculated using a market value of $48.98, the NYSE closing price per share of our common stock on
December 31, 2020. The numbers have been rounded to the nearest whole dollar or share.
Name
Robert Allardice
Larry D. De Shon
Carlos Dominguez
Trevor Fetter
Kathryn A. Mikells
Michael G. Morris
Teresa W. Roseborough
Virginia P. Ruesterholz
Matthew E. Winter
Greig Woodring
Stock Awards(1)
Number
of Shares or
Units of Stock
That Have Not
Vested (#)(3)
Market Value
of Shares or
Units of Stock
That Have Not
Vested ($)
Stock
Grant Date(2)
8/3/2020
8/3/2020
8/3/2020
8/3/2020
8/3/2020
8/3/2020
8/3/2020
8/3/2020
8/3/2020
8/3/2020
4,352
4,352
4,352
4,352
4,352
4,352
4,352
4,352
4,352
4,352
213,161
213,161
213,161
213,161
213,161
213,161
213,161
213,161
213,161
213,161
(1) Additional stock ownership information is set forth in the beneficial ownership table on page 69.
(2) The RSUs were granted on August 3, 2020, the first day of the scheduled trading window following the filing of our Form 10-Q
for the quarter ended June 30, 2020.
(3) The number of RSUs for each award was determined by dividing $180,000 by $42.00, the closing price of our common stock as
reported on the NYSE on the date of the award. The number shown also reflects dividend equivalents credited to outstanding
RSUs. The RSUs will vest on May 19, 2021, 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 their annual RSU award until the end of Board
service. Directors Fetter, Mikells, Morris and Winter 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 2020.
COMMUNICATING WITH THE BOARD
Shareholders and other interested parties may communicate with directors by contacting Donald C. Hunt, 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
2021 Proxy Statement
25
BOARD AND GOVERNANCE MATTERS
DIRECTOR NOMINEES
Twelve 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 their successor is elected and qualified, or until their 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: 74
• Regional Chief Executive Officer of North and South
America, Advisory Director, Deutsche Bank Americas
Holding Corp. (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-Jan. 2021)
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 provides 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.
LARRY D. DE SHON INDEPENDENT
Professional highlights:
• Avis Budget Group, Inc.
– President (2017-2019)
– Chief Executive Officer and Chief Operating
Officer (2016-2019)
– President and Chief Operating Officer (Oct.
2015-Dec. 2015)
– President, International (2011-Oct. 2015)
– Executive Vice President, Operations
(2006-2011)
• UAL Corporation (parent of United Airlines)
– Positions of increasing responsibility, including
Senior Vice President positions in marketing, on-
board service and global airport operations
(1978-2006)
Director since: 2020
Age: 61
Committees:
• Audit
• FIRMCo
• Nominating
Other public company directorships:
• Avis Budget Group, Inc. (2015-2019)
Skills and qualifications relevant to The Hartford:
As a former chief executive officer and director of Avis Budget Group, Mr. De Shon provides extensive leadership and corporate
governance experience, deep operating skills and international expertise. He has successfully led organizations through times of
disruption and global transformations, developed innovative solutions to strengthen his companies’ positions in the marketplace
and modernized systems for better customer and employee experiences. At Avis Budget Group Mr. De Shon created the first end-
to-end digital car rental experience, migrated the platform to the cloud, and built one of the largest connected car fleets in the
world. In addition, he oversaw businesses in Europe, the Middle East, Africa, Asia, Australia and New Zealand. Prior to joining Avis,
Mr. De Shon had a 28-year career with United Airlines, most recently leading an organization of 23,000 employees in 29
countries.
2021 Proxy Statement
27
BOARD AND GOVERNANCE MATTERS
CARLOS DOMINGUEZ INDEPENDENT
Professional highlights:
• Sprinklr Inc.
– Vice Chairman of the Board and Lead Evangelist
(2020-present)
– President (2015-2020)
– 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: 62
Committees:
• Compensation
• FIRMCo
• Nominating
Other public company directorships:
• PROS Holdings, Inc. (2020-present)
• Medidata Solutions, Inc. (2008-2019)
Skills and qualifications relevant to The Hartford:
Mr. Dominguez has more than 30 years of enterprise technology experience. He provides extensive and relevant digital expertise
as The Hartford focuses on data analytics and digital capabilities to continuously improve the way it operates and delivers value to
customers. As President of Sprinklr Inc., Mr. Dominguez guided strategic direction and led 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.
TREVOR FETTER INDEPENDENT — LEAD DIRECTOR
Professional highlights:
• Senior Lecturer, Harvard Business School (Jan. 2019-
Director since: 2007
Age: 61
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)
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 and financial reporting and control. He provides
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. Since 2017, Mr. Fetter has served as The
Hartford's lead director, providing strong independent Board leadership. He also has extensive corporate governance expertise
from his service as director of large public companies, including four years as Chairman of the Board’s Nominating and Corporate
Governance Committee.
28 www.thehartford.com
BOARD AND GOVERNANCE MATTERS
DONNA A. JAMES INDEPENDENT
Professional highlights:
• Lardon & Associates, LLC
– President and Chief Executive Officer (2006-
present)
• Nationwide Mutual Insurance and Financial Services
– President, Nationwide Strategic Investments
(2003-2006)
– Positions of increasing responsibility, including
Executive Vice President – Chief Administrative
Officer; Co-President Shared Services; Executive
Vice President Human Resource; and Vice
President Office of the Chief Executive Officer
(1993-2003)
Director since: 2021
Age: 63
Committees:
• FIRMCo
Other public company directorships:
• Boston Scientific, Inc. (2015-
present)
• L Brands, Inc. (2003-present)
• Marathon Petroleum (2011-2018)
• Time Warner Cable (2009-2016)
Skills and qualifications relevant to The Hartford:
Ms. James brings to the Board extensive insurance-industry experience in a range of functions, including accounting, investing,
operations, treasury and human resources. She is president and CEO of Lardon & Associates, a business-advisory firm specializing
in corporate governance, new business development, strategy, and financial and risk management. She had a 25-year career with
Nationwide Mutual Insurance Company, culminating in the role of president of strategic investments. Before that, she held a
variety of positions, including chief administrative officer, chief human resources officer, assistant to the CEO and director of
operations and treasury services. Ms. James has significant corporate governance experience by virtue of her service on several
major public company boards, including as audit committee chair.
KATHRYN A. MIKELLS INDEPENDENT
Professional highlights:
• Chief Financial Officer, Diageo plc (2015-present)*
• Chief Financial Officer, Xerox Corporation
Director since: 2010
Age: 55
(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)
Committees:
• Audit (Chair)
• 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 provides 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 Nalco 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.
*Ms. Mikells is expected to leave her role at Diageo at the end of June 2021.
2021 Proxy Statement
29
BOARD AND GOVERNANCE MATTERS
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: 74
Committees:
• Audit
• FIRMCo
• Nominating (Chair)
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, Mr. Morris 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.
TERESA WYNN ROSEBOROUGH INDEPENDENT
Professional highlights:
• Executive Vice President, General Counsel and
Director since: 2015
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)
Age: 62
Committees:
• Compensation
• FIRMCo
• Nominating
• Deputy Assistant Attorney General, Office of Legal
Counsel, U.S. Department of Justice (1994-1996)
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 provides 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.
Age: 59
Director since: 2013
– 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:
• Bed Bath & Beyond Inc. (2017-
present)
• Frontier Communications
Corporation (2013-2019)
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 provides 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 — CHAIRMAN
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: 60
Committees:
• FIRMCo
Other public company directorships:
• Citizens Financial Group, Inc. (Feb.
2021-present)
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. In his prior role as The Hartford's 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.
2021 Proxy Statement
31
BOARD AND GOVERNANCE MATTERS
MATTHEW E. WINTER INDEPENDENT
Professional highlights:
• The Allstate Corporation
– President (2015-2018)
– President, Allstate Personal Lines (2013-2015)
– President and Chief Executive Officer, Allstate
Financial (2009-2012)
• American International Group, Inc.
– Vice Chairman (Apr. 2009-Oct. 2009)
– President and CEO, of AIG American General
(2006-2009)
• Massachusetts Mutual Life Insurance Company
– Executive Vice President (2002-2006)
– Positions of increasing responsibility (1996-2002)
Director since: 2020
Age: 64
Committees:
• Compensation
• FIRMCo
Other public company directorships:
• ADT Inc. (2018-present)
• H&R Block, Inc. (2017-present)
Skills and qualifications relevant to The Hartford:
As President of The Allstate Corporation, Mr. Winter oversaw the complete range of Allstate’s P&C and life insurance products
and was responsible for business operations, including field offices located across the U.S. and in Canada, and distribution through
Allstate and independent agencies. He brings to the Board significant expertise in areas relevant to our business, including
operations, distribution and risk management, gained from over 25 years as a senior leader in the insurance industry. Before
joining Allstate, Mr. Winter held numerous senior executive positions at large insurance providers, including as vice chairman of
American International Group, where he was responsible for a number of business units with global reach; and executive vice
president at Massachusetts Mutual Life Insurance Company, where he led the company's domestic insurance businesses.
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: 69
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, 2021. 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 2021, 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;
• The appropriateness of D&T’s fees for audit and non-audit services; and
• D&T’s commitment to diversity & inclusion.
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 chair are directly 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, 2021.
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, 2020 and 2019.
Audit fees
Audit-related fees(1)
Tax fees(2)
All other fees(3)
Total
Year Ended December 31, 2020
Year Ended December 31, 2019
$
$
$
$
$
11,151,000 $
1,099,000 $
102,000 $
35,000 $
12,387,000 $
11,668,000
1,620,000
316,000
123,000
13,727,000
(1) Fees for the years ended December 31, 2020 and 2019 principally consisted of procedures related to regulatory filings,
acquisition or divestiture related services and internal control related services.
(2) Fees for the years ended December 31, 2020 and 2019 principally consisted of tax compliance services.
(3) Fees for the year ended December 31, 2020 and 2019 pertain to permissible services not related to financial reporting.
The Audit Committee reviewed the non-audit services provided by the Deloitte Entities during 2020 and 2019 and concluded that
they were compatible with maintaining the Deloitte Entities’ independence.
2021 Proxy Statement
33
AUDIT MATTERS
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 2020, 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, 2020.
In this context, the Audit Committee has:
(1) Reviewed and discussed the audited financial statements for the year ended December 31, 2020 with management;
(2) Discussed with D&T the matters required to be discussed by the applicable requirements of the Public Company
Accounting Oversight Board (“PCAOB”) and the SEC; 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, 2020
for filing with the SEC.
Report Submitted: February 18, 2021
Members of the Audit Committee:
Kathryn A. Mikells, Chair
Robert B. Allardice, III
Larry De Shon
Michael G. Morris
Greig Woodring
34 www.thehartford.com
COMPENSATION MATTERS
ITEM 3
ADVISORY APPROVAL OF 2020 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 while maintaining a commitment to the company’s ethics and values, (2) providing
market-competitive compensation opportunities designed to attract and retain talent needed for long-term success, 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.
2021 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 Hartford Funds business who have an independent
compensation program (collectively, “Senior Executives”).
Name
Title
Christopher Swift
Beth Costello
Douglas Elliot
William Bloom
David Robinson
Chairman and Chief Executive Officer
Executive Vice President and Chief Financial Officer
President
Executive Vice President, Claims, Operations, Technology and Data & Analytics
Executive Vice President and General Counsel
Brion Johnson
Former Executive Vice President and Chief Investment Officer; Former President of HIMCO
EXECUTIVE SUMMARY
STRATEGIC PRIORITIES
The Hartford’s strategy focuses on realizing the full potential of our product capabilities and underwriting expertise, becoming an
easier company to do business with, and attracting, retaining and developing the talent needed for long-term success. The company
endeavors to expand its insurance product offerings and distribution and capitalize on the strength of its brand. The company is also
working to increase efficiencies through investments in technology.
In 2020, we were focused on increasing shareholder value through a number of initiatives and investments:
•
•
•
•
•
Integrating the acquisition of Navigators Group successfully, and maximizing our combined potential by deepening our
distribution relationships, capitalizing on a broader product portfolio and meeting a wider array of customer needs.
Increasing the speed and ease of our interactions and business processes through data, digital technology and voice of
customer, including expanded use of robotics and continued enhancements to underwriting and quoting platforms.
Continuing investment in new products and business models such as Spectrum, our next-generation package offering for
small businesses, which offers customers tailored coverage recommendations as well as the ability to customize their own
coverage, including real-time quote pricing. We are investing to maintain market leadership in small commercial as existing
competitors and new entrants increase their focus on this business. Through a planned roll out of new automobile and
homeowners insurance products for AARP members, we are investing in our Personal Lines segment to return that
business to top line growth.
Improving the employee experience by investing in our workforce and striving to attract, retain and develop the best
talent in the industry, enhance our industry-leading position in diversity and inclusion, and sustain our ethical culture. We
see the benefits of this commitment in our sustained top-decile employee engagement scores.
Becoming more cost efficient and competitive along with enhancing the experience we provide to agents and customers
through an operational transformation and cost reduction plan we commenced in July 2020 called Hartford Next. Relative
to 2019, we expect to achieve a reduction in annual insurance operating costs and other expenses of approximately $500
million by 2022, reducing the Property & Casualty ("P&C") expense ratio by 2.0 to 2.5 points, the Group Benefits expense
ratio by 1.5 to 2.0 points and the claims expense ratio by approximately 0.5 points.
36 www.thehartford.com
COMPENSATION MATTERS
NAVIGATING THE CHALLENGES AND OPPORTUNITIES OF 2020
The COVID-19 pandemic and the increased focus on racial inequity in the U.S. greatly affected our employees, customers,
communities and shareholders. In the face of these challenges, the company took the following actions to support all of our
stakeholders:
Ensuring Business Resiliency and Employee Health, Safety & Well-being
•
•
•
•
Previous technology investments enabled approximately 95% of in-office staff to immediately go remote
Provided additional benefits and support services to employees (e.g., free COVID testing, telehealth visits, weekly
self-care guidance and remote work transition support)
Implemented appropriate safety measures (e.g., masks, distancing protocols, contact tracing and enhanced cleaning)
Increased focus on mental health
Offering Customer Support
•
•
•
•
•
Instituted a moratorium on cancellation of policies for non-payment of premium through May 31, 2020 and waived
late fees
Provided billing accommodations, including offering installment payment plans and deferred installment billing
Facilitated mid-term endorsements to commercial policies to adjust for changes in risk, reflecting reductions in
payroll, revenue, sales and miles driven
Provided personal auto insurance customers a 15% refund on April, May and June premiums
Provided leniency in enforcement of certain policy provisions (e.g., claim notice requirements and vacancy
provisions)
Giving to Communities
• Donated $1 million to national and local organizations focused on the pandemic
• Donated $1.5 million to aid in the recovery efforts to support U.S. small businesses – 50% of funding benefited
diverse-owned businesses
• Matched hospitals across the country with local restaurants to sponsor meals for their front-line workers
•
•
•
Supported more than 2,500 of our small business customers across the country by making multiple holiday shopping
guides and an internal shopping directory available to our 18,500 employees
Live-streamed fire safety and prevention education to more than 51,000 students, educators and parents in 750
cities and towns across the country as part of The Hartford’s first-ever National Junior Fire Marshal Day
Provided adaptive fitness kits to 750 individuals with physical disabilities to enable exercise and physical activity at
home
Reinforcing our Support for Racial Equity
• Utilized established courageous conversation framework and brand messaging to show support for our Black
colleagues, educate all employees, and demonstrate our commitment to fighting bias and racism
•
•
•
Reaffirmed our ongoing support of vital Black institutions including the National Museum of African American
History and Culture
Intensified CEO leadership internally through all-employee panel discussions and externally through the CEO Action
for Diversity & Inclusion, the CEO Action for Racial Equity, and the Corporate Call to Action convened by the
Connecticut State Treasurer
Fast tracked elements of our diversity and inclusion strategy, including adopting diversity and inclusion goals for
each business and functional area, with progress considered as part of the leadership performance and compensation
assessment processes
•
Released EEO-1 data at the end of the first quarter of 2021
2021 Proxy Statement
37
COMPENSATION MATTERS
2020 FINANCIAL RESULTS
Like all companies, we faced unprecedented challenges in 2020, but through extraordinary team efforts, we persevered and
delivered strong results. Full year 2020 net income available to common stockholders and core earnings* were $1.7 billion ($4.76
per diluted share) and $2.1 billion ($5.78 per diluted share), respectively. Net income and core earnings return on equity ("ROE")*†
were 10.0% and 12.7%, respectively.
Highlighted below are year-over-year comparisons of our net income available to common stockholders and core earnings
performance and our net income ROE and core earnings ROE results for each of the past three years. Core earnings is the primary
determinant of our annual incentive plan ("AIP") funding, as described on page 42, 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 45 (in each case, as adjusted for compensation purposes).
YEAR-OVER-YEAR PERFORMANCE
THREE-YEAR PERFORMANCE
2020 BUSINESS PERFORMANCE AND IMPACT OF COVID-19
In February 2020, the company provided outlooks for the key business metrics highlighted below. These outlooks were
management's estimates for 2020 performance based on business, competitive, capital market, catastrophe and other assumptions,
and supported the company's 2020 operating plan. When setting the 2020 operating plan, both the Board and management
concluded that these key business metrics would only be achievable with strong business performance. Importantly, the 2020
operating plan and the related business metric outlooks were established before the start of the COVID-19 pandemic. Our 2020
financial results were negatively affected by COVID-19, including $278 million before tax of direct COVID-19 claims in P&C and
$230 million before tax of COVID-19 impacts in Group Benefits. As described on page 42, performance relative to the outlooks is a
major determinant of the formulaic AIP funding level. No adjustments to compensation targets were made to address the adverse
impact of the pandemic on our business and financial results.
* 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 available to common stockholders ROE.
38 www.thehartford.com
$ (Millions)Net IncomeAvailable toCommonStockholders$2,064$1,71620192020$ (Millions)Core Earnings$2,062$2,08620192020Net Income ROE13.7%14.4%10.0%201820192020Core Earnings ROE11.6%13.6%12.7%201820192020
COMPENSATION MATTERS
Key business metrics for full year 2020 compared to outlooks provided in February 2020
Commercial Lines
Personal Lines
Group Benefits
Combined ratio(1) of 100.4 was above
the outlook of 95.5 - 97.5 primarily due
to $278 million, or 3.1 points, of
COVID-19 incurred losses in property,
workers’ compensation and financial
and other lines, net of favorable
frequency of non-COVID workers’
compensation claims. Higher than
expected current accident year
catastrophes was partly offset by lower
than expected non-catastrophe
property losses.
Underlying combined ratio* of 95.5,
which excludes catastrophes and prior
year development, was also above
outlook of 92.0 - 94.0 because of the
COVID-19 incurred losses, partly offset
by lower than expected non-catastrophe
property losses.
Combined ratio of 75.5 was better than
outlook of 98.5 - 100.5 primarily due to
reductions in prior accident year
catastrophe reserves and lower than
expected current accident year losses in
automobile due to reduced driving as a
result of the COVID-19 pandemic.
Underlying combined ratio of 83.1,
which excludes catastrophes and prior
year development, was also better than
outlook of 91.5 - 93.5, primarily due to
lower than expected current accident
year losses in automobile due to reduced
driving and, to a lesser extent, lower
homeowners’ non-catastrophe weather
claims.
Net income margin of 6.4% was within
the target range of 6.25% - 7.25% due to
favorable development on prior incurral
year disability claims and net realized
capital gains, largely offset by higher
than expected mortality in group life due
to the direct and indirect effects of the
COVID-19 virus.
Core earnings margin* of 6.4% was
lower than outlook of 6.5% - 7.5%
primarily due to the higher than
expected mortality in group life, partially
offset by favorable development on
prior incurral year disability claims,
driven by higher than expected
recoveries and lower than expected
incidence on prior incurral year
disability claims.
(1) The combined 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 and our 2020 Corporate Peer Group (provided on page 52).
Includes reinvestment of dividends.
COMPONENTS OF COMPENSATION AND PAY MIX
NEO compensation is heavily weighted towards variable compensation (annual and long-term incentives), where actual amounts
earned may differ from target 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.
2021 Proxy Statement
39
(17)%(6)%(3)%8%0%14%7%28%18%49%The Hartford (HIG)2020 Corporate Peer GroupS&P 500 Insurance CompositeS&P 500 Property and CasualtyS&P 500ONE-YEAR (2020)THREE-YEAR (2018-2020) COMPENSATION MATTERS
Compensation Component Description
Base Salary
• Fixed level of cash compensation based on market data, internal pay equity, experience,
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 goals aligned with
the company's strategic priorities.
Long-Term Incentive Plan
• Variable awards granted based on individual performance, potential and market data.
• Designed to drive long-term performance, align senior executive interests with shareholders,
and foster retention.
• Award mix (50% performance shares and 50% stock options) reflects stock price performance,
peer-relative shareholder returns (stock price and dividends) and 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:
Target Pay Mix — CEO
Salary
9%
Annual Incentive
24%
Long-Term Incentive
67%
Variable with Performance: 91%
Target Pay Mix — Other NEOs
Salary
16%
Annual Incentive
30%
Long-Term Incentive
54%
Variable with Performance: 84%
2020 COMPENSATION DECISIONS
2020 Compensation Decisions
Rationale
The Compensation Committee
updated the payout curves for
2020 AIP and 2020-2022
performance share awards.
As a result of shareholder feedback received in 2019, the Compensation Committee made the
following changes for 2020 awards:
• Updated the AIP curve for 2020 awards to expand the range from +/- 15% to +/-20% of
target, requiring greater outperformance to achieve above target awards. (page 42)
• Updated the TSR payout curve for performance share awards granted in 2020 to target the
55th percentile. (pages 45-46)
The Compensation Committee
approved an AIP funding level
of 80% of target.
Performance against the pre-established Compensation Core Earnings target produced a
formulaic AIP funding level of 80% of target. The Compensation Committee undertook its
qualitative review of performance and concluded that the formulaic AIP funding level
appropriately reflected 2020 performance. Accordingly, no adjustments were made. (page 43)
The Compensation Committee
certified a 2018-2020
performance share award
payout at 75% of target.
The company's average annual Compensation Core ROE during the performance period was
12.8%, resulting in a payout of 151% 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 46)
The Compensation Committee (and, in the case of the CEO, the independent directors) approved the following compensation for
each active NEO:
40 www.thehartford.com
COMPENSATION MATTERS
Base Salary
AIP Award
LTI Award
Total Compensation
NEO
2020
Change
from 2019
2020
Change
from 2019
2020
Change
from 2019
2020
Change
from 2019
Christopher Swift $ 1,150,000
Beth Costello
$ 725,000
Douglas Elliot
$ 950,000
William Bloom
$ 625,000
0%
0%
0%
0%
$ 2,400,000
(45.9)%
$ 8,500,000
$ 1,000,000
(45.9)%
$ 1,850,000
$ 1,520,000
(45.9)%
$ 5,310,000
$ 800,000
(46.7)%
$ 1,300,000
David Robinson
$ 600,000
NA*
$ 580,000
NA*
$ 1,300,000
3.0%
4.2%
3.1%
4.0%
NA*
$ 12,050,000
(12.9) %
$ 3,575,000
$ 7,780,000
$ 2,725,000
$ 2,480,000
(17.8) %
(12.7) %
(19.3) %
NA*
*Mr. Robinson was not previously an NEO.
This table provides a concise picture of compensation decisions made in 2020, and highlights changes from 2019. In each case,
Total 2020 Compensation was lower than 2019 compensation due to the lower AIP awards for 2020. Another view of 2020
compensation for the NEOs is available in the Summary Compensation Table on page 55.
COMPENSATION BEST PRACTICES
Our current compensation best practices include the following:
WHAT WE DO
✓ Compensation heavily weighted toward variable pay
✓ Senior Executives generally receive the same benefits as other 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
✓ Claw-back provisions in compensation and severance plans
✓ 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
* Double-trigger vesting for equity awards applies if the awards are assumed or replaced with substantially equivalent awards.
WHAT WE DON'T DO
û No Senior Executive tax gross-ups for perquisites or excise taxes on severance payments
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 or dividend equivalents on equity awards until vesting
SAY-ON-PAY RESULTS
At our 2020 annual meeting, we received 96% support on Say-on-Pay. The Compensation Committee considered the vote to be an
endorsement of The Hartford’s executive compensation programs and policies, and recent program changes. They took this strong
level of support into account in their ongoing review of those programs and policies. Management also discussed the vote, along
with aspects of its executive compensation, diversity and inclusion and corporate governance practices, during our annual
shareholder outreach program to gain a deeper understanding of shareholders’ perspectives. Feedback regarding the compensation
program was generally positive, with many shareholders expressing support for the Compensation Committee's changes to the
payout curves for 2020 AIP and 2020-2022 performance share awards. For further discussion of our shareholder outreach
program, see pages 20-21.
2021 Proxy Statement
41
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 incentive) compensation. In addition, Senior Executives are eligible for benefits available to employees generally. This
section describes the three main components of our compensation program for Senior Executives and lays out the framework in
which compensation decisions are made. For a discussion of the 2020 compensation decisions made within this framework, see
2020 Named Executive Officers' Compensation and Performance on page 47.
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. Salary decisions are based on market data, internal
pay equity and level of responsibility, experience, 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.
Determination of AIP Funding Level
At the beginning of the year, the Compensation Committee set a “Compensation Core Earnings” target based on The Hartford’s
operating plan, as well as the threshold performance level, below which no AIP awards are earned, and the maximum funding level
of 200% for performance significantly exceeding target. The Compensation Committee updated this AIP curve for 2020 awards,
requiring greater outperformance to achieve above target awards. For 2020, the maximum funding level of 200% for performance
significantly exceeding target increased from 115% of target to 120% of target. Threshold performance, below which no AIP awards
are earned, was reduced from 85% of target to 80% of target and funding for threshold performance was reduced from 50% to 35%
of target.
The Compensation Committee selected core earnings because:
•
•
•
•
It believes core earnings best reflects annual operating performance;
Core earnings is a metric commonly used by investment analysts when evaluating annual performance;
Core earnings is prevalent among peers; and
All employees can impact core earnings.
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 external items that do not reflect
operating year performance. 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 non-recurring tax benefits or charges, catastrophe losses above or below budget, and unusual or non-
recurring items. The 2020 definition and a reconciliation from GAAP net income to Compensation Core Earnings are provided in
Appendix A.
The outlook for certain key business metrics within the operating plan are announced to investors at the beginning of each year,
which helps align the interests of our Senior Executives with our shareholders, as performance relative to the outlook is a major
determinant of the formulaic AIP funding level.
To ensure a holistic review of performance, the Compensation Committee also considers a number of qualitative factors, including:
quality of earnings, risk and compliance, peer-relative performance, expense management, and non-financial and strategic
objectives. Informed by this qualitative review, the Compensation Committee may then adjust the formulaic funding up or down to
arrive at an AIP funding level more commensurate with the company’s performance.
The Compensation Committee believes retaining the flexibility to adjust the formulaic AIP funding is aligned with
shareholders' interests because it allows the Compensation Committee to arrive at a final AIP funding level that best reflects
holistic company performance and mitigates the risk inherent in a strictly formulaic approach. Using a strict formula may
have unintended consequences due to events or market conditions unanticipated when goals are set, or may overemphasize
short-term performance at the expense of long-term shareholder returns or undervalue achievements that are not yet
evident in our financial performance. These factors are particularly relevant in the P&C insurance industry, where the “cost of
goods sold” (that is, the amount of insured losses) is not known at the time of sale and develops over time — in some cases
over many years. Because of this industry dynamic, a substantial majority of our 2020 Corporate Peer Group (listed on page
52) include discretion in their annual award design.
42 www.thehartford.com
2020 Compensation Core Earnings
COMPENSATION MATTERS
2020 AIP Funding Level: When setting
the 2020 operating plan, which forms
the basis for the Compensation Core
Earnings target, management and the
Board anticipated strong Commercial
Lines results driven by the inclusion of a
full year of Navigators Group, lower
catastrophe losses and pricing increases,
partially offset by not assuming the level
of favorable prior accident year
developments we had in 2019; lower
margins in Group Benefits due to lower
investment income and moderation in
favorable incidence and recovery
trends; deterioration in Personal Lines
results due to higher catastrophe losses
and a higher expense ratio, as well as not
assuming the level of favorable prior
accident year development we had in
2019; and lower limited partnership
returns relative to the strong returns
experienced in 2019. As noted above,
the 2020 operating plan was established
before the start of the COVID-19
pandemic and did not anticipate the
pandemic's impact on financial results.
The 2020 AIP Compensation Core
Earnings target was set at $1.88 billion,
which was 5% higher than the 2019
Compensation Core Earnings target of
$1.79 billion, but 3.6% lower than the
2019 Compensation Core Earnings
result of $1.95 billion.
Actual Compensation Core Earnings for 2020 were $1.77 billion, which produced a formulaic AIP funding level of 80% of target,
with below target performance primarily related to COVID-19.
In assessing overall performance and arriving at the 2020 AIP funding level, the Compensation Committee started with the
formulaic AIP funding level and undertook a qualitative review focused on the factors described on the following page. While the
Compensation Committee acknowledged the strong financial results and strategic accomplishments achieved during an
extraordinarily difficult year, in light of the impact of COVID-19 on our businesses and customers, it concluded that no adjustment
was necessary to the formulaic AIP funding level of 80% of target.
2021 Proxy Statement
43
COMPENSATION MATTERS
COMPENSATION CORE EARNINGS PERFORMANCE AGAINST PRE-ESTABLISHED TARGET
FORMULAIC RESULTS
• Total adjustments to arrive at Compensation Core Earnings reduced core earnings as reported by $319 million, primarily
driven by adjustments for catastrophes below budget that was principally driven by a $289 million subrogation benefit from
PG&E Corporation and Pacific Gas and Electric Company related to the 2017 and 2018 California wildfires (See Appendix A
for a description of all adjustments)
• Compensation Core Earnings against the pre-established target resulted in a formulaic AIP funding of 80% of target
Quality of Earnings
Strategic
QUALITATIVE REVIEW
• Achieved or exceeded externally provided business metric
targets across all businesses excluding the impacts of
COVID-19
• Direct and indirect COVID-19 losses of $508 million,
• Renewed the auto and home insurance program for AARP
members through 2032 and invested in a new technology
platform to improve pricing accuracy, increase conversions
and simplify and streamline the customer experience
before tax, and premium refunds of $81 million, before tax,
partially offset by favorable Personal Lines auto frequency
of $218 million, before tax
• Continued investment in digital capabilities, with Small
Commercial digital capabilities ranked No.1 in Keynova
Group’s Small Commercial Insurance Scorecard
Importance: Understanding trends that drove earnings
informs how the Compensation Committee thinks about
holistic company performance
Importance: Strategic accomplishments position the company
for long term-growth and often represent significant successes
in a given year, but such accomplishments may not be reflected
or may reflect negatively in the quantitative formula
Peer-Relative Performance
Ethics and Compliance
• Top quartile Core ROE and book value per share growth
• Above median core earnings per share growth
• Bottom quartile one-year TSR and below median three-
year TSR
Importance: Performance against the public companies within
our 2020 Corporate Peer Group on key financial metrics and
TSR is not captured in the quantitative formula and informs
how the Compensation Committee thinks about holistic
company performance
• Named to a list of most ethical companies by Ethisphere
Institute for the twelfth time
• Named to the Just 100 for the third consecutive year;
highest ranking insurance company for the second straight
year
Importance: Linked to strategy of attracting and retaining
talent, as prospective employees are significantly more likely
to work for a company that has a strong reputation of ethical
conduct
Expense Management
• Total managed expenses below operating plan
• Implemented a multi-year expense initiative, Hartford
Next, with net savings within core earnings of $57 million
in the second half of 2020, higher than planned
Importance: Managing expenses is critical to maintaining
competitive pricing and freeing up resources for investments
in the business
2021 AIP Curve
The Compensation Committee updated the AIP curve for 2021 awards to reduce the slope for payouts in the range of +/- 5% of
target, which increases predictability and reduces volatility of payouts for performance in that range. This change will be described
in greater detail in our 2022 proxy statement.
44 www.thehartford.com
COMPENSATION MATTERS
Determination of Individual NEO Awards
The AIP funding level multiplied by an individual’s target AIP opportunity produces an initial AIP award, which the Committee may
adjust based on individual performance. In light of his responsibility for overall company performance, the CEO's AIP award has
equaled the AIP funding level, without further adjustment, every year since he assumed the position in 2014. For awards granted to
the NEOs in February 2021 for 2020 performance under the AIP, see 2020 Named Executive Officer's Compensation and Performance
beginning on page 47.
3. LONG-TERM INCENTIVE AWARDS
Long-term incentive ("LTI") awards are 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 and market data. 2020 LTI awards for Senior Executives consist of performance shares (50% of the award
value) and stock options (50% of the award value). This LTI mix rewards for stock price performance, peer-relative shareholder
returns (stock price and dividends) and operating performance.
2020-2022 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
Strategic measure that drives shareholder value creation
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 2020 performance
share awards is provided in Appendix A.
2020-2022 Compensation Core ROE
As illustrated in the graph at right, for
2020 performance share awards, the
target level of performance is an average
annual Compensation Core ROE for 2020,
2021, and 2022 of 11.3%, as reflected in
the 2020-2022 operating plan.
Peer-Relative TSR: For 50% of the performance share award, payouts, if any, will be based on company TSR performance at the end
of the three-year performance period relative to a Performance Peer Group. The current 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 52, 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 companies that: (1) publish industry 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 did not make any changes to this group for 2020
performance share awards.
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. In response to shareholder feedback, the Compensation
2021 Proxy Statement
45
COMPENSATION MATTERS
Committee updated the TSR payout curve for performance share awards granted in 2020 to target above-median performance.
There is no payout for performance below the 30th percentile; 35% payout for performance at the 30th percentile; target payout for
performance at the 55th percentile; and 200% payout for performance at the 85th percentile.
2020 Performance Peer Group
Three-Year Relative TSR Ranking
Alleghany Corp.
Allstate Corp.
American Financial Group, Inc.
Berkley (W. R.) Corp.
Chubb Limited
Cincinnati Financial Corp.
CNA Financial Corp.
Everest Re Group, Ltd.
Hanover Insurance Group, Inc.
Markel Corporation
Mercury General Corp.
MetLife, Inc.
Old Republic International Corp.
Progressive Corp.
Travelers Companies, Inc.
Unum Group
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. In 2020, to ensure that executives
whose employment terminates due to retirement, death or disability have the opportunity to participate in the long-term impact of
their actions on the company’s stock price, the Compensation Committee decided to extend the post-employment exercise period
applicable in the event of any such termination for all outstanding stock options, including those granted in 2020, to the remainder
of the option’s originally stated term.
Certification of 2018-2020 Performance Share Awards
On February 27, 2018, the Compensation Committee granted Senior Executives performance shares tied 50% to achievement of
average annual Compensation Core ROE goals over a three-year measurement period, and 50% to TSR performance relative to a
peer group of 16 companies.(1) For the Core ROE component of the award, achievement of average annual Compensation Core ROE
of 9.3%, 11.6% and 13.9% during the measurement period would have resulted in payouts of 35%, 100% and 200% of target,
respectively. For the TSR component of the award, there would be no payout for performance below the 30th percentile, 35%
payout for performance at the 30th percentile, target payout for median performance, and 200% payout for performance at the
85th percentile.
These performance shares vested as of December 31, 2020, the end of the three-year performance period, and the Compensation
Committee certified a payout at 75% of target on February 17, 2021 based on the following results:
•
•
The average of the company's Compensation Core ROE for each year of the measurement period was 12.8%, resulting in a
payout of 151% 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 2018 performance shares are given on pages 41-43 of our 2019 Proxy Statement filed with the Securities and
Exchange Commission on April 4, 2019.
Diversity Modifier for 2021-2023 Performance Shares
The Compensation Committee updated the 2021 LTI program to include a performance share modifier tied to the company's
diversity and workforce representation goals. The modifier will determine whether an increase or decrease of 10% on performance
share awards is warranted based upon performance against predetermined year-end 2023 representation goals for women and
people of color. This change will be described in greater detail in our 2022 proxy statement. Representation goals for women and
people of color will be described in our forthcoming Sustainability Highlight Report.
(1) While the peer group at the time of the grant consisted of 17 companies, AXA subsequently acquired XL Group plc, resulting in a
performance peer group of 16 companies for measuring TSR performance.
46 www.thehartford.com
COMPENSATION MATTERS
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. The CEO and President are
permitted limited personal use of corporate aircraft to minimize their time spent on personal travel and to 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. Our aircraft usage policy otherwise prohibits personal travel via corporate aircraft by Senior Executives except
in extraordinary circumstances. There was no personal use by Senior Executives due to extraordinary circumstances in 2020.
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.
2020 NAMED EXECUTIVE OFFICERS' COMPENSATION AND PERFORMANCE
In evaluating individual performance, the Compensation Committee considered each NEO's achievements to advance the
company's position in our strategic priorities of realizing the full potential of our product capabilities and underwriting expertise,
becoming an easier company to do business with, and attracting, retaining and developing the talent needed for long-term success.
CHRISTOPHER SWIFT
Chairman and Chief Executive Officer
Mr. Swift has served as CEO since July 1, 2014; he was also appointed Chairman on January 5, 2015. As CEO, he is responsible for
the company’s strategy and growth, capital allocation, performance, culture and leadership.
2020 Performance
In reviewing Mr. Swift’s performance, the independent directors took into account that Mr. Swift led the company’s response to the
COVID-19 pandemic and racial inequity including: additional benefits and support for employees (e.g., free COVID-19 testing and
remote work support); enhanced community giving; all-employee panel discussions on racial equity; support for CEO Action for
Diversity & Inclusion, the CEO Action for Racial Equity and the Corporate Call to Action convened by the Connecticut State
Treasurer; and adoption of diversity and inclusion goals for each business and functional area. In addition, under Mr. Swift’s
leadership, the company:
• Achieved strong underlying financial results, despite unprecedented challenges of 2020, delivering core earnings of $2.086
billion.
• Executed key strategic priorities including the Navigators Group integration, the launch of our next-generation Spectrum
package offering for small businesses and the extension of our AARP relationship through 2032.
• Maintained top decile employee engagement and performance enablement scores as measured by Qualtrics Experience
Management (XM) survey through continued focus on talent management and diversity and inclusion.
2020 Compensation Decisions
• Salary. $1,150,000, unchanged from 2019.
• AIP Award. Target of $3,000,000, unchanged from 2019. In recognition of the fact that Mr. Swift is responsible for overall
company performance and progress toward achievement of the company's strategic priorities, the Compensation Committee
approved a 2020 AIP award of $2,400,000 (80% of target), which was equal to the company AIP funding level of 80% for 2020.
• LTI Award. In February 2020, based on its assessment of Mr. Swift's responsibilities and performance and Corporate Peer
Group compensation, the Compensation Committee granted him an LTI award of $8,500,000, an increase of 3.0% from the
previous year, in the form of 50% stock options and 50% performance shares.
2021 Proxy Statement
47
COMPENSATION MATTERS
BETH COSTELLO
Executive Vice President and Chief Financial Officer
Ms. Costello has served as CFO since July 1, 2014. As the company’s CFO, Ms. Costello is responsible for finance, treasury, capital,
accounting, investor relations and procurement.
2020 Performance
In reviewing Ms. Costello’s performance, the Compensation Committee took into account that she:
• Delivered a capital management plan that included a $1.5 billion equity repurchase authorization through 2022 and an 8%
increase in our common stock dividend.
• Launched a multi-year strategic cost management initiative, “Hartford Next” with run-rate savings on target and 2020 core
earnings impact ahead of plan.
• Strengthened organizational talent through key internal moves while maintaining top decile employee engagement and
enablement scores as measured by Qualtrics Experience Management (XM) survey.
In addition, the Compensation Committee noted that under her financial leadership the company received the highest evaluation
score of “Superior” in S&P’s enterprise risk management evaluation framework and A.M. Best raised its financial strength rating on
Hartford Life and Accident Insurance Company to A+ from A.
2020 Compensation Decisions
• Salary. $725,000, unchanged from 2019.
• AIP Award. Target of $1,250,000, unchanged from 2019. For 2020, the Compensation Committee approved an AIP award of
$1,000,000 (80% of target), which was equal to the company AIP funding level of 80% for 2020 to reflect her responsibility
for overall company performance.
• LTI Award. In February 2020, based on its assessment of Ms. Costello's responsibilities and performance and Corporate Peer
Group compensation, the Compensation Committee granted her an LTI award of $1,850,000, an increase of 4.2% from the
previous year, in the form of 50% stock options and 50% performance shares.
DOUGLAS ELLIOT
President
Mr. Elliot has served as President of The Hartford since July 1, 2014. He leads the company’s Property & Casualty business lines
(Small Commercial, Middle & Large Commercial, Personal Lines and Global Specialty) as well as Underwriting.
2020 Performance
In reviewing Mr. Elliot’s performance, the Compensation Committee took into account that he:
• Delivered strong P&C core earnings, despite unprecedented challenges in 2020, highlighted by a strong P&C combined ratio
excluding catastrophes and prior year development.
• Continued to lead the Navigators Group integration, with excellent results on re-underwriting the Middle & Large Commercial
and Global Specialty books of business, cross-sell initiatives and pricing.
• Oversaw the extension of our AARP relationship through 2032 and led execution of Personal Lines' investment in a new
technology platform to improve pricing accuracy, increase conversions and simplify and streamline the customer experience.
• Continued focus on talent management and maintained top decile employee engagement and enablement scores as measured
by Qualtrics Experience Management (XM) survey.
2020 Compensation Decisions
• Salary. $950,000, unchanged from 2019.
• AIP Award. Target of $1,900,000, unchanged from 2019. For 2020, the Compensation Committee approved an AIP award of
$1,520,000 (80% of target), taking into account strong P&C underlying combined ratio and continued progress in realizing the
full potential of our product capabilities, one of our key long-term strategic goals.
• LTI Award. In February 2020, based on its assessment of Mr. Elliot's responsibilities and performance and Corporate Peer
Group compensation, the Compensation Committee granted him an LTI award of $5,310,000, an increase of 3.1% from the
previous year, in the form of 50% stock options and 50% performance shares.
48 www.thehartford.com
COMPENSATION MATTERS
WILLIAM BLOOM
Executive Vice President, Claims, Operations, Technology, and Data & Analytics
Mr. Bloom has served as Executive Vice President since July 1, 2014. He is responsible for The Hartford's s technology and service
operations, as well as oversight of data and analytics initiatives. In 2020, he also assumed leadership of the company's claims
organization.
2020 Performance
In reviewing Mr. Bloom’s performance, the Compensation Committee took into account that he:
• Led initiatives that enabled the company to transition its workforce to nearly all-remote status in light of the COVID-19
pandemic, implemented COVID-related billing holds and other customer accommodations, and redeployed talent to meet
changing customer needs.
• Delivered on digital investments that allowed for improved digital adoption in both Small Commercial and Personal Lines,
leading to higher net promoter scores.
• Renegotiated several large vendor contracts resulting in significant annual savings and improved vendor capabilities.
• Strengthened organizational talent through key internal moves while maintaining top decile employee engagement and
enablement scores as measured by Qualtrics Experience Management (XM) survey.
2020 Compensation Decisions
• Salary. $625,000, unchanged from 2019.
• AIP Award. Mr. Bloom's AIP target was increased from $950,000 in 2019 to $1,000,000 in 2020 based on an evaluation of
his performance, level of responsibility, experience and target compensation as compared to the Corporate Peer Group. For
2020, the Compensation Committee approved an AIP award of $800,000 (80% of target), taking into account his critical work
in enabling a remote operating environment and supporting our strategy of becoming an easier company to do business with.
• LTI Award. In February 2020, based on its assessment of Mr. Bloom's responsibilities and performance and Corporate Peer
Group compensation, the Compensation Committee granted him an LTI award of $1,300,000, an increase of 4.0% from the
previous year, in the form of 50% stock options and 50% performance shares.
DAVID ROBINSON
Executive Vice President and General Counsel
Mr. Robinson has served as Executive Vice President and General Counsel since June 1, 2015. He is responsible for The Hartford's
law department, government affairs and compliance.
2020 Performance
In reviewing Mr. Robinson’s performance, the Compensation Committee took into account that he:
• Led law, compliance and government affairs' COVID-19 response, including responding to an unprecedented level of legislative
and regulatory activity and advising on numerous novel business and coverage challenges.
• Led the successful transition to a virtual Board environment, including increased engagement between management and the
Board, an increase in the Board's regular meeting cadence, the onboarding of two new directors and the company's first virtual
annual meeting of shareholders.
• Led the enhancement of the law department's operating model in support of the claims organization, yielding savings on outside
counsel expense.
• Strengthened organizational talent through key internal moves while maintaining top decile employee engagement and
enablement scores as measured by Qualtrics Experience Management (XM) survey.
2020 Compensation Decisions
• Salary. $600,000
• AIP Award. Target of $725,000. For 2020, the Compensation Committee approved an AIP award of $580,000 (80% of
target), taking into account comprehensive support for the company's COVID-19 response and the related legislative,
regulatory business and coverage challenges.
• LTI Award. In February 2020, based on its assessment of Mr. Robinson's responsibilities and performance and Corporate
Peer Group compensation, the Compensation Committee granted him an LTI award of $1,300,000 in the form of 50% stock
options and 50% performance shares.
2021 Proxy Statement
49
COMPENSATION MATTERS
BRION JOHNSON
Former Executive Vice President and Chief Investment Officer; Former President of HIMCO
Mr. Johnson served as Chief Investment Officer and President of Hartford Investment Management Company ("HIMCO") from
May 16, 2012 until August 1, 2020, and continued as an employee of the company in an advisory capacity until his retirement on
December 31, 2020.
2020 Compensation Decisions
• Salary. $600,000, unchanged from 2019.
• AIP Award. Target of $1,400,000, unchanged from 2019. For 2020, the Compensation Committee approved an AIP award of
$1,000,000 (71% of target) based upon the time Mr. Johnson served as Chief Investment Officer and President of HIMCO
and the successful transition of his responsibilities to his successor.
• LTI Award. In February 2020, based on its assessment of Mr. Johnson's performance and Corporate Peer Group
compensation, the Compensation Committee granted him an LTI award of $1,750,000, unchanged from the previous year, in
the form of 50% stock options and 50% performance shares.
50 www.thehartford.com
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 market
and historical compensation information for each NEO to understand how each element of compensation relates to other elements
and to the compensation package as a whole, including outstanding equity.
Annual Compensation Design, Payout and Performance Goal-Setting Process
December to January
• Review feedback from fall shareholder engagement
• Approve design of AIP and LTI programs for the upcoming year, including updates to Performance and Corporate Peer
Groups
• Determine enterprise AIP funding based on the previous year's actual performance against the pre-established
Compensation Core Earnings target and a review of qualitative factors
• Review Senior Executive stock ownership
February
• Review Senior Executive performance for previous year and determine individual AIP awards
• Establish AIP and LTI performance targets based on the company's three-year operating plan
• Review and approve current year total compensation recommendations for Senior Executives, including salary, AIP targets
and LTI awards
• Establish Senior Executive leadership goals and objectives for the current year
May to July
• Review Say-on-Pay voting results and recommendations of proxy advisory firms
• Review company pay equity status
• Review talent succession planning, workforce diversity and the company’s diversity programs
September
• Review Enterprise Risk Management's annual compensation risk assessment
• Review AIP and LTI program design for the coming year
Ongoing
• Monitor the company's year-to-date performance in relation to targets
• Review and consider compensation plans, policies and practices in light of company performance, strategy, shareholder
feedback and best practices
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 2020, 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 oversees the development of the materials for each Compensation Committee
meeting, including market data, historical compensation and outstanding equity, individual and company performance metrics and
2021 Proxy Statement
51
COMPENSATION MATTERS
compensation recommendations for consideration by the Compensation Committee (in the case of the CEO, by the independent
directors). No member of our management team, including the CEO, has a role in determining their 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 considers competitive market data, 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.
2020 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. For this reason, the Corporate Peer Group differs from the Performance Peer Group described earlier for purposes of the
TSR performance measure applicable to performance shares. For 2020, the Compensation Committee did not make any changes to
the Corporate Peer Group.
Data in millions – as of 12/31/2020(1)
Company Name(2)
Allstate Corp.
American International Group, Inc.
Berkley (W. R.) Corp.
Chubb Ltd.
Cigna Corp.
Cincinnati Financial Corp.
CNA Financial Corp.
Hanover Insurance Group, Inc.
Lincoln National Corp.
MetLife Inc.
Principal Financial Group Inc.
Progressive Corp.
Travelers Companies Inc.
Unum Group
Voya Financial Inc.
25TH PERCENTILE
MEDIAN
75TH PERCENTILE
THE HARTFORD
PERCENT RANK
Revenues
Assets
Market Cap
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
44,791
43,337
8,099
36,052
160,550
7,536
10,808
4,827
17,439
67,842
14,742
42,638
31,981
13,162
7,649
9,453
17,439
42,988
20,494
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
125,987
586,481
28,607
190,774
155,451
27,542
64,026
13,444
365,948
795,146
296,628
64,098
116,764
70,626
180,312
64,062
125,987
243,701
74,111
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
33,426
32,617
11,837
69,467
75,209
14,058
10,573
4,257
9,723
42,253
13,629
57,874
35,557
4,672
7,426
10,148
14,058
38,905
17,551
52 %
36 %
51 %
(1) Data provided by S&P Global Market Intelligence. The amounts shown in the “Revenues” column reflect 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.
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.
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.
52 www.thehartford.com
COMPENSATION MATTERS
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 22, 2021, the CEO and each of the other 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.
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.
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 engages an independent third party to complete a comprehensive review of all
incentive compensation plans every five years. In 2020, 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.
• Our equity incentive plans do 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; or
◦
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 our
equity incentive plans.
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.
2021 Proxy Statement
53
COMPENSATION MATTERS
POTENTIAL SEVERANCE AND CHANGE OF CONTROL PAYMENTS
The company does not have individual employment agreements. NEOs are covered under a severance pay plan that provides
severance in a lump sum equal to two times 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 their employment is terminated without “Cause” (see definitions on page 67) within 2 years following a Change of
Control (as defined in the plan), then any awards that were assumed or replaced with substantially equivalent awards vest. If the
awards were not assumed or replaced with substantially equivalent awards, the awards vest immediately upon the Change of
Control.
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.
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), Dominguez, Fetter, Roseborough and Winter, all of whom are independent non-management directors. No
Compensation and Management Development Committee member has served as an officer or employee of The Hartford and no
Hartford executive officer 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 Compensation Discussion and Analysis with management and has
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, 2020.
Report submitted as of March 26, 2021 by:
Members of the Compensation and Management Development Committee:
Virginia P. Ruesterholz, Chair
Carlos Dominguez
Trevor Fetter
Teresa W. Roseborough
Matthew E. Winter
54 www.thehartford.com
EXECUTIVE COMPENSATION TABLES
SUMMARY COMPENSATION TABLE
The table below reflects total compensation paid to or earned by each NEO.
Name and Principal
Position
Year
Salary
($)
Bonus
($)
Stock
Awards
($)(1)
Option
Awards
($)(2)
Non-Equity
Incentive Plan
Compensation
($)(3)
Christopher Swift
Chairman and Chief
Executive Officer
2020
1,150,000
2019
1,150,000
2018
1,137,500
—
—
—
—
—
—
—
—
—
—
—
—
—
3,740,850
4,250,000
4,551,525
4,125,000
3,736,000
4,000,000
814,185
979,268
828,925
925,000
887,500
887,500
2,336,931
2,655,000
2,841,255
2,575,000
2,335,000
2,500,000
572,130
650,000
689,625
513,700
572,130
NA
NA
NA
NA
625,000
550,000
650,000
NA
NA
2,400,000
4,440,000
4,800,000
1,000,000
1,850,000
1,925,000
1,520,000
2,812,000
3,050,000
800,000
1,500,000
1,550,000
580,000
NA
NA
725,000
725,000
718,750
950,000
950,000
943,750
625,000
612,500
568,750
593,750
NA
NA
600,000
—
770,175
875,000
1,000,000
593,750
562,500
—
—
965,475
747,200
875,000
800,000
1,890,000
2,250,000
Beth Costello
Executive Vice
President and Chief
Financial Officer
Douglas Elliot
President
William Bloom
Executive Vice
President, Claims,
Operations,
Technology & Data
David Robinson
Executive Vice
President and
General Counsel*
Brion Johnson
Former Executive
Vice President and
Chief Investment
Officer; Former
President of HIMCO
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
2020
2019
2018
COMPENSATION MATTERS
Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)(4)
33,824
48,198
—
42,587
56,823
—
14,901
21,419
—
21,488
27,131
—
25,565
NA
NA
3,388
8,346
—
All Other
Compensation
($)(5)
Total
($)
231,521
11,806,195
246,025
14,560,748
210,115
13,883,615
65,700
3,572,472
68,800
4,567,391
65,500
4,425,675
65,700
7,542,532
133,175
9,332,849
170,363
8,999,113
65,700
2,734,318
65,600
3,519,856
68,281
3,250,731
54,350
2,475,795
NA
NA
NA
NA
65,700
3,314,263
65,600
4,398,171
65,500
4,425,200
*Mr. Robinson was not previously an NEO.
(1) This column reflects the aggregate grant date fair value of performance shares calculated in accordance with FASB ASC Topic
718 for the fiscal years ended December 31, 2020, 2019 and 2018. Detail on the 2020 grants is provided in the Grants of Plan
Based Awards Table on page 57. 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 20 of the company's
Annual Report on Form 10-K for 2020 and footnote 19 of the company's Annual Reports on Form 10-K for 2019 and 2018.
To determine the fair value of the 2020 performance share award under FASB ASC Topic 718, the market value on the grant
date is adjusted 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. These adjustments result in a
value under FASB ASC Topic 718 that is 88.02% of the market value on 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 2019 and 2018 unvested performance shares, would in total be:
NEO
C. Swift
B. Costello
D. Elliot
W. Bloom
D. Robinson
B. Johnson
2020 Performance
Shares ($)
(February 25, 2020 grant date)
2019 Performance
Shares ($)
(February 26, 2019 grant date)
2018 Performance
Shares ($)
(February 27, 2018 grant date)
8,500,000
1,850,000
5,310,000
1,300,000
1,300,000
1,750,000
7,664,156
1,649,006
4,784,292
1,161,197
1,625,694
NA
7,567,405
1,678,987
4,729,628
1,040,498
1,513,461
NA
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.
2021 Proxy Statement
55
COMPENSATION MATTERS
(2) This column reflects the full aggregate grant date fair value for the fiscal years ended December 31, 2020, 2019 and 2018
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 20
of the company's Annual Report on Form 10-K for 2020 and footnote 19 of the company's Annual Reports on Form 10-K for
2019 and 2018.
(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 2020 are described in
further detail in footnote 2 of the Pension Benefits Table on page 60.
(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 55 for the NEOs.
Name
Christopher Swift
Beth Costello
Douglas Elliot
William Bloom
David Robinson
Brion Johnson
Year
Perquisites
($)(1)
2020
165,821
2020
2020
2020
2020
2020
—
—
—
—
—
Contributions or Other
Allocations to Defined
Contribution Plans
($)(2)
65,700
65,700
65,700
65,700
54,350
65,700
Total
($)
231,521
65,700
65,700
65,700
54,350
65,700
(1) As permitted by SEC rules, we have included the perquisites and other personal benefits that we provided in 2020 where the
aggregate amount of such compensation to an NEO exceeds $10,000. Perquisite amounts for Mr. Swift include personal use of
corporate aircraft not requiring reimbursement to the company ($160,000), commuting costs, and expenses associated with
the attendance of his spouse at a business function.
(2) This column represents company contributions under the company’s tax-qualified 401(k) plan (The Hartford Investment and
Savings Plan) and The Hartford Excess Savings Plan (the “Excess Savings Plan”), a non-qualified plan established to “mirror” the
qualified plan to facilitate deferral of amounts that cannot be deferred under the 401(k) plan due to Internal Revenue Code
limits. Additional information can be found under the “Excess Savings Plan” section of the Non-Qualified Deferred Compensation
Table beginning on page 62.
56 www.thehartford.com
COMPENSATION MATTERS
GRANTS OF PLAN BASED AWARDS TABLE
This table discloses information about equity awards granted to the NEOs in 2020 pursuant to the 2014 Incentive Stock Plan. The
table also discloses potential payouts under the AIP and performance share awards. Actual AIP payouts are reported in the
Summary Compensation Table on page 55 under the heading “Non-Equity Incentive Plan Compensation.” Equity awards have been
rounded to the nearest whole share or option.
Estimated Future Payouts Under
Non-Equity Incentive Plan
Awards(1)
Estimated Future Payouts
Under
Equity Incentive Plan
Awards(2)
Name
Plan
Grant
Date
Threshold
($)
Target
($)
Maximum
($)
Threshold
(#)
Target
(#)
Maximum
(#)
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)
2020 AIP
1,050,000
3,000,000
9,000,000
Stock Options
2/25/2020
327,679
55.27
4,250,000
2/25/2020
13,457
76,895
153,790
3,740,850
C.
Swift
B.
Costello
D.
Elliot
Performance
Shares
2020 AIP
Stock Options
2/25/2020
Performance
Shares
2020 AIP
2/25/2020
Stock Options
2/25/2020
Performance
Shares
2/25/2020
437,500
1,250,000
3,750,000
665,000
1,900,000
5,700,000
W. Bloom 2020 AIP
350,000
1,000,000
3,000,000
D.
Robinson
Stock Options
2/25/2020
Performance
Shares
2020 AIP
2/25/2020
Stock Options
2/25/2020
Performance
Shares
2/25/2020
253,750
725,000
2,175,000
2,929
16,736
33,472
814,185
71,318
55.27
925,000
8,406
48,037
96,074
2,336,931
204,703
55.27
2,655,000
2,058
11,760
23,521
572,130
50,116
55.27
650,000
2,058
11,760
23,521
572,130
50,116
55.27
650,000
B.
Johnson
2020 AIP
490,000
1,400,000
4,200,000
Stock Options
Performance
Shares
2/25/2020
2/25/2020
2,770
15,831
31,663
770,175
67,463
55.27
875,000
(1) The “Threshold” column shows the payout amount for achieving the minimum level of performance for which an amount is
payable under the AIP at 35% of target (no amount is payable if this level of performance is not reached). The “Maximum”
column shows the maximum amount payable at 300% of target (the maximum amount payable for an individual AIP award).
The actual 2020 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 25, 2020 vest on December 31, 2022, the end of the three year
performance period. The vesting percentage is 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 45. The “Threshold” column for this grant represents 17.5% of target which is the payout
for achieving the minimum level of performance under either of the two applicable performance measures 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 2020 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 grant date.
The value of each stock option award is $12.97 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 25, 2020, the date of the 2020 LTI grants for the
NEOs, was $55.27. 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 0.8802 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.
2021 Proxy Statement
57
COMPENSATION MATTERS
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, 2020 and valued using $48.98, the NYSE closing price per
share of the company’s common stock on December 31, 2020.
Option Awards
Stock Awards
Number of
Securities
Underlying
Unexercised
Options
Exercisable
(#)(1)
Number of
Securities
Underlying
Unexercised
Options
Unexercisable
(#)(1)
Option
Exercise
Price
($)
148,448
141,388
103,872
301,887
294,481
302,908
189,879
117,421
—
47,214
77,830
72,076
70,679
42,129
25,263
—
94,429
207,547
190,486
201,939
118,674
73,299
—
33,019
32,949
40,388
26,108
17,791
—
37,068
40,388
26,108
17,791
—
56,604
55,601
60,582
56,964
74,722
67,463
—
—
—
—
—
—
94,940
234,842
327,679
—
—
—
—
21,065
50,527
71,318
—
—
—
—
59,338
146,599
204,703
—
—
—
13,055
35,582
50,116
—
—
13,055
35,582
50,116
—
—
—
—
—
—
20.63
24.15
35.83
41.25
43.59
48.89
53.81
49.01
55.27
35.83
41.25
43.59
48.89
53.81
49.01
55.27
35.83
41.25
43.59
48.89
53.81
49.01
55.27
41.25
43.59
48.89
53.81
49.01
55.27
43.59
48.89
53.81
49.01
55.27
41.25
43.59
48.89
53.81
49.01
55.27
Option
Expiration
Date
2/28/2022
3/5/2023
3/4/2024
3/3/2025
3/1/2026
2/28/2027
2/27/2028
2/26/2029
2/25/2030
3/4/2024
3/3/2025
3/1/2026
2/28/2027
2/27/2028
2/26/2029
2/25/2030
3/4/2024
3/3/2025
3/1/2026
2/28/2027
2/27/2028
2/26/2029
2/25/2030
3/3/2025
3/1/2026
2/28/2027
2/27/2028
2/26/2029
2/25/2030
3/1/2026
2/28/2027
2/27/2028
2/26/2029
2/25/2030
3/3/2025
3/1/2026
2/28/2027
2/27/2028
2/26/2029
2/25/2030
Name
Grant Date
Chris Swift
2/28/2012
3/5/2013
3/4/2014
3/3/2015
3/1/2016
2/28/2017
2/27/2018
2/26/2019
2/25/2020
3/4/2014
3/3/2015
3/1/2016
2/28/2017
2/27/2018
2/26/2019
2/25/2020
3/4/2014
3/3/2015
3/1/2016
2/28/2017
2/27/2018
2/26/2019
2/25/2020
3/3/2015
3/1/2016
2/28/2017
2/27/2018
2/26/2019
2/25/2020
3/1/2016
2/28/2017
2/27/2018
2/26/2019
2/25/2020
3/3/2015
3/1/2016
2/28/2017
2/27/2018
2/26/2019
2/25/2020
Beth
Costello
Douglas
Elliot
William
Bloom
David
Robinson
Brion
Johnson
Number
of Shares
or Units
of Stock
That
Have Not
Vested
(#)
Market
Value of
Shares or
Units of
Stock That
Have Not
Vested ($)
Equity
Incentive
Plan
Awards:
Number of
Unearned
Shares,
Units or
Other Rights
That Have
Not Vested
(#)(2)
Equity
Incentive
Plan Awards:
Market or
Payout Value
of Unearned
Shares, Units
or Other
Rights That
Have Not
Vested
($)(3)
168,332
78,997
8,244,901
3,869,274
36,218
17,193
1,773,958
842,136
105,080
49,350
5,146,818
2,417,158
25,504
12,082
1,249,186
591,771
25,504
12,082
1,249,186
591,771
35,706
16,264
1,748,880
796,615
(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 65 following
the Payments upon Termination or Change of Control table for a description of the circumstances in which vesting is accelerated.
(2) This column represents unvested performance share awards at (i) 200% of target (the maximum amount payable) assuming
that the company has achieved the highest performance level with respect to awards granted on February 26, 2019 and (ii)
100% of target with respect to awards granted on February 25, 2020. Dividends are not credited on performance shares
awarded prior to February 25, 2020; however, dividend equivalents are credited on performance shares awarded on February
25, 2020, which remain subject to the same terms and conditions as the underlying performance shares to which they relate
58 www.thehartford.com
COMPENSATION MATTERS
and are paid only if, and to the extent that, the underlying performance shares vest and are paid. See “(3) Accelerated Vesting of
Performance Shares and Other LTI Awards” on page 65 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 26, 2019 vest on December 31, 2021, 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 46 of the 2020 proxy statement.
Performance shares granted on February 25, 2020 vest on December 31, 2022, 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 45 of this proxy statement.
(3) This column reflects the market value of performance shares granted on February 26, 2019 at 200% of target and February 25,
2020 at 100% of target, plus the value of dividend equivalents credited on performance shares granted on February 25, 2020
as of December 31, 2020.
OPTION EXERCISES AND STOCK VESTED TABLE
This table provides information regarding option awards exercised and stock awards that vested during 2020. The numbers have
been rounded to the nearest whole dollar or share.
Name
Christopher Swift
Beth Costello
Douglas Elliot
William Bloom
David Robinson
Brion Johnson
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)
—
—
—
—
55,752
2,793,175
12,370
619,724
128,535
3,194,095
34,845
1,745,735
—
—
—
—
—
—
7,666
12,060
11,150
384,054
602,828
558,628
(1) The amounts in this column reflect the value realized upon the exercise of vested stock options during 2020. 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 shares of common stock that vested in 2020. RSUs were granted on February 28,
2017 to Mr. Robinson and settled in shares of common stock on March 5, 2020 (4,352) and April 13, 2020 (43), respectively. For
all NEOs, performance shares were granted on February 27, 2018, vested on December 31, 2020 and paid out at 75% of target
following the Compensation Committee’s February 17, 2021 certification of company performance against two equally
weighted measures:
•
•
at 151% performance for pre-established ROE targets, and
below threshold performance against the relative TSR performance objective for the three-year performance
period January 1, 2018 – December 31, 2020.
(3) The aggregate value of the RSU award granted to Mr. Robinson (including accumulated dividend equivalents) is based on the
NYSE closing price per share of the company's common stock on February 28, 2020 ($49.95) and April 2, 2020 ($33.27) for his
RSU and dividend equivalents, respectively. The value of performance share awards is based on the NYSE closing price per share
of the company's common stock on February 17, 2021 ($50.10), the date the Compensation Committee certified the vesting
percentage.
2021 Proxy Statement
59
COMPENSATION MATTERS
PENSION BENEFITS TABLE
The table below shows the number of years of credited service, the actuarial present value of the accumulated pension benefit, and
the actual cash balance account as of December 31, 2020 under the company’s tax-qualified pension plan (The Hartford Retirement
Plan for U.S. Employees, or the “Retirement Plan”) and the non-qualified pension plan (The Hartford Excess Pension Plan II, or the
“Excess Pension Plan”) for each of the NEOs, except Mr. Bloom. Mr. Bloom had accrued a benefit in respect of a prior period of
employment when a final average pay formula was applicable. He was rehired after the cash balance account formula accruals
ceased as of December 31, 2012. Therefore, the columns below illustrate Mr. Bloom's accrued final average pay formula benefit for
his earlier period of employment.
Name
Christopher Swift
Beth Costello
Douglas Elliot
William Bloom
David Robinson
Brion Johnson
Number of
Years
Credited
Service
(#)(1)
Present
Value of
Accumulated
Benefit
($)(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
3.50
3.50
6.08
6.08
1.24
1.24
79,679
443,146
182,566
226,965
54,958
193,181
163,552
1,711
146,651
138,755
32,932
63,631
77,083
428,711
169,411
210,612
53,424
187,788
—
—
138,209
130,768
32,932
63,424
—
—
—
—
—
—
—
—
—
—
—
—
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
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, 2020, each of the
NEOs was vested at 100% in their 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 2020), and the present value as of December 31, 2020 is determined using a discount rate of
2.64%, the present value amounts are similar to the actual December 31, 2020 cash balance accounts.
(3) 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 their 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
60 www.thehartford.com
COMPENSATION MATTERS
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
annuity or reduced actuarially-equivalent amount in order to provide for payments to a contingent annuitant.
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 ($285,000 in 2020). 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 2020 and their annual rates
of return for the calendar year ended December 31, 2020, 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
Name of Fund
December 31, 2020) Name of Fund
Rate of Return
(for the year ended
Rate of Return
(for the year ended
December 31, 2020)
The Hartford Stock Fund
ISP International Equity Fund(1)
ISP Active Large Cap Equity Fund(2)
ISP Small/Mid Cap Equity Fund(3)
State Street S&P 500 Index Fund
Hartford Stable Value Fund
-16.21 % Vanguard Target Retirement 2015 Trust
13.67 % Vanguard Target Retirement 2020 Trust
20.11 % Vanguard Target Retirement 2025 Trust
12.78 % Vanguard Target Retirement 2030 Trust
18.36 % Vanguard Target Retirement 2035 Trust
2.35 % Vanguard Target Retirement 2040 Trust
Hartford Total Return Bond HLS Fund
9.03 % Vanguard Target Retirement 2045 Trust
SSgA Real Asset Fund
3.20 % Vanguard Target Retirement 2050 Trust
Vanguard Federal Money Market Fund
0.45 % Vanguard Target Retirement 2055 Trust
State Street Global All Cap Equity Ex-U.S.
Index Non-Lending Series Fund
State Street Russell Small/Mid Cap®
Index Non-Lending Series Fund
11.29 % Vanguard Target Retirement 2060 Trust
32.62 % Vanguard Target Retirement 2065 Trust
Vanguard Target Retirement Income Trust
10.10 %
10.44 %
12.13 %
13.42 %
14.19 %
14.92 %
15.60 %
16.30 %
16.47 %
16.44 %
16.51 %
16.46 %
(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 Sprucegrove All
Country World ex USA CIT 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%).
2021 Proxy Statement
61
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, 2020.
Name
Christopher Swift
Beth Costello
Douglas Elliot
William Bloom
David Robinson
Brion Johnson
Executive
Contributions
in Last FY ($)(1)
Registrant
Contributions
in Last FY ($)(2)
Aggregate
Earnings
in Last FY ($)(3)
Aggregate
Withdrawals /
Distributions ($)
Aggregate
Balance
at Last FYE ($)(4)
42,900
42,900
42,900
42,900
42,900
42,900
42,900
42,900
42,900
42,900
42,900
42,900
163,718
17,638
18,988
102,382
42,598
13,493
—
—
—
—
—
—
1,282,381
786,162
844,862
632,158
713,236
899,557
(1) The amounts shown reflect executive contributions into the Excess Savings Plan during 2020 with respect to Annual Incentive
Plan cash awards paid in 2020 in respect of performance during 2019. These amounts are included in the “Non-Equity
Incentive Plan Compensation” column of the Summary Compensation Table in the 2020 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 2020. 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 55.
(3) The amounts shown represent investment gains (or losses) during 2020 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 55 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, 2020. 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 2020 service.
62 www.thehartford.com
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, 2020 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 67). Benefit eligibility and values as of December 31, 2020 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”), which 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 67), the NEO would receive a lump sum severance
amount equal to two times the sum of their annual base salary and the target AIP award, both determined as of the involuntary
termination date, payable within 60 days of termination. Treatment of the AIP award for the year in which the termination occurs,
outstanding and unvested LTI awards and other benefits as of the termination date if an NEO is involuntarily terminated other than
for Cause (including if the NEO is, or is not, retirement eligible) are described in Footnotes 1, 2, 3 and 5 to the table below.
Treatment upon a Change of Control
If, within the two year period following a Change of Control (as defined on page 67), (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 67), 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 their benefit under the Excess
Pension Plan and their 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 they 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 will receive retirement treatment if they meet 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)
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 the
NEO is at least age 65 with at least 5 years of service (the "Rule of 70"). All of the NEOs were eligible to receive retirement
treatment for their AIP awards as of December 31, 2020.
For the 2018, 2019 and 2020 LTI awards, an NEO will receive retirement treatment if they provide written notice three months in
advance of their planned retirement date, continues to perform their 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. Messrs. Swift, Elliot, Bloom, and Robinson were eligible to receive retirement
treatment for their 2018, 2019 and 2020 LTI awards under the Rule of 65, as described below.
2021 Proxy Statement
63
COMPENSATION MATTERS
Payments upon Termination or Change of Control
The table and further discussion below (including the section titled Treatment of Former NEO) address benefits that would be
payable to the NEOs as of December 31, 2020 assuming their termination of employment on December 31, 2020 under various
circumstances or in the event of a Change of Control effective December 31, 2020 (and, in the case of Mr. Johnson, that were
actually payable upon his retirement on December 31, 2020). 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 58,
The vested performance shares set forth in the Option Exercises and Stock Vested Table on page 59,
The vested pension benefits set forth in the Pension Benefits Table on page 60, and
The vested benefits set forth in the Non-Qualified Deferred Compensation Table on page 62 (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, 2020 of $48.98.
Payment Type
Christopher
Swift
Beth
Costello
Douglas
Elliot
William
Bloom
David
Robinson
VOLUNTARY TERMINATION OR RETIREMENT
2020 AIP Award ($)(1)
Accelerated Stock Option Vesting ($)(2)
Accelerated Performance Share Vesting ($)(3)
Accelerated Other LTI Vesting ($)(3)
Benefits Continuation and Outplacement ($)(5)
TOTAL TERMINATION BENEFITS ($)
INVOLUNTARY TERMINATION – NOT FOR CAUSE
2020 AIP Award ($)(1)
Cash Severance ($)(4)
Accelerated Stock Option Vesting ($)(2)
Accelerated Performance Share Vesting ($)(3)
Accelerated Other LTI Vesting ($)(3)
Benefits Continuation and Outplacement ($)(5)
TOTAL TERMINATION BENEFITS ($)
CHANGE OF CONTROL/ INVOLUNTARY TERMINATION
NOT FOR CAUSE OR TERMINATION FOR GOOD
REASON
2020 AIP Award ($)(1)
Cash Severance ($)(4)
Accelerated Stock Option Vesting ($)(2)
Accelerated Performance Share Vesting ($)(3)
Accelerated Other LTI ($)(3)
Benefits Continuation and Outplacement ($)(5)
Additional Pension Benefits ($)
TOTAL TERMINATION BENEFITS ($)
2,400,000
1,000,000
1,520,000
800,000
580,000
—
7,991,725
—
—
—
—
—
10,391,725
—
1,000,000
—
—
—
4,990,567
1,216,364
1,216,364
—
—
6,510,567
—
—
2,016,364
—
—
1,796,364
2,400,000
8,300,000
—
1,000,000
3,950,000
—
1,520,000
5,700,000
—
800,000
580,000
3,250,000
2,650,000
—
—
7,991,725
872,031
4,990,567
1,216,364
1,216,364
—
—
—
41,904
18,733,629
42,275
5,864,306
36,151
12,246,718
—
35,925
5,302,289
—
41,904
4,488,268
2,400,000
8,300,000
—
1,000,000
3,950,000
—
1,520,000
5,700,000
—
800,000
580,000
3,250,000
2,650,000
—
—
7,991,725
1,729,115
4,990,567
1,216,364
1,216,364
—
41,904
—
42,275
—
36,151
—
18,733,629
—
6,721,390
—
12,246,718
—
35,925
163
5,302,452
—
41,904
—
4,488,268
INVOLUNTARY TERMINATION – DEATH OR DISABILITY
2020 AIP Award ($)(1)
Accelerated Stock Option Vesting ($)(2)
2,400,000
1,000,000
1,520,000
800,000
580,000
—
—
—
—
—
Accelerated Performance Share Vesting ($)(3)
7,991,725
1,729,115
4,990,567
1,216,364
1,216,364
Accelerated Other LTI Vesting ($)(3)
Benefits Continuation ($)(5)
—
—
—
—
—
51,210
52,323
33,948
33,272
51,210
TOTAL TERMINATION BENEFITS ($)
10,442,935
2,781,438
6,544,515
2,049,636
1,847,574
64 www.thehartford.com
COMPENSATION MATTERS
(1) 2020 AIP Award
Voluntary Termination or Retirement. Generally, upon a voluntary termination of employment during 2020, the NEO would
not be eligible to receive an AIP award for 2020 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 2020 based
on the portion of the year served, payable no later than March 15 following the calendar year of termination. All of the NEOs
were eligible for retirement treatment as of December 31, 2020 under the AIP. The amounts shown represent the actual
award payable for 2020, as reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation
Table on page 55.
Involuntary Termination – Not For Cause. Each NEO would be eligible for a pro rata portion of their 2020 AIP award. The
amounts shown represent the actual award payable for 2020, as reflected in the “Non-Equity Incentive Plan Compensation”
column of the Summary Compensation Table on page 55.
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 their 2020 AIP award, commensurate with amounts received by
the executives who did not terminate employment. The amounts shown represent the actual award payable for 2020, as
reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table on page 55.
Involuntary Termination For Cause. No AIP award would be payable.
Death or Disability. Each NEO would receive a 2020 AIP award comparable to the award that would have been paid had they
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 their 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
no later than the scheduled expiration date. All of the NEOs, except for Ms. Costello, were eligible for retirement treatment as
of December 31, 2020 on their 2018, 2019 and 2020 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
no later than the scheduled expiration date. All of the NEOs, except for Ms. Costello, were eligible for retirement treatment as
of December 31, 2020 on their 2018, 2019 and 2020 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 value of
accelerated stock option vesting presuming that all options were to vest upon a Change of Control on December 31, 2020
(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) or quit for Good Reason.
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 no later than 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 26, 2019 and February 25, 2020 would fully
vest, subject to compliance with a non-competition provision. As of December 31, 2020, all of the NEOs, except for Ms.
Costello, were eligible to receive retirement treatment on their outstanding performance share awards, subject to compliance
with the non-competition provision. The amounts shown included dividend equivalents accrued as of December 31, 2020 on
February 25, 2020 performance awards.
Involuntary Termination – Not For Cause. All of the NEOs, except for Ms. Costello, would receive full vesting for their 2019
and 2020 performance share awards due to eligibility for retirement treatment, subject to compliance with the non-
competition provision. Ms. Costello, who is not retirement eligible, would be entitled to pro rata treatment of 2019 and 2020
performance share awards at the end of the applicable performance period. The amount shown is the value the NEO would be
2021 Proxy Statement
65
COMPENSATION MATTERS
entitled to at the end of the respective performance period for these awards to which pro rata or full payment applies, based
on $48.98, the closing stock price on December 31, 2020, and payout at target. The amounts shown include dividend
equivalents accrued as of December 31, 2020 on February 25, 2020 performance awards.
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., 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 or quit for Good Reason), based on $48.98, the closing stock price on December 31,
2020, 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. The amounts shown include dividend
equivalents accrued as of December 31, 2020 on February 25, 2020 performance awards.
Involuntary Termination For Cause. All unvested awards would be canceled.
Death or Disability. Performance share awards granted in 2019 and 2020 would vest in full at target and be payable within 60
days of the termination date. The amounts shown include dividend equivalents accrued as of December 31, 2020 on
February 25, 2020 performance awards.
(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, 2020 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 they 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 for one year.
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. The amounts shown represent the estimated employer
cost of life and health coverage continuation for three years.
(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 $163 than the accumulated benefit
present value set forth in the Pension Benefits Table on page 60.
TREATMENT OF FORMER NEO
In June 2020, the company announced Brion Johnson's decision to retire. As part of his transition, he continued as an employee of
the company in an advisory capacity until his retirement on December 31, 2020. No adjustments were made to Mr. Johnson’s salary
or benefits during this transition period. Upon Mr. Johnson's retirement on December 31, 2020, his outstanding, unvested equity
awards received the following treatment:
•
Stock options granted on February 27, 2018 accelerated so that the final tranche of 18,988 options became vested on
December 31, 2020, which are included in the Outstanding Equity table on page 58.
66 www.thehartford.com
COMPENSATION MATTERS
•
•
•
Stock options granted on February 26, 2019 accelerated so that the final two tranches of 49,815 options became vested
on December 31, 2020, which are included in the Outstanding Equity table on page 58.
Stock options granted February 25, 2020 accelerated so that all 67,463 options became vested on December 31, 2020,
which are included in the Outstanding Equity table on page 58.
Performance shares granted in 2019 and 2020 will vest based on actual performance following the end of their respective
performance periods, subject to Mr. Johnson's compliance with the non-competition provision applicable to such awards
during the remainder of their respective performance periods. Such awards remain subject to the achievement of the
applicable performance criteria and will be paid in 2022 and 2023, respectively, following certification of performance at
the end of the applicable performance periods. The value of these awards at the end of their respective performance
periods, based on the closing stock price on December 31, 2020 ($48.98) and payout at target performance, and including
dividend equivalents accrued as of December 31, 2020 on Mr. Johnson's 2020 performance award, would be $1,671,055.
Mr. Johnson also received a cash AIP award of $1,000,000 as shown in the Summary Compensation Table on page 55.
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 their 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.
2021 Proxy Statement
67
COMPENSATION MATTERS
CEO Pay Ratio
For 2020, Mr. Swift had total compensation, as reported in the Summary Compensation Table on page 55, of $11,806,195, while our
median employee had total compensation of $92,639, yielding a CEO pay ratio of 127 times the median. Annual base salary at year-
end 2020 was used to determine the median employee; no statistical sampling was used. The median employee's total
compensation was calculated in the same manner as for the CEO in the Summary Compensation Table. All non-U.S. employees were
excluded using the 5% de minimis rule (159 employees were based in the U.K., 59 in Belgium, 7 in Canada, 6 in Hong Kong, 4 in
Switzerland and 1 in the Netherlands).
68 www.thehartford.com
INFORMATION ON STOCK OWNERSHIP
DIRECTORS AND EXECUTIVE OFFICERS
The following table shows, as of March 22, 2021: (1) the number of shares of our common stock beneficially owned by each director
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, NEOs and Section 16 executive officers as a group.
As of March 22, 2021, no individual director, NEO or Section 16 executive officer beneficially owned 1% or more of the total
outstanding shares of our common stock. The directors, NEOs and Section 16 executive officers as a group beneficially owned
approximately 1.55% of the total outstanding shares of our common stock as of March 22, 2021.
Name of Beneficial Owner
Robert B. Allardice, III
William A. Bloom
Beth Costello(3)
Larry De Shon
Carlos Dominguez
Douglas Elliot
Trevor Fetter(4)
Donna James
Brion Johnson
Kathryn A. Mikells(5)
Michael G. Morris
David Robinson
Teresa W. Roseborough
Virginia P. Ruesterholz
Christopher J. Swift(6)
Matthew Winter
Greig Woodring(7)
All directors, NEOs and Section 16 executive officers as a group (23 persons)
Common Stock(1)
19,921
235,159
465,587
5,083
12,997
1,294,115
114,582
891
208,342
89,940
91,242
199,587
23,094
36,932
Total(2)
19,921
380,463
660,299
5,083
12,997
1,841,775
114,582
891
242,569
89,940
91,242
338,405
23,094
36,932
2,254,878
3,154,435
5,568
11,663
5,568
11,663
5,543,240
7,845,897
(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 22, 2021: (i) may be acquired by
directors, NEOs 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 22, 2021, (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, NEO'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 22, 2021 or within 60 days thereafter by: Mr. Bloom, 197,806 shares; Ms. Costello, 405,291 shares; Mr.
Elliot, 1,087,245 shares; Mr. Johnson, 192,268 shares; Mr. Robinson, 168,906 shares; Mr. Swift, 1,921,871 shares; and all
NEOs and Section 16 executive officers as a group, 4,309,178 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 that vest and stock options that become exercisable more than 60 days
after March 22, 2021, and all outstanding performance shares (at target).
(3) The amount shown includes 11 shares of common stock held by Ms. Costello’s spouse.
(4) The amount shown includes 10,188 shares of common stock held by a trust for which Mr. Fetter serves as trustee.
(5) The amount shown includes 11,800 shares of common stock held by a limited liability company of which Ms. Mikells is a
member.
(6) The amount shown includes 43,179 shares of common stock held by Mr. Swift’s spouse and 151,905 held in two trusts for
which Mr. Swift or his spouse serves as trustee.
(7) The amount shown includes 84 shares of common stock held by a trust for which Mr. Woodring serves as trustee.
2021 Proxy Statement
69
INFORMATION ON STOCK OWNERSHIP
CERTAIN SHAREHOLDERS
The following table shows those persons known to the company as of February 16, 2021 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
The Vanguard Group
100 Vanguard Blvd.
Malvern, PA 19355
BlackRock Inc.
55 East 52nd Street
New York, NY 10055
JPMorgan Chase & Co.
383 Madison Avenue
New York, NY 10179
State Street Corporation
One Lincoln Street
Boston, MA 02111
Amount and Nature of Beneficial
Ownership
38,908,481(2)
Percent of Class(1)
10.86%
24,677,290(3)
20,413,518(4)
19,738,870(5)
6.9%
5.6%
5.51%
(1) The percentages contained in this column are based solely on information provided in Schedules 13G or 13G/A filed with the
SEC by each of the beneficial owners listed above regarding their respective holdings of our common stock as of December 31,
2020.
(2) This information is based solely on information contained in a Schedule 13G/A filed on February 10, 2021 by The Vanguard
Group to report that it was the beneficial owner of 38,908,481 shares of our common stock as of December 31, 2020.
Vanguard has (i) sole power to vote or to direct the vote with respect to none of such shares; (ii) shared power to vote or to
direct the vote with respect to 578,011 of such shares, (iii) sole power to dispose or direct the disposition with respect to
37,323,787 of such shares and (iv) the shared power to dispose or direct the disposition of 1,584,694 of such shares.
(3) This information is based solely on information contained in a Schedule 13G/A filed on January 29, 2021 by BlackRock, Inc. to
report that it was the beneficial owner of 24,677,290 shares of our common stock as of December 31, 2020. BlackRock has (i)
sole power to vote or to direct the vote with respect to 21,087,803 of such shares; (ii) shared power to vote or to direct the
vote with respect to none of such shares; (iii) sole power to dispose or direct the disposition of 24,677,290 of such shares; and
(iv) shared power to dispose or direct the disposition of none of such shares.
(4) This information is based solely on information contained in a Schedule 13G/A filed on January 25, 2021 by JPMorgan Chase &
Co. to report that it was the beneficial owner of 20,413,518 shares of our common stock as of December 31, 2020. JPMorgan
has (i) sole power to vote or to direct the vote with respect to 19,432,505 of such shares; (ii) shared power to vote or to direct
the vote of 40,120 of such shares; (iii) sole power to dispose or to direct the disposition of 20,374,674 of such shares; and (iv)
shared power to dispose or to direct the disposition of 26,751 of such shares.
(5) This information is based solely on information contained in a Schedule 13G filed on February 12, 2021 by State Street
Corporation to report that it was the beneficial owner of 19,738,870 shares of our common stock as of December 31, 2020.
State Street has (i) sole power to vote or to direct the vote with respect to none of such shares; (ii) shared power to vote or to
direct the vote with respect to 18,014,795 of such shares and (iii) sole power to dispose or to direct the disposition of none of
such shares; and (iv) shared power to dispose or direct the disposition of 19,698,477 of such shares.
70 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 2021 Annual Meeting of Shareholders,
Proxy Statement and 2020 Annual Report by writing to Donald C. Hunt, 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 2021 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 March 29, 2021.
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 them.
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, 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 22, 2021 (the “Record Date”) may vote at the Annual Meeting.
On the Record Date, we had 357,287,856 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 72. 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 as described on page 72.
Q: What vote is required to approve each proposal?
A: Proposal
Voting Standard
1
2
3
Election of Directors
To ratify the appointment of our independent
registered public accounting firm
To approve, on a non-binding, advisory basis, the
compensation of our named executive officers as
disclosed in this proxy statement
A director will be elected if the number of shares voted “for” that
director exceeds the number of votes “against” that director.
An affirmative vote requires the majority of those shares present in
person or represented by proxy and entitled to vote.
An affirmative vote requires the majority of those shares present in
person or represented by proxy and entitled to vote.
2021 Proxy Statement
71
INFORMATION ABOUT THE MEETING
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
At the annual meeting
Cast your ballot, sign your proxy card and send by mail
Follow the instructions on the virtual meeting site
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 Prior to the Annual Meeting. 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
them. 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.
Q: Can I vote my shares at the virtual Annual Meeting?
A: You may vote online during the virtual Annual Meeting by visiting www.virtualshareholdermeeting.com/HIG2021, entering the
16-digit control number provided on your proxy card, voting instruction form or notice, and following the on-screen
instructions.
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 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.
72 www.thehartford.com
INFORMATION ABOUT THE MEETING
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 prior to the Annual Meeting at www.proxyvote.com or via telephone;
1.
2. Giving written notice of revocation to our Corporate Secretary;
3.
4.
Submitting a subsequently dated and properly completed proxy card; or
Entering a new vote during the Annual Meeting at www.virtualshareholdermeeting.com/HIG2021 (your attendance at the
Annual Meeting will not by itself revoke 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 by voting online during the virtual Annual Meeting.
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.
Q: How can I submit a proposal for inclusion in the 2022 proxy statement?
A: We must receive proposals submitted by shareholders for inclusion in the 2022 proxy statement relating to the 2022 Annual
Meeting no later than the close of business on November 29, 2021. Any proposal received after that date will not be included in
our proxy materials for 2022. In addition, all proposals for inclusion in the 2022 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 2022 Annual
Meeting unless we receive notice of the proposal by Friday, February 18, 2022. Proposals should be addressed to Donald C.
Hunt, 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, 2020
• 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, 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.
2021 Proxy Statement
73
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, 2020.
By order of the Board of Directors,
Donald C. Hunt
Corporate Secretary
Dated: March 29, 2021
SHAREHOLDERS ARE URGED TO VOTE BY PROXY, WHETHER OR NOT THEY EXPECT TO ATTEND THE VIRTUAL ANNUAL
MEETING. A SHAREHOLDER MAY REVOKE THEIR PROXY AND VOTE AT THE VIRTUAL ANNUAL MEETING (STREET HOLDERS
MUST OBTAIN A LEGAL PROXY FROM THEIR BROKER, BANKER OR TRUSTEE TO VOTE AT THE VIRTUAL ANNUAL MEETING).
74 www.thehartford.com
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 2020, 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 core earnings provides investors with a valuable measure of the performance of the
Company’s ongoing businesses because it reveals trends in our insurance and financial services businesses that may be obscured by
including the net effect of certain items. Therefore, the following items are excluded from core earnings:
•
•
•
Certain realized capital gains and losses - Some realized capital gains and losses are primarily driven by investment decisions
and external economic developments, the nature and timing of which are unrelated to the insurance and underwriting aspects
of our business. Accordingly, core earnings excludes the effect of all realized gains and losses that tend to be highly variable
from period to period based on capital market conditions. The Hartford believes, however, that some realized capital gains
and losses are integrally related to our insurance operations, so core earnings includes net realized gains and losses such as
net periodic settlements on credit derivatives. These net realized gains and losses are directly related to an offsetting item
included in the income statement such as net investment income.
Restructuring and other costs - Costs incurred as part of a restructuring plan are not a recurring operating expense of the
business.
Loss on extinguishment of debt - Largely consisting of make-whole payments or tender premiums upon paying debt off before
maturity, these losses are not a recurring operating expense of the business.
• Gains and losses on reinsurance transactions - Gains or losses on reinsurance, such as those entered into upon sale of a
business or to reinsure loss reserves, are not a recurring operating expense of the business.
•
•
Integration and transaction costs in connection with an acquired business - As transaction costs are incurred upon acquisition
of a business and integration costs are completed within a short period after an acquisition, they do not represent ongoing
costs of the business.
Change in loss reserves upon acquisition of a business - These changes in loss reserves are excluded from core earnings
because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to
the acquisition.
• Deferred gain resulting from retroactive reinsurance and subsequent changes in the deferred gain - Retroactive reinsurance
agreements economically transfer risk to the reinsurers and including the full benefit from retroactive reinsurance in core
earnings provides greater insight into the economics of the business.
•
•
Change in valuation allowance on deferred taxes related to non-core components of pre-tax income - These changes in
valuation allowances are excluded from core earnings because they relate to non-core components of pre-tax income, such as
tax attributes like capital loss carryforwards.
Results of discontinued operations - These results are excluded from core earnings for businesses sold or held for sale because
such results could obscure the ability to compare period over period results for our ongoing businesses.
In addition to the above components of net income available to common stockholders that are excluded from core earnings,
preferred stock dividends declared, which are excluded from net income available to common stockholders, are included in
the determination of core earnings. Preferred stock dividends are a cost of financing more akin to interest expense on debt
and are expected to be a recurring expense as long as the preferred stock is outstanding.
Net income (loss) and net income (loss) available to common stockholders are the most directly comparable U.S. GAAP measures to
core earnings. Core earnings should not be considered as a substitute for net income (loss) or net income (loss) available to common
stockholders and does not reflect the overall profitability of the Company’s business. Therefore, The Hartford believes that it is
useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, and core earnings when
reviewing the Company’s performance. Below is a reconciliation of net income (loss) available to common stockholders to core
earnings for the years ended Dec. 31, 2020 and 2019.
2021 Proxy Statement
75
APPENDIX A
($ in millions)
Net income available to common stockholders
Adjustments to reconcile net income available to common stockholders to core earnings:
Net realized capital losses (gains), excluded from core earnings, before tax
Restructuring and other costs, before tax
Loss on extinguishment of debt, before tax
Loss on reinsurance transaction, before tax
Integration and transaction costs associated with acquired business, before tax
Change in loss reserves upon acquisition of a business, before tax
Change in deferred gain on retroactive reinsurance, before tax
Income tax expense (benefit)(1)
Year Ended
Dec. 31, 2020
Year Ended
Dec. 31, 2019
$
1,716 $
2,064
18
104
—
—
51
—
312
(115)
(389)
—
90
91
91
97
16
2
Core Earnings
$
2,086 $
2,062
(1) Primarily represents federal income tax expense (benefit) related to before tax items not included in core earnings. The year ended December 31, 2020 included a tax benefit of
$18 related to the loss on sale of Continental Europe Operations.
Compensation Core Earnings: As discussed under “Annual Incentive Plan Awards” on page 42, at the beginning of each
year, the Compensation Committee approves a definition of “Compensation Core Earnings,” a non-GAAP financial measure.
Compensation Core Earnings is used to set AIP award targets and threshold levels below which no AIP award is earned. Below is the
Compensation Committee’s 2020 definition of “Compensation Core Earnings” and a reconciliation of core earnings to this non-
GAAP financial measure.
($ in millions)
2020 Core Earnings as reported
Adjusted for, after tax:
$
2,086
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, net of
reinsurance recoveries, included in core earnings
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, litigation and regulatory settlement charges and/or prior/current year non-recurring tax
benefits or charges
Total equity method earnings that are below or (above) the 2020 operating budget from the limited
partnership that owns Talcott Resolution
Total Hartford Funds earnings that are below or (above) the 2020 operating budget
—
(319)
—
18
(21)
3
Compensation Core Earnings
$
1,767
76 www.thehartford.com
Core Earnings Margin: The Hartford uses the non-GAAP measure core earnings margin to evaluate, and believes it is an
important measure of, the Group Benefits segment's operating performance. Core earnings margin is calculated by dividing core
earnings by revenues, excluding buyouts and realized gains (losses). Net income margin, calculated by dividing net income by
revenues, is the most directly comparable U.S. GAAP measure. The Company believes that core earnings margin provides investors
with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the
effect of buyouts and realized gains (losses) as well as other items excluded in the calculation of core earnings. Core earnings margin
should not be considered as a substitute for net income margin and does not reflect the overall profitability of Group Benefits.
Therefore, the Company believes it is important for investors to evaluate both core earnings margin and net income margin when
reviewing performance. Below is a reconciliation of net income margin to core earnings margin for the year ended Dec. 31, 2020.
APPENDIX A
Margin
Net income margin
Adjustments to reconcile net income margin to core earnings margin:
Net realized capital losses (gains) excluded from core earnings, before tax
Integration and transaction costs associated with acquired business, before tax
Income tax benefit
Impact of excluding buyouts from denominator of core earnings margin
Core earnings margin
Year Ended Dec. 31,
2020
6.4 %
(0.4) %
0.3 %
— %
0.1 %
6.4 %
Core Earnings Return on Equity: The Company provides different measures of the return on stockholders' equity
(ROE). Core earnings ROE is calculated based on non-GAAP financial measures. Core earnings ROE is calculated by dividing (a) the
non-GAAP measure core earnings for the prior four fiscal quarters by (b) the non-GAAP measure 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 measure for the reasons set forth in the core earnings
definition. A reconciliation of consolidated net income (loss) ROE to Consolidated Core earnings ROE is set forth below.
Net Income (loss) available to common stockholders ROE
10.0 %
14.4 %
13.7 %
Last Twelve
Months
Ended
Dec. 31, 2020
Last Twelve
Months
Ended
Dec. 31, 2019
Last Twelve
Months
Ended
Dec. 31, 2018
Adjustments to reconcile net income (loss) available to common
stockholders ROE to core earnings ROE:
Net realized capital losses (gains), excluded from core earnings,
before tax
Restructuring and other costs, before tax
Loss on extinguishment of debt, before tax
Loss on reinsurance transaction, before tax
Integration and transaction costs associated with an acquired
business, before tax
Changes in loss reserves upon acquisition of a business, before tax
Change in deferred gain on retroactive reinsurance, before tax
Income tax expense (benefit) on items not included in core earnings
Loss (income) from discontinued operations, after tax
Impact of AOCI, excluded from denominator of Core Earnings ROE
= Core earnings ROE
0.1
0.6
—
—
0.3
—
1.8
(0.7)
—
0.6
12.7 %
(2.7)
—
0.6
0.6
0.6
0.7
0.1
—
—
(0.7)
13.6 %
0.9
—
—
—
0.4
—
—
(0.6)
(2.5)
(0.3)
11.6 %
2021 Proxy Statement
77
APPENDIX A
Compensation Core ROE: As discussed under "Long-Term Incentive Awards" on page 45, 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 2020 definition of “Compensation Core ROE.” A
reconciliation of GAAP net income to Compensation Core ROE for the 2020 performance share awards will not be available until
the end of the performance period in 2022. Reconciliations for each year covered by the 2018 performance share awards are
provided in the table below, with any variations from the 2020 performance share award definition explained in the notes below the
table.
GAAP net income
Preferred stock dividends
Net income (loss) available to common shareholders
Adjustments to reconcile net income available to common stockholders to core
earnings:
Net realized capital losses (gains) excluded from core earnings, before tax
Restructuring and other costs, before tax
Loss on extinguishment of debt, before tax
Loss on reinsurance transaction, before tax
Change in loss reserves upon acquisition of a business, before tax
Integration and transaction costs associated with acquired business, before tax
Change in deferred gain on retroactive reinsurance, before tax
Income tax expense (benefit)
Loss (income) from discontinued operations, after tax
Core Earnings as reported
Adjusted for after tax:
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 recorded in core earnings
Entire amount of a loss (gain) associated with litigation and regulatory settlement
charges and/or with prior/current year non-recurring tax benefits or charges
Core Earnings as adjusted
Prior year ending common stockholders' equity, excluding accumulated other
comprehensive income (AOCI)
Current year ending common stockholders' equity, excluding AOCI
Average common stockholders' equity, excluding AOCI
Compensation Core ROE
Average of 2018, 2019 and 2020 Compensation Core ROE = 12.8%
2020
2019
2018
$
1,737
$
2,085
$
1,807
(21)
1,716
(21)
2,064
(6)
1,801
18
104
—
—
—
51
312
(115)
—
(389)
118
—
90
91
97
91
16
2
—
—
6
—
—
47
—
(75)
(322)
2,086
2,062
1,575
(272)
—
—
25
—
—
257
—
—
1,814
2,087
1,832
15,884
14,346
12,831
17,052
16,468
15,884
15,115
14,346
13,589
11.0 %
13.8 %
13.5 %
(1)
The catastrophe budget for each year will be based on the multi-year outlook finalized in the first quarter of the year of grant. 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.
78 www.thehartford.com
APPENDIX A
Underlying Combined Ratio: This non-GAAP financial measure of underwriting results represents the combined ratio
before catastrophes, prior accident year development and current accident year change in loss reserves upon acquisition of a
business. Combined ratio is the most directly comparable GAAP measure. The underlying combined ratio represents the combined
ratio for the current accident year, excluding the impact of current accident year catastrophes and current accident year change in
loss reserves upon acquisition of a business. The Company believes this ratio is an important measure of the trend in profitability
since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment
expense reserve development. The changes to loss reserves upon acquisition of a business are excluded from underlying combined
ratio because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to
the acquisition as such trends are valuable to our investors' ability to assess the Company's financial performance. Below is a
reconciliation of combined ratio to the underlying combined ratio for individual reporting segments for the year-ended
December 31, 2020.
Combined Ratio
Impact of current accident year catastrophes and PYD on
combined ratio
Current accident year change in loss reserves upon acquisition
of a business
= Underlying Combined Ratio
Commercial Lines
Personal Lines
100.4
(5.0)
—
95.5
75.5
7.7
—
83.1
2021 Proxy Statement
79
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020
TABLE OF CONTENTS
Description
Page
Part I
BUSINESS
RISK FACTORS
Part II
MARKET FOR THE HARTFORD'S COMMON EQUITY, RELATED STOCKHOLDER MATTER AND ISSUER
PURCHASES OF EQUITY SECURITIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
CONTROLS AND PROCEDURES
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
Item
1
1A.
5
7
9
9A.
10
11
13
14
Part IV
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
15
[a] The information called for by Item 11 will be set forth in the Proxy Statement under the subcaptions "Compensation Discussion and Analysis", "Executive Compensation",
4
14
29
31
None
114
116
[a]
[b]
[c]
117
"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.
[b] 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.
[c] 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 the pandemic caused by the spread of the novel strain of coronavirus, specifically identified as the Coronavirus Disease
2019 (“COVID-19”) including impacts to the Company's insurance and product-related, regulatory/legal, recessionary and other global
economic, capital and liquidity and operational risks
•
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, foreign
currency exchange rates 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 discontinuance 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;
the impacts associated with the withdrawal of the United Kingdom (“U.K.”) from the European Union (“E.U.”) on our international
operations in the U.K. and E.U.
•
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 another pandemic, civil unrest, 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, including usage-based methods of determining premiums, advancements in automotive safety features, the
development of autonomous vehicles, and platforms that facilitate ride sharing,
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:
2
◦
◦
◦
◦
◦
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;
capital requirements which are subject to many factors, including many that are outside the Company’s control, such as National
Association of Insurance Commissioners ("NAIC") risk based capital formulas, rating agency capital models, Funds at Lloyd's and
Solvency Capital Requirement, which can in turn affect our credit and financial strength ratings, cost of capital, regulatory
compliance and other aspects of our business and results;
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;
state and international 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 intent-to-sell impairments and allowance for credit losses on available-for-sale
securities and mortgage loans;
the potential for further impairments of our goodwill;
•
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;
risks associated with acquisitions and divestitures, including the challenges of integrating acquired companies or businesses, which
may result in our inability 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 federal, state and international 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, state or foreign 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 Annual Report. 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
2020 Revenues of $20,523 by Segment
[1]Includes Revenue of $54 for Property & Casualty Other Operations and $146 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 ("P&C") insurance, group benefits insurance and
services, and mutual funds and exchange-traded products to
individual and business customers in the United States as well as
in the United Kingdom, continental Europe and other
international locations. The Hartford is headquartered in
Connecticut and its oldest subsidiary, Hartford Fire Insurance
Company, dates back to 1810. At December 31, 2020, total
assets and total stockholders’ equity of The Hartford were $74.1
billion and $18.6 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 Hartford Stag logo is one of the most
recognized symbols in the financial services industry.
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 Other Operations, Group Benefits and Hartford Funds,
as well as a Corporate category. The Company includes in the
Corporate category discontinued operations related to the life
and annuity business sold in May 2018, reserves for run-off
structured settlement and terminal funding agreement liabilities,
restructuring costs, capital raising activities (including equity
financing, debt financing and related interest expense),
transaction expenses incurred in connection with an acquisition,
purchase accounting adjustments related to goodwill and other
expenses not allocated to the reporting segments. Corporate also
includes investment management fees and expenses related to
managing third party business, including management of the
invested assets of Talcott Resolution Life, Inc. and its subsidiaries
("Talcott Resolution"). Talcott Resolution is the holding company
of the life and annuity business that we sold in May 2018. In
addition, Corporate includes a 9.7% ownership interest in the
legal entity that acquired the life and annuity business sold.
4
CommercialLines$10,04149%GroupBenefits$6,00629%PersonalLines$3,27516%Hartford Funds$1,0015%Other [1]$2001% Part I - Item 1. Business
2020 Earned Premiums of $8,910 by Line of
Business
2020 Earned Premiums of $8,910 by Product
COMMERCIAL LINES
Principal Products and Services
Automobile
Property
General
Liability
Marine
Package
Business
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.
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 provides replacement of lost
income due to an event that interrupts business operations.
Encompasses various ocean and inland marine coverages including cargo, craft, hull, specie, transport and liability, among
others.
Covers both property and general liability damages.
Workers'
Compensation
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.
Assumed
Reinsurance
Includes assumed reinsurance of property, liability, surety, credit and political, agriculture, and marine risks throughout the
world but principally in Europe and North America.
5
SmallCommercial$3,65041%Middle &LargeCommercial$2,97633%Global Specialty$2,24125%Other$430%CommercialLines Other$310%Marine$2513%Bond $274 3%AssumedReinsurance$2983%ProfessionalLiability$5616%CommercialAuto$7538%CommercialProperty$7939%General Liability$1,40116%PackageBusiness$1,52417%Workers'Compensation$3,02434%
Part I - Item 1. Business
Through its three lines of business of small commercial, middle &
large commercial, and global specialty, Commercial Lines offers
its products and services to businesses in the United States
("U.S.") and internationally. Commercial Lines generally consists
of products written for small businesses and middle market
companies as well as national and multi-national accounts, largely
distributed through retail agents and brokers, wholesale agents
and global and specialty reinsurance brokers. The majority of
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. Small commercial and middle market lines within
middle & large commercial are generally referred to as standard
commercial lines.
Small commercial provides coverages for small businesses, which
the Company generally considers to be businesses with an annual
payroll under $12, revenues under $25 and property values less
than $20 per location. Within small commercial, both property
and general liability coverages are offered under a single package
policy, marketed under the Spectrum name. Small commercial
also provides excess and surplus lines coverage to small
businesses including umbrella, general liability, property and
other coverages.
Middle & large commercial business provides insurance
coverages to medium-sized and national accounts businesses,
which are companies whose payroll, revenue and property values
exceed the small business definition. In addition to offering
standard commercial lines products, middle & large commercial
includes program business which provides tailored programs,
primarily to customers with common risk characteristics. On
national accounts, a significant portion of the business is written
through large deductible programs. Other programs written
within middle & large commercial are retrospectively-rated
where the premiums are adjustable based on loss experience.
Also within middle & large commercial, 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.
Global specialty provides a variety of customized insurance
products, including property, liability, marine, professional
liability, and bond. On May 23, 2019, the Company acquired
Navigators Group, a global specialty insurer. The vast majority of
the business written by our Navigators Group insurance
subsidiaries is reported in the global specialty business unit.
Revenues and earnings of the Navigators Group business are
included in operating results of the Company's Commercial Lines
segment since the acquisition date. For discussion of this
transaction, see Note 2- Business Acquisitions of Notes to
Consolidated Financial Statements.
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 and
overseas, principally in Europe. The products are marketed and
distributed using independent retail agents and brokers,
wholesale agents and global and specialty reinsurance brokers. As
the sole corporate member of Lloyd's Syndicate 1221 ("Lloyd's
Syndicate"), the Company has the exclusive right to underwrite
business up to an approved level of premium in the Lloyd’s
market.
In the United States, 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 in the United States 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,
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 & Large Commercial
Middle & large commercial business is considered “high touch”
and involves individual underwriting and pricing decisions.
Competition in this market includes stock companies, mutual
companies, alternative risk sharing groups and other
underwriting organizations. The pricing of middle market and
national 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 & large commercial
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 has extended its
capabilities in industry verticals, such as energy, construction,
technology and life sciences. Through business partners, the
Company offers business insurance coverages to exporters and
other U.S. companies with a physical presence overseas. The
Hartford’s middle & large commercial 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.
6
Part I - Item 1. Business
For specialty casualty businesses within middle & large
commercial, 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 loss-sensitive products, 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.
Global Specialty
Global specialty competes against multi-national insurance and
reinsurance companies, writing marine, property, excess casualty,
professional liability, bond and assumed reinsurance. Global
specialty also includes property coverages written through
Maxum Specialty Insurance Group ("Maxum"). Due to adverse
loss experience over the past couple of years, particularly in
ocean marine, property, excess casualty and international
professional liability lines, pricing has increased across the
industry in response to those loss cost trends. Nonetheless, the
market continues to be highly competitive.
In the bond business, favorable underwriting results in recent
years has led to increased competition for market share.
Management and professional lines in both the U.S. and
international continue to witness significant firming in price,
terms and conditions. Private company market rates remain
strong in reflecting the increased employment practices liability
insurance ("EPLI") exposure.
Lloyd's Syndicate and London market business have been under
financial stress in recent years due to a perceived lack of
adequate premium pricing and an excessive focus on growth at
the expense of underwriting discipline in those markets,
combined with a significant increase in the level of catastrophe
activity. As such, syndicates and London market carriers,
including The Hartford, are taking pricing and underwriting
actions to improve profitability. Lloyd's, which is regulated by the
Financial Conduct Authority and Prudential Regulatory Authority
in the U.K., has been implementing changes to improve
performance of the syndicates including a more rigorous
approach to the approval of syndicate business plans.
Additionally Lloyd’s have also introduced recent changes which
require that members limit the amount of tier 2 capital (e.g.
letters of credit) that can be used to meet syndicate solvency
capital requirements. For further discussion, see Part II, Item 7,
MD&A - Capital Resources and Liquidity.
7
Part I - Item 1. Business
PERSONAL LINES
2020 Earned Premiums of $3,008 by Line of
Business
2020 Earned Premiums of $3,008 by Product
Principal Products and Services
Automobile
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.
Homeowners
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,
mostly through 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 $2.8 billion, $2.9 billion and $3.0 billion in
2020, 2019 and 2018, respectively.
The Company is in the process of transforming its automobile and
homeowners products to regain competitive advantage with the
state-by-state rollout of a new automobile product beginning in
March of 2021 and the rollout of a new homeowners product
beginning in the second quarter of 2021. Among other things,
overall rate levels, price segmentation, rating factors and
underwriting procedures are being updated. Personal Lines
works 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
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
8
AARP Direct$2,52984%AARPAgency$2247%Other Agency$2257%Other$301%Automobile$2,05868%Homeowners$95032%
Part I - Item 1. Business
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 December 31, 2032, 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, new business automobile and home policies
have been issued to AARP members with 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.
Beginning in 2021, Personal Lines will no longer offer the lifetime
continuation agreement on new business home and automobile
policies, subject to regulatory approval on a state-by-state basis.
The endorsement will remain on renewal policies, provided they
were originally written with the lifetime continuation agreement.
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,
including through new entrants to the marketplace, 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 on-line 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 pre-1986 asbestos and environmental ("A&E")
exposures. For a discussion of coverages provided under policies
written with exposure to A&E prior to 1986, reported within the
P&C Other Operations segment (“Run-off A&E”), run-off assumed
reinsurance and all other non-A&E exposures, see Part II, Item 7,
MD&A - Critical Accounting Estimates, Property & Casualty
Insurance Product Reserves.
9
Part I - Item 1. Business
GROUP BENEFITS
2020 Premiums and Fee Income of $5,536
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 short-term disability, long-term disability, and family leave 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 or absent from work to care for a family member. 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 business with its leave
management administration services.
Group Benefits generally offers term insurance policies, allowing
for the adjustment of rates or policy terms at renewal 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.
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.
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
10
Groupdisability$2,83251%Group life$2,43444%Other$2705%
Part I - Item 1. Business
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.
In addition to providing group disability, leave management and
life insurance, we offer integrated claim, leave and benefits
administration with The Hartford's Ability Advantage platform.
We also offer voluntary products including critical illness,
accident and hospital indemnity coverage to employees through
our Employee Choice Benefits programs, and travel accident
coverage for employers and other organizations. 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 Assets Under
Management ("AUM") of $139,436 as of
December 31, 2020
Mutual Fund AUM as of December 31, 2020
Principal Products and Services
Mutual Funds
ETP
Includes approximately 70 actively managed 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 multi-factor and actively managed fixed income
exchange-traded funds ("ETF"). Multi-factor 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. AUM are
separated into three distinct categories referred to as mutual
funds, ETP and Talcott Resolution life and annuity separate
11
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.
Mutual Fund$121,80287%TalcottResolution lifeand annuity separateaccounts$14,80911%ETP$2,8252%Equity$82,12367%Multi-strategyinvestments$22,64519%Fixedincome$17,03414% Part I - Item 1. Business
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, restructuring costs, capital
raising activities (including equity financing, debt financing and
related interest expense), transaction expenses incurred in
connection with an acquisition, purchase accounting adjustments
related to goodwill and other expenses not allocated to the
reporting segments.
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 operating results of the life and
annuity business are included in discontinued operations for all
periods prior to the closing date.
RESERVES
Total Property & Casualty Reserves as of
December 31, 2020
Total Reserves as of December 31, 2020 [1]
[1]Includes reserves for future policy benefits and other policyholder funds and
benefits payable of $638 and $701, respectively, of which $420 and $415,
respectively, relate to the Group Benefits segment with the remainder related to
run-off structured settlement and terminal funding agreements within Corporate.
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.
Further discussion of The Hartford’s property and casualty
insurance product reserves, including run-off 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 12 -
Reserve for Unpaid Losses and Loss Adjustment Expenses of
Notes to Consolidated Financial Statements.
12
P&C Unpaid lossesand lossadjustmentexpenses$29,62276%Group BenefitsUnpaid lossesand lossadjustmentexpenses$8,23321%All Other [1]$1,3393%CommercialLines $25,05885%P&C OtherOperations $2,728 9%Personal Lines$1,836 6%
Part I - Item 1. Business
Total Group Benefits Reserves for Future Policy
Benefits and Other Policyholder Funds and
Benefits Payable as of December 31, 2020 [1]
[1]Includes short duration contract reserves of $121 of short-term disability and
$36 of supplemental health as well as reserves for future policy benefits that
includes $307 of paid up life reserves and policy reserves on life policies, $99 of
reserves for conversions to individual life and $14 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.
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 12 - Reserve for Unpaid Losses and Loss
Adjustment Expenses of Notes to Consolidated Financial
Statements.
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
13
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.
For many of its insurance products, the Company is required to
obtain approval for its premium rates from state insurance
departments and the Lloyd's Syndicate's ability to write business
is subject to Lloyd's approval for its premium capacity each year.
Geographic Distribution of Earned Premium
(% of total)
Location
California
New York
Texas
Florida
All other [1]
Total
Commercial
Lines
Personal
Lines
Group
Benefits
Total
7 %
6 %
4 %
3 %
32 %
52 %
2 %
1 %
1 %
1 %
12 %
17 %
3 %
2 %
2 %
1 %
23 %
31 %
12 %
9 %
7 %
5 %
67 %
100 %
[1] No other single state or country accounted for 5% or more of the Company's
consolidated earned premium in 2020.
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 6,600 claim professionals handling 50 states,
Washington D.C and 2 international locations, 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 9 - Reinsurance of Notes
to Consolidated Financial Statements.
LTD$6,72174%Life,includingpremiumwaiver$1,35515%Other [1]$5776%Other policyholderfunds andbenefits payable$4155% 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 $56.5
billion as of December 31, 2020
Part I - Item 1. Business
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, 2020 and 2019, the fair value of HIMCO’s
total assets under management was approximately $106.1 billion
and $98.0 billion, respectively, including $45.9 billion and $42.4
billion, respectively, that were held in HIMCO managed third
party accounts and $4.6 billion and $4.1 billion, respectively, that
support the Company's pension and other post-retirement
benefit plans.
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,
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 operations 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.
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,
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.
The pandemic caused by the spread of
COVID-19 has disrupted our operations and
may have a material adverse impact on our
business results, financial condition, results of
operations and/or liquidity.
The global spread of COVID-19 has created significant market
volatility, uncertainty and economic disruption. The extent to
which COVID-19 impacts our business, financial condition,
results of operations and/or liquidity will depend on future
developments which are highly uncertain and cannot be easily
predicted including: the duration and scope of the pandemic; the
effectiveness of vaccines; the length of time it takes to administer
vaccines to the population; new variants of the Coronavirus
which may impact the severity of the pandemic; and the actions
taken to contain or treat its impact. Additional uncertainty exists
regarding governmental, business and individual actions that
have been and may continue to be taken in response to the
pandemic; the impact of the pandemic on economic activity and
actions taken in response; potential legislative, regulatory, and
judicial responses to the pandemic pertaining specifically to
insurance underwriting and claims; the effect on our customers
and customers’ demand for our products; our ability to sell our
products and our ability to use historical experience to assist our
decision making in areas including underwriting, pricing, capital
management and investments.
Below are several key effects of COVID-19 on the Company’s
business results, financial condition, results of operations and/or
liquidity:
•
Insurance and Product Related Risk - The Company may
continue to incur increased loss costs under insurance
policies that we have written including for workers’
compensation, group life insurance, short-term disability,
general liability, surety, director and officer liability, and
14
Taxable fixedmaturities (excl. U.S.treasuries & govt.agencies)56%U.S. treasuries andgov't agencies andshort-terms15%Tax-exemptfixed maturities15%Mortgage loans8%Equity and other3%Limited partnershipsand other alternativeinvestments3% Part I - Item 1A. Risk Factors
employment practices liability, as well as property business.
We may continue to be required to pay workers’
compensation claims for lost wages and medical costs
associated with COVID-19, if claims are determined to be
occupationally related to the work of the insured’s
employees.
In addition, the Company’s Group Benefits business has
issued group life policies to employers and associations,
which may continue to result in increased death claims due
to COVID-19 mortality. We may also continue to experience
higher short-term disability and paid family leave claims from
employees and covered individuals who have been affected
by COVID-19.
Under general liability or umbrella policies, we may have
exposure to increased claims for indemnification from our
insureds who may be found liable for negligently having
exposed third parties to COVID-19 at a place of business,
home or other premise. In our commercial surety lines, there
is the potential for elevated frequency and severity due to an
increase in the number of bankruptcies, especially in small
businesses and impacted industries such as hospitality,
entertainment and transportation. In construction surety,
there is the potential for elevated losses if contractors
experience project shutdowns or payment delays, which
could negatively impact their cash flows, or result in
disruptions in their supply chains, labor shortages or inflation
in the cost of materials. We may also have increased
allegations under director and officer and employment
practices liability policies for inadequate disclosures,
mismanagement of resources, and hiring/lay off actions
relating to COVID-19.
Nearly all of our property insurance policies require direct
physical loss or damage to property and contain standard
exclusions that we believe preclude coverage for COVID-19
related claims, and the vast majority of such policies contain
exclusions for virus-related losses. Nevertheless, the
Company and certain of its writing companies have been
served as defendants in lawsuits seeking insurance coverage
under commercial insurance policies for alleged losses
resulting from the shutdown or suspension of our insureds’
businesses due to the spread of COVID-19. While the
Company and its subsidiaries deny the allegations and intend
to defend vigorously and while virtually none of the plaintiffs
have submitted proofs of loss or otherwise quantified or
factually supported any allegedly covered loss, it is possible
that adverse outcomes, if any, in the aggregate, could have a
material adverse effect on the Company’s consolidated
operating results.
Further, some of the brokers and agents we do business with
could have their operations affected by COVID-19 making it
more difficult for us to conduct business.
•
Regulatory/Legal Risk - We also cannot predict how legal
and regulatory responses to concerns about COVID-19 and
related public health issues will impact our business,
including the possible extension of insurance coverage
beyond our policy language, such as for business
interruption, civil authority and other claims. Further,
policyholders may elect to litigate coverage issues which
would lead to increased costs to the Company. For additional
information on legislative and regulatory risks, see Part II,
15
•
Item 7, MD&A - Capital Resources and Liquidity,
Contingencies, Legislative and Regulatory Developments.
Recessionary and other Global Economic Risk - As a result
of COVID-19 containment efforts, many business
operations, including many of the Company’s insureds, have
either been shut down or significantly curtailed for an
uncertain period of time. Due to the economic downturn, we
could continue to see increased policy lapses and non-
renewals and reduced demand for new business. In addition,
employers have reduced and may continue to reduce their
work forces, resulting in lower premiums for the Company’s
workers’ compensation and group benefit products. The
COVID-19 pandemic and resulting economic stress may
continue to contribute to lower earned premiums, and
reduced net investment income due to lower reinvestment
rates. In response to the economic downturn, central banks
have reduced benchmark interest rates to near zero.
In addition, the Company could experience credit losses on
various asset balances, including receivables and the
principal amount of various invested assets, including fixed
maturities and mortgage loans. In addition to credit losses on
invested assets, The Company could experience declines in
the value of available for sale debt securities if credit spreads
were to widen significantly, which would reduce
shareholders’ equity. The economic impacts of COVID-19
could also result in higher reinsurance costs and/or more
limited availability of reinsurance coverage. Reinsurance
treaties renewed by the Company subsequent to July 1,
2020 exclude coverage for losses arising from communicable
diseases.
Also, market volatility may cause us to change our existing
hedging strategies resulting in economic loss. As markets
become less liquid and/or experience lower trading volumes,
it may be more difficult to value certain investment securities
that we hold. Additionally, the Company may determine that
an impairment has occurred when assessing its goodwill and
other intangible assets, which would result in reduced
earnings in the period that the impairment is recorded.
•
Capital and Liquidity Risk - We may also experience liquidity
pressures including the need to provide additional capital to
certain insurance subsidiaries, reductions in the amount of
available dividend capacity from our subsidiaries and the
need to post more collateral due to declining investment
valuations or due to requirements under derivative
agreements. Further, among other possible actions, we may
choose not to repurchase shares and may decide to invest
proceeds from maturing fixed maturities in short-term
investments which earn lower returns.
• Operational Risk - The Company also faces operational risks
as a result of COVID-19. The Company has limited the
number of employees working in its offices, resulting in the
vast majority of employees working from home. While the
Company has the technology in place to enable this
arrangement and to facilitate communication with insureds,
intermediaries, claimants and other third parties, there is a
risk that business operations will be disrupted due to, among
other things, cybersecurity attacks or data security incidents,
higher than anticipated web traffic and call volumes as well
as lack of sufficient broadband internet connectivity for
employees and third parties working from home. If those
Part I - Item 1A. Risk Factors
disruptions become significant, it could result in, among
other impacts, delays in settling claims, processing new
business, renewals, cancellations and endorsements for
insureds, billing and collecting premiums, transacting with
reinsurers, contracting with and paying vendors, and
disruptions to investment operations.
We rely on vendors, including some located overseas, for a
number of services including IT development, IT
maintenance support and various business processes,
including, among others, certain claims administration, policy
administration, and other operational functions. As the
COVID-19 virus has affected virtually all parts of the world,
our vendors could also experience disruptions to their
operations and while we have contingency plans for some
level of disruption, there can be no assurance that issues
vendors experience with their business processes would not
have a material effect on our own operations.
For all of the reasons discussed above, the global public
health and economic impacts caused by the COVID 19
pandemic could have a material adverse effect on our
financial condition, results of operations and liquidity.
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, inflation,
foreign currency exchange rates, and shifts in demand and supply
of U.S. dollars. 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, political instability,
politically motivated violence or civil unrest, may increase the
frequency and severity of insured losses. In addition, a
deterioration in global economic conditions and/or geopolitical
conditions, including due to military action, trade wars, 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.
16
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 operations:
•
•
•
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 credit losses, 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. In the past few years, equity
markets have been volatile, which could be indicative of a
greater risk of a decline. For additional information on equity
market sensitivity, see Part II, Item 7, 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,
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
recognized capital losses.
Part I - Item 1A. Risk Factors
•
•
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.
Foreign Currency Exchange Rate - Changes in foreign
currency exchange rates may impact our non-U.S. dollar
denominated investments and foreign subsidiaries. As the
Company has expanded its international operations,
exposure to exchange rate fluctuations has increased. We
hold cash and fixed maturity securities denominated in
foreign currencies, including British Pounds and Canadian
dollars, among others, and also have other assets and
liabilities denominated in foreign currencies such as
premiums receivable and loss reserves. While the Company
predominately uses asset-liability matching, including the
use of derivatives, to hedge certain of these exposures to
fluctuations in foreign currency exchange rates, these
actions do not eliminate the risk that changes in the
exchange rates of foreign currencies to the U.S. dollar could
result in financial loss to the Company, including realized or
unrealized capital losses resulting from currency revaluation
and increases to regulatory capital requirements for foreign
subsidiaries that have net assets that are not denominated in
their local currency. For additional information on foreign
exchange risk, see Part II, Item 7, MD&A - Enterprise Risk
Management, Financial Risk.
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.
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
17
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
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.
The discontinuance of LIBOR may adversely
affect the value of certain investments we
hold and floating rate securities we have
issued, and any other assets or liabilities
whose value may be tied to LIBOR.
LIBOR is an indicative measure of the average interest rate at
which major global banks could borrow from one another. LIBOR
is used as a benchmark or reference rate in certain derivatives
and floating rate fixed maturities that are part of our investment
Part I - Item 1A. Risk Factors
portfolio, as well as two classes of junior subordinated
debentures that we have issued and are currently outstanding.
In July 2017, the U.K. Financial Conduct Authority ("FCA")
announced that by the end of 2021 it intends to stop persuading
or compelling banks to report information used to set LIBOR,
which could result in LIBOR no longer being published after 2021
or a determination by regulators that LIBOR is no longer
representative of its underlying market. Since 2017, actions by
regulators have resulted in efforts to establish alternative
reference rates to LIBOR in several major currencies. The
Alternative Reference Rate Committee, a group of private-
market participants convened by the Federal Reserve Board and
the Federal Reserve Bank of New York, has recommended the
Secured Overnight Funding Rate (“SOFR”) as its preferred
alternative rate for U.S. dollar LIBOR. SOFR is a measure of the
cost of borrowing cash overnight, collateralized by U.S. Treasury
securities, and is based on directly observable U.S. Treasury-
backed repurchase transactions. The Federal Reserve Bank of
New York began publishing daily SOFR in April 2018.
Development and adoption of broadly accepted methodologies
for transitioning from LIBOR, an unsecured forward-looking rate,
to SOFR, a secured rate based on historical transactions, is
ongoing.
In December 2020, based on feedback from the banks that report
information used to set LIBOR and following discussions with the
FCA, the administrator of LIBOR, ICE Benchmark Administration,
released a consultation on the potential for it to continue
publication of the most widely-used U.S. dollar LIBOR rates until
the end of June 2023. Subject to the results of the consultation,
then, it is possible that some U.S. dollar LIBOR rates will continue
to be available for a limited period beyond the end of 2021.
The Company continues to monitor and assess the potential
impacts of the discontinuation of LIBOR, which will vary
depending on (1) existing contract language to determine a
LIBOR replacement rate, referred to as “fallback provisions”, in
individual contracts and (2) whether, how, and when industry
participants develop and widely adopt new reference rates and
fallback provisions for both existing and new products or
instruments. At this time, it is not possible to predict how markets
will respond to these new rates and the effect that the
discontinuation of LIBOR might have on new or existing financial
instruments. If LIBOR ceases to exist or is found by regulators to
no longer be representative, outstanding contracts with interest
rates tied to LIBOR may be adversely affected and impact our
results of operations through a reduction in value of some of our
LIBOR referenced floating rate investments, an increase in the
interest we pay on our outstanding junior subordinated
debentures, or an adverse impact to hedge effectiveness of
derivatives or availability of hedge accounting. Additionally, any
discontinuation of or transition from LIBOR may impact pricing,
valuation and risk analytic processes and hedging strategies.
For additional information on the Company’s financial
instruments that are tied to LIBOR, see Part II, Item 7,
Management's Discussion and Analysis of Financial Condition
and Results of Operation, Enterprise Risk Management, Financial
Risk.
The withdrawal of the U.K. from the E.U. may
adversely affect our business, financial
condition and results of operation.
In June 2016, the U.K voted in a national referendum to withdraw
from the E.U. (“Brexit”) and formal negotiations on the separation
process, including the final exit date, have been ongoing and
extended various times. The U.K. officially departed from the E.U.
on January 31, 2020. Following the end of the Brexit Transition
Period on December 31, 2020, the Trade and Cooperation
Agreement between the E.U. and the U.K. (the “TCA”) came into
effect on a provisional basis. The end of the Brexit Transition
Period has resulted in significant changes and continuing
uncertainty to E.U.-U.K. trade in financial services given the TCA
does not include any provisions that compensate for the loss of
‘passporting’ rights under the E.U. Single Market Directives. In
particular, there is no mutual recognition of licensing regimes, the
market access provisions do not preclude E.U. Member States
from imposing authorization requirements on UK financial
services businesses and there are no provisions in the TCA on
equivalence or regulatory cooperation in the area of financial
services. Finally, the E.U. has largely carved out financial services
from the most-favored nation provisions for investment
liberalization and cross-border trade in services, so in theory the
E.U. is free to offer better terms on financial services to other
jurisdictions in the future without offering the same to the U.K.
A separate, short Joint Declaration on Financial Services
Regulatory Cooperation was published alongside the TCA which
is essentially an agreement to agree at a later stage some of the
detail on financial services which is absent from the TCA. In this
respect, the UK and the E.U. intend to enter into a Memorandum
of Understanding by March 2021 but this will not have the same
legal effect or status as an international treaty.
Prolonged uncertainty relating to the terms of the U.K.’s
withdrawal, could, among other outcomes, cause significant
volatility in global financial markets, currency exchange rate
fluctuations and asset valuations, and disrupt the U.K. market and
the E.U. markets by increasing restrictions on the trade and free
movement of goods, services and people between the U.K. and
the E.U. The withdrawal could also lead to legal uncertainty and
potentially divergent national laws and regulations as the U.K.
determines which E.U. laws to replace or replicate.
As a result of the acquisition of Navigators Group, we have
international operations in the U.K. and E.U. While Navigators
Group has implemented measures to sell business in the E.U.
independently of its U.K. insurance companies by having its
Lloyd's Syndicate write business through the Lloyd’s subsidiary in
Belgium, the extent of the disruption due to Brexit throughout
the U.K. and E.U. is uncertain. Should we seek to access the E.U.
market through our U.K. insurance companies, that will depend
on general trade and services agreements made by the U.K. with
the E.U. or on specific arrangements made by our U.K. insurance
companies to retain access to the E.U. market. In addition, the
ability to access the E.U. market through our Lloyd's Syndicate
depends on Lloyd's being able to comply with E.U. regulations
through its Belgium subsidiary. The consequence of making such
specific arrangements may increase our cost of doing business.
Specifically, Lloyd’s is still in discussion with the Belgium Financial
Services Markets Authority ("FSMA") and the National Bank of
Belgium ("NBB") regarding the Lloyd’s Europe operating model
and the activities performed for it by managing agents (through
the Outsourcing Agreement) and the question of whether it was
possible that they could be construed as constituting insurance
distribution under the Insurance Distribution Directive ("IDD"),
which would therefore require them to be authorized within the
18
Part I - Item 1A. Risk Factors
European Economic Area ("EEA"). Lloyd’s are proposing to make
changes to the operating model by the second half of 2021 with
the engagement of the market.
The consequences of U.K.’s withdrawal from the E.U. in the long
term are unknown and not quantifiable at this time. However,
given the lack of comparable precedent, any effects of a
withdrawal may adversely affect our business, financial condition
and results of operations.
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. For risks due to evolving
changes in social, economic and environmental conditions, see
the Risk Factor, “Unexpected and unintended claim and coverage
issues under our insurance contracts may adversely impact our
financial performance.”
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 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
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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. 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. For
additional information related to risks associated with the
adverse development cover, see Note 12 - Reserve for Unpaid
Losses and Loss Adjustment Expenses 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, civil unrest, 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, which can occur throughout
multiple geographic locations. We are also exposed to
catastrophe losses in other parts of the world through our global
specialty business. 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. In addition, in part because
accounting rules do not permit insurers to reserve for such
catastrophic events until they occur, claims from catastrophic
Part I - Item 1A. Risk Factors
events could have a material adverse effect on our business,
financial condition, 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 (the "Program") Reauthorization Act of 2019
(“TRIPRA 2019”) 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. TRIPRA 2019 also requires
that the federal government create the following reports, which
could lead to additional legislation or regulation: (1) Treasury
Department to include in its biennial report on the effectiveness
of the Program an evaluation of the availability and affordability
of terrorism risk insurance for places of worship; and (2)
Government Accountability Office report to analyze and address
the vulnerabilities and potential costs of cyber terrorism, to
assess adequacy of coverage under the Program, and to make
recommendations for future legislative changes to address
evolving cyber terrorism risks. 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 2019 expires
on December 31, 2027 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 and
international insurance regulations.
We seek to price our property and casualty and group benefits
insurance policies such that insurance premiums and future net
20
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, including in
international markets, 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. For more on international regulatory risks,
see the Risk Factor, “Regulatory and legislative developments
could have a material adverse impact on our business, financial
condition, results of operations and 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, 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.
Part I - Item 1A. Risk Factors
Competitive activity, use of predictive
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
use of predictive 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 predictive analytics and other data
and/or adopt innovative new technologies 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. The risks we insure are also 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. In addition, our business may be disrupted
due to failures of accelerated technological changes, including our
automation of minimally complex tasks, which may adversely
impact our business and results of operations. While there is
substantial uncertainty about the timing, penetration and
reliability of such technologies, and the legal frameworks that
may apply, such as 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, wholesale
agents, reinsurance brokers, broker-dealers, banks, registered
investment advisors, affinity partners, our own internal sales
force and other third-party organizations. In some areas of our
21
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
December 31, 2032. 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. Social, economic,
political and environmental issues, including rising income
inequality, climate change, prescription drug use and addiction,
exposures to new substances or those previously considered to
be safe, along with the use of social media to proliferate
messaging around such issues, has expanded the theories for
reporting claims, which may increase our claims administration
and/or litigation costs. State and local governments' increased
efforts aimed to respond to the costs and concerns associated
with these types of issues, may also lead to expansive, new
theories for reporting claims or may lead to the passage of
"reviver" statutes that extend the statute of limitations for the
reporting of these claims, including statutes passed in certain
states with respect to sexual molestation and sexual abuse claims.
In addition, these and other social, economic, political and
environmental issues may either extend coverage beyond our
underwriting intent or increase the frequency or severity of
claims. Some of 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
and/or we may be unable to compensate for such losses through
future pricing and underwriting. 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.
Part I - Item 1A. Risk Factors
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
downgrades on derivative instruments, including potential
collateral calls, see Part II, Item 7, MD&A - Capital Resources and
Liquidity - Derivative Commitments.
The amount of 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. In the United States, statutory
accounting standards and statutory capital and reserve
requirements for these entities are prescribed by the applicable
insurance regulators and the 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
22
formula for property and casualty companies sets required
statutory surplus levels based on underwriting, asset and credit
and off-balance sheet risks.
Countries in which our international insurance subsidiaries are
incorporated or deemed commercially domiciled are subject to
regulatory requirements as defined by the regulatory jurisdiction,
including Solvency II. In addition, our Lloyd’s member company is
required to maintain required Funds at Lloyd’s (“FAL”) to meet
the capital requirements of its syndicate. The FAL is determined
based on the syndicate’s Solvency Capital Requirement (“SCR”)
under the Solvency II capital adequacy model plus an economic
capital assessment determined by the Lloyd’s Franchise Board
(which is responsible for the day-to-day management of the
Lloyd's market).
In any particular year, statutory surplus amounts, RBC ratios, FAL
and SCR may increase or decrease depending on a variety of
factors, including (as applicable)
•
•
•
•
•
•
•
•
•
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 paid to the holding
company,
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 regulatory capital formulas.
Most of these factors are outside of the Company's control. The
regulatory capital formulas could also be negatively affected if
the NAIC, state insurance regulators or other insurance
regulators change the accounting guidance for determining
capital adequacy. Among other factors, rating agencies consider
the level of statutory capital and surplus of our U.S. insurance
subsidiaries as well as the level of a measure of GAAP capital held
by the Company in determining the Company's financial strength
and credit ratings. Rating agencies may implement changes to
their capital formulas that have the effect of increasing the
amount of capital we must hold in order to maintain our current
ratings. If our capital resources are insufficient to maintain a
particular rating by one or more rating agencies, we may need 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
Part I - Item 1A. Risk Factors
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,
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.
In addition, our assumed reinsurance business purchases
retrocessional coverage for a portion of the risks it assumes.
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 or retrocessionaire
to meet its financial obligations to us, including the impact of any
insolvency or rehabilitation proceedings involving a reinsurer or
retrocessionaire 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.
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
23
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 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 U.S. 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. The laws and
regulations of the countries in which our international insurance
subsidiaries are incorporated or deemed commercially domiciled,
as well as requirements of the Council of Lloyd’s, also impose
limitations on the payment of dividends which, in some instances,
are more restrictive. 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
Part I - Item 1A. Risk Factors
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 credit losses 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
allowance for credit loss 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 recognize an impairment of
our goodwill.
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
24
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, civil unrest, 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, cyber frauds 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, internal accounting and technical controls as well
as other preventive actions may be insufficient to prevent
physical and electronic break-ins, denial of service, cyber-attacks,
business email compromises, ransomware 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
Part I - Item 1A. Risk Factors
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,
federal and international regulations regarding data privacy,
including the European Union General Data Protection
Regulation and California Consumer Privacy Act, 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 and cloud-
based systems, 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 Risk Factor, “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.”
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. For an equity repurchase plan 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
25
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.
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 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
Part I - Item 1A. Risk Factors
commerce and investment management. 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
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.
We are subject to extensive laws and regulations that are
complex, subject to change and often conflict 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.
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 modifications of the Dodd-
Frank Act could have unanticipated consequences for the
Company and its businesses. It is unclear whether and to what
26
extent Congress will continue to make changes to the Dodd-
Frank Act, and how those changes might impact the Company, its
business, financial conditions, results of operations and liquidity.
Our U.S. 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.
Our international insurance subsidiaries are subject to the laws
and regulations of the relevant jurisdictions in which they
operate, including the requirements of the Prudential Regulation
Authority and the Financial Conduct Authority in the U.K; the
National Bank of Belgium and the Financial Services and Markets
Authority in Belgium; and the Commissariat Aux Assurances in
Luxembourg. Our Lloyd’s Syndicate is also subject to
management and supervision by the Council of Lloyd’s, which has
wide discretionary powers to regulate members’ underwriting at
Lloyd’s, as well as regulations imposed by overseas regulators
where the Lloyd’s Syndicate conducts business.
In addition, future regulatory initiatives could be adopted at the
federal, state and international 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 U.S.
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.
In addition, changes in laws or regulations, particularly relating to
privacy and data security and potential limitations on predictive
models, such as use of certain underwriting rating variables, may
materially impede our ability to execute on business strategies
and/or our ability to be competitive. 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") continue to advance the development of
insurance group capital standards. As of January 1, 2020, the IAIS
Insurance Capital Standard entered a five-year monitoring period
at the end of which insurance firms are required to be in
compliance with such 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. Working through the NAIC, U.S. state
Part I - Item 1A. Risk Factors
insurance regulators have developed a group capital calculation
for use in solvency-monitoring activities. The calculation is
intended to provide additional analytical information to the lead
state for use in assessing group risks and capital adequacy to
complement the current holding company analysis in the U.S. The
next step is for the revised NAIC Model Act and Regulation to go
to the states for adoption. The Covered Agreement between the
U.S. and European Union, as well as the Covered Agreement
between the U.S. and the U.K., provide a 60-month period
(expiring September 22, 2022) for the U.S. to implement a
"worldwide group capital calculation" for U.S. groups. If this
deadline is not met, European Union member states and the U.K.
each could potentially subject U.S. groups doing business in the
EU and the U.K. to their own group supervision requirements,
possibly including imposition of Solvency II's group capital
standard.
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 and other regulators. The result of
those potential challenges could require us to increase levels of
regulatory 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
concerning the scope of insurance coverage or the amount or
types of damages covered by insurance. In addition, changes in
federal or state laws and regulations relating to the liability of
insurers or policyholders, including state laws expanding “bad
faith” liability and state “reviver” statutes, extending statutes of
limitations for certain sexual molestation and sexual abuse claims,
could result in changes in business practices, additional litigation,
or could result in unexpected losses, including increased
frequency and severity of claims. 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
27
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, state or foreign tax laws
could adversely affect our business, financial
condition, results of operations and liquidity.
Changes in federal, state or foreign tax laws and tax rates or
regulations could have a material adverse effect on our
profitability and financial condition. The Company’s federal and
state tax returns reflect 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 in the U.S., federal and/or state tax legislation
could modify or eliminate these items, impacting the Company, its
investments, investment strategies, and/or its policyholders. In
addition, the Organization for Economic Co-operation and
Development’s efforts around Global Pillars I and II dealing with
possible new digital taxes and global minimum taxes, if enacted,
could increase the Company’s overall tax burden, adversely
affecting the Company’s business, financial condition and results
of operation.
On December 22, 2017, the U.S. government enacted
comprehensive tax legislation commonly referred to as the "Tax
Cuts and Jobs Act" ("TCJA"). There is a risk that Congress could
enact future legislation that may change or eliminate the
provisions of TCJA or affect how the provisions apply to the
Company including a corporate tax rate increase or other changes
that may affect the manner in which insurance companies are
taxed. Moreover we could continue to see states enact changes to
their tax laws including the state impacts of TCJA, such as
limitations on interest deductions and income earned by foreign
affiliates, which, in turn, could adversely affect the Company's
business and financial results. Among other risks, there is risk that
these additional clarifications could increase taxes on the
Company, further increase administrative costs, make the sale of
our products more costly and/or make our products less
competitive.
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
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
Part I - Item 1A. Risk Factors
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 and similar rules applying to subsidiaries
domiciled outside of the United States 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 - Basis of
Presentation and Significant Accounting Policies of Notes to the
Consolidated Financial Statements.
28
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 18, 2021, the Company had approximately 10,150
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.
The Hartford's cash dividends paid on common stock and
expected payment of future cash dividends are discussed in the
Summary of Capital Resources and Liquidity and Liquidity
Requirements and Sources of Capital - Dividends sections of Part
II, Item 7, MD&A — Capital Resources and Liquidity.
For information related to securities authorized for issuance
under equity compensation plans, see Part III, Item 12, Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.
The Company did not repurchase any shares during the three
months ended December 31, 2020.
In December 2020, the Company announced a $1.5 billion share
repurchase authorization by the Board of Directors which is
effective from January 1, 2021 through December 31, 2022.
During the period from January 1, 2021 through February 18,
2021, the Company repurchased 1.1 million shares for $56. The
Company's prior share repurchase program, which was
authorized by the Board of Directors in February 2019, expired
on December 31, 2020. The timing of any future repurchases will
be dependent upon several factors, including the market price of
the Company's securities, the Company's capital position,
consideration of the effect of any repurchases on the Company's
financial strength or credit ratings, and other considerations.
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
2016
2017
2018
2019
2020
The Hartford Financial Services Group, Inc.
S&P 500 Index
S&P Insurance Composite Index
11.81%
11.96%
17.58%
20.25%
21.83%
16.19%
(19.24%)
(4.38%)
(11.21%)
39.71%
31.49%
29.38%
(16.98%)
18.40%
(0.44%)
29
Part II - Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Company/Index
The Hartford Financial Services Group, Inc.
S&P 500 Index
S&P Insurance Composite Index
Cumulative Five-Year Total Return
Base
Period
2015
For the years ended
2016
2017
2018
2019
2020
$
$
$
100 $
111.81 $
134.45 $
108.58 $ 151.70 $
125.94
100 $
111.96 $
136.40 $
130.42 $ 171.49 $
203.04
100 $
117.58 $
136.62 $
121.31 $ 156.95 $
156.26
30
The Hartford Financial Services Group, Inc.S&P 500 IndexS&P Insurance Composite IndexDec 2015Dec 2016Dec 2017Dec 2018Dec 2019Dec 2020$0$50$100$150$200$250
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)
Index
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 Annual Report. 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 September 30, 2020, the Company entered into a definitive
agreement to sell all of the issued and outstanding equity of
Navigators Holdings (Europe) N.V., a Belgium holding company,
and its subsidiaries, Bracht, Deckers & Mackelbert N.V. (“BDM”)
and Assurances Contintales Contintale Verzekeringen N.V.
(“ASCO”), (collectively referred to as "Continental Europe
Operations").
On May 23, 2019, the Company completed the acquisition of
Navigators Group, a specialty underwriter.
For discussion of acquisitions, dispositions and reclassifications,
see Note 1 - Basis of Presentation and Significant Accounting
Policies of Notes to Consolidated Financial Statements.
The Hartford defines increases or decreases greater than or equal
to 200% as “NM” or not meaningful.
For discussion of the earliest of the three years included in the
financial statements of the current filing, refer to Part 2, Item 7,
Management's Discussion and Analysis of Financial Condition
and Results of Operations in The Hartford’s 2019 Form 10-K
Annual Report.
Description
Page
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
Impact of New Accounting Standards
31
36
42
46
48
69
74
78
79
82
84
85
104
113
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 ETP assets. AUM is a measure used by the
Company's Hartford Funds segment because a significant portion
of the Company’s mutual fund and ETP revenues are based upon
asset values. These revenues increase or decrease with a rise or
fall in AUM whether caused by changes in the market or through
net flows.
Book Value per Diluted Share (excluding
AOCI)- This is a non-GAAP per share measure that is
calculated by dividing (a) common stockholders' equity, excluding
AOCI, after tax, by (b) common shares outstanding and dilutive
potential common shares. The Company provides this measure to
31
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
enable investors to analyze the amount of the Company's net
worth that is primarily attributable to the Company's business
operations. The Company believes that excluding AOCI from the
numerator is useful to investors because it eliminates the effect
of items that can fluctuate significantly from period to period,
primarily based on changes in interest rates. Book value per
diluted share is the most directly comparable U.S. GAAP measure.
Combined Ratio- The sum of the loss and loss adjustment
expense ratio, the expense ratio and the policyholder dividend
ratio. This ratio is a relative measurement that describes the
related cost of losses and expenses for every $100 of earned
premiums. A combined ratio below 100 demonstrates
underwriting profit; a combined ratio above 100 demonstrates
underwriting losses.
Core Earnings- The Hartford uses the non-GAAP measure
core earnings as an important measure of the Company’s
operating performance. The Hartford believes that core earnings
provides investors with a valuable measure of the performance of
the Company’s ongoing businesses because it reveals trends in
our insurance and financial services businesses that may be
obscured by including the net effect of certain items. Therefore,
the following items are excluded from core earnings:
•
•
•
Certain realized capital gains and losses - Some realized
capital gains and losses are primarily driven by investment
decisions and external economic developments, the nature
and timing of which are unrelated to the insurance and
underwriting aspects of our business. Accordingly, core
earnings excludes the effect of all realized gains and losses
that tend to be highly variable from period to period based
on capital market conditions. The Hartford believes,
however, that some realized capital gains and losses are
integrally related to our insurance operations, so core
earnings includes net realized gains and losses such as net
periodic settlements on credit derivatives. These net realized
gains and losses are directly related to an offsetting item
included in the income statement such as net investment
income.
Restructuring and other costs - Costs incurred as part of a
restructuring plan are not a recurring operating expense of
the business.
Loss on extinguishment of debt - Largely consisting of make-
whole payments or tender premiums upon paying debt off
before maturity, these losses are not a recurring operating
expense of the business.
• Gains and losses on reinsurance transactions - Gains or
losses on reinsurance, such as those entered into upon sale of
a business or to reinsure loss reserves, are not a recurring
operating expense of the business.
•
•
Integration and transaction costs in connection with an
acquired business - As transaction costs are incurred upon
acquisition of a business and integration costs are completed
within a short period after an acquisition, they do not
represent ongoing costs of the business.
Change in loss reserves upon acquisition of a business -
These changes in loss reserves are excluded from core
earnings because such changes could obscure the ability to
compare results in periods after the acquisition to results of
periods prior to the acquisition.
• Deferred gain resulting from retroactive reinsurance and
subsequent changes in the deferred gain - Retroactive
reinsurance agreements economically transfer risk to the
reinsurers and including the full benefit from retroactive
reinsurance in core earnings provides greater insight into the
economics of the business.
•
•
Change in valuation allowance on deferred taxes related to
non-core components of pre-tax income - These changes in
valuation allowances are excluded from core earnings
because they relate to non-core components of pre-tax
income, such as tax attributes like capital loss carryforwards.
Results of discontinued operations - These results are
excluded from core earnings for businesses sold or held for
sale because such results could obscure the ability to
compare period over period results for our ongoing
businesses.
In addition to the above components of net income available to
common stockholders that are excluded from core earnings,
preferred stock dividends declared, which are excluded from net
income available to common stockholders, are included in the
determination of core earnings. Preferred stock dividends are a
cost of financing more akin to interest expense on debt and are
expected to be a recurring expense as long as the preferred stock
is outstanding.
Net income (loss) and net income (loss) available to common
stockholders are the most directly comparable U.S. GAAP
measures to core earnings. Core earnings should not be
considered as a substitute for net income (loss) or net income
(loss) available to common stockholders and does not reflect the
overall profitability of the Company's business. Therefore, The
Hartford believes that it is useful for investors to evaluate net
income (loss), net income (loss) available to common
stockholders, and core earnings when reviewing the Company's
performance.
32
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income to Core Earnings
Net income
Preferred stock dividends
Net income available to common stockholders
Adjustments to reconcile net income available to common stockholders to core earnings:
Net realized capital losses (gains) excluded from core earnings, before tax
Restructuring and other costs, before tax
Loss on extinguishment of debt, before tax
Loss on reinsurance transactions, before tax
Pension settlement, before tax
Integration and transaction costs associated with acquired business, before tax
Change in loss reserves upon acquisition of a business, before tax
Change in deferred gain on retroactive reinsurance, before tax
Income tax expense (benefit)
Loss (income) from discontinued operations, net of tax
For the years ended December 31,
2020
2019
2018
$
1,737 $
2,085 $
1,807
21
21
6
$
1,716 $
2,064 $
1,801
18
104
—
—
—
51
—
312
(115)
—
(389)
118
—
90
91
—
91
97
16
2
—
—
6
—
—
47
—
—
(75)
(322)
Core earnings
$
2,086 $
2,062 $
1,575
Core Earnings Margin- The Hartford uses the non-
GAAP measure core earnings margin to evaluate, and believes it
is an important measure of, the Group Benefits segment's
operating performance. Core earnings margin is calculated by
dividing core earnings by revenues, excluding buyouts and
realized gains (losses). Net income margin, calculated by dividing
net income by revenues, is the most directly comparable U.S.
GAAP measure. The Company believes that core earnings margin
provides investors with a valuable measure of the performance of
Group Benefits because it reveals trends in the business that may
be obscured by the effect of buyouts and realized gains (losses) as
well as other items excluded in the calculation of core earnings.
Core earnings margin should not be considered as a substitute for
net income margin and does not reflect the overall profitability of
Group Benefits. Therefore, the Company believes it is important
for investors to evaluate both core earnings margin and net
income margin when reviewing performance. A reconciliation of
net income margin to core earnings margin is set forth in the
Results of Operations section within MD&A - Group Benefits.
Current Accident Year Catastrophe Ratio- A
component of the loss and loss adjustment expense ratio,
represents the ratio of catastrophe losses incurred in the current
accident year (net of reinsurance) to earned premiums. For U.S.
events, a catastrophe is an event that causes $25 or more in
industry insured property losses and affects a significant number
of property and casualty policyholders and insurers, as defined by
the Property Claim Services office of Verisk. For international
events, the Company's approach is similar, informed, in part, by
how Lloyd's defines catastrophes. Lloyd's is an insurance market-
place operating worldwide. Lloyd's does not underwrite risks. The
Company accepts risks as the sole member of its Lloyd's
Syndicate. The current accident year catastrophe ratio includes
the effect of catastrophe losses, but does not include the effect of
reinstatement premiums.
Expense Ratio- For the underwriting segments of
Commercial Lines and Personal Lines is the ratio of underwriting
expenses less fee income, to earned premiums. Underwriting
expenses include the amortization of deferred policy acquisition
costs ("DAC") and insurance operating costs and expenses,
including certain centralized services costs and bad debt expense.
DAC include commissions, taxes, licenses and fees and other
incremental direct underwriting expenses and are amortized over
the policy term.
The expense ratio for Group Benefits is expressed as the ratio of
insurance operating costs and other expenses including
amortization of intangibles and amortization of DAC, to
premiums and other considerations, excluding buyout premiums.
The expense ratio for Commercial Lines, Personal Lines and
Group Benefits does not include integration and other
transaction costs associated with an acquired business.
Fee Income- Is largely driven from amounts earned as a
result of contractually defined percentages of assets under
management in our Hartford Funds business. These fees are
generally earned on a daily basis. Therefore, the growth in assets
under management either through positive net flows or favorable
market performance will have a favorable impact on fee income.
Conversely, either negative net flows or unfavorable market
performance will reduce fee income.
Gross New Business Premium- Represents the
amount of premiums charged, before ceded reinsurance, for
policies issued to customers who were not insured with the
Company in the previous policy term. Gross new business
premium plus gross renewal written premium less ceded
reinsurance equals total written premium.
Loss and Loss Adjustment Expense Ratio- A
measure of the cost of claims incurred in the calendar year
divided by earned premium and includes losses and loss
adjustment expenses incurred for both the current and prior
33
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
accident years. Among other factors, the loss and loss adjustment
expense ratio needed for the Company to achieve its targeted
ROE fluctuates from year to year based on changes in the
expected investment yield over the claim settlement period, the
timing of expected claim settlements and the targeted returns set
by management based on the competitive environment.
The loss and loss adjustment expense ratio is affected by claim
frequency and claim severity, particularly for shorter-tail
property lines of business, where the emergence of claim
frequency and severity is credible and likely indicative of ultimate
losses. Claim frequency represents the percentage change in the
average number of reported claims per unit of exposure in the
current accident year compared to that of the previous accident
year. Claim severity represents the percentage change in the
estimated average cost per claim in the current accident year
compared to that of the previous accident year. As one of the
factors used to determine pricing, the Company’s practice is to
first make an overall assumption about claim frequency and
severity for a given line of business and then, as part of the rate-
making process, adjust the assumption as appropriate for the
particular state, product or coverage.
Loss and Loss Adjustment Expense Ratio
before Catastrophes and 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.
Loss Ratio, excluding Buyouts- Utilized for the
Group Benefits segment and is expressed as a ratio of benefits,
losses and loss adjustment expenses, excluding those related to
buyout premiums, to premiums and other considerations,
excluding buyout premiums. Since Group Benefits occasionally
buys a block of claims for a stated premium amount, the Company
excludes this buyout from the loss ratio used for evaluating the
profitability of the business as buyouts may distort the loss ratio.
Buyout premiums represent takeover of open claim liabilities and
other non-recurring premium amounts.
Mutual Fund and Exchange-Traded Product
Assets- Are owned by the shareholders of those products and
not by the Company and, therefore, are not reflected in the
Company’s Consolidated Financial Statements except in
instances where the Company seeds new investment products
and holds an investment in the fund for a period of time. Mutual
fund and ETP assets are a measure used by the Company
primarily because a significant portion of the Company’s Hartford
Funds segment revenues are based upon asset values. These
revenues increase or decrease with a rise or fall in AUM whether
caused by changes in the market or through net flows.
Net New Business Premium- Represents the amount
of premiums charged, after ceded reinsurance, for policies issued
to customers who were not insured with the Company in the
previous policy term. Net new business premium plus renewal
written premium equals total written premium.
Policies in Force- Represents the number of policies with
coverage in effect as of the end of the period. The number of
policies in force is a growth measure used for Personal Lines and
standard commercial lines (small commercial and middle market
lines within middle & large commercial) within Commercial Lines
and is affected by both new business growth and policy count
retention.
Premium Retention- Represents renewal premium
written in the current period divided by total premium written in
the prior period.
Policy Count Retention- Represents the ratio of the
number of policies renewed during the period divided by the
number of policies available to renew. The number of policies
available to renew represents the number of policies, net of any
cancellations, written in the previous policy term. Policy count
retention is affected by a number of factors, including the
percentage of renewal policy quotes accepted and decisions by
the Company to non-renew policies because of specific policy
underwriting concerns or because of a decision to reduce
premium writings in certain classes of business or states. Policy
count retention is also affected by advertising and rate actions
taken by competitors.
Policyholder Dividend Ratio- The ratio of
policyholder dividends to earned premium.
Prior Accident Year Loss and Loss Adjustment
Expense Ratio- Represents the increase (decrease) in the
estimated cost of settling catastrophe and non-catastrophe
claims incurred in prior accident years as recorded in the current
calendar year divided by earned premiums.
Reinstatement Premiums- Represents additional
ceded premium paid for the reinstatement of the amount of
reinsurance coverage that was reduced as a result of the
Company ceding losses to reinsurers.
Renewal Earned Price Increase (Decrease)-
Written premiums are earned over the policy term, which is six
months for certain Personal Lines automobile business and
twelve months for substantially all of the remainder of the
Company’s Property and Casualty business. Since the Company
earns premiums over the six to twelve month term of the policies,
renewal earned price increases (decreases) lag renewal written
price increases (decreases) by six to twelve months.
Renewal Written Price Increase (Decrease)-
For Commercial Lines, represents the combined effect of rate
changes, amount of insurance and individual risk pricing decisions
per unit of exposure on commercial lines policies that renewed.
For Personal Lines, renewal written price increases represent the
total change in premium per policy since the prior year on those
policies that renewed and includes the combined effect of rate
changes, amount of insurance and other changes in exposure. For
Personal Lines, other changes in exposure include, but are not
limited to, the effect of changes in number of drivers, vehicles and
incidents, as well as changes in customer policy elections, such as
deductibles and limits. The rate component represents the
change in rate filed with and approved by state regulators during
the period and the amount of insurance represents the change in
the value of the rating base, such as model year/vehicle symbol
for automobiles, building replacement costs for property and
wage inflation for workers’ compensation. A number of factors
affect renewal written price increases (decreases) including
34
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
expected loss costs as projected by the Company’s pricing
actuaries, rate filings approved by state regulators, risk selection
decisions made by the Company’s underwriters and marketplace
competition. Renewal written price changes reflect the property
and casualty insurance market cycle. Prices tend to increase for a
particular line of business when insurance carriers have incurred
significant losses in that line of business in the recent past or the
industry as a whole commits less of its capital to writing
exposures in that line of business. Prices tend to decrease when
recent loss experience has been favorable or when competition
among insurance carriers increases. Renewal written price
statistics are subject to change from period to period, based on a
number of factors, including changes in actuarial estimates and
the effect of subsequent cancellations and non-renewals, and
modifications made to better reflect ultimate pricing achieved.
Return on Assets ("ROA"), Core Earnings- The
Company uses this non-GAAP financial measure to evaluate, and
believes is an important measure of, the Hartford Funds
segment’s operating performance. ROA, core earnings is
calculated by dividing annualized core earnings by a daily average
AUM. ROA is the most directly comparable U.S. GAAP measure.
The Company believes that ROA, core earnings, provides
investors with a valuable measure of the performance of the
Hartford Funds segment because it reveals trends in our business
that may be obscured by the effect of items excluded in the
calculation of core earnings. ROA, core earnings, should not be
considered as a substitute for ROA and does not reflect the
overall profitability of our Hartford Funds business. Therefore,
the Company believes it is important for investors to evaluate
both ROA, and ROA, core earnings when reviewing the Hartford
Funds segment performance. A reconciliation of ROA to ROA,
core earnings is set forth in the Results of Operations section
within MD&A - Hartford Funds.
Underlying Combined Ratio-This non-GAAP financial
measure of underwriting results represents the combined ratio
before catastrophes, prior accident year development and
current accident year change in loss reserves upon acquisition of
a business. Combined ratio is the most directly comparable GAAP
measure. The underlying combined ratio represents the
combined ratio for the current accident year, excluding the
impact of current accident year catastrophes and current
accident year change in loss reserves upon acquisition of a
business. The Company believes this ratio is an important
measure of the trend in profitability since it removes the impact
of volatile and unpredictable catastrophe losses and prior
accident year loss and loss adjustment expense reserve
development. The changes to loss reserves upon acquisition of a
business are excluded from underlying combined ratio because
such changes could obscure the ability to compare results in
periods after the acquisition to results of periods prior to the
acquisition as such trends are valuable to our investors' ability to
assess the Company's financial performance. A reconciliation of
combined ratio to underlying combined ratio is set forth in the
Results of Operations section within MD&A - Commercial Lines
and Personal Lines.
Underwriting Gain (Loss)- The Hartford's management
evaluates profitability of the Commercial and Personal Lines
segments primarily on the basis of underwriting gain or loss.
Underwriting gain (loss) is a before tax non-GAAP measure that
represents earned premiums less incurred losses, loss adjustment
expenses and underwriting expenses. Net income (loss) is the
most directly comparable GAAP measure. Underwriting gain
(loss) is influenced significantly by earned premium growth and
the adequacy of The Hartford's pricing. Underwriting profitability
over time is also greatly influenced by The Hartford's
underwriting discipline, as management strives to manage
exposure to loss through favorable risk selection and
diversification, effective management of claims, use of
reinsurance and its ability to manage its expenses. The Hartford
believes that the measure underwriting gain (loss) provides
investors with a valuable measure of profitability, before tax,
derived from underwriting activities, which are managed
separately from the Company's investing activities.
35
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reconciliation of Net Income to Underwriting Gain (Loss)
For the years ended December 31,
2020
2019
2018
Net income
$
856 $
1,192 $
1,212
Adjustments to reconcile net income to underwriting gain (loss):
Commercial Lines
Net servicing income
Net investment income
Net realized capital losses (gains)
Other expense
Loss on reinsurance transaction
Income tax expense
Underwriting gain (loss)
Net income (loss)
Personal Lines
Adjustments to reconcile net income to underwriting gain (loss):
Net servicing income
Net investment income
Net realized capital losses (gains)
Other expense
Income tax expense (benefit)
Underwriting gain (loss)
Net Income
Adjustments to reconcile net income to underwriting gain (loss):
P&C Other Ops
Net investment income
Net realized capital losses (gains)
Other expense (income)
Income tax expense (benefit)
Underwriting loss
Written and Earned Premiums- Written premium
represents the amount of premiums charged for policies issued,
net of reinsurance, during a fiscal period. Premiums are
considered earned and are included in the financial results
principally 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
(4)
(2)
(2)
(1,160)
(1,129)
(997)
60
35
—
176
(271)
38
91
270
(37) $
189 $
43
2
—
267
525
718 $
318 $
(32)
(14)
(157)
5
1
184
(13)
(179)
(43)
1
76
737 $
160 $
(16)
(155)
7
1
(19)
(214)
(168) $
61 $
15
$
$
$
$
(55)
1
(1)
(46)
(84)
(20)
—
12
$
(269) $
(31) $
(90)
4
1
(7)
(77)
Company’s reputation and ratings. Persistency refers to the
percentage of premium remaining in-force from year-to-year.
THE HARTFORD'S
OPERATIONS
The Hartford conducts business principally in five reporting
segments including Commercial Lines, Personal Lines, Property &
Casualty Other Operations, Group Benefits and Hartford Funds,
as well as a Corporate category. The Company includes in the
Corporate category reserves for run-off structured settlement
and terminal funding agreement liabilities, restructuring costs,
capital raising activities (including equity financing, debt financing
and related interest expense), transaction expenses incurred in
connection with an acquisition, purchase accounting adjustments
related to goodwill, and other expenses not allocated to the
reporting segments. Corporate also includes investment
management fees and expenses related to managing third party
business, including management of the invested assets of Talcott
Resolution Life, Inc. and its subsidiaries ("Talcott Resolution").
36
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Talcott Resolution is the holding company of the life and annuity
business that was sold in May 2018. In addition, Corporate
includes a 9.7% ownership interest in the legal entity that
acquired the life and annuity business sold.
The Company derives its revenues principally from: (a) premiums
earned for insurance coverage provided to insureds; (b)
management fees on mutual fund and ETP assets; (c) net
investment income; (d) fees earned for services provided to third
parties; and (e) net realized capital gains and losses. Premiums
charged for insurance coverage are earned principally on a pro
rata basis over the terms of the related policies in-force.
The profitability of the Company's property and casualty
insurance businesses over time is greatly influenced by the
Company’s underwriting discipline, which seeks to manage
exposure to loss through favorable risk selection and
diversification, its management of claims, its use of reinsurance,
the size of its in force block, actual mortality and morbidity
experience, and its ability to manage its expense ratio which it
accomplishes through economies of scale and its management of
acquisition costs and other underwriting expenses. Pricing
adequacy depends on a number of factors, including the ability to
obtain regulatory approval for rate changes, proper evaluation of
underwriting risks, the ability to project future loss cost
frequency and severity based on historical loss experience
adjusted for known trends, the Company’s response to rate
actions taken by competitors, its expense levels and expectations
about regulatory and legal developments. The Company seeks to
price its insurance policies such that insurance premiums and
future net investment income earned on premiums received will
cover underwriting expenses and the ultimate cost of paying
claims reported on the policies and provide for a profit margin.
For many of its insurance products, the Company is required to
obtain approval for its premium rates from state insurance
departments and the Lloyd's Syndicate's ability to write business
is subject to Lloyd's approval for its premium capacity each year.
Most of Personal Lines written premium is associated with our
exclusive licensing agreement with AARP. This agreement
provides an important competitive advantage given the size of
the 50 plus population and the strength of the AARP brand.
During the second quarter of 2020, the Company extended this
agreement through December 31, 2032.
Similar to property and casualty, profitability of the group
benefits business depends, in large part, on the ability to evaluate
and price risks appropriately and make reliable estimates of
mortality, morbidity, disability and longevity. To manage the
pricing risk, Group Benefits generally offers term insurance
policies, allowing for the adjustment of rates or policy terms in
order to minimize the adverse effect of market trends, loss costs,
declining interest rates and other factors. However, as policies
are typically sold with rate guarantees of up to three years,
pricing for the Company’s products could prove to be inadequate
if loss and expense trends emerge adversely during the rate
guarantee period or if investment returns are lower than
expected at the time the products were sold. For some of its
products, the Company is required to obtain approval for its
premium rates from state insurance departments. New and
renewal business for group benefits business, particularly for
long-term disability, are priced using an assumption about
expected investment yields over time. While the Company
employs asset-liability duration matching strategies to mitigate
risk and may use interest-rate sensitive derivatives to hedge its
exposure in the Group Benefits investment portfolio, cash flow
patterns related to the payment of benefits and claims are
uncertain and actual investment yields could differ significantly
from expected investment yields, affecting profitability of the
business. In addition to appropriately evaluating and pricing risks,
the profitability of the Group Benefits business depends on other
factors, including the Company’s response to pricing decisions
and other actions taken by competitors, its ability to offer
voluntary products and self-service capabilities, the persistency
of its sold business and its ability to manage its expenses which it
seeks to achieve through economies of scale and operating
efficiencies.
The financial results of the Company’s mutual fund and ETP
businesses depend largely on the amount of assets under
management and the level of fees charged based, in part, on asset
share class and product type. Changes in assets under
management are driven by the two main factors of net flows and
the market return of the funds, which are heavily influenced by
the return realized in the equity and bond markets. Net flows are
comprised of new sales less redemptions by mutual fund and ETP
shareholders. Financial results are highly correlated to the
growth in assets under management since these products
generally earn fee income on a daily basis.
The investment return, or yield, on invested assets is an important
element of the Company’s earnings since insurance products are
priced with the assumption that premiums received can be
invested for a period of time before benefits, losses and loss
adjustment expenses are paid. Due to the need to maintain
sufficient liquidity to satisfy claim obligations, the majority of the
Company’s invested assets have been held in available-for-sale
securities, including, among other asset classes, corporate bonds,
municipal bonds, government debt, short-term debt, mortgage-
backed securities, asset-backed securities and collateralized loan
obligations. The primary investment objective for the Company is
to maximize economic value, consistent with acceptable risk
parameters, including the management of credit risk and interest
rate sensitivity of invested assets, while generating sufficient net
of tax income to meet policyholder and corporate obligations.
Investment strategies are developed based on a variety of factors
including business needs, regulatory requirements and tax
considerations.
Impact of COVID-19 on our
financial condition, results of
operations and liquidity
Impact to revenues
Earned premiums
The COVID-19 pandemic has caused significant disruption to the
economy of the U.S. and other countries in which we operate. Due
to government restrictions that have prevented some businesses
from offering goods and services to their customers and due to
shelter-in-place guidelines that have reduced business activity,
many of our customers, especially small businesses, have had to
curtail their operations or have found they are unable to meet
cash flow needs due to declining business volume, causing some
to lay off workers. As one of the largest providers of small
business insurance in the U.S., in 2020, we experienced a 3% year
over year decline in our small commercial written premium
although trends improved in the second half of 2020. In addition
37
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
to the expected decline in small commercial written and earned
premium, other business lines in Commercial Lines have also been
negatively affected due to government-mandated restrictions
and stay-at-home guidelines reducing business activity and due to
consumers having less disposable income or less willingness to
spend on the products and services that our commercial lines
policyholders sell. Excluding the effect of the Navigators
acquisition, Commercial Lines written premium declined $290, or
4%, year over year driven by lower new business and due to
endorsements or other changes to in-force policies that decrease
premiums to reflect reduced exposures.
Within Commercial Lines, workers’ compensation written
premium declined year over year, partly due to declining payrolls
as a result of the economic effects of COVID-19.
Contributing to a 6% decline in Personal Lines written premium in
2020 was the effect of increased shopping behaviors, and lower
new business levels arising out of the competitive marketplace. In
addition, The Hartford provided a 15 percent refund on
policyholders’ April, May and June personal automobile insurance
premiums which reduced Personal Lines written and earned
premiums by $81 in the second quarter of 2020. In Group
Benefits, fully insured ongoing premium decreased 2% in 2020
resulting primarily from lower insured exposure on in-force
policies. Because of the economic stress caused by COVID-19, we
also experienced a higher amount of uncollectible premiums
receivable in 2020. As a result, to reflect our higher expectation
of credit losses, The Hartford increased its allowance for credit
losses ("ACL") on premiums receivable by $40 in the twelve
months ended December 31, 2020.
Net investment income and realized
capital gains (losses)
Total net investment income decreased in 2020 primarily due to a
lower yield on fixed maturity investments resulting from lower
reinvestment rates and lower yields on floating rate securities,
partially offset by a higher level of invested assets, due in part to
the acquisition of Navigators Group. In an effort to stimulate the
economy, central banks have reduced benchmark interest rates
to near zero, impacting our yields on floating rate securities and
reinvestment rates. From late March to mid-May, 2020, the
Company temporarily reinvested receipts of interest and
proceeds from maturing fixed maturity investments in liquid,
short-term investments. While the Company resumed investing
in fixed maturities in May, 2020, lower interest rates since the
pandemic began have generally resulted in lower investment
yields on newly invested funds. A prolonged period of lower
interest rates could depress the Company's net investment
income such that to earn the same level of return on equity we
may have to charge higher premiums for the insurance products
we sell unless loss costs similarly lessen.
Net realized capital gains (losses) on equity securities for the year
ended December 31, 2020 totaled $(214) before tax, consisting
of unrealized mark-to-market gains (losses) on equity securities
held and net realized gains (losses) on equity securities sold, net
of realized gains on equity derivative hedges. While equity
markets in the last nine months of 2020 increased more than the
value they lost during the first quarter, economic conditions
remain uncertain and if equity markets were to experience similar
declines as occurred in the first quarter of 2020, we may incur
more net realized capital losses in future periods.
Net realized capital losses for the year ended December 31, 2020
also included $47 of increases in the allowance for credit losses,
partially offset by reversals of the allowance due to
improvements in market value or sales, and $5 of intent-to-sell
impairments. The increase in the allowance for credit losses in the
twelve month period included increases of $28 on available for
sale fixed maturities and increases of $19 on commercial
mortgage loans. If it takes a prolonged period for the economy to
recover or if the impacts of the economic downturn are deeper
than anticipated, we could experience further credit losses and
intent-to-sell impairments, particularly with highly leveraged
companies and issuers in the energy, commercial real estate, and
travel and leisure sectors, resulting in further net realized capital
losses.
Impact to direct benefits, losses and
loss adjustment expenses from
COVID-19 claims
For the year ended December 31, 2020, we recorded direct
COVID-19 incurred losses in P&C of $278, reflecting
management’s best estimate of the ultimate cost of settling
COVID-19 claims incurred, including $141 for property claims,
$66 for workers’ compensation, net of favorable frequency on
other workers' compensation claims, and $71 of incurred losses
largely concentrated in financial lines such as D&O and E&O and
in surety and marine.
Nearly all of our property insurance policies require direct
physical loss or damage to property and contain standard
exclusions that we believe preclude coverage for COVID-19
related claims, and the vast majority of such policies contain
exclusions for virus-related losses. Included in the $141 of
COVID-19 property incurred losses and loss adjustment
expenses in the twelve month period were $101 of losses arising
from a small number of property policies that do not require
direct physical loss or damage and from policies intended to cover
specific business needs, including crisis management and
performance disruption, as well as a reserve of $40 for legal
defense costs. Given the significant business disruptions that
have occurred due to the COVID-19 pandemic, the Company has
experienced increased property claims, resulting in increased
litigation activity and legal expenses. Within Property & Casualty,
we incur COVID-19 workers’ compensation losses when it is
determined that workers were exposed to COVID-19 out of and
in the course of their employment and in other cases where states
have passed laws providing for the presumption of coverage for
certain industry classes, including health care and other essential
workers. While current accident year losses for workers’
compensation for the year ended December 31, 2020 increased
by $180 due to COVID-19 claims, this has been partially offset by
lower claim frequency of non-COVID-19 related workers’
compensation claims due to reduced business activity, resulting in
a net increase in incurred losses of $66. Favorable non-COVID-19
workers’ compensation claim frequency could continue through
2021 though possibly to a lesser extent if more business activity
resumes. The Company could incur additional COVID-19 direct
incurred losses in P&C through much of 2021, particularly for
workers’ compensation and financial lines.
Within Group Benefits, the Company experienced excess
mortality in its group life business of $239 in 2020, primarily
caused by direct and indirect impacts of COVID-19. Within the
group disability business, in 2020 the Company recognized $29 of
38
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
COVID-19 direct losses from short-term disability claims, more
than offset by $38 of favorable frequency on other short-term
disability claims.
Other impacts from COVID-19 and
resulting economic downturn
Apart from impacts on the investment portfolio, net investment
income and net realized capital gains (losses), in 2020, the
Company incurred a number of other insurance business impacts
from the COVID-19 pandemic and the resulting economic
downturn as follows:
•
•
•
•
•
For the year ended December 31, 2020, we recognized an
estimated decrease in current accident incurred losses in
Personal Lines automobile of $218 due to a significant
reduction in miles driven since the pandemic began, though
miles driven has begun to increase again. In the second
quarter of 2020, Personal Lines written and earned
premiums were reduced by $81 due to providing automobile
policyholders with premium refunds or credits in recognition
of the decrease in miles driven.
The Company experienced the impacts of lower premium
retention, including the impact of a lower exposure base on
workers' compensation premium.
From April through approximately July of 2020, the
Company waived late payment fees for a period of time for
business and personal insurance customers and temporarily
suspended the policy cancellation process for policyholders
of our Commercial Lines, Personal Lines and Group Benefits
segments with the period of policy cancellations for non-
payment varying by state.
Because of the economic stress caused by COVID-19 and
partly due to the extension of billing terms, we expect a
higher amount of uncollectible premiums receivable. As a
result, to reflect our higher expectation of credit losses, The
Hartford increased its ACL on premiums receivable by $40 in
the year ended December 31, 2020.
Apart from the increase in the premiums receivable
allowance, we have experienced a decline in insurance
operating costs and other expenses partly due to lower
travel and employee benefits costs and lower operating costs
associated with lower earned premium volumes.
Considering the impacts of COVID-19, the Company evaluated
the impact of market factors on the fair value of the reporting
units using the income approach and determined the estimated
fair values do not indicate a goodwill impairment for any
reporting unit. The annual goodwill assessment for the reporting
units was completed as of October 31, 2020, and resulted in no
write-downs of goodwill for the year ended December 31, 2020.
For information about additional resources the Company has to
manage capital and liquidity during the COVID-19 pandemic and
economic downturn, refer to the Capital Resources & Liquidity
section of MD&A.
For additional information about the potential impacts of the
COVID-19 pandemic and resulting economic downturn, see the
risk factor "The pandemic caused by the spread of COVID-19 has
disrupted our operations and may have a material adverse impact
on our business results, financial condition, results of operations
and/or liquidity" in Item 1A of Part I.
Common stockholders’ equity
Apart from the direct loss and premium impacts of COVID-19 on
net income, we could also experience a reduction in AOCI within
common stockholders’ equity. The net unrealized gain position on
our portfolio of fixed maturities, AFS increased by $1.4 billion
from December 31, 2019 to December 31, 2020, due to an
increase in valuations resulting from a decline in interest rates. If
credit spreads widen going forward or if interest rates increase
from the level they were at as of December 31, 2020, we would
recognize a decline in the fair value of fixed maturities, AFS in
future periods through a reduction of AOCI within common
stockholders’ equity.
In December 2020, the Company announced a $1.5 billion equity
repurchase authorization by the Board of Directors which is
effective from January 1, 2021 through December 31, 2022. Any
future repurchase of shares is dependent on market conditions
and other factors including the extent to which COVID-19
impacts our business, results of operations, financial condition
and liquidity. For further information, see Note 16 - Equity of
Notes to Consolidated Financial Statements.
Operational Transformation
and Cost Reduction Plan
In recognition of the need to become more cost efficient and
competitive along with enhancing the experience we provide to
agents and customers, on July 30, 2020, the Company announced
an operational transformation and cost reduction plan it refers to
as Hartford Next. Through reduction of its headcount, IT
investments to further enhance our capabilities, and other
activities, relative to 2019, the Company expects to achieve a
reduction in annual insurance operating costs and other expenses
of approximately $500 by 2022. The Hartford Next program will
contribute to our goal of reducing the 2022 P&C expense ratio by
about 2.0 to 2.5 points, reducing the 2022 Group Benefits
expense ratio by about 1.5 to 2.0 points and reducing our 2022
claim expense ratio by approximately 0.5 point.
To achieve those expected savings, we expect to incur
approximately $410, with $153 expensed over the last six
months of 2020, and expected expenses of $110 in 2021, $77 in
2022 and $70 after 2022, with the expenses after 2022
consisting mostly of amortization of internal use software and
capitalized real estate costs. The estimated costs of
approximately $410 includes an expected $54 in capitalized
development costs for internal use software to be amortized over
the useful life of the software, typically 3 years, and
approximately $23 of capitalized real estate assets to be
amortized over their useful lives. Included in the estimated costs
of $410, we expect to incur restructuring costs of approximately
$158, including $73 of employee severance, and approximately
$85 of other costs, including consulting expenses and the cost to
retire certain IT applications.
Restructuring costs are reported as a charge to net income but
not in core earnings. All other costs of the Hartford Next program
will be included in insurance operating costs and other expenses
in the Consolidated Statement of Operations. Relative to 2019
full year actual expenses, the Company recognized a net increase
in insurance operating costs and other expenses of approximately
39
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
$47 over the last six months of 2020 and expects a net expense
reduction of approximately $240 in 2021 and approximately
$423 in 2022.
The following table presents Hartford Next program costs
incurred, including restructuring costs, and expense savings
realized in 2020 from the inception of the program on July 30,
2020 through December 31, 2020, and expected costs and
expense savings in each year through the expected completion of
the program on December 31, 2022:
Hartford Next Costs and Expense Savings
2020
Estimate for 2021
Estimate for 2022
Employee severance
IT costs to retire applications
Professional fees and other expenses
Estimated restructuring costs
Non-capitalized IT costs
Other costs
Amortization of capitalized IT development costs [1]
Amortization of capitalized real estate [2]
Estimated costs within core earnings
Total Hartford Next program costs
Cumulative savings relative to 2019 beginning July 1, 2020
Net expense (savings) before tax
Net expense (savings) before tax:
To be accounted for within core earnings
Restructuring costs recognized outside of core earnings
Net expense (savings) before tax
[1] Does not include approximately $48 of IT asset amortization after 2022.
[2] Does not include approximately $19 of real estate amortization after 2022.
—
14
7
21
33
15
5
3
56
77
(500)
(423)
(444)
21
(423)
$
73 $
— $
2
29
104
30
19
—
—
49
153
(106)
47 $
(57) $
104
47 $
10
23
33
56
19
1
1
77
110
(350)
(240) $
(273) $
33
(240) $
$
$
$
40
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2020 Financial Highlights
Net Income Available to
Common Stockholders per
Diluted Share
Net Income Available to
Common Stockholders
Book Value per Diluted Share
Þ Decreased $0.90 or 16%
- Decrease in net income
+ Decrease in weighted average shares
outstanding
Ý
Increased $6.54 or 15%
+ Increase in common stockholders' equity
largely due to net income in excess of
stockholder dividends and an increase in
AOCI, primarily driven by an increase in net
unrealized capital gains on available for sale
securities
+ Decrease in dilutive shares outstanding
Decreased $348 or 17%
Þ
- A change from net realized capital gains in the
2019 period to losses in the 2020 period
- $220, after tax, of P&C COVID-19 claims
including property, financial lines and
workers’ compensation, net of favorable
workers’ compensation frequency
- An increase in current accident year
catastrophes
- A decrease in net investment income
- Higher mortality within group life driven by
COVID-19
- Restructuring costs related to the Hartford
Next initiative
+ Loss on reinsurance and loss on
extinguishment of debt in 2019
+ Greater net favorable prior accident year
development
+ Lower non-COVID-19 current accident year
non-catastrophe property losses, lower
personal automobile claim frequency, net of
premium refunds, and lower P&C operating
expenses
Investment Yield, After Tax
Property & Casualty Combined
Ratio
Group Benefits Net Income
Margin
Þ
-
Decreased 40 bps
Lower reinvestment rates and lower yield on
variable rate securities due to the decline in
interest rates
Þ
-
Improved 0.8 points
Lower current accident year loss ratio in
Personal Lines, due to lower automobile
claim frequency
Decreased 2.4 points
Þ
- Higher mortality in group life, driven by the
direct and indirect impacts of COVID-19
-
Lower net investment income
- More favorable prior accident year
- A decrease in net realized capital gains
+ A lower group disability loss ratio, driven by
lower claim incidence and an increase in
favorable prior incurral year development
development with 2020 reserve reductions
for catastrophes partially offset by reserve
increases for A&E and sexual molestation
and sexual abuse claims
Lower expense ratio mostly driven by lower
variable incentive compensation, staffing
levels, and travel
-
+ Higher current accident year catastrophes,
largely due to losses from civil unrest
+ Higher current accident year loss ratio in
Commercial Lines driven by COVID-19
losses, partially offset by lower non-
catastrophe property losses
41
$2,064$1,71620192020$5.66$4.7620192020$43.85$50.3912/31/201912/31/20203.4%3.0%2019202097.296.4201920208.8%6.4%20192020
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
CONSOLIDATED
RESULTS OF
OPERATIONS
The Consolidated Results of Operations should be read in
conjunction with the Company's Consolidated Financial
Statements and the related Notes as well as with the segment
operating results sections of the MD&A.
Consolidated Results of Operations
Earned premiums
Fee income
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
Restructuring and other costs
2020
2019
2018
$ 17,288 $ 16,923 $ 15,869
1,277
1,846
(14)
126
1,301
1,951
395
170
1,313
1,780
(112)
105
20,523
20,740
18,955
11,805
11,472
11,165
1,706
4,480
1,622
4,580
1,384
4,281
—
—
236
72
104
90
91
259
66
—
6
—
298
68
—
Total benefits, losses and expenses
18,403
18,180
17,202
Income from continuing operations, before tax
2,120
2,560
1,753
Income tax expense
383
475
268
Income from continuing operations, net of tax
1,737
2,085
1,485
Income from discontinued operations, net of tax
Net income
Preferred stock dividends
—
—
322
1,737
2,085
1,807
21
21
6
Net income available to common stockholders
$ 1,716 $ 2,064 $ 1,801
Increase
(Decrease) From
2019 to 2020
Increase
(Decrease) From
2018 to 2019
2%
(2%)
(5%)
(104%)
(26%)
(1%)
3%
5%
(2%)
(100%)
(100%)
(9%)
9%
NM
1%
(17%)
(19%)
(17%)
—%
(17%)
—%
(17%)
7%
(1%)
10%
NM
62%
9%
3%
17%
7%
NM
NM
(13%)
(3%)
—%
6%
46%
77%
40%
(100%)
15%
NM
15%
42
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For a discussion of the Company's operating results by segment,
see MD&A - Segment Operating Summaries. In addition, for
further discussion of impacts resulting from the COVID-19
pandemic, refer to the Impact of COVID-19 on our financial
condition, results of operations and liquidity section of this
MD&A.
Year ended December 31, 2020 compared
to year ended December 31, 2019
Net income available to common
stockholders decreased by $348 primarily driven by a $409
before tax change from net realized capital gains in the 2019
period to net realized capital losses in the 2020 period, $278
before tax of P&C COVID-19 claims in the 2020 period, higher
mortality in group life, mostly driven by COVID-19, a $143 before
tax increase in current accident year catastrophes, a $105 before
tax decrease in net investment income, and $104 before tax of
restructuring costs, partially offset by lower Personal Lines
automobile claim frequency in the 2020 period net of premium
credits given to policyholders in second quarter 2020, lower non-
catastrophe property losses, a decrease in P&C insurance
operating costs, higher net favorable P&C prior accident year
development, and the effect of charges in 2019, including the
Navigators ADC premium paid of $91 before tax and a $90
before tax loss on debt extinguishment.
43
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Revenue
Earned Premiums
Net Investment Income
[1]For the years ended 2020 and 2019, the total includes $9 and $10, respectively,
recorded in Corporate other revenue.
Year ended December 31, 2020 compared
to year ended December 31, 2019
Earned premiums increased primarily due to:
•
•
An increase in Property and Casualty reflecting a 7%
increase in Commercial Lines driven by the Navigators
Group acquisition, partially offset by a 6% decline in Personal
Lines. Driving part of the decrease in Personal Lines earned
premiums was the impact of the Company offering a 15
percent credit on policyholders’ April, May and June personal
automobile insurance premiums totaling $81.
A 1% decrease in Group Benefits, principally driven by a
decline in group life due to lower insured exposure on in-
force policies.
Fee income decreased due to:
•
Lower fee income in Hartford Funds largely due to a shift in
mix of assets to lower fee generating funds, lower installment
fee income in P&C and lower fee income on administrative
services only business in Group Benefits.
Other revenues decreased primarily due to a decrease in
income generated from the Talcott Resolution investment and
less transition services revenue received related to the sale of the
life and annuity business in 2018.
Year ended December 31, 2020 compared
to year ended December 31, 2019
Net investment income decreased primarily due to:
•
Lower yield on fixed maturity investments resulting from
lower reinvestment rates and lower yields on floating rate
securities, partially offset by a higher level of invested assets,
due in part to the acquisition of Navigators Group.
Net realized capital gains (losses) decreased from
net gains in the 2019 period to net losses in the 2020 period,
primarily driven by:
• Depreciation in the value of equity securities due to the
significant decline in equity market levels in the first quarter
of 2020 as well as realized losses upon sales of equity
securities, partially offset by net realized gains upon
termination of derivatives used to hedge against a decline in
equity market levels.
•
A loss of $48, before tax, on sale of the Company’s
Continental Europe Operations, which the Company agreed
to sell in September of 2020, net credit losses recognized on
fixed maturities and an increase in the ACL on mortgage
loans, partially offset by slightly higher net gains on sales of
fixed maturity securities.
For further discussion of investment results, see MD&A -
Investment Results, Net Realized Capital Gains and MD&A -
Investment Results, Net Investment Income.
44
$15,869$15,869$16,923$16,923$17,288$17,288$10,446$11,490$11,918$5,423$5,423$5,361Property & Casualty ("P&C")Group Benefits ("GB")Other [1]201820192020$0$5,000$10,000$15,000$20,000$1,780$1,780$1,951$1,951$1,846$1,846$1,575$1,719$1,624$205$232$222NII excluding limited partnerships and otheralternative investmentsLimited partnerships and otheralternative investments201820192020$0$500$1,000$1,500$2,000$2,500 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Benefits, losses and expenses
–
Year ended December 31, 2020 compared
to year ended December 31, 2019
Losses and LAE Incurred for P&C
Partially offset by more favorable Property & Casualty
net prior accident year reserve development of $71,
before tax. Prior accident year reserve development in
the 2020 period was a favorable $136 before tax, with
$529 of reserve reductions related to catastrophes,
including decreases in estimated losses arising from
wind and hail events in 2017, 2018 and 2019 and from
the 2017 and 2018 California wildfires, including a $289
before tax subrogation benefit from PG&E. Reserve
development in 2020 also included a $254 before tax
increase in reserves for sexual molestation and sexual
abuse claims, a $208 before tax increase in A&E
reserves and a $102 before tax increase in reserves on
Navigators related to 2018 and prior accident years.
While $220 of A&E and $102 of Navigators’ reserve
development has been economically ceded to NICO, the
Company recognized a $312 deferred gain under
retroactive reinsurance accounting with $10 of the
$220 ceded A&E losses recognized as a benefit to
income in 2020. Prior accident year development in
2019 primarily included reserve decreases for workers’
compensation, small commercial package business,
catastrophes, personal lines automobile liability, and
uncollectible reinsurance, partially offset by increases in
general liability and professional liability, including
increases in Navigators Group reserves upon acquisition
of the business, and commercial lines automobile
liability. For further discussion, see MD&A - Critical
Accounting Estimates, Property & Casualty Insurance
Product Reserves, Net of Reinsurance.
Benefits, losses and loss adjustment
expenses increased due to:
•
An increase in incurred losses for Property & Casualty which
was driven by an increase in Commercial Lines, partially
offset by a decrease in Personal Lines, and was attributable
to:
–
–
An increase in Property & Casualty current accident
year ("CAY") loss and loss adjustment expenses before
catastrophes due to the effect on incurred losses of
earned premium from the Navigators Group acquisition
and COVID-19 incurred losses of $278 which is net of
favorable frequency of workers’ compensation claims
due to reduced business activity and lower payrolls.
Partially offsetting the increase were lower weather-
related non-COVID-19 non-catastrophe property
claims and lower claim frequency in personal automobile
due to shelter-in-place guidelines reducing miles driven.
An increase in current accident year catastrophe losses
of $143 before tax. Current accident year catastrophe
losses for 2020 were primarily from civil unrest, a
number of hurricanes and tropical storms, Pacific Coast
wildfires and Northeast windstorms as well as tornado,
wind and hail events in the South, Midwest and Central
Plains. Catastrophe losses in the 2019 period were
primarily from tornado, wind and hail events in the
South, Midwest and Mountain West and winter storms
across the country as well as from hurricanes and
tropical storms in the Southeast. For additional
information, see MD&A - Critical Accounting Estimates,
Property & Casualty Insurance Product Reserves, Net of
Reinsurance.
Losses and LAE Incurred for Group Benefits
•
Losses and LAE increased in Group Benefits driven by higher
mortality on group life claims, primarily caused by direct and
indirect impacts of COVID-19, partially offset by the impact
of a lower group disability loss ratio driven by lower claim
incidence and increased favorable prior incurral year
development.
For further discussion of impacts resulting from the COVID-19
pandemic, refer to the impact of COVID-19 on our financial
45
$6,940$7,398$7,6532018 YTD2019 YTD2020 YTD$0$2,000$4,000$6,000$8,000$4,214$4,055$4,1372018 YTD2019 YTD2020 YTD$0$1,000$2,000$3,000$4,000$5,000
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
condition, results of operations and liquidity section of this
MD&A
Amortization of deferred policy acquisition
costs increased from the prior year period primarily due to an
increase in Commercial Lines mainly attributable to the impact of
the Navigators Group acquisition, partially offset by decreases in
Personal Lines and Group Benefits consistent with the decline in
earned premium in those segments.
Insurance operating costs and other
expenses decreased due to:
•
•
A reduction in incentive compensation and employee travel
and benefits costs, a reduction in contingent consideration of
$12 before tax in Hartford Funds associated with the
acquisition of Lattice, and expense reductions from the
Company’s Hartford Next operational and transformation
cost reduction plan.
Partially offsetting the decrease in expenses were a $40
before tax increase in the ACL on uncollectible premiums
receivable in 2020 due to the economic impacts of
COVID-19 and higher information technology costs within
INVESTMENT RESULTS
Group Benefits and middle & large commercial, partially
offset by Personal Lines technology expenses incurred in
2019. In addition, 2020 included a full year of operating costs
incurred due to the Navigators Group acquisition in May of
2019, partially offset by lower integration and transaction
costs in 2020.
Restructuring and other costs are due to the
Company's Hartford Next operational transformation and cost
reduction plan which includes $73 of incurred severance costs.
For further discussion of impacts resulting from the Hartford
Next initiative, see MD&A - The Hartford's Operations,
Operational Transformation and Cost Reduction Plan and Note
23 - Restructuring and Other Costs of Notes to Consolidated
Financial Statements.
Income tax expense decreased primarily due to a decline
in income before tax.
For further discussion of income taxes, see Note 17 - Income
Taxes of Notes to Consolidated Financial Statements.
Fixed maturities, available-for-sale ("AFS"), at fair value
$ 45,035
79.7 % $ 42,148
79.5 %
Composition of Invested Assets
December 31, 2020
December 31, 2019
Amount
Percent
Amount
Percent
Equity securities, at fair value
Mortgage loans (net of ACL of $38 and $0)
Limited partnerships and other alternative investments
Other investments [1]
Short-term investments
1,438
4,493
2,082
201
3,283
2.5 %
7.9 %
3.7 %
0.4 %
5.8 %
1,657
4,215
1,758
331
2,921
Total investments
[1] Primarily consists of equity fund investments, overseas deposits, consolidated investment funds and derivative instruments which are carried at fair value.
$ 56,532
100.0 % $ 53,030
3.1 %
8.0 %
3.3 %
0.6 %
5.5 %
100.0 %
December 31, 2020 compared to
December 31, 2019
Fixed maturities, AFS increased primarily due to net
additions of corporate securities and an increase in valuations as
a result of a decline in interest rates.
Short-term investments are slightly higher in order to
fund asset purchase commitments at year end 2020, which were
settled in January 2021.
46
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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,
2020
2019
2018
Amount Yield [1] Amount Yield [1] Amount Yield [1]
$ 1,442
3.4 % $ 1,559
3.8 % $ 1,459
3.7 %
3.9 %
12.3 %
39
172
222
42
(71)
3.4 %
4.4 %
14.4 %
46
165
232
32
(83)
32
141
205
20
(77)
3.9 %
3.1 %
4.1 %
13.2 %
$ 1,846
3.6 % $ 1,951
4.1 % $ 1,780
4.0 %
Total net investment income excluding limited partnerships and other
alternative investments
[1]Yields calculated using annualized net investment income divided by the monthly average invested assets at amortized cost as applicable, excluding repurchase agreement and
3.7 % $ 1,575
3.3 % $ 1,719
$ 1,624
3.7 %
securities lending collateral, if any, and derivatives book value.
[2]Includes net investment income on short-term investments.
[3]Primarily includes changes in fair value of certain equity fund investments and income from derivatives that qualify for hedge accounting and are used to hedge fixed maturities.
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Total net investment income decreased primarily
due to a lower yield on fixed maturity investments resulting from
lower reinvestment rates and lower yields on floating rate
securities, partially offset by a higher level of invested assets, due
in part to the acquisition of Navigators Group.
Annualized net investment income yield,
excluding limited partnerships and other alternative investments
and non-routine items on fixed maturities, which primarily
include make-whole payments and prepayment fees, partially
offset by paydowns, was down primarily due to lower
reinvestment and short-term rates.
Average reinvestment rate, on fixed maturities and
mortgage loans, excluding certain U.S. Treasury securities, for the
year-ended December 31, 2020, was 2.5% which was below the
average yield of sales and maturities of 3.4% for the same period.
The average reinvestment rate for the year-ended December 31,
2019 was 3.4% which was below the average yield of sales and
maturities of 4.0%.
For the 2021 calendar year, we expect the annualized net
investment income yield, excluding limited partnerships and
other alternative investments and non-routine items on fixed
maturities, to be lower than the portfolio yield earned for the year
ended December 31, 2020, due to a lower yield on short-term
investments and lower reinvestment rates. The estimated impact
on net investment income yield is subject to change due to
evolving market conditions and active portfolio management.
47
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net Realized Capital Gains (Losses)
(Before tax)
Gross gains on sales
Gross losses on sales
Equity securities [1]
Net credit losses on fixed maturities, AFS [2]
Change in ACL on mortgage loans [3]
Intent-to-sell impairments [4]
Net other-than-temporary impairment ("OTTI") losses recognized in earnings
Valuation allowances on mortgage loans
Other, net [5]
$
For the years ended December 31,
2020
2019
2018
255 $
(50)
(214)
(28)
(19)
(5)
47
234 $
(56)
254
114
(172)
(48)
—
(3)
1
(35)
—
(1)
—
(5)
Net realized capital gains (losses)
[1]The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of December 31, 2020, were $53 for the
year-ended December 31, 2020. The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of
December 31, 2019, were $164 for the year-ended December 31, 2019. The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related
to equity securities still held as of December 31, 2018, were $(80) for the year-ended December 31, 2018.
395 $
(14) $
(112)
$
[2]Due to the adoption of accounting guidance for credit losses on January 1, 2020, realized capital losses previously reported as OTTI are now presented as credit losses which are
net of any recoveries. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies. In addition, see Credit Losses on Fixed Maturities, AFS
within the Investment Portfolio Risks and Risk Management section of the MD&A.
[3]Represents the change in ACL recorded during the period following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note
1 - Basis of Presentation and Significant Accounting Policies. In addition, see ACL on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the
MD&A.
[4]See Intent-to-Sell Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
[5]Includes gains (losses) on non-qualifying derivatives for 2020, 2019, and 2018 of $104, $(24), and $(12), respectively, gains (losses) from transactional foreign currency
revaluation of $(1), $(9) and $1, respectively, and a loss of $48 from the sale of the Continental Europe Operations for the year ended December 31, 2020.
Year ended December 31, 2020
Gross gains and losses on sales were primarily
driven by issuer-specific sales of corporate securities and tax-
exempt municipal bonds, rebalancing within the foreign
government sector, and sales of U.S. treasury securities for
duration and/or liquidity management.
Equity securities net losses were driven by mark-to-
market losses due to the decline in equity market levels in the
first quarter and losses incurred on sales across multiple issuers
as the Company reduced its exposure to equity securities,
partially offset by mark-to-market equity gains given recent
equity market performance and tighter credit spreads, which
resulted in price appreciation of preferred equities.
Other, net gains are primarily due to $75 of realized gains on
terminated derivatives used to hedge against a decline in equity
market levels and $21 of gains on interest rate derivatives due to
a decline in interest rates. These gains were partially offset by a
loss of $48, before tax, on the sale of the Company’s Continental
Europe Operations which the Company agreed to sell in
September of 2020.
Year ended December 31, 2019
Gross gains and losses on sales were primarily
driven by issuer-specific selling of corporate securities, continued
reduction of tax-exempt municipal bonds and sales of U.S.
treasuries for duration management.
Equity securities net gains were primarily driven by
appreciation of equity securities due to higher equity market
levels.
Other, net losses includes losses on interest rate derivatives
of $34 due to higher rates, losses on equity derivatives of $17 due
48
to an increase in domestic equity markets, and losses of $9 due to
foreign currency revaluation. These losses were partially offset by
gains on credit derivatives of $27 due to credit spread tightening.
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 credit losses on fixed maturities, AFS
and ACL on mortgage loans; and
contingencies relating to corporate litigation and regulatory
matters.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 2020
Loss and LAE Reserves, Net of Reinsurance as of December 31, 2020
Commercial
Lines
Personal Lines
Property &
Casualty
Other
Operations
Total Property &
Casualty
Insurance
% Total
Reserves
-net
Workers’ compensation
$
10,886 $
— $
— $
10,886
45.6%
General liability
Marine
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
4,105
279
1,852
475
1,066
13
1,184
381
—
139
218
189
20,787
4,271
—
—
—
—
1,399
25
—
—
372
10
—
2
1,808
28
—
—
—
—
—
—
—
—
—
789
87
426
1,302
1,426
Total reserves-gross
2,728 $
$
[1]Commercial Lines policy packages that include property and general liability coverages are generally referred to as the package line of business.
25,058 $
1,836 $
4,105
17.2%
279
1,852
475
1.2%
7.7%
2.0%
2,465
10.3%
38
1,184
381
372
938
305
617
0.1%
5.0%
1.5%
1.6%
3.9%
1.3%
2.6%
23,897 100.0%
5,725
29,622
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
49
Commercial Lines$20,78787%Personal Lines$1,8088%Property &Casualty OtherOperations$1,3025%
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. Case reserves are established by a claims handler on
each individual claim and are adjusted as new information
becomes known during the course of handling the claim. Incurred
but not reported (“IBNR”) reserves represent the difference
between the estimated ultimate cost of all claims and the actual
loss and loss adjustment expenses reported to the Company by
claimants (“reported losses”). Reported losses represent
cumulative loss and loss adjustment expenses paid plus case
reserves for outstanding reported claims. For most lines,
Company actuaries evaluate the total reserves (IBNR and case
reserves) on an accident year basis. An accident year is the
calendar year in which a loss is incurred, or, in the case of claims-
made policies, the calendar year in which a loss is reported. For
certain lines acquired from the Navigators Group book of
business, total reserves are evaluated on a policy year basis and
then converted to accident year. A policy year is the calendar year
in which a policy incepts.
Factors that Change Reserve Estimates-
Reserve estimates can change over time because of unexpected
changes in the external environment. Inflation in claim costs, such
as with medical care, hospital care, automobile parts, wages and
home and building repair, would cause claims to settle for more
than they are initially reserved. Changes in the economy can
cause an increase or decrease in the number of reported claims
(claim frequency). For example, an improving economy could
result in more automobile miles driven and a higher number of
automobile reported claims, or a change in economic conditions
can lead to more or less workers’ compensation reported claims.
An increase in the number or percentage of claims litigated can
increase the average settlement amount per claim (claim
severity). Changes in the judicial environment can affect
interpretations of damages and how policy coverage applies
which could increase or decrease claim severity. Over time,
judges or juries in certain jurisdictions may be more inclined to
determine liability and award damages. New legislation can also
change how damages are defined or change the statutes of
limitations for the filing of civil suits, resulting in greater claim
frequency or severity. In addition, new types of injuries may arise
from exposures not contemplated when the policies were written.
Past examples include pharmaceutical products, silica, lead paint,
sexual molestation and sexual 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
in the geographic mix of business, changes in the mix of business
50
by industry and changes in the mix of business by policy limit or
deductible can increase the risk that losses will ultimately
develop differently than the loss development patterns assumed
in our reserving. In addition, changes in the quality of risk
selection in underwriting and changes in interpretations of policy
language could increase or decrease ultimate losses from what
was assumed in establishing the reserves.
In the case of assumed reinsurance, all of the above risks apply.
The Company assumes property and casualty risks from other
insurance companies as part of its Global Re business acquired
from Navigators Group and from certain pools and associations.
Global Re, which is a part of the global specialty business, mostly
assumes property, casualty, surety, agriculture, and marine risks
and, until recently, assumed accident and health insurance risks.
Changes in the case reserving and reporting patterns of insurance
companies ceding to The Hartford can create additional
uncertainty in estimating the reserves. Due to the inherent
complexity of the assumptions used, final claim settlements may
vary significantly from the present estimates of direct and
assumed reserves, particularly when those settlements may not
occur until well into the future.
Reinsurance Recoverables- Through both facultative
and treaty reinsurance agreements, the Company cedes a share
of the risks it has underwritten to other insurance companies. The
Company records reinsurance recoverables for loss and loss
adjustment expenses ceded to its reinsurers representing the
anticipated recovery from reinsurers of unpaid claims, including
IBNR.
The Company estimates the portion of losses and loss adjustment
expenses to be ceded based on the terms of any applicable
facultative and treaty reinsurance, including an estimate of IBNR
for losses that will ultimately be ceded.
The Company provides an allowance for uncollectible
reinsurance, reflecting management’s best estimate of
reinsurance cessions that may be uncollectible in the future due
to reinsurers’ unwillingness or inability to pay. The allowance for
uncollectible reinsurance comprises an ACL and an allowance for
disputed balances. The ACL primarily considers the credit quality
of the Company's reinsurers while the allowance for disputes
considers recent outcomes in arbitration and litigation in disputes
between reinsurers and cedants and recent commutation 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 $105 as of December 31, 2020, comprised of
$44 related to Commercial Lines, $1 related to Personal Lines and
$60 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.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For Property & Casualty Other Operations, asbestos and
environmental (“Run-off A&E”) reserves are reviewed by type of
event rather than by line of business.
Reserve adjustments, which may be material, are reflected in the
operating results of the period in which the adjustment is
determined to be necessary. In the judgment of management,
information currently available has been properly considered in
establishing the reserves for unpaid losses and loss adjustment
expenses and in recording the reinsurance recoverables for ceded
unpaid losses.
Reserving Methodology
The following is a discussion of the reserving methods used for
the Company's property and casualty lines of business other than
asbestos and environmental.
Reserves are set by line of business within the operating
segments. A single line of business may be written in more than
one segment. Lines of business for which reported losses emerge
over a long period of time are referred to as long-tail lines of
business. Lines of business for which reported losses emerge
more quickly are referred to as short-tail lines of business. The
Company’s shortest-tail lines of business are homeowners,
commercial property, marine and automobile physical damage.
The longest tail lines of business include workers’ compensation,
general liability, professional liability and assumed reinsurance.
For short-tail lines of business, emergence of paid loss and case
reserves is credible and likely indicative of ultimate losses. For
long-tail lines of business, emergence of paid losses and case
reserves is less credible in the early periods after a given accident
year and, accordingly, may not be indicative of ultimate losses.
Use of Actuarial Methods and Judgments- The
Company’s reserving actuaries regularly review reserves for both
current and prior accident years using the most current claim
data. A variety of actuarial methods and judgments are used for
most lines of business to arrive at selections of estimated ultimate
losses and loss adjustment expenses. New methods may be added
for specific lines over time to inform these selections where
appropriate. The reserve selections incorporate input, as
appropriate, from claims personnel, pricing actuaries and
operating management about reported loss cost trends and other
factors that could affect the reserve estimates. Most reserves are
reviewed fully each quarter, including loss and loss adjustment
expense reserves for homeowners, commercial property, marine,
automobile physical damage, automobile liability, package
property business, and workers’ compensation. Other reserves,
including most general liability and professional liability lines, are
reviewed semi-annually. Certain additional reserves are also
reviewed semi-annually or annually, including reserves for losses
incurred in accident years older than twelve years for Personal
Lines and older than twenty years for Commercial Lines, as well
as reserves for bond, assumed reinsurance, latent exposures such
as construction defects, and unallocated loss adjustment
expenses. For reserves that are reviewed semi-annually or
annually, management monitors the emergence of paid and
reported losses in the intervening quarters and, if necessary,
performs a reserve review to determine whether the reserve
estimate should change.
An expected loss ratio is used in initially recording the reserves
for both short-tail and long-tail lines of business. This expected
loss ratio is determined by starting with the average loss ratio of
51
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
representing a range of actuarial indications.
Reserve Discounting- Most of the Company’s property
and casualty insurance product reserves are not discounted.
However, the Company has discounted liabilities funded through
structured settlements and has discounted a portion of workers’
compensation reserves that have a fixed and determinable
payment stream. For further discussion of these discounted
liabilities, see Note 1 - Basis of Presentation and Significant
Accounting Policies of Notes to Consolidated Financial
Statements.
Differences Between GAAP and Statutory
Basis Reserves- As of December 31, 2020 and 2019, U.S.
property and casualty insurance product reserves for losses and
loss adjustment expenses, net of reinsurance recoverables,
reported under U.S. GAAP were lower than net reserves reported
on a statutory basis, primarily due to reinsurance recoverables on
two ceded retroactive reinsurance agreements that are recorded
as a reduction of other liabilities under statutory accounting. One
of the retroactive reinsurance agreements covers substantially all
adverse development on asbestos and environmental reserves
subsequent to 2016 and the other covers adverse development
on Navigators Insurers' existing net loss and allocated loss
adjustment reserves as of December 31, 2018. Under both
agreements, the Company cedes to NICO, a subsidiary of
Berkshire Hathaway Inc. ("Berkshire").
Reserving Methods by Line of Business- Apart
from Run-off A&E which is discussed in the following section on
Property & Casualty Other Operations, below is a general
discussion of which reserving methods are preferred by line of
business. Because the actuarial estimates are generated at a
much finer level of detail than line of business (e.g., by distribution
channel, coverage, accident period), other methods than those
described for the line of business may also be employed for a
coverage and accident year within a line of business. Also, as
circumstances change, the methods that are given more influence
will change.
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
Commercial
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 personal automobile liability, and bodily injury in particular, 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.
The Company performs a variety of techniques, including the paid and reported development methods and
frequency/severity techniques. For older, more mature accident years, the Company primarily uses reported
development techniques. For more recent accident years, the Company relies on several methods that
incorporate expected loss ratios, reported loss development, paid loss development, frequency/severity, case
reserve adequacy, and claim settlement rates.
Professional 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
Workers’
compensation
Marine
Assumed reinsurance
and all other
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 shifting more weight onto the reported development
method as an accident year matures. For certain general liability lines the Company uses a Berquist-Sherman
technique to adjust for changes in claim reserving patterns. The Company also uses various frequency/severity
methods aimed at capturing large loss development.
Workers’ compensation is the Company’s single largest reserve line of business and a wide range of methods are
used. Due to the long-tailed nature of workers' compensation, the selection of methods is driven by expected loss
ratio methods ("ELR") at early evaluations with emphasis shifting first to Bornhuetter-Ferguson methods, then to
paid and reported development methods (with more reliance placed on paid methods), and finally to methods that
are responsive to the inventory of open claims. Across these techniques, there are adjustments related to changes
in emergence patterns across years, projections of future cost inflation, outlier claims, and analysis of larger
states.
For marine liability, the Company generally relies on the expected loss ratio, Berquist-Sherman, and reported
development techniques. The Company generally weights these techniques together, relying more heavily on the
expected loss ratio method at early ages of development and then shifts towards Berquist-Sherman and then
more towards the reported development method as an accident year matures. For marine property segments, the
Company relies on a Berquist-Sherman method for early development ages then shifts to reported development
techniques.
Standard methods, such as expected loss ratio, Berquist-Sherman and reported development techniques are
applied. These methods and analyses are informed by underlying treaty by treaty analyses supporting the
expected loss ratios, and cedant data will often inform the loss development patterns. In some instances, reserve
indications may also be influenced by information gained from claims and underwriting audits. For the A&H
business where the reporting is quick and treaties are not written evenly throughout the year, policy quarter
analyses are performed to avoid potential distortions. Policy quarter and policy year loss reserve estimates are
then converted to an accident year basis.
Allocated loss
adjustment expenses
("ALAE")
Unallocated loss
adjustment expenses
("ULAE")
For some lines of business (e.g., professional liability, assumed reinsurance, and the acquired Navigators Group
book of business), 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.
ULAE is analyzed separately from loss and ALAE. For most lines of business, future ULAE costs to be paid 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. For some lines, a simplified paid-to-paid
approach is used.
In the final step of the reserve review process, senior reserving
actuaries and senior management apply their judgment to
determine the appropriate level of reserves considering the
actuarial indications and other factors not contemplated in the
actuarial indications. Those factors include, but are not limited to,
the assessed reliability of key loss trends and assumptions used in
the current actuarial indications, the maturity of the accident
year, pertinent trends observed over the recent past, the level of
volatility within a particular line of business, and the
improvement or deterioration of actuarial indications in the
current period as compared to the prior periods. The Company
also considers the magnitude of the difference between the
actuarial indication and the recorded reserves.
52
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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
2020, see Note 12 - Reserve for Unpaid Losses and Loss
Adjustment Expenses in the Notes to Consolidated Financial
Statements.
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
assess whether those conditions constitute a long-term trend
that should result in a reserving action (i.e., increasing or
decreasing the reserve).
General liability- Within Commercial Lines, including the
acquired Navigators Group book of business, and Property &
Casualty Other Operations, the Company has exposure to
general liability claims, including from bodily injury, property
damage and product liability. Reserves for these exposures can be
particularly difficult to estimate due to the long development
pattern and uncertainty about how cases will settle. In particular,
the Company has exposure to bodily injury claims that is the
result of long-term or continuous exposure to harmful products
or substances. Examples include, but are not limited to,
pharmaceutical products, silica, talcum powder, head injuries and
lead paint. The Company also has exposure to claims from
construction defects, where property damage or bodily injury
from negligent construction is alleged. In addition, the Company
has exposure to claims asserted against religious institutions, and
other organizations, including the Boy Scouts of America, relating
to sexual molestation and sexual abuse. State “reviver” statutes,
extending statutes of limitations for certain sexual molestation
and sexual abuse claims, could result in additional litigation or
could result in unexpected sexual molestation and sexual abuse
losses. Such exposures may involve potentially long latency
periods and may implicate coverage in multiple policy periods,
which can raise complex coverage issues with significant effects
on the ultimate scope of coverage. Such exposures may also be
impacted by insured bankruptcies. These factors make reserves
for such claims more uncertain than other bodily injury or
property damage claims. With regard to these exposures, the
Company monitors trends in litigation, the external environment
including legislation, the similarities to other mass torts and the
potential impact on the Company’s reserves. Additionally,
uncertainty in estimated claim severity causes reserve variability,
particularly with respect to changes in internal claim handling and
case reserving practices.
Workers’ compensation- Included in both small
commercial and in middle & large commercial, workers’
compensation is the Company’s single biggest line of business and
the property and casualty line of business with the longest
pattern of loss emergence. To the extent that patterns in the
frequency of settlement payments deviate from historical
patterns, loss reserve estimates would be less reliable. Medical
costs make up approximately 50% of workers’ compensation
payments. As such, reserve estimates for workers’ compensation
are particularly sensitive to changes in medical inflation, the
changing use of medical care procedures and changes in state
legislative and regulatory environments. In addition, a
deteriorating economic environment can reduce the ability of an
injured worker to return to work and lengthen the time a worker
receives disability benefits. In National Accounts, reserves for
large deductible workers’ compensation insurance require
estimating losses attributable to the deductible amount that will
be paid by the insured; if such losses are not paid by the insured
due to financial difficulties, the Company is contractually liable.
Commercial Lines automobile- Uncertainty in
estimated claim severity causes reserve variability for
commercial automobile losses including reserve variability due to
changes in internal claim handling and case reserving practices as
well as due to changes in the external environment.
Directors' and officers' insurance- Uncertainty
regarding the number and severity of class action suits can result
in reserve volatility for both directors' and officers' insurance
claims. Additionally, the Company’s exposure to losses under
directors’ and officers’ insurance policies, both domestically and
internationally, is primarily in excess layers, making estimates of
loss more complex.
Personal Lines automobile- While claims emerge over
relatively shorter periods, estimates can still vary due to a
number of factors, including uncertain estimates of frequency and
severity trends. Severity trends are affected by changes in
internal claim handling and case reserving practices as well as by
changes in the external environment. Changes in claim practices
increase the uncertainty in the interpretation of case reserve
data, which increases the uncertainty in recorded reserve levels.
Severity trends have increased in recent accident years, in part
driven by more expensive parts associated with new automobile
technology, causing additional uncertainty about the reliability of
past patterns. In addition, the introduction of new products and
class plans has led to a different mix of business by type of insured
than the Company experienced in the past. Such changes in mix
increase the uncertainty of the reserve projections, since
historical data and reporting patterns may not be applicable to
the new business.
Assumed reinsurance- While the pricing and reserving
processes can be challenging and idiosyncratic for insurance
companies, the inherent uncertainties of setting prices and
estimating such reserves are even greater for the reinsurer. This
is primarily due to the longer time between the date of an
occurrence and the reporting of claims to the reinsurer, the
diversity of development patterns among different types of
reinsurance treaties or contracts, the necessary reliance on the
ceding companies for information regarding reported claims and
differing pricing and reserving practices among ceding companies.
In addition, trends that have affected development of liabilities in
the past may not necessarily occur or impact liability
53
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
to court delays and closings, may also have potential impacts on
development patterns for liability lines.
Impact of Key Assumptions on
Reserves
As stated above, the Company’s practice is to estimate reserves
using a variety of methods, assumptions and data elements within
its reserve estimation process. The Company does not
consistently use statistical loss distributions or confidence levels
around its reserve estimate and, as a result, does not disclose
reserve ranges.
Across most lines of business, the most important reserve
assumptions are future loss development factors applied to paid
or reported losses to date. The trend in loss cost frequency and
severity is also a key assumption, particularly in the most recent
accident years, where loss development factors are less credible.
The following discussion discloses possible variation from current
estimates of loss reserves due to a change in certain key
indicators of potential losses. For automobile liability lines in both
Personal Lines and Commercial Lines, the key indicator is the
annual loss cost trend, particularly the severity trend component
of loss costs. For workers’ compensation and general liability, loss
development patterns are a key indicator, particularly for more
mature accident years. For workers’ compensation, paid loss
development patterns have been impacted by medical cost
inflation and other changes in loss cost trends. For general
liability, incurred loss development patterns have been impacted
by, among other things, emergence of new types of claims (e.g.,
construction defect claims) and a shift in the mixture between
smaller, more routine claims and larger, more complex claims.
Each of the impacts described below is estimated individually,
without consideration for any correlation among key indicators
or among lines of business. Therefore, it would be inappropriate
to take each of the amounts described below and add them
together in an attempt to estimate volatility for the Company’s
reserves in total. For any one reserving line of business, the
estimated variation in reserves due to changes in key indicators is
a reasonable estimate of possible variation that may occur in the
future, likely over a period of several calendar years. The
variation discussed is not meant to be a worst-case scenario, and,
therefore, it is possible that future variation may be more than
the amounts discussed below.
development in the same manner or to the same degree in the
future. As a result, actual losses and LAE may deviate, perhaps
substantially, from the expected estimates.
International business- In addition to several of the
line-specific trends listed above, the International business
acquired through the Navigators Group book of business may
have additional uncertainty due to geopolitical, foreign currency,
and trade dispute risks.
COVID-19 impacts- As further explained under "Impacts
of COVID-19" within The Hartford's Operations section of
MD&A, through December 31, 2020, the Company incurred $278
of COVID-19 claims in P&C, including in workers' compensation,
property and financial lines. Under workers’ compensation, we
could experience a continuation of COVID-19 incurred losses,
particularly due to laws or directives in certain states that require
coverage of COVID-19 claims for health care and other essential
workers based on a presumption that they contracted the virus
while working. We could also incur losses on general liability
policies if claimants can successfully assert that insureds were
negligent from protecting employees, customers and others from
exposure though we do not expect this exposure to be significant.
Under commercial property policies, we have reserved for
business interruption claims that pertain to policies in middle &
large commercial and in global specialty which do not require
direct physical loss or property damage. We have also
experienced an increase in COVID-19 related claims under
director's and officer's insurance policies. In other cases,
particularly in small commercial, where there are policy
exclusions and the requirement that there be direct physical loss
or damage to the property, we have not recorded loss reserves as
there is no coverage though we have recorded a reserve for legal
defense costs.
In addition to the direct impacts of COVID-19 mentioned above,
we are monitoring for indirect impacts as well. In our commercial
surety lines there continues to be the potential for elevated
frequency and severity due to an increase in the number of
bankruptcies, especially in small businesses and impacted
industries such as hospitality, entertainment and transportation.
In construction surety, there is the potential for elevated losses
from contractors who experience project shutdowns or payment
delays, which negatively impact their cash flows, or result in
disruptions in their supply chains, labor shortages or inflation in
the cost of materials.
Reserve estimates for COVID-19 claims are difficult to estimate.
In establishing reserves for COVID-19 incurred claims through
December 31, 2020, we have provided IBNR at a higher
percentage of ultimate estimated incurred losses than usual as we
expect longer claim reporting patterns given the economic effects
of COVID-19. For example, we expect longer delays than usual
between the time a worker is treated and the date the claim is
eventually submitted for workers' compensation coverage.
Reserve estimates for D&O, E&O and employment practices
liability are subject to significant uncertainty given that estimates
must be made of the expected ultimate severity of claims that
have recently been reported. Several lines have experienced a
decline in frequency during the pandemic months; however,
uncertainty remains with respect to severity given the
pandemic's potential impact on economic activity, driving
behaviors, and the healthcare and legal systems. Changes in the
legal environment and litigation process, including but not limited
54
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% change in
paid loss
development
patterns
8% change in
reported loss
development
patterns
Reserves, Net
of Reinsurance
December 31,
2020
$1.4 billion
Estimated
Range of
Variation in
Reserves
+/-$70
$1.1 billion
+/-$30
$10.9 billion
+/- $400
$4.1 billion
+/- $450
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.
55
The estimated liabilities of insureds and the Company’s exposure
to the insureds depends heavily on an analysis of the relevant
legal issues and litigation environment. This analysis is conducted
by the Company’s lawyers and is subject to applicable privileges.
For both asbestos and environmental reserves, the Company also
analyzes its historical paid and reported losses and expenses year
by year, to assess any emerging trends, fluctuations or
characteristics suggested by the aggregate paid and reported
activity. The historical losses and expenses are analyzed on both a
direct basis and net of reinsurance.
Once the gross ultimate exposure for indemnity and allocated
loss adjustment expense is determined for its insureds by each
policy year, the Company calculates its ceded reinsurance
projection based on any applicable facultative and treaty
reinsurance and the Company’s experience with reinsurance
collections. See the section that follows entitled A&E Adverse
Development Cover that discusses the impact the reinsurance
agreement with NICO may have on future adverse development
of asbestos and environmental reserves, if any.
Uncertainties Regarding Adequacy of A&E
Reserves- A number of factors affect the variability of
estimates for gross asbestos and environmental reserves
including assumptions with respect to the frequency of claims, the
average severity of those claims settled with payment, the
dismissal rate of claims with no payment, resolution of coverage
disputes with our policyholders and the expense to indemnity
ratio. Reserve estimates for gross asbestos and environmental
reserves are subject to greater variability than reserve estimates
for more traditional exposures.
The process of estimating asbestos and environmental reserves
remains subject to a wide variety of uncertainties, which are
detailed in Note 15 - Commitments and Contingencies of Notes
to Consolidated Financial Statements. The Company believes that
its current asbestos and environmental reserves are appropriate.
Future developments could continue to cause the Company to
change its estimates of its gross asbestos and environmental
reserves. Losses ceded under the adverse development cover
("A&E ADC") with NICO in excess of the ceded premium paid of
$650 have resulted in a deferred gain resulting in a timing
difference between when gross reserves are increased and when
reinsurance recoveries are recognized. This timing difference
results in a charge to net income until such periods when the
recoveries are recognized. Consistent with past practice, the
Company will continue to monitor its reserves in Property &
Casualty Other Operations regularly, including its annual reviews
of asbestos liabilities, reinsurance recoverables, the allowance for
uncollectible reinsurance, and environmental liabilities. Where
future developments indicate, we will make appropriate
adjustments to the reserves at that time.
Total P&C Insurance Product Reserves
Development
In the opinion of management, based upon the known facts and
current law, the reserves recorded for the Company’s property
and casualty insurance products at December 31, 2020 represent
the Company’s best estimate of its ultimate liability for unpaid
losses and loss adjustment expenses related to losses covered by
policies written by the Company. However, because of the
significant uncertainties surrounding reserves, it is possible that
management’s estimate of the ultimate liabilities for these claims
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, 2020
Commercial
Lines
Personal
Lines
Property &
Casualty
Other
Operations
Total
Property &
Casualty
Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross $
23,363 $
2,201 $
2,697 $
28,261
Reinsurance and other recoverables [1]
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") [2]
Total provision for unpaid losses and loss adjustment expenses
Change in deferred gain on retroactive reinsurance included in other
liabilities [2]
Payments
Net reserves transferred to liabilities held for sale
Foreign currency adjustment
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 [3]
Loss and loss expense incurred ratio
$
$
4,029
19,334
5,493
397
44
5,934
(102)
(4,348)
(45)
14
20,787
4,271
68
2,133
1,695
209
(438)
1,466
—
(1,791)
—
—
1,808
28
1,178
1,519
—
—
258
258
(210)
(265)
—
—
1,302
1,426
5,275
22,986
7,188
606
(136)
7,658
(312)
(6,404)
(45)
14
23,897
5,725
25,058 $
1,836 $
2,728 $
29,622
8,940 $
3,042
48.6
66.5
58.9
48.7
Prior accident year development (pts) [4]
[1]Includes a cumulative effect adjustment of $1 and $(1) for Commercial Lines and Property & Casualty Other Operations respectively, representing an adjustment to the ACL
(14.6)
0.5
recorded on adoption of accounting guidance for credit losses on January 1, 2020. See Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated
Financial Statements for further information.
[2]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and A&E ADC which, under retroactive reinsurance accounting, is
deferred and is recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the two adverse development cover reinsurance
agreements, refer to Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[3]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income.
[4]“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, 2020, Net of
Reinsurance
Wind and hail
Civil Unrest
Hurricanes and Tropical Storms
Wildfires
Other
Total catastrophe losses
Commercial
Lines
Personal
Lines
Total
$
$
167 $
105
96
21
8
97 $
—
51
61
—
397 $
209 $
264
105
147
82
8
606
In December, 2019, the judge overseeing the bankruptcy of
PG&E Corporation and Pacific Gas and Electric Company
(together, “PG&E”) approved an $11 billion settlement of
insurance subrogation claims to resolve all such claims arising
from the 2017 Northern California wildfires and 2018 Camp
wildfire. That settlement was contingent upon, among other
things, the judge entering an order confirming PG&E’s chapter 11
bankruptcy plan (“PG&E Plan”) incorporating the settlement
56
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
agreement. On June 20, 2020, the bankruptcy court judge
approved the PG&E Plan and PG&E subsequently transferred the
$11 billion settlement amount to a trust designed to allocate and
distribute the settlement among subrogation holders, including
certain of the Company’s insurance subsidiaries. In the second
quarter of 2020, the Company recorded an estimated $289
subrogation benefit though the ultimate amount it collects will
depend on how the Company’s ultimate paid claims subject to
subrogation compare to other insurers’ ultimate paid claims
subject to subrogation. In 2020, the Company received
distributions, net of attorney costs, of $227.
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2020
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property &
Casualty
Insurance
Workers’ compensation
$
(110) $
— $
— $
Workers’ compensation discount accretion
General liability
Marine
Package business
Commercial property
Professional liability
Bond
Assumed reinsurance
Automobile liability
Homeowners
Net asbestos reserves
Net environmental reserves
Catastrophes
Uncollectible reinsurance
Other reserve re-estimates, net
Prior accident year development before change in deferred
gain
Change in deferred gain on retroactive reinsurance included in
other liabilities
Total prior accident year development
$
35
237
3
(58)
(4)
(14)
(19)
(6)
27
—
—
—
(149)
—
—
(58)
102
44 $
—
—
—
—
—
—
—
—
(61)
7
—
—
(380)
—
(4)
(438)
—
—
—
—
—
—
—
—
—
—
(2)
—
—
(8)
58
48
—
(438) $
210
258 $
(110)
35
237
3
(58)
(4)
(14)
(19)
(6)
(34)
7
(2)
—
(529)
(8)
54
(448)
312
(136)
57
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for
the Year Ended December 31, 2019
Beginning liabilities for unpaid losses and loss adjustment
expenses, gross
Reinsurance and other recoverables
Beginning liabilities for unpaid losses and loss adjustment
expenses, net
Navigators Group acquisition
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes
Current accident year catastrophes
Prior accident year development [1]
Total provision for unpaid losses and loss adjustment expenses
Change in deferred gain on retroactive reinsurance included in
other liabilities [1]
Payments
Foreign currency adjustment
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
Commercial
Lines
Personal
Lines
Property &
Casualty Other
Operations
Total Property
& Casualty
Insurance
$
19,455 $
2,456 $
2,673 $
3,137
16,318
2,001
4,913
323
(44)
5,192
(16)
(4,161)
(1)
19,333
4,030
108
2,348
—
2,087
140
(42)
2,185
—
(2,400)
—
2,133
68
987
1,686
—
—
—
21
21
—
(187)
—
1,520
1,177
24,584
4,232
20,352
2,001
7,000
463
(65)
7,398
(16)
(6,748)
(1)
22,986
5,275
$
$
23,363 $
8,325 $
50.0
62.6
2,201 $
2,697 $
28,261
3,235
74.2
68.3
Prior accident year development (pts) [3]
[1]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators ADC which, under retroactive reinsurance accounting, is deferred
(0.5)
(1.3)
and recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the Navigators ADC agreement, refer to Note 12 - Reserve
for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[2]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income.
[3]“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
58
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Current Accident Year Catastrophe Losses for the Year Ended December 31, 2019, Net of
Reinsurance
Commercial
Lines
Personal
Lines
Total
Wind and hail
Winter storms
Tropical storms
Hurricanes
Wildfires
Tornadoes
Typhoons
Other
$
157 $
54
18
20
4
53
16
1
102 $
18
5
4
4
7
—
—
259
72
23
24
8
60
16
1
Total catastrophe losses
$
323 $
140 $
463
Unfavorable (Favorable) Prior Accident Year Development for the Year Ended December 31, 2019
Total Property &
Casualty
Insurance
Property &
Casualty Other
Operations
Commercial
Lines
Personal
Lines
Workers’ compensation
$
(120) $
— $
— $
(120)
Workers’ compensation discount accretion
General liability
Marine
Package business
Commercial property
Professional liability
Bond
Assumed reinsurance
Automobile liability
Homeowners
Net asbestos reserves
Net environmental reserves
Catastrophes
Uncollectible reinsurance
Other reserve re-estimates, net
Total prior accident year development
Change in deferred gain on retroactive reinsurance included in
other liabilities
Total prior accident year development
$
33
61
8
(47)
(11)
29
(3)
3
27
—
—
—
(40)
(5)
5
(60)
16
(44) $
—
—
—
—
—
—
—
—
(38)
3
—
—
(2)
—
(5)
(42)
—
(42) $
—
—
—
—
—
—
—
—
—
—
—
—
—
(25)
46
21
—
21 $
33
61
8
(47)
(11)
29
(3)
3
(11)
3
—
—
(42)
(30)
46
(81)
16
(65)
59
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for
the Year Ended December 31, 2018
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 $
2,588 $
Reinsurance and other recoverables
3,147
71
739
23,775
3,957
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
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
15,746
2,223
1,849
19,818
4,037
275
(200)
4,112
(3,540)
16,318
3,137
2,249
546
(32)
2,763
(2,638)
2,348
108
—
—
65
65
(228)
1,686
987
6,286
821
(167)
6,940
(6,406)
20,352
4,232
$
$
19,455 $
7,081 $
50.0
58.4
2,456 $
2,673 $
24,584
3,439
76.7
81.3
Prior accident year development (pts) [2]
[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.
(2.8)
(0.9)
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
Less: reinsurance recoverable under the property aggregate treaty [1]
Commercial
Lines
Personal
Lines
Total
$
124 $
164 $
50
1
—
56
71
1
—
303
(28)
25
1
2
384
23
—
1
600
(54)
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
275 $
546 $
$
288
75
2
2
440
94
1
1
903
(82)
821
Risk Management — Insurance Risk.
60
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
Total prior accident year development
$
(200) $
—
—
—
—
—
—
(18)
(25)
—
—
18
—
(7)
(32) $
—
—
—
—
—
—
—
—
—
—
—
22
43
40
52
(26)
(12)
(12)
2
(33)
(25)
—
—
(49)
22
38
65 $
(167)
P&C Other Operations
Total Reserves, Net of Reinsurance
For discussion of the factors contributing to unfavorable
(favorable) prior accident year reserve development, refer to
Note 12 - Reserve for Unpaid Losses and Loss Adjustment
Expenses of Notes to Consolidated Financial Statements.
Property & Casualty Other Operations
Net reserves and reserve activity in Property & Casualty Other
Operations are categorized and reported as asbestos,
environmental, and “all other”. The “all other” category of
reserves covers a wide range of insurance and assumed
reinsurance coverages, including, but not limited to, potential
liability for construction defects, lead paint, silica, pharmaceutical
products, head injuries, sexual molestation and sexual abuse 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.
Asbestos and Environmental Reserves
The vast majority of the Company's exposure to A&E relates to
policy coverages provided prior to 1986, reported within the P&C
Other Operations segment (“Run-off A&E”). In addition, since
1986, the Company has written asbestos and environmental
exposures under general liability policies and pollution liability
under homeowners policies, which are reported in the
Commercial Lines and Personal Lines segments.
61
$1,686$1,686$1,520$1,520$1,302$1,302$551$526$513$151$120$87$984$874$702All otherEnvironmentalAsbestos12/31/1812/31/1912/31/20$0$500$1,000$1,500$2,000
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Run-off A&E Summary as of December 31,
2020
Gross
Direct
Asbestos Environmental
Total
A&E
$ 1,252 $
449 $ 1,701
Assumed Reinsurance
460
Total
1,712
67
516
527
2,228
Ceded- other than NICO
(444)
(97)
(541)
Ceded - NICO A&E ADC
"Run-off"[1]
(566)
(332)
(898)
Net
[1]Including $898 of ceded losses for Run-off A&E and a ($38) reduction in ceded
702 $
87 $
$
789
losses for Commercial Lines and Personal Lines, cumulative net incurred losses of
$860 have been ceded to NICO under an adverse development cover reinsurance
agreement. See the section that follows entitled A&E Adverse Development Cover
for additional information.
Rollforward of Run-off A&E Losses and LAE
Asbestos Environmental
2020
Beginning liability — net
$
874 $
Losses and loss adjustment
expenses incurred
Losses and loss adjustment
expenses paid
Reclassification of allowance for
uncollectible insurance [1]
Ending liability — net
2019
Beginning liability — net
Losses and loss adjustment
expenses incurred
Losses and loss adjustment
expenses paid
Reclassification of allowance for
uncollectible insurance [1]
$
$
(2)
(172)
2
702 $
984 $
—
(111)
1
Ending liability — net
$
874 $
2018
Beginning liability — net
$ 1,143 $
Losses and loss adjustment
expenses incurred
Losses and loss adjustment
expenses paid
—
(159)
120
—
(33)
—
87
151
—
(32)
1
120
182
—
(31)
151
Ending liability — net
[1] Related to the reclassification of an allowance for uncollectible reinsurance from
984 $
$
the "all other" category of P&C Other Operations reserves.
A&E Adverse Development Cover
Effective December 31, 2016, the Company entered into an A&E
ADC reinsurance agreement with NICO, a subsidiary of
Berkshire, to reduce uncertainty about potential adverse
development. Under the A&E ADC, the Company paid a
reinsurance premium of $650 for NICO to assume adverse net
loss and allocated loss adjustment expense reserve development
up to $1.5 billion above the Company’s existing net A&E reserves
62
as of December 31, 2016 of approximately $1.7 billion, including
both Run-off A&E and A&E reserves in Commercial Lines and
Personal Lines. The $650 reinsurance premium was placed in a
collateral trust account as security for NICO’s claim payment
obligations to the Company. The Company has retained the risk
of collection on amounts due from other third-party reinsurers
and continues to be responsible for claims handling and other
administrative services, subject to certain conditions. The A&E
ADC covers substantially all the Company’s A&E reserve
development up to the reinsurance limit.
Under retroactive reinsurance accounting, net adverse A&E
reserve development 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 have been recognized as a dollar-for-dollar offset
to direct losses incurred. Cumulative ceded losses exceeding the
$650 reinsurance premium paid have resulted in a deferred gain.
As of December 31, 2020, the Company has incurred a
cumulative $860 in adverse development on A&E reserves that
have been ceded under the A&E ADC treaty with NICO, including
$898 for Run-off A&E reserves and ($38) for A&E reserves in
Commercial Lines and Personal Lines. As such, $640 of coverage
is available for future adverse net reserve development, if any. As
a result, the Company has recorded a $210 deferred gain within
other liabilities, representing the difference between the
reinsurance recoverable of $860 and ceded premium paid of
$650. The deferred gain is 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 will
result in charges against earnings, which may be significant.
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.
Since December 31, 2016, asbestos and environmental net
reserves have been declining since all adverse development has
been ceded to NICO, up to a limit of $1.5 billion and the deferred
gain on retroactive reinsurance has been recorded within other
liabilities rather than in net loss and loss adjustment expense
reserves. Recoveries from NICO will not be collected until the
Company has cumulative loss payments of more than the $1.7
billion carrying value of net reserves as of December 31,
2016. Accordingly, the payment of losses without any current
collection of recoveries from NICO has reduced the Company’s
net loss reserves which decreases the net survival ratios such
that, unadjusted, the net survival ratios would not be
representative of the true number of years of average loss
payments covered by the reserves. Therefore, the net survival
ratios presented in the table below are calculated before
considering the effect of the A&E ADC reinsurance agreement
but net of other reinsurance in place.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Net and Gross Survival Ratios
One year net survival ratio [1]
Three year net survival ratio [1]
One year gross survival ratio
Asbestos Environmental
7.3
8.6
6.8
12.7
13.1
13.2
12.5
Three year gross survival ratio
[1] As of December 31, 2020, the one year net survival ratios after considering the
reduction in reserves for losses ceded to the ADC were 4.1 and 2.6 for asbestos
and environmental, respectively. As of December 31, 2020, the three year net
survival ratios after considering the ADC were 4.7 and 2.7, respectively.
8.6
Run-off A&E Paid and Incurred Losses and
LAE Development
Asbestos
Environmental
Paid
Losses &
LAE
Incurred
Losses &
LAE
Paid
Losses &
LAE
Incurred
Losses &
LAE
$
252 $
170 $
40 $
141
(80)
(40)
(7)
(35)
—
(132)
—
(106)
172 $
(2) $
33 $
—
131 $
115 $
39 $
95
(20)
(39)
—
(76)
(7)
—
111 $
— $
32 $
(39)
(56)
—
213 $
249 $
47 $
83
$
$
$
$
2020
Gross
Ceded- other
than NICO
Ceded - NICO
A&E ADC
Net
2019
Gross
Ceded- other
than NICO
Ceded - NICO
A&E ADC
Net
2018
Gross
Ceded- other
than NICO
Ceded - NICO
A&E ADC
(54)
(85)
(16)
—
(164)
—
(12)
(71)
—
Net
$
159 $
— $
31 $
Annual Reserve Reviews
Review of Asbestos and Environmental
Reserves
The Company performs its regular comprehensive annual review
of asbestos and environmental reserves in the fourth quarter,
including both Run-off A&E (P&C Other Operations) and asbestos
and environmental reserves included in Commercial Lines and
Personal Lines. As part of the evaluation of asbestos and
environmental reserves in the fourth quarter of 2020, the
Company reviewed all of its open direct domestic insurance
accounts exposed to asbestos and environmental liability, as well
as assumed reinsurance accounts.
2020 comprehensive annual reviews
As a result of the 2020 fourth quarter review, the Company
increased estimated asbestos reserves before NICO reinsurance
in P&C Other Operations by $130, primarily due to an increase in
the rate of asbestos claims settlements for both mesothelioma
63
and non-mesothelioma claims. In addition, average settlement
values and defense costs were higher than anticipated, driven by
elevated plaintiff demands. Overall, the number of claim filings in
the period covered by the 2020 study was roughly flat with the
2019 study, driven by an increase in non-mesothelioma claim
filings, while the number of mesothelioma claim filings decreased
as expected. The increase in asbestos reserves was offset by $132
reinsurance recoverable under the NICO treaty, recognizing ($2)
in reserve releases not subject to the NICO treaty.
As a result of the 2020 fourth quarter review, the Company
increased estimated environmental reserves before NICO
reinsurance in P&C Other Operations by $106, primarily due to
an increasing number of claims and suits alleging contamination
from or exposure to per & polyfluoroalkyl substances ("PFAS"). In
addition, higher than anticipated remediation costs and legal
defense costs also contributed to the reserve increase. The
increase in environmental reserves was offset by a $106
reinsurance recoverable under the NICO treaty.
The total $236 increase in asbestos and environmental reserves
in P&C Other Operations was offset by a $238 reinsurance
recoverable under the NICO treaty, with a ($2) release in
asbestos reserves not subject to the NICO treaty. Including a
reduction of asbestos and environmental reserves in Commercial
Lines and Personal Lines, the net increase in A&E reserves ceded
to the A&E ADC in 2020 was $220 offset by a $220 increase in
reinsurance recoverables under the NICO treaty. However, since
cumulative losses ceded to the A&E ADC of $860 exceed the
$650 of ceded premium paid, the Company recognized a $210
increase in deferred gain on retroactive reinsurance, resulting in
the Company recording a charge to earnings of $208 in 2020,
consisting of the $210 deferred gain net of the $2 of favorable
development on A&E reserves not subject to the NICO treaty.
2019 comprehensive annual reviews
During the 2019 fourth quarter review, the Company increased
estimated asbestos reserves before NICO reinsurance in P&C
Other Operations by $76, primarily due to an increase in average
settlement values, most notably from mesothelioma claims,
driven by elevated plaintiff demands. In addition, cost-sharing
agreements and settlements with certain insureds reduced the
uncertainty of the Company’s asbestos liability but resulted in a
reserve increase. Partially offsetting the adverse development
was a decrease in the number of claim filings, most notably from
mesothelioma claims. The increase in reserves was offset by a
$76 reinsurance recoverable under the NICO treaty.
As a result of the 2019 fourth quarter review, the Company
increased estimated environmental reserves before NICO
reinsurance in P&C Other Operations by $56, primarily due to
regulatory remediation requirements that changed in 2019 for
certain sites polluted by coal ash and resulted in more costly and
extensive remediation plans, a higher than anticipated number of
claims associated with PFAS, and increased defense and cleanup
costs associated with Superfund sites. The increase in
environmental reserves was offset by a $56 reinsurance
recoverable under the NICO treaty.
The total $132 increase in asbestos and environmental reserves
in P&C Other Operations was offset by a $132 reinsurance
recoverable under the NICO treaty. Including a reduction of
asbestos and environmental reserves in Commercial Lines and
Personal Lines, the net increase in A&E reserves in 2019 was
$117 offset by a $117 increase in reinsurance recoverables under
the NICO treaty.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
For information regarding the 2018 comprehensive annual
review, refer to Part 2, Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations in The
Hartford’s 2019 Form 10-K Annual Report.
Major Categories of Asbestos Accounts
Direct asbestos exposures include both Known and Unallocated
Direct Accounts.
•
Known Direct Accounts- includes both Major Asbestos
Defendants and Non-Major Accounts, and represent
approximately 71% of the Company's total Direct gross
asbestos reserves as of December 31, 2020 compared to
approximately 73% as of December 31, 2019. 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.
• 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 29% of
the Company's Direct gross asbestos reserves as of
December 31, 2020 compared to approximately 27% as of
December 31, 2019.
Review of "All Other" Reserves in Property &
Casualty Other Operations
Prior year development on all other reserves resulted in increases
of $50, $21 and $65, respectively for calendar years 2020, 2019
and 2018. Included in the 2020 adverse reserve development was
a $35 increase in reserves for unallocated loss adjustment
expenses ("ULAE"), primarily due to an increase in expected
aggregate claim handling costs associated with asbestos and
environmental claims, as well as higher than anticipated
unallocated loss adjustment expenses in recent years, prompting
an increase in the projected run rate expense. In addition,
elevated claim activity related to certain mass torts and assumed
residual value policies contributed to the overall reserve
increases, offset by favorable development from previously
disputed or potentially uncollectible reinsurance.
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. In performing its
assessment, the Company evaluates the collectibility of the
reinsurance recoverables and the adequacy of the allowance for
uncollectible reinsurance associated with older, long-term
casualty liabilities reported in Property & Casualty Other
Operations. In conducting these evaluations, the company used
its most recent detailed evaluations of ceded liabilities reported
in the segment. The Company analyzed the overall credit quality
of the Company’s reinsurers, recent trends in arbitration and
litigation outcomes in disputes between cedants and reinsurers,
and recent developments in commutation activity between
reinsurers and cedants. As of 2020, 2019, and 2018 the
allowance for uncollectible reinsurance for Property & Casualty
Other Operations totaled $60, $71 and $105, 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 and Impact of Key Assumptions on
Reserves sections.
Range of Prior Accident Year Unfavorable (Favorable) Development for the Ten Years Ended
December 31, 2020
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, 2020
[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 (1.5%)
(20.5%) - 8.3%
(1.3%) - 1.0%
(0.8%) - 2.4%
0.9% - 17.0%
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
64
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
variability for each of the segments are discussed under Critical
Accounting Estimates for Property & Casualty Insurance Product
Reserves and Asbestos and Environmental Reserves. See the
section entitled Property & Casualty Other Operations, Annual
Reserve Reviews about the impact that the A&E ADC retroactive
reinsurance agreement with NICO may have on net reserve
changes of asbestos and environmental reserves going forward.
The following table summarizes the effect of reserve re-
estimates, net of reinsurance, on calendar year operations for the
ten-year period ended December 31, 2020. 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, 2020 for the
indicated accident year in each row. This table does not include
Navigators Group reserve re-estimates for periods prior to the
acquisition of the business on May 23, 2019.
Effect of Net Reserve Re-estimates on Calendar Year Operations
By Accident Year
2010 & Prior
2011
2012
2013
2014
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
Calendar Year
$ 367 $
(40) $ 25 $ 330 $ 350 $ 316 $ 87 $
(37) $ 38 $ 499 $ 1,935
36
148
(4)
12
19
—
(98)
(55)
(43)
(14)
(6)
(35)
(29)
20
6
(12)
(33)
(19)
11
(15)
(2)
(54)
(19)
(15)
(26)
(29)
(10) 174
(25)
(138)
(8)
(239)
(25)
(121)
2015
67
(9)
2016
(55)
(29)
2017
(276)
(169)
2018
(190)
(268)
2019
(92)
(92)
(81) $ (136) $ 1,065
Increase (decrease) in net reserves [1] [2] $ 367 $
[1]For the 2020 and 2019 calendar years, net favorable prior accident year development recognized in the Consolidated Statement of Operations was $(448) rather than $(136)
and $65 rather than $81, respectively, as shown in this table as the Company recognized a $312 and $16 deferred gain on retroactive reinsurance. For additional information
regarding the two adverse development cover reinsurance agreements, refer to Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated
Financial Statements.
(4) $ 192 $ 228 $ 250 $ 457 $
19
(11)
(116)
78
(93)
14
9
(41) $ (167) $
(41)
(29)
191
[2]For calendar years before 2017, the 2010 and prior accident year development includes adverse development for A&E reserves. Beginning with the 2017 calendar year, A&E
reserve development has been ceded to NICO.
The commentary below explains, by accident year, the total prior
accident year development recognized over the past 10 years.
Accident years 2010 and Prior
The net increases in estimates of ultimate losses for accident
years 2010 and prior are driven mostly by increased reserves for
asbestos and environmental reserves, and also by increased
estimates for customs bonds, sexual molestation and sexual
abuse and other mass torts claims.
Partially offsetting these reserve increases was favorable
development in general liability and personal automobile liability.
Accident year 2011
Unfavorable changes in estimates of ultimate losses on accident
year 2011 were primarily related to workers' compensation and
commercial automobile liability. Workers' compensation loss cost
trends were higher than initially expected as an increase in
frequency outpaced a moderation of severity trends. Unfavorable
commercial automobile liability reserve re-estimates were driven
by higher frequency of large loss bodily injury claims.
Accident years 2012 and 2013
Estimates of ultimate losses were decreased for accident years
2012 and 2013 due to favorable frequency and/or medical
severity trends for workers’ compensation and favorable
professional liability claim emergence. Favorable emergence of
property lines of business, including catastrophes, for the 2013
accident year, is partially offset by increased reserves in
automobile liability due to increased severity of large claims.
Accident years 2014 and 2015
Changes in estimates of ultimate losses for accident years 2014
and 2015 were largely driven by unfavorable frequency and
severity trends for personal and commercial automobile liability,
increased severity of liability claims on package business and
increased estimated severity on the acquired Navigators Group
book of business related to U.S. construction, premises liability,
products liability and excess casualty offset by favorable
frequency and medical severity trends for workers'
compensation.
Accident year 2016
Estimates of ultimate losses were decreased for the 2016
accident year largely due to reserve decreases on short-tail lines
of business, where results emerge more quickly, and workers’
compensation due to lower estimated claim severity, somewhat
offset by unfavorable reserve estimates for higher hazard general
liability exposures due to increased frequency and severity
trends, higher estimated severity in middle & large commercial
and on the acquired Navigators Group book of business related to
U.S. construction, premises liability, products liability and excess
casualty.
Accident year 2017
Ultimate loss estimates were decreased for the 2017 accident
year mainly due to release of reserves related to catastrophes,
lower reserve estimates in personal automobile liability due to
emergence of lower estimated severity and lower reserve
estimates for workers’ compensation related to lower than
previously estimated claim severity , somewhat offset by
65
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
increases in estimates of ultimate losses in general liability and
bond. Partially offsetting was an increase to general liability
reserves that was related to high hazard exposures which
experienced increased frequency and severity trends. In addition,
unfavorable bond reserve re-estimates were driven by large
claims. On the Navigators Group book of business, reserve
increases for professional liability were related to large syndicate
D&O losses.
Accident year 2018
Ultimate loss estimates were decreased for the 2018 accident
year mainly due to reduction in estimated catastrophe reserves
for California wildfires and for various wind and hail events.
Reserve estimates were also reduced, to a lesser extent, for
personal automobile liability which decreased due to lower than
previously expected claim severity. These reserve decreases
were slightly offset by increases in commercial automobile
liability, professional liability and general liability. Commercial
automobile liability reserve increases were related to higher
estimated severity on middle & large commercial. Increases in
general liability reserves for middle market and complex liability
claims were also largely due to higher than previously expected
severity. On the Navigators Group book of business, reserve
increases for professional liability were related to large loss
activity and increased estimated severity on directors and
officers reserves.
Accident year 2019
Ultimate loss estimates were decreased for the 2019 accident
year mainly due to favorable emergence of property lines of
business, mainly related to catastrophes, slightly offset by
increases in commercial automobile liability reserves due to
higher than expected large losses in middle & large commercial.
Group Benefit LTD Reserves,
Net of Reinsurance
The Company establishes reserves for group life and accident &
health contracts, including long-term disability coverage, for both
reported claims and claims related to insured events that the
Company estimates have been incurred but have not yet been
reported. As long-term disability reserves are long-tail claim
liabilities, they are discounted because the payment pattern and
the ultimate costs are reasonably fixed and determinable on an
individual claim basis. The Company held $6,494 and $6,616 of
LTD unpaid losses and loss adjustment expenses, net of
reinsurance, as of December 31, 2020 and 2019, 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
66
DLR is retained for the possibility that the claim reopens upon
further evidence of disability. In addition, a reserve for estimated
unpaid claim expenses is included in the DLR.
The DLR also includes a liability for potential payments to
pending claimants beyond the elimination period who have not
yet been approved for LTD. In these cases, the present value of
future benefits is reduced for the likelihood of claim denial based
on Company experience.
Estimates for incurred but not reported ("IBNR") claims are made
by applying completion factors to expected emerged experience
by line of business. Included within IBNR are bulk reserves for
claims reported but still within the waiting period until benefits
are paid, typically 3 or 6 months depending on the
contract. Completion factors are derived from standard actuarial
techniques using triangles that display historical claim count
emergence by incurral month. These estimates are reviewed for
reasonableness and are adjusted for current trends and other
factors expected to cause a change in claim emergence. The
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.
Impact of Key Assumptions on
Reserves
The key assumptions affecting our group life and accident &
health reserves including disability include:
Discount Rate - The discount rate is the interest rate at
which expected future claim cash flows are discounted to
determine the present value. A higher selected discount rate
results in a lower reserve. If the discount rate is higher than our
future investment returns, our invested assets will not earn
enough investment income to cover the discount accretion on our
claim reserves which would negatively affect our profits. For each
incurral year, the discount rates are estimated based on
investment yields expected to be earned net of investment
expenses. The incurral year is the year in which the claim is
incurred and the estimated settlement pattern is determined.
Once established, discount rates for each incurral year are
unchanged except that LTD reserves assumed from the
acquisition of Aetna's U.S. group life and disability business are all
discounted using rates as of the November 1, 2017 acquisition
date. The weighted average discount rate on LTD reserves was
3.4% in 2020 and 2019. 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 $29, pretax, as of December 31, 2020.
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
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 9 years,
claim termination rates for a single incurral year have generally
increased and have ranged from 6% below to 7% above current
assumptions over that time period. For a single recent incurral
year (such as 2020), 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, 2020, 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.
Impact of COVID-19 on 2020 Results
of Operations
Within Group Benefits, the Company experienced excess
mortality in its group life business of $239 in 2020, primarily
caused by direct and indirect impacts of COVID-19. Within the
group disability business, in 2020 the Company recognized $29 of
COVID-19 direct losses from short-term disability claims, more
than offset by $38 of favorable frequency on other short-term
disability claims.
Current Trends Contributing to
Reserve Uncertainty
We hedge our interest rate exposure over a three year period at
the time we price and sell long-term disability policies and our
weighted average discount rate assumption for the 2020 incurral
year is up slightly from that of the 2019 incurral year.
While we have not seen a significant change in claim recovery
patterns to date, in future periods, because of COVID-19, we
could experience a delay in the Social Security Administration’s
processing of disability claims and a delay in physicians approving
a disability claimant’s ability to return to work, resulting in lower
expected claim terminations or recoveries, including Social
Security offsets. Also, due to the effects on the economy,
including higher unemployment, we could experience an increase
in claim incidence on long-term disability claims.
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. Effective January 1, 2020, the Company adopted
updated accounting guidance on recognition and measurement of
goodwill impairment, as required. The updated guidance requires
recognition and measurement of goodwill impairment based on
the excess of the carrying value of the reporting unit over its
estimated fair value, up to the amount of the reporting unit’s
goodwill.
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
67
growth, decreases in earnings projections and increases in the
weighted average cost of capital will all cause a reporting unit’s
fair value to decrease, increasing the possibility of impairment.
A reporting unit is defined as an operating segment or one level
below an operating segment. The Company’s reporting units, for
which goodwill has been allocated consist of Commercial Lines,
Personal Lines, Group Benefits and Hartford Funds.
The carrying value of goodwill was $1,911 as of December 31,
2020 and was comprised of $659 for Commercial Lines, $119 for
Personal Lines, $861 for Group Benefits, and $272 for Hartford
Funds.
The annual goodwill assessment for the reporting units was
completed as of October 31, 2020, and resulted in no write-
downs of goodwill for the year ended December 31, 2020. All
reporting units passed the annual impairment test with a
significant margin. For information regarding the 2019 and 2018
impairment tests see Note 11 - Goodwill & Other Intangible
Assets of Notes to Consolidated Financial Statements.
Due to the continuing impacts in the economy because of the
COVID-19 pandemic, near-term expected net cash flows over the
forecast period reflect estimated COVID-19 claims and economic
effects of the pandemic. Considering the impacts of COVID-19, if
the weighted average cost of capital used for purposes of
discounting increases significantly or if the economic downturn
worsens or persists for an extended period and the Company's
actual and forecasted operating results deteriorate, the Company
may determine it is more likely than not that a reporting unit's fair
value is below its carrying value, including goodwill, which could
result in an impairment of goodwill.
Valuation of Investments and
Derivative Instruments
Fixed Maturities, Equity Securities,
Short-term Investments, and
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 derivative instruments are determined primarily
using a discounted cash flow model or option model technique
and incorporate counterparty credit risk. In some cases, quoted
market prices for exchange-traded transactions and transactions
cleared through central clearing houses ("OTC-cleared") may be
used and in other cases independent broker quotes may be used.
For further discussion, see the Fixed Maturities, Equity Securities,
Short-term Investments and Derivatives section in Note 5 - Fair
Value Measurements of Notes to Consolidated Financial
Statements.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Evaluation of Credit Losses on Fixed
Maturities, AFS and ACL on Mortgage
Loans
Each quarter, a committee of investment and accounting
professionals evaluates investments to determine if a credit loss
is present for fixed maturities, AFS or an ACL 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 credit
losses recorded, see the Credit Losses on Fixed Maturities, AFS
and Intent-to-Sell Impairments and ACL on Mortgage Loans
sections within the Investment Portfolio Risks and Risk
Management section of the MD&A.
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.
68
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
SEGMENT OPERATING SUMMARIES
Results of Operations
COMMERCIAL LINES
Underwriting Summary
Written premiums
Change in unearned premium reserve
Earned premiums
Fee income
Losses and loss adjustment expenses
2020
2019
2018
$ 8,969 $ 8,452 $ 7,136
59
162
89
8,910
8,290
7,047
30
35
34
Current accident year before catastrophes
5,488
4,913
4,037
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 (loss) gain
Net servicing income
Net investment income [2]
Net realized capital gains (losses) [2]
Loss on reinsurance transaction
Other (expenses)
Income before income taxes
Income tax expense [3]
Net income
397
44
5,929
1,397
1,594
28
29
(37)
4
323
(44)
5,192
1,296
1,600
18
30
189
2
1,160
1,129
(60)
271
—
(35)
(91)
(38)
1,032
1,462
275
(200)
4,112
1,048
1,369
4
23
525
2
997
(43)
—
(2)
1,479
176
267
270
856 $ 1,192 $ 1,212
$
Increase
(Decrease)
From 2019 to
2020
Increase
(Decrease)
From 2018 to
2019
6%
(64%)
7%
(14%)
12%
23%
NM
14%
8%
—%
56%
(3%)
(120%)
100%
3%
(122%)
100%
8%
(29%)
(35%)
(28%)
18%
82%
18%
3%
22%
17%
78%
26%
24%
17%
NM
30%
(64%)
—%
13%
NM
NM
NM
(1%)
1%
(2%)
[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 Development, Net of Reinsurance and Note 12- Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[2]For discussion of consolidated investment results, see MD&A - Investment Results.
[3]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
69
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Small Commercial:
Net new business premium
Policy count retention
Renewal written price increases
Renewal earned price increases
Premium retention
Premium Measures
2020
2019
2018
$
557
$
646
$
600
84 %
2.0 %
2.3 %
84 %
83 %
1.8 %
1.9 %
85 %
82 %
2.5 %
3.8 %
84 %
Policies in-force as of end of period (in thousands)
1,283
1,291
1,271
Middle Market [1]:
Net new business premium
Policy count retention
Renewal written price increases
Renewal earned price increases
Premium retention
Policies in-force as of end of period (in thousands)
Global Specialty:
Global specialty gross new business premium [2]
U.S. global specialty renewal written price increases
U.S. global specialty renewal earned price increases
[1]Middle market disclosures exclude loss sensitive and programs businesses.
[2]Excludes Global Re and Continental Europe Operations and is before ceded reinsurance.
Underwriting Ratios
$
479
$
584
$
540
80 %
3.8 %
2.7 %
84 %
62
78 %
2.0 %
1.7 %
83 %
64
78 %
7.4 %
6.4 %
77 %
59
752
17.6 %
13.1 %
$
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
2020
2019
2018
61.6
4.5
0.5
66.5
33.5
0.3
100.4
59.3
3.9
57.3
3.9
(0.5)
(2.8)
62.6
34.7
0.4
97.7
58.4
33.9
0.3
92.6
Impact of current accident year catastrophes and prior year development
(5.0)
(3.4)
(1.1)
Impact of current accident year change in loss reserves upon acquisition
of a business [1]
—
(0.3)
—
Increase
(Decrease)
From 2019 to
2020
Increase
(Decrease)
From 2018 to
2019
2.3
0.6
1.0
3.9
(1.2)
(0.1)
2.7
(1.6)
0.3
2.0
—
2.3
4.2
0.8
0.1
5.1
(2.3)
(0.3)
2.5
Underlying combined ratio
[1]Upon acquisition of Navigators Group and a review of Navigators Insurers reserves, the year ended December 31, 2019 included $68 of prior accident year reserve increases and
94.0
95.5
91.5
1.5
$29 of current accident year reserve increases which were excluded for the purposes of the underlying combined ratio calculation.
2021 Outlook
The Company expects higher Commercial Lines written
premiums in 2021, with growth across small commercial, middle
& large commercial, and global specialty. In small commercial,
policy retention is expected to remain strong with new business
growth across all lines of business. Assuming the economy
recovers with the rollout of vaccines, we expect an increase in
insured exposures, including from higher payrolls on workers’
compensation policies. In middle & large commercial, assuming a
continued economic recovery, we expect written premium
growth in our general industries book of business driven by new
business growth and an increase in insured exposures and that we
will generate new business growth in specialized industries as
well as with large and complex solutions. In global specialty,
premium growth in 2021 is expected primarily in wholesale and
financial lines benefiting from written pricing increases.
In 2021, management expects positive renewal written pricing in
all lines of business except workers' compensation, with workers'
compensation pricing expected to be flat to slightly positive in
middle market and down in small commercial. In small commercial
70
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
and middle & large commercial, high-single digit rate increases
are expected to continue in commercial auto, general liability and
property. In global specialty, in 2021, we expect written pricing
increases in the high teens in international, low double-digits in
wholesale and high single digits in US financial lines. Written
pricing increases in 2021 in lines other than workers’
compensation are driven by a number of factors including the
effects of social inflation, increased catastrophe losses due to
changing weather patterns, and a prolonged low interest rate
environment, that puts added pressure on the need for
underwriting profits to make up for the lost investment yield.
The Company expects the Commercial Lines combined ratio will
be between approximately 93.5 and 95.5 for 2021, compared to
100.4 in 2020, primarily due to lower current accident year
catastrophe losses expected in 2021 and lower COVID-19
incurred claims. The underlying combined ratio is expected to be
lower as fewer COVID-19 claims are expected in 2021 as we
emerge from the pandemic. Apart from lower expected
COVID-19 claims, earned pricing increases in excess of moderate
increases in loss costs in most lines will be partially offset by
continued margin compression in small commercial workers’
compensation, while the expense ratio is expected to improve by
nearly a point. Current accident year catastrophes are assumed
to be 3.1 points of the combined ratio in 2021 compared to 4.5
points in 2020.
Net Income
Underwriting Gain (Loss)
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Underwriting loss in 2020 compared with an underwriting
gain in 2019 with the underwriting loss in 2020 primarily due to
COVID-19 incurred losses in property, workers’ compensation
and financial and other lines, higher current accident year
catastrophes, a change from net favorable prior accident year
development in 2019 to net unfavorable prior accident year
development in 2020 and the effect of lower earned premiums
excluding the effect of the Navigators acquisition. Underwriting
expenses were down slightly as a decrease in incentive
compensation, benefits costs, commissions and travel costs were
largely offset by the inclusion of Navigators for a full twelve
months in 2020, an increase in the ACL on premiums receivable in
2020 due to the economic impacts of COVID-19 and the effect of
a reduction in state taxes and assessments in 2019. In 2020, the
acquisition of Navigators Group contributed to an increase in
earned premiums with a corresponding increase to losses and loss
adjustment expenses, amortization of DAC and underwriting
expenses.
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Net income decreased primarily due to a change from an
underwriting gain in 2019 to an underwriting loss in 2020 and a
change from net realized capital gains in 2019 to net realized
capital losses in 2020, partially offset by higher net investment
income. Also partially offsetting the decline in net income was
$91 before tax of ADC ceded premium in the prior year period.
For further discussion of investment results, see MD&A -
Investment Results.
71
$1,212$1,192$856201820192020$0$500$1,000$1,500$525$189$(37)201820192020$-200$0$200$400$600 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Earned Premiums
automobile. The international lines also achieved strong price
increases, led by D&O.
New business premium decreased in 2020 in most lines driven by
lower quote volume due to the economic effects of COVID-19
and a competitive pricing environment, though to a lesser extent
in the second half of 2020. Also contributing to the decrease in
new business in small commercial was the effect of new business
from the 2018 Foremost renewal rights agreement in 2019.
•
Small commercial written premium declined in 2020 driven by
a decrease in workers compensation, partially offset by
growth in package business.
• Middle & large commercial written premium decreased in
2020 driven by lower new business and premium retention
across all lines, partially offset by the acquisition of Navigators
Group. Middle & large commercial premium decreases in
2020 were primarily driven by declines in general industries,
driven by underwriting actions to improve the profitability of
that book, as well as in industry verticals and national
accounts, partially offset by growth in specialty and
commercial excess lines.
• Global specialty written premium increased in 2020 with the
increase driven by the acquisition of Navigators Group. Apart
from Navigators Group, written premium decreased slightly in
2020 due to a decline in wholesale and bond business,
partially offset by growth in professional liability.
Current Accident Year Loss and LAE
Ratio before Catastrophes
[1]Other of $43, $42, and $45 for 2020, 2019, and 2018, respectively, is included
in the total.
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Earned premiums increased in 2020 with the increase in
reflecting a full twelve months of premium from the acquisition of
Navigators Group. Excluding Navigators, earned premiums
declined in 2020, with decreases in both small commercial and in
middle & large commercial.
Written premiums increased in 2020 with the growth
attributable to the acquisition of Navigators Group. Excluding
Navigators, written premiums declined in 2020 due to the
economic impacts of COVID-19, including lower new business
across most lines as well as reductions in estimated audit
premiums and endorsements reducing premium in workers’
compensation due to a declining exposure base, partially offset by
continued written pricing increases in all lines except workers'
compensation.
In small commercial, renewal written price increases were slightly
higher in 2020 than 2019, with mid-single digit to high single-digit
rate increases in most lines, largely offset by written pricing
decreases in workers’ compensation. In middle market, higher
written pricing increases in 2020 were mostly due to double digit
rate increases in middle market automobile and specialty excess
liability lines and mid-single digit to high single-digit rate
increases in most other middle market lines. In global specialty,
our US wholesale book achieved an approximate 25% renewal
written price increase, led by excess casualty, property and
72
$7,047$7,047$8,290$8,290$8,910$8,910$605$1,547$2,241$2,746$2,983$2,976$3,651$3,718$3,650Global SpecialtyMiddle & Large CommercialSmall CommercialOther [1]201820192020$0$2,000$4,000$6,000$8,000$10,00057.359.361.6201820192020010203040506070 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Current Accident Year Loss and LAE ratio
before catastrophes increased in 2020, primarily due to
COVID-19 incurred losses, net of favorable non-COVID-19
workers' compensation frequency as well as a slightly higher loss
ratio in small commercial workers' compensation, partially offset
by lower non-catastrophe property losses and margin
improvement in the Navigators book, primarily in wholesale and
global re.
2020 included COVID-19 incurred losses of $278 before tax,
including losses of $141 in property, $66 in workers’
compensation, net of favorable frequency on other workers'
compensation claims, and $71 in financial and other lines.
Included in the $141 of COVID-19 property incurred losses and
loss adjustment expenses in 2020 were $101 of losses arising
from a small number of property policies that do not require
direct physical loss or damage and from policies intended to cover
specific business needs, including crisis management and
performance disruption. In addition, we recorded a reserve of
$40 for legal defense costs in 2020. Workers’ compensation
COVID-19 incurred losses in 2020 were driven by claims in both
states with presumptive coverage and in other states where the
claimant must prove their COVID-19 illness was contracted at
work. Financial lines COVID-19 claims in 2020 were primarily
driven by exposures in D&O, E&O and employment practices
liability and the recessionary impacts on the surety book of
business.
Catastrophes and Unfavorable (Favorable)
Prior Accident Year Development
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Current accident year catastrophe losses for
2020 were primarily from civil unrest, a number of hurricanes and
tropical storms, Pacific Coast wildfires, and Northeast
windstorms as well as tornado, wind and hail events in the South,
Midwest and Central Plains. Catastrophe losses for 2019 were
primarily from tornado, wind and hail events in various areas of
the Midwest, Mountain West and Southeast and, to a lesser
extent, winter storms in the northern plains, Midwest and
Northeast.
Prior accident year development was a net
unfavorable $44 before tax in 2020 compared to a net favorable
$44 before tax in the comparable 2019 period. Net unfavorable
reserve development for 2020 included reserve increases for
general liability driven primarily by increases in reserves for
sexual molestation and sexual abuse claims, and increases in
commercial automobile liability reserves, partially offset by net
reserve decreases for catastrophes, workers' compensation and
package business. Favorable development on prior year
catastrophe reserves in 2020 was due to recognizing a $29
before tax subrogation benefit from a settlement with PG&E over
certain of the 2017 and 2018 California wildfires and a reduction
in estimated catastrophe losses from a number of wind and hail
events that occurred in 2017, 2018 and 2019. Prior accident year
development in 2020 also included $102 of reserve increases
related to Navigators Group on 2018 and prior accident years
that was economically ceded to NICO but for which the benefit
was not recognized in earnings as it has been recorded as a
deferred gain on retroactive reinsurance. Net reserve decreases
for 2019 were primarily related to lower loss reserve estimates
for workers' compensation claims, package business reserves and
catastrophes, partially offset by a $68 before tax increase to
Navigators Group reserves upon acquisition of the business and
increases in reserves for automobile liability and general liability.
The increase in Navigators Group reserves upon acquisition of
the business principally related to higher reserve estimates for
general liability, professional liability and marine.
73
$275$323$397$(200)$(44)$44CAY CATsPYD201820192020$-300$-200$-100$0$100$200$300$400 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
PERSONAL LINES
Underwriting Summary
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 gain (loss)
Net servicing income [2]
Net investment income [3]
Net realized capital gains (losses) [3]
Other expenses
Income (loss) before income taxes
Income tax expense (benefit) [4]
Net income (loss)
2020
2019
2018
$
2,936 $
3,131 $
3,276
(72)
(67)
3,008
34
3,198
37
Increase
(Decrease)
From 2019 to
2020
Increase
(Decrease)
From 2018 to
2019
(6%)
(7%)
(6%)
(8%)
(19%)
49%
NM
(33%)
(6%)
(5%)
(33%)
NM
8%
(12%)
(112%)
—%
129%
142%
126%
(4%)
46%
(6%)
(8%)
(7%)
(74%)
(31%)
(21%)
(6%)
2%
50%
175%
(19%)
15%
NM
—%
NM
NM
NM
(123)
3,399
40
2,249
546
(32)
2,087
140
(42)
2,185
2,763
259
625
6
160
13
179
43
(1)
394
76
318 $
275
611
4
(214)
16
155
(7)
(1)
(51)
(19)
(32)
1,695
209
(438)
1,466
244
591
4
737
14
157
(5)
(1)
902
184
718 $
$
[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 $81, $83, and $84 for 2020, 2019, and 2018, respectively and includes servicing expenses of $67, $70, and $68 for 2020, 2019, and 2018,
respectively.
[3]For discussion of consolidated investment results, see MD&A - Investment Results.
[4]For discussion of income taxes, see Note 17 - 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
2020
2019
2018
$
$
$
$
2,003 $
933
2,936 $
2,176 $
955
3,131 $
2,058 $
950
3,008 $
2,221 $
977
3,198 $
2,273
1,003
3,276
2,369
1,030
3,399
Increase
(Decrease)
From 2019 to
2020
Increase
(Decrease)
From 2018 to
2019
(8%)
(2%)
(6%)
(7%)
(3%)
(6%)
(4%)
(5%)
(4%)
(6%)
(5%)
(6%)
74
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Premium Measures
2020
2019
2018
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
Premium retention
Automobile [1]
Homeowners
1,369
826
1,422
877
$
$
223
63
$
$
220
73
$
$
86 %
86 %
2.4 %
6.4 %
3.4 %
5.7 %
85 %
85 %
4.6 %
6.5 %
5.5 %
8.4 %
1,510
927
169
46
82 %
83 %
7.2 %
9.7 %
9.6 %
9.3 %
85 %
90 %
[1] Premium retention for automobile decreased in the twelve months ended December 31, 2020 largely due to $81 of premium credits given to automobile policyholders. Excluding
82 %
91 %
87 %
89 %
the impact of the premium credits, automobile premium retention would have been 86% in the twelve month period ended December 31, 2020.
Underwriting Ratios
2020
2019
2018
Increase
(Decrease)
From 2019 to
2020
Increase
(Decrease)
From 2018 to
2019
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
Impact of current accident year catastrophes and
prior year development
Underlying combined ratio
56.3
6.9
(14.6)
48.7
26.8
75.5
7.7
83.1
65.3
4.4
(1.3)
68.3
26.7
95.0
(3.1)
91.9
66.2
16.1
(0.9)
81.3
25.0
106.3
(15.2)
91.2
(9.0)
2.5
(13.3)
(19.6)
0.1
(19.5)
10.8
(8.8)
(0.9)
(11.7)
(0.4)
(13.0)
1.7
(11.3)
12.1
0.7
Automobile
Combined ratio
Underlying combined ratio
Homeowners
Combined ratio
Underlying combined ratio
Product Combined Ratios
2020
2019
2018
Increase
(Decrease)
From 2019 to
2020
Increase
(Decrease)
From 2018 to
2019
96.6
97.9
91.7
78.3
98.6
98.2
124.3
75.1
(11.1)
(9.9)
(37.5)
(5.8)
(2.0)
(0.3)
(32.6)
3.2
85.5
88.0
54.2
72.5
75
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2021 Outlook
Written premium is expected to be relatively flat in 2021
compared with 2020 despite $81 of premium credits issued in
2020 as non-renewal of premium more than offsets new business.
While new business conversions are expected to increase, new
business premium is expected to be relatively flat as the Company
begins to transition from 12-month automobile policies to 6-
month automobile policies for AARP members as we roll out our
new automobile and homeowners products in certain states.
In 2021, the Company expects written pricing increases in 2021
to be in the low single digits for automobile and high-single digits
for homeowners. Rate increases in automobile will likely continue
to moderate as lower claim frequency due to shelter-in-place
guidelines during the pandemic is reflected in rate filings.
The Company expects the combined ratio for Personal Lines will
be between approximately 94.0 and 96.0 for 2021 compared to
75.5 in 2020 as 2020 benefited from lower claim frequency due
to fewer miles driven as a result of the pandemic as well as from
favorable prior accident year development. The underlying
combined ratio for Personal Lines is expected to be higher due to
an increase in the current accident year loss and loss adjustment
expense ratio before catastrophes in both automobile and
homeowners. Current accident year catastrophes are assumed to
be 7.2 points of the combined ratio in 2021 compared with 6.9
points in 2020. For automobile, we expect the underlying
combined ratio to increase as automobile claim frequency rises
again as we emerge from the pandemic. The underlying combined
ratio for homeowners is also expected to increase in 2021,
primarily driven by a return to a higher, more normal, level of non-
catastrophe weather loss experience, partially offset by the effect
of earned pricing increases.
Net Income (Loss)
Underwriting Gain (Loss)
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Underwriting gain in 2020 increased primarily due to
favorable prior accident year development in the 2020 period
driven by a reduction in prior year catastrophe reserves, lower
current accident year losses in automobile due to effects of the
COVID-19 pandemic, a reduction in non-catastrophe weather
losses in homeowners, and lower underwriting expenses, partially
offset by a reduction in earned premium, including the effect of
$81 in premium credits given to automobile policyholders in the
second quarter of 2020.
Earned Premiums
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Earned premiums decreased in 2020, reflecting a decline
in written premium over the prior twelve months in both Agency
and in AARP Direct and, the effect of $81 of premium credits
given to automobile policyholders in the second quarter of 2020
in recognition of shelter-in-place guidelines that have resulted in
a decline in miles driven.
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Net income increased by $400, primarily due to favorable
prior accident year catastrophe reserve development in the 2020
period, lower non-catastrophe current accident year losses in
automobile and homeowners, and lower underwriting expenses,
partially offset by an increase in current accident year
catastrophes, a reduction in earned premium, including the effect
of $81 in premium credits given to automobile policyholders in
the second quarter of 2020, a change to net realized capital losses
in the 2020 period and lower net investment income.
76
$(32)$318$718201820192020$-200$0$200$400$600$800$(214)$160$737201820192020$-400$-200$0$200$400$600$800$3,399$3,399$3,198$3,198$3,008$3,008$1,030$977$950$2,369$2,221$2,058HomeownersAutomobile201820192020$0$1,500$3,000$4,500 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Current accident year loss and LAE ratio
before catastrophes decreased in 2020 in both
automobile and homeowners. For automobile, the loss and loss
adjustment expense ratio benefited from earned pricing increases
and from lower claim frequency, primarily driven by shelter-in-
place guidelines due to the COVID-19 pandemic. For
homeowners, the primary driver was fewer non-catastrophe
weather claims.
Current Accident Year Catastrophes and
Unfavorable (Favorable) Prior Accident Year
Development
Written premiums decreased in 2020 in AARP Direct and
Agency. For automobile, written premium in 2020 included a
reduction for the $81 of premium credits given to policyholders in
the second quarter. Written premium for both automobile and
homeowners declined as the amount of non-renewed premium
exceeded the new business premium. New business increased
slightly in automobile and declined in homeowners.
Renewal written pricing increases were lower in 2020
in automobile in response to moderating loss cost trends. For
homeowners, while written pricing increases had moderated
during the first half of 2020, written pricing increases were higher
in the second half of 2020 due to the rate need arising from
catastrophe and other property claims experience.
Policy count retention increased for both automobile
and homeowners reflecting the effect of moderating renewal
written price increases during all of 2020 for automobile and
during the first six months of 2020 for homeowners.
Premium retention for automobile decreased in 2020
mostly due to the $81 of automobile premium credits given to
policyholders in the second quarter of 2020. Premium retention
for homeowners improved in 2020 driven by renewal rate
increases, partially offset by a decline in policy count retention in
the second half of 2020.
Policies in-force decreased in 2020 in both automobile
and homeowners, driven by not generating enough new business
to offset the loss of non-renewed policies.
Current Accident Year Loss and Loss
Adjustment Expense Ratio before
Catastrophes
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Current accident year catastrophe losses for
the year ended December 31, 2020 were primarily from a
number of hurricanes and tropical storms, Pacific Coast wildfires
and Northeast windstorms as well as tornado, wind and hail
events in the South, Midwest and Central Plains. Catastrophe
losses for 2019 primarily included winter storms across the
country and tornado, wind and hail events in the South, Midwest,
and Mountain West.
Prior accident year development was favorable in
2020, principally due to a reduction in catastrophe loss reserves
and, to a lesser extent, lower than previously expected AARP
Direct automobile liability claim severity for the 2017 to 2019
accident years. The reduction in catastrophe loss reserves was
77
66.265.356.3201820192020010203040506070$546$140$209$(32)$(42)$(438)CAY CATsPYD201820192020$-600$-500$-400$-300$-200$-100$0$100$200$300$400$500$600 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
driven by lower estimated losses for the 2017 and 2018
California wildfires, including a $260 subrogation benefit from
PG&E, as well as a reduction in losses for various 2017, 2018 and
2019 wind and hail events. Prior accident year development was
favorable in 2019 primarily due to a decrease in automobile
liability reserves for the 2017 accident year.
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]
Other income (expenses)
Income (loss) before income taxes
Income tax expense (benefit) [3]
Net income (loss)
Underwriting Summary
2020
2019
2018
Increase
(Decrease)
From 2019 to
2020
Increase
(Decrease)
From 2018 to
2019
$
$
— $
—
—
258
258
11
(269)
55
(1)
1
(214)
(46)
(168) $
— $
(2)
2
21
21
12
(31)
84
20
—
73
12
61 $
(4)
(4)
—
65
65
12
(77)
90
(4)
(1)
8
(7)
15
—%
100%
(100%)
NM
NM
(8%)
NM
(35%)
(105%)
NM
NM
NM
NM
100%
50%
NM
(68%)
(68%)
—%
60%
(7%)
NM
100%
NM
NM
NM
[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 17 - Income Taxes of Notes to Consolidated Financial Statements.
Net Income (Loss)
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Net loss in 2020 changed from net income in 2019, primarily
due to an increase in net unfavorable prior accident year
development, a decrease in net investment income and a change
from net realized capital gains to net realized capital losses.
Unfavorable prior accident year development in 2020 primarily
included a $208 charge for increases in A&E reserves and a $35
increase in ULAE reserves which was largely driven by the higher
estimate for A&E claims. Before NICO reinsurance, A&E reserves
were increased by $236 in P&C Other Operations, including $130
for asbestos and $106 for environmental. Cumulative adverse
A&E reserve development on both ongoing operations and P&C
Other Operations totaled $860 through December 31, 2020 and
since this amount exceeds ceded premium paid for the A&E ADC
of $650, the Company recognized a $210 deferred gain on
retroactive reinsurance in 2020, all recognized within P&C Other
Operations.
Asbestos Reserves prior accident year development in
2020 before NICO reinsurance of $130 was primarily due to a
higher rate of claim settlements, particularly with certain larger,
national defendants, higher than expected average settlement
values and defense costs, and an increase in the Company's
78
$15$61$(168)201820192020$-200$-150$-100$-50$0$50$100
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
estimated share of liability under pending or potential cost
sharing agreements and settlements.
Environmental Reserves prior accident year
development in 2020 before NICO reinsurance of $106 was
primarily due to an increasing number of claims and suits alleging
contamination from or exposure to per & polyfluoroalkyl
substances ("PFAS"), and increased defense and cleanup costs
associated with Superfund sites.
Results of Operations
GROUP BENEFITS
Operating Summary
Premiums and other considerations
Net investment income [1]
Net realized capital gains (losses) [1]
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 [2]
Net income
2020
2019
2018
$
5,536 $
5,603 $
5,598
448
22
6,006
4,137
50
1,308
40
5,535
471
486
34
6,123
4,055
54
1,311
41
5,461
662
88
383 $
126
536 $
$
474
(47)
6,025
4,214
45
1,282
60
5,601
424
84
340
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
(1%)
(8%)
(35%)
(2%)
2%
(7%)
—%
(2%)
1%
(29%)
(30%)
(29%)
—%
3%
172%
2%
(4%)
20%
2%
(32%)
(2%)
56%
50%
58%
[1]For discussion of consolidated investment results, see MD&A - Investment Results.
[2]For discussion of income taxes, see Note 17 - 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
2020
2019
2018
$
5,305 $
5,416 $
5,418
56
7
175
5,536 $
717 $
180
5,603 $
647 $
$
$
5
175
5,598
704
Ratios, Excluding Buyouts
Group disability loss ratio
Group life loss ratio
Total loss ratio
2020
2019
2018
66.1 %
87.5 %
74.5 %
67.3 %
79.5 %
72.3 %
73.1 %
78.4 %
75.3 %
24.0 %
Expense ratio [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.
24.5 %
25.2 %
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
(2%)
NM
(3%)
(1%)
11%
—%
40%
3%
—%
(8%)
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
(1.2)
8.0
2.2
0.7
(5.8)
1.1
(3.0)
0.5
79
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Margin
2020
2019
2018
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
Net income margin
6.4%
8.8%
5.6%
(2.4)
3.2
Adjustments to reconcile net income margin to core earnings margin:
Net realized capital losses (gains) excluded from core earnings, before tax
(0.4%)
(0.5%)
0.9%
0.3%
—%
0.1%
6.4%
0.6%
—%
—%
8.9%
0.8%
(0.3%)
—%
7.0%
Net Income
0.1
(0.3)
0.0
0.1
(2.5)
(1.4)
(0.2)
0.3
0.0
1.9
Integration and transaction costs associated with acquired business,
before tax
Income tax benefit
Impact of excluding buyouts from denominator of core earnings margin
Core earnings margin
2021 Outlook
The Company expects Group Benefits fully insured ongoing
premiums to increase modestly in 2021 due to modestly higher
book persistency and continued strong sales which is expected to
offset continued lagging employment levels as a result of the
pandemic. In 2021, the segment's net income margin is expected
to be between 3.5% and 4.5%, compared to a net income margin
of 6.4% in 2020. The expected decrease in net income margin
largely reflects downward pressure on pricing due to recent
historical favorable claim incidence, an expectation of less
favorable claim incidence and recoveries on long-term disability
claims in 2021 and lower expected investment yields, partially
offset by an expectation of lower excess mortality caused by
COVID-19 though that is subject to significant uncertainty. The
expected net income margin of 3.5% to 4.5% assumes excess
mortality of $160 before tax, largely in the first half of 2021 with
the most significant portion in the first quarter of 2021. Margins
on long-term disability business are expected to decline as the
favorable long-term disability loss trends begin to reverse due to
economic factors and as price competition intensifies, partly
driven by customer behavior to seek multiple bids for renewal.
Margins on group life business in 2021 will largely depend on how
long COVID-19 infections continue in 2021 pending the timing of
distribution and citizen acceptance of vaccines. Management
expects that the 2021 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 3.7% to 4.7%, down from a 2020 core earnings
margin of 6.4%.
80
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Net income decreased primarily due to higher mortality in
group life, and, to a lesser extent, lower net investment income,
and lower net realized capital gains, partially offset by modestly
higher recoveries and lower claim incidence on group disability
claims. The increased mortality in group life included $239 of
claims deemed to be excess mortality due to direct and indirect
impacts of COVID-19. Lower net investment income was
primarily driven by lower reinvestment rates and, to a lesser
extent, lower income from limited partnership and other
alternative investments.
Insurance operating costs and other
expenses were relatively flat in 2020 as higher information
technology ("IT") and other costs related to improving the
customer experience were largely offset by lower incentive
compensation, employee benefits, travel costs, and lower
integration costs.
$340$536$383201820192020$0$100$200$300$400$500$600
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Total loss ratio increased 2.2 points in 2020 reflecting a
higher group life loss ratio, partially offset by a lower group
disability loss ratio. The group life loss ratio increased 8.0 points
primarily due to a higher current incurral year loss ratio driven by
higher mortality, including $239 of excess mortality due to the
direct and indirect effects of COVID-19. Prior incurral year
development for group life was more favorable due to favorable
mortality emergence on the prior incurral year recognized in the
three month period ended March 31, 2020, partially offset by the
reserve assumption update related to late reported death claims.
The group disability loss ratio decreased 1.2 points with a 0.6
point improvement in the current incurral year loss ratio and 0.3
points of more favorable prior incurral year development. The
current incurral year group disability loss ratio improved 0.6
points as lower claim incidence more than offset 1.0 points ($29)
of COVID-19 short-term disability and New York Paid Family
Leave claims. The more favorable prior incurral year development
in group disability was driven by higher claim recoveries and
continued improving claim incidence, partially offset by the
favorable impacts in 2019 from the long term disability reserve
assumption update.
Expense ratio increased 0.7 points in 2020. The expense
ratio increased largely due to the decline in premiums and other
considerations as higher IT and other costs related to improving
the customer experience was largely offset by lower incentive
compensation, employee benefits, and travel costs.
Fully Insured Ongoing Premiums
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Fully insured ongoing premiums decreased in 2020
with a decrease in both group disability and group life with the
declines resulting primarily from lower insured exposure on in-
force policies. Premiums for voluntary business increased
primarily due to strong sales and persistency.
Fully insured ongoing sales, excluding
buyouts increased in 2020 with increases in both group
disability and group life.
Ratios
81
$5,418$5,418$5,416$5,416$5,305$5,305$241$254$270$2,610$2,515$2,405$2,567$2,647$2,630OtherGroup lifeGroup disability201820192020$0$1,000$2,000$3,000$4,000$5,000$6,00024.024.525.275.372.374.5Expense ratioLoss ratio201820192020020406080100
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
HARTFORD FUNDS
Operating Summary
2020
2019
2018
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
(1%)
(43%)
60%
(1%)
17%
(5%)
(5%)
15%
19%
14%
3%
1.6
(0.4)
0.1
1.3
(3%)
40%
NM
(2%)
(25%)
(2%)
(3%)
—%
(3%)
1%
1%
(0.1)
(0.7)
0.1
(0.7)
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
23%
27%
(33%)
(121%)
NM
(27%)
11%
3%
10%
(8%)
1%
1%
(5%)
165%
NM
23%
9%
21%
Fee income and other revenue
Net investment income
Net realized capital gains (losses)
Total revenues
Amortization of DAC
Operating costs and other expenses
Total benefits, losses and expenses
Income before income taxes
Income tax expense [1]
Net income
Daily average total Hartford Funds segment AUM
Return on Assets ("ROA") [2]
Adjustments to reconcile ROA to ROA, core earnings:
Effect of net realized capital (gains) losses, excluded from core earnings,
before tax
Effect of income tax expense (benefit)
$
989 $
4
8
1,001
14
773
787
214
44
170 $
999 $
7
5
1,011
12
813
825
186
37
149 $
1,032
5
(4)
1,033
16
831
847
186
38
$
148
$ 120,908 $ 117,914 $ 116,876
12.6
14.1
12.5
(0.7)
0.1
13.5
(0.3)
—
12.2
0.4
(0.1)
12.9
Return on Assets ("ROA"), core earnings [2]
[1]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
[2]Represents annualized earnings divided by a daily average of assets under management, as measured in basis points.
Hartford Funds Segment AUM
Mutual Fund and ETP AUM - beginning of period
$ 112,533 $ 91,557 $ 99,090
2020
2019
2018
Sales - mutual fund
Redemptions - mutual fund
Net flows - ETP
Net Flows - mutual fund and ETP
Change in market value and other
28,604
22,479
22,198
(31,412)
(23,624)
(23,888)
(276)
1,332
(3,084)
187
1,404
(286)
15,178
20,789
(7,247)
Mutual Fund and ETP AUM - end of period
124,627
112,533
Talcott Resolution life and annuity separate account AUM [1]
14,809
14,425
91,557
13,283
Hartford Funds AUM - end of period
[1]Represents AUM of the life and annuity business sold in May 2018 that is still managed by the Company's Hartford Funds segment.
$ 139,436 $ 126,958 $ 104,840
82
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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.
2021 Outlook
Assuming continued growth in equity markets in 2021, the
Company expects net income for Hartford Funds to increase from
2020 to 2021. From its diversified lineup of mutual funds and
ETFs, the Company expects strong sales, though net flows are
more uncertain given market volatility and historical redemption
rates.
Net Income
2020
2019
2018
$ 82,123 $ 71,629 $ 56,986
17,034
22,645
2,825
16,130
21,332
3,442
14,467
18,233
1,871
$ 124,627 $ 112,533 $ 91,557
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
15%
6%
6%
(18%)
11%
26%
11%
17%
84%
23%
costs. Fee income and other revenues decreased slightly as the
effect of a continued shift to lower fee generating assets was
largely offset by higher daily average assets under management.
See Note 5 - Fair Value Measurements of Notes to Consolidated
Financial Statements for additional information on the Lattice
contingent consideration.
Hartford Funds AUM
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Net income increased primarily due to lower operating costs
and other expenses driven by a $12 before tax decrease in Lattice
contingent consideration in 2020, a $7 before tax increase in
Lattice contingent consideration in 2019 and a reduction in travel
December 31, 2020 compared to
December 31, 2019
Hartford Funds AUM increased compared to the prior
year due to an increase in market values, partially offset by net
outflows, along with the continued runoff of AUM related to the
Talcott Resolution life and annuity separate account AUM.
83
$148$149$170201820192020$0$50$100$150$200$104,840$126,958$139,43612/31/1812/31/1912/31/20$0$50,000$100,000$150,000
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
CORPORATE
Operating Summary
2020
2019
2018
Increase
(Decrease)
From 2019
to 2020
Increase
(Decrease)
From 2018
to 2019
$
49 $
50 $
Fee income
Net investment income
Net realized capital gains (losses)
Other revenue
Total revenues
Benefits, losses and loss adjustment expenses [1]
Insurance operating costs and other expenses
Loss on extinguishment of debt [2]
Interest expense [2]
Restructuring and other costs
Total benefits, losses and expenses
Loss before income taxes
Income tax benefit [3]
Loss from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income (loss)
Preferred stock dividends
22
22
53
146
15
76
—
236
104
431
(285)
(63)
(222)
—
(222)
21
(243) $
66
22
96
234
19
83
90
259
—
451
(217)
(46)
(171)
—
(171)
21
(192) $
32
59
(7)
21
105
11
83
6
298
—
398
(293)
(95)
(198)
322
124
6
118
(2%)
(67%)
—%
(45%)
(38%)
(21%)
(8%)
(100%)
(9%)
NM
(4%)
(31%)
(37%)
(30%)
—%
(30%)
—%
(27%)
56%
12%
NM
NM
123%
73%
—%
NM
(13%)
—%
13%
26%
52%
14%
(100%)
NM
NM
NM
Net income (loss) available to common stockholders
$
[1]Includes benefits expense on life and annuity business previously underwritten by the Company.
[2]For discussion of debt, see Note 14 - Debt of Notes to Consolidated Financial Statements.
[3]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
Net Income (Loss)
income, lower transition services revenue, and lower income from
the Company's retained equity interest in the former life and
annuity operations, partially offset by a $90 before tax loss on
extinguishment of debt in 2019, transaction costs incurred in
2019 in connection with the acquisition of Navigators Group and
lower interest expense.
Income before tax from the Company's retained equity interest in
the former life and annuity operations was $42 and $66 for the
years ended December 31, 2020 and 2019, respectively. Net
investment income was lower in 2020 than 2019 primarily due to
a lower yield on short-term investments as well as lower asset
levels.
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Net loss increased in 2020 compared to 2019 primarily due to
restructuring costs of $104 before tax, lower net investment
84
$124$(171)$(222)201820192020$0
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Interest Expense
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Interest expense decreased primarily due to the
repayment of our 5.5% senior notes in March of 2020. For
additional information, see Note 14 - Debt of Notes to the
Consolidated Financial Statements.
ENTERPRISE RISK
MANAGEMENT
The Company’s Board of Directors has ultimate responsibility for
risk oversight, as described more fully in our Proxy Statement,
while management is tasked with the day-to-day management of
the Company’s risks.
The Company manages and monitors risk through risk policies,
controls and limits. At the senior management level, 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.
ERCC
ERCC Members
CEO (Chair)
President
Chief Financial Officer
Chief Investment Officer
Chief Risk Officer
Chief Underwriting Officer
General Counsel
Others as deemed necessary by the Committee Chair
Asset Liability
Committee
Underwriting
Risk Committee
Emerging Risk
Steering
Committee
Operational Risk
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:
•
•
•
•
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.
85
$298$259$236201820192020$0$100$200$300$400 Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Sources of Insurance Risk Non-catastrophe
insurance risks exist within each of the Company's segments
except Hartford Funds and include:
•
•
Property- Risk of loss to personal or commercial property
from automobile related accidents, weather, explosions,
smoke, shaking, fire, theft, vandalism, inadequate installation,
faulty equipment, collisions and falling objects, and/or
machinery mechanical breakdown resulting in physical
damage and other covered perils.
Liability- Risk of loss from automobile related accidents,
uninsured and underinsured drivers, lawsuits from accidents,
defective products, breach of warranty, negligent acts by
professional practitioners, environmental claims, latent
exposures, fraud, coercion, forgery, failure to fulfill
obligations per contract surety, liability from errors and
omissions, losses from political and credit coverages, losses
from derivative lawsuits, and other securities actions and
covered perils.
• Mortality- Risk of loss from unexpected trends in insured
deaths impacting timing of payouts from group life insurance,
personal or commercial automobile related accidents, and
death of employees or executives during the course of
employment, while on disability, or while collecting workers
compensation benefits.
• Morbidity- Risk of loss to an insured from illness incurred
during the course of employment or illness from other
covered perils.
• Disability- Risk of loss incurred from personal or commercial
automobile related losses, accidents arising outside of the
workplace, injuries or accidents incurred during the course of
employment, or from equipment, with each loss resulting in
short term or long-term disability payments.
•
•
Longevity- Risk of loss from increased life expectancy trends
among policyholders receiving long-term benefit payments.
Cyber Insurance- Risk of loss to property, breach of data and
business interruption from various types of cyber-attacks.
Catastrophe risk primarily arises in the property, automobile,
workers' compensation, casualty, group life, and group disability
lines of business. Not all insurance losses arising from catastrophe
risk are categorized as catastrophe losses within the segment
operating results. For example, losses arising from the COVID-19
pandemic were not categorized as catastrophe losses within
either the P&C or Group Benefits segments as the pandemic was
not identified as a catastrophe event by the Property Claim
Service in the U.S. See the term Current Accident Year
Catastrophe Ratio within the Key Performance Measures section
of MD&A for an explanation of how the Company defines
catastrophe losses in its financial reporting.
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.
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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 the reported capital and surplus of the property and
casualty insurance subsidiaries prior to reinsurance and to less than 15% of
the reported capital and 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. [2]
- The estimated 250 year pre-tax probable maximum loss from earthquake
events is estimated to be $1.2 billion before reinsurance and $0.6 billion net
of reinsurance. [1]
- The estimated 250 year pre-tax probable maximum losses from hurricane
events are estimated to be $1.8 billion before reinsurance and $0.9 billion
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 the aggregate reported capital and surplus
of the property and casualty and group benefits insurance subsidiaries. In
evaluating these scenarios, the Company assesses the impact on group life,
short-term disability, long-term disability and property & casualty
claims. While ERM has a process to track and manage these limits, from time
to time, the estimated loss for pandemics may fluctuate above or below these
limits due to changes in modeled loss estimates, exposures, or statutory
surplus. In addition, the Company assesses losses in the investment portfolio
associated with market declines in the event of a widespread pandemic. [2]
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.
[2]For U.S. insurance subsidiaries, reported capital and surplus is equal to actual U.S. statutory capital and surplus. For Navigators Insurers in non-U.S. jurisdictions, reported capital
and surplus is equal to U.S. GAAP equity of those subsidiaries less certain assets such as goodwill and intangible assets.
Reinsurance as a Risk Management Strategy
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 utilizes various
reinsurance programs to mitigate catastrophe losses including
excess of loss occurrence-based treaties covering property and
workers’ compensation, and an aggregate property catastrophe
treaty. The aggregate property catastrophe treaty covers the
aggregate of catastrophe events designated by the Property
Claim Services office of Verisk and, for international business, net
losses arising from two or more risks involved in the same loss
occurrence totaling at least $500 thousand, in excess of a $700
retention. The occurrence-based property catastrophe treaties
respond in excess of $100 per occurrence for all perils other than
named storm and earthquake (subject to a $50 annual aggregate
deductible). Our per occurrence property catastrophe treaties
and workers’ compensation catastrophe treaty incepting January
1, 2020 did not exclude pandemic losses from coverage and did
not require a pandemic to be designated as a catastrophe event
by PCS for coverage. Accordingly, we would have the opportunity
for recovery if COVID-19 related losses were to exceed the
retentions and fall within the terms and conditions of the
contracts, including that losses are sustained by the Company
during a defined period of time, commonly referred to as an hours
clause. Based on current estimates of ultimate incurred losses
from the pandemic, we have not booked a recovery under our per
occurrence property or workers’ compensation catastrophe
treaties. Our aggregate property catastrophe program requires a
PCS catastrophe designation for events in the U.S. and since the
pandemic has not been designated a PCS event, COVID-19 losses
would not be covered by the aggregate program. In addition to
87
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
catastrophe reinsurance, the Company has per risk and quota
share reinsurance that would respond to certain COVID-19
related losses. The reinsurance market has shifted to require
communicable disease exclusions and, as such, our per
occurrence property catastrophe treaty and workers’
compensation catastrophe treaty incepting January 1, 2021 do
not cover pandemic losses. The Company has reinsurance in place
to cover individual group life losses in excess of $1 per person.
With respect to civil unrest, losses relating to civil unrest that in
2020 was designated by the Property Claim Services office of
Verisk as a catastrophe event will cede to our property
catastrophe aggregate cover. Such losses are not expected to be
covered by the property catastrophe occurrence treaties because
the unrest occurred in non-contiguous areas though the
Company has property per risk and property quota share
reinsurance that would cover certain losses related to the civil
unrest. For our property catastrophe treaty incepting January 1,
2021, losses from most cyber events are not covered.
Primary Catastrophe Treaty Reinsurance Coverages as of January 1, 2021
Per Occurrence Property Catastrophe Treaty from 1/1/2021 to 12/31/2021 [1] [2]
Losses of $0 to $100
Losses of $100 to $350 for earthquakes and named hurricanes and tropical storms
[6]
Losses of $100 to $350 from one event other than earthquakes and named
hurricanes and tropical storms (subject to a $50 Annual Aggregate Deductible
("AAD")) [6]
Losses of $350 to $500 from one event (all perils)
Losses of $500 to $1.1 billion from one event [3] (all perils)
Aggregate Property Catastrophe Treaty for 1/1/2021 to 12/31/2021 [4]
$0 to $700 of aggregate losses
$700 to $900 of aggregate losses
Workers' Compensation Catastrophe Treaty for 1/1/2021 to 12/31/2021
Losses of $0 to $100 from one event
Portion of losses
reinsured
Portion of losses
retained by The Hartford
None
None
100% retained
100% retained
70% of $250 in excess of
$100
75% of $150 in excess of
$350
90% of $600 in excess
$500
30% co-participation
25% co-participation
10% co-participation
None
100%
None
100% retained
None
100% retained
Losses of $100 to $450 from one event [5]
[1] These treaties do not cover the assumed reinsurance business which purchases its own retrocessional coverage.
[2]In addition to the Per Occurrence Property Catastrophe Treaty, for Florida wind events, The Hartford has purchased the mandatory FHCF reinsurance for the annual period
20% co-participation
80% of $350 in excess of
$100
starting at June 1, 2020. 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 estimated at approximately $55 of per event losses in excess of a $24 retention (estimates are based on best available information at this time and are
periodically updated as information is made available by Florida).
[3]Portions of this layer of coverage extend beyond a traditional one year term.
[4]The aggregate treaty is not limited to a single event; rather, it is designed to provide reinsurance protection for the aggregate of all catastrophe events (up to $350 per event), either
designated by the Property Claim Services office of Verisk or, for international business, net losses arising from two or more risks involved in the same loss occurrence totaling at
least $500 thousand. All catastrophe losses apply toward satisfying the $700 attachment point under the aggregate treaty.
[5]In addition to the limits shown, the workers' compensation reinsurance includes a non-catastrophe, industrial accident layer, providing coverage for 80% of $30 in per event losses
in excess of a $20 retention.
[6]Named hurricanes and tropical storms are defined as any storm or storm system declared to be a hurricane or tropical storm by the US National Hurricane Center, US Weather
Prediction Center, or their successor organizations (being divisions of the US National Weather Service).
In addition to the property catastrophe reinsurance coverage
described in the above table, the Company has other reinsurance
agreements that cover property catastrophe losses. The Per
Occurrence Property Catastrophe Treaty, and Workers'
Compensation Catastrophe Treaty include a provision to
reinstate one limit in the event that a catastrophe loss exhausts
limits on one or more layers under the treaties.
Reinsurance for Terrorism- For the risk of terrorism, private
sector catastrophe reinsurance capacity is generally limited and
largely unavailable for terrorism losses caused by nuclear,
biological, chemical or radiological attacks. As such, the
Company's principal reinsurance protection against large-scale
terrorist attacks is the coverage currently provided through
TRIPRA to the end of 2027.
TRIPRA provides a backstop for insurance-related losses
resulting from any “act of terrorism”, which is certified by the
Secretary of the Treasury, in consultation with the Secretary of
Homeland Security and the Attorney General, for losses that
exceed a threshold of industry losses of $200. Under the
program, in any one calendar year, the federal government will
pay a percentage of losses incurred from a certified act of
terrorism after an insurer's losses exceed 20% of the Company's
eligible direct commercial earned premiums of the prior calendar
year up to a combined annual aggregate limit for the federal
government and all insurers of $100 billion. The percentage of
losses paid by the federal government is 80% . The Company's
estimated deductible under the program is $1.6 billion for 2021.
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.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Reinsurance for A&E and Navigators Group Reserve
Development - The Company has two adverse development
cover (“ADC”) reinsurance agreements in place, both of which are
accounted for as retroactive reinsurance. One agreement covers
substantially all A&E reserve development for 2016 and prior
accident years (the “A&E ADC”) and the other covers
substantially all reserve development of Navigators Insurance
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. A portion of the total gross reinsurance recoverables
balance relates to the Company’s participation in various
mandatory (assigned) and involuntary risk pools and the value of
annuity contracts held under structured settlement agreements.
Group Benefits and Corporate reinsurance recoverables
represent reserves 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.
The table below shows the gross and net reinsurance
recoverables reported in the Property and Casualty and Group
Benefits reporting segments as well as Corporate.
To manage reinsurer credit risk, a reinsurance security review
committee evaluates the credit standing, financial performance,
management and operational quality of each potential reinsurer.
In placing reinsurance, the Company considers the nature of the
risk reinsured, including the expected liability payout duration,
and establishes limits tiered by reinsurer credit rating. Where its
Company and certain of its affiliates for 2018 and prior accident
years (“Navigators ADC”). For more information on the A&E ADC
and the Navigators ADC, see Note 1, Basis of Presentation and
Significant Accounting Policies, and Note 12, Reserve for Unpaid
Losses and Loss Adjustment Expenses of Notes to Consolidated
Financial Statements.
contracts permit, the Company secures future claim obligations
with various forms of collateral or other credit enhancement,
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. For further discussion on reinsurance
recoverables, including details of recoverables by AM Best credit
rating, see Note 9 – Reinsurance of Notes to Consolidated
Financial Statements.
Annually, the Company completes evaluations of the reinsurance
recoverable asset associated with older, long-term casualty
liabilities reported in the Property & Casualty Other Operations
and Group Benefits reporting segments as well as recoverables in
Corporate, 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 and Group Benefit LTD
Reserves, Net of Reinsurance.
Reinsurance Recoverables as of December 31
Property and
Casualty
Group Benefits
Corporate
Total
2020
2019
2020
2019
2020
2019
2020
2019
Paid loss and loss adjustment expenses
$
269 $
249 $
6 $
6 $
— $
— $
275 $
255
Unpaid loss and loss adjustment expenses
Gross reinsurance recoverables
5,297
5,566
4,819
5,068
239
245
Allowance for uncollectible reinsurance
(105)
(114)
(1)
247
253
—
308
308
(2)
320
320
—
5,844
6,119
5,386
5,641
(108)
(114)
Net reinsurance recoverables
$ 5,461 $
4,954 $
244 $
253 $
306 $
320 $ 6,011 $ 5,527
Guaranty Funds and Other Insurance-related
Assessments
As part of its risk management strategy, the Company regularly
monitors the financial strength of other insurers and, in
particular, activity by insurance regulators and various state
guaranty associations in the U.S. relating to troubled insurers. In
all states, insurers licensed to transact certain classes of
insurance are required to become members of a guaranty fund.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or
failed internal processes and systems, human error, or from
external events.
Sources of Operational Risk Operational risk is
inherent in the Company's business and functional areas.
Operational risks include: compliance with laws and regulation,
cybersecurity, business disruption, technology failure, inadequate
execution or process management, reliance on model and data
analytics, internal fraud, external fraud, third party dependency
and attraction and retention of talent.
Impact Operational risk can result in financial loss, disruption
of our business, regulatory actions or damage to our reputation.
Management Responsibility for day-to-day management
of operational risk lies within each business unit and functional
area. ERM provides an enterprise-wide view of the Company's
operational risk on an aggregate basis. ERM is responsible for
establishing, maintaining and communicating the framework,
principles and guidelines of the Company's operational risk
management program. Operational risk mitigation strategies
include the following:
89
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Establishing policies and monitoring risk tolerances and
exceptions;
trading the Company's securities during the investigation and
assessment of such cybersecurity incidents.
•
•
•
•
•
Conducting business risk assessments and implementing
action plans where necessary;
Validating existing crisis management protocols;
Identifying and monitoring emerging risks; and
Purchasing insurance coverage.
In response to COVID-19 the Company has implemented a
number of mitigation strategies to address potential operational
impacts, including:
•
•
•
•
•
Activated our cross-functional Crisis Management Team
("CMT") comprising representatives from areas such as the
Business Resiliency Office, IT, Corporate Health & Well-
being, Employee Relations, Security, Facilities and
Communications ;
Enabled the vast majority of employees to work from home
with no material impacts to operations; for employees in the
office, various protocols have been implemented to promote
employee health and safety including, but not limited to, the
use of personal protective equipment, practicing social
distancing and enhanced cleaning;
Strengthened technology infrastructure and expanded
policies for accessing the Company’s network remotely;
Actively worked with sourcing partners to ensure they were
implementing their business continuity plans; and
Provided support to employees through our Corporate,
Health & Well-being team composed of healthcare
professionals to identify and isolate employees with
potential COVID-19 exposure.
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
employs a ‘defense-in-depth’ strategy that uses multiple security
measures to protect the integrity of the Company's information
assets. This ‘defense-in-depth’ strategy aligns to 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 uses internal teams and outside
advisors with specialized skills to support the response and
recovery efforts and requires elevation of issues, as necessary, to
senior management. In addition, we have procedures to ensure
timely notification of critical cybersecurity incidents pursuant to
the Program to help identify employees who may have material
non-public information and to implement blackout restrictions on
90
From a governance perspective, senior members of our
Enterprise Risk Management, Information Protection and
Internal Audit functions provided detailed, regular reports on
cybersecurity matters in 2020 to the Board, including the
Finance, Investment, and Risk Management Committee
("FIRMCo"), a committee consisting of all directors and the Audit
Committee, which oversees controls for the Company's major
risk exposures, and has principal responsibility for oversight of
cybersecurity risk. The topics covered by these updates include
the Company's activities, policies and procedures to prevent,
detect and respond to cybersecurity incidents, as well as lessons
learned from cybersecurity incidents and internal and external
testing of our cyber defenses.
Financial Risk
Financial risks include direct and indirect risks to the Company's
financial objectives from events that impact financial market
conditions and the value of financial assets. Some events may
cause correlated movement in multiple risk factors. The primary
sources of financial risks are the Company's invested assets.
Consistent with its risk appetite, the Company establishes
financial risk limits to control potential loss on a U.S. GAAP,
statutory, and economic basis. Exposures are actively monitored
and managed, with risks mitigated where appropriate. The
Company uses various risk management strategies, including
limiting aggregation of risk, portfolio re-balancing and hedging
with over-the-counter and exchange-traded derivatives with
counterparties meeting the appropriate regulatory and due
diligence requirements. Derivatives are utilized to achieve the
following 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; and
engaging in income generation covered call transactions and
synthetic replication transactions. Derivative activities are
monitored and evaluated by the Company’s compliance and risk
management teams and reviewed by senior management. The
Company identifies different categories of financial risk, including
liquidity, credit, interest rate, equity and foreign currency
exchange.
Liquidity Risk
Liquidity risk is the risk to current or prospective earnings or
capital arising from the Company's inability or perceived inability
to meet its contractual funding obligations as they come due.
Sources of Liquidity Risk Sources of liquidity risk
include funding risk, company-specific liquidity risk and market
liquidity risk resulting from differences in the amount and timing
of sources and uses of cash as well as company-specific and
general market conditions. Stressed market conditions may
impact the ability to sell assets or otherwise transact business and
may result in a significant loss in value.
Impact Inadequate capital resources and liquidity could
negatively affect the Company’s overall financial strength and its
ability to generate cash flows from its businesses, borrow funds at
competitive rates and raise new capital to meet operating and
growth needs.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
across its investment, reinsurance, and insurance portfolios and
limiting exposure to any specific reinsurer or counterparty.
Potential credit losses can be mitigated through diversification
(e.g., geographic regions, asset types, industry sectors), hedging
and the use of collateral to reduce net credit exposure.
The Company manages credit risk through the use of various
surveillance, analyses and governance processes. The investment,
derivatives and reinsurance areas have formal policies and
procedures for counterparty approvals and authorizations, which
establish criteria defining minimum levels of creditworthiness
and financial stability for eligible counterparties. Potential
investments are subject to underwriting reviews and private
securities are also 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 derivative transactions through central clearing
houses that require daily variation margin;
Entering into derivative and reinsurance contracts only with
strong creditworthy institutions
Requiring collateral; and
• Non-renewing policies/contracts or reinsurance treaties.
The Company has developed credit exposure thresholds which
are based upon counterparty ratings. Aggregate counterparty
credit quality and exposure are monitored on a daily basis
utilizing an enterprise-wide credit exposure information system
that contains data on issuers, ratings, exposures, and credit limits.
Exposures are tracked on a current and potential basis and
aggregated by ultimate parent of the counterparty across
investments, reinsurance receivables, insurance products with
credit risk, and derivatives.
As of December 31, 2020, 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.
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 among legal
entities. 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 Hartford Financial Services Group,
Inc. ("HFSG Holding Company") have been and will continue to be
met by the HFSG 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 facilities as needed. The Company maintains
multiple sources of contingent liquidity including a revolving
credit facility, 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.
Refer to the Capital Resources & Liquidity section of MD&A for
the discussion of what the Company is doing to manage liquidity
during the COVID-19 pandemic.
Credit Risk and Counterparty Risk
Credit risk is the risk to earnings or capital due to uncertainty of
an obligor’s or counterparty’s ability or willingness to meet its
obligations in accordance with contractually agreed upon terms.
Credit risk is comprised of three major factors: the risk of change
in credit quality, or credit migration risk; the risk of default; and
the risk of a change in value due to changes in credit spreads.
Sources of Credit Risk The majority of the
Company’s credit risk is concentrated in its investment holdings
and use of derivatives, but it is also present in the Company’s
ceded reinsurance activities and various insurance products.
Impact A decline in creditworthiness is typically reflected as
an increase in an investment’s credit spread and an associated
decline in the investment's fair value, potentially resulting in
recording an ACL and an increased probability of a realized loss
upon sale. In certain instances, counterparties may default on
their obligations and the Company may realize a loss on default.
Premiums receivable, including premiums for retrospectively
rated plans, reinsurance recoverable and deductible losses
recoverable are also subject to credit risk based on the
counterparty’s unwillingness or inability to pay.
For a discussion of impacts resulting from the COVID-19
pandemic, refer to the Impact of COVID-19 on our financial
condition, results of operations and liquidity section of this
MD&A.
Management The objective of the Company’s enterprise
credit risk management strategy is to identify, quantify, and
manage credit risk in aggregate and to limit potential losses in
accordance with the Company's credit risk management policy.
The Company manages its credit risk by managing aggregations
of risk, holding a diversified mix of issuers and counterparties
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Assets and Liabilities Subject to Credit Risk
Investments Essentially all of the Company's invested
assets are subject to credit risk. In 2020, net credit losses on
fixed maturities, AFS and the increase (decrease) in ACL on
mortgage loans were $28 and $19 respectively. In 2019.
credit related impairments were $3 and there were no
mortgage loans that had a valuation allowance. (See the
Investment Portfolio Risk section of Financial Risk
Management under “Credit Losses on Fixed Maturities, AFS
and Intent-to-Sell Impairments" and "ACL on Mortgage
Loans”).
Reinsurance recoverables Reinsurance recoverables,
net of an allowance for uncollectible reinsurance, were
$6,011 and $5,527 as of December 31, 2020 and 2019
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 ACL,
were $4,268 and $4,384, as of December 31, 2020 and 2019,
respectively. For a discussion regarding collectibility of these
balances, see Note 8 - Premiums Receivable and Agents'
Balances of Notes to Consolidated Financial Statements.
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 additional collateralization before
entering into any new trades.
Managing the Credit Risk of Counterparties
to Derivative Instruments
The Company also has derivative counterparty exposure policies
which limit the Company’s exposure to credit risk. The Company
monitors counterparty exposure on a monthly basis to ensure
compliance with Company policies and statutory limitations. The
Company’s policies with respect to derivative counterparty
exposure establishes market-based credit limits, favors long-term
financial stability and creditworthiness of the counterparty and
typically requires credit enhancement/credit risk reducing
agreements, which are monitored and evaluated by the
Company’s risk management team and reviewed by senior
management.
The Company minimizes the credit risk of derivative instruments
by entering into transactions with high quality counterparties
primarily rated A or better. The Company also generally requires
that OTC derivative contracts be governed by an International
92
Swaps and Derivatives Association ("ISDA") Master Agreement,
which is structured by legal entity and by counterparty and
permits right of offset. The Company enters into credit support
annexes in conjunction with the ISDA agreements, which require
daily collateral settlement based upon agreed upon thresholds.
The Company also has derivative counterparty exposure policies
which limit the Company’s exposure to credit risk. Credit
exposures are generally quantified based on the prior business
day’s net fair value, including income accruals, of all derivative
positions transacted with a single counterparty for each separate
legal entity. The notional amount of derivative contracts
represents the basis upon which pay or receive amounts are
calculated and are not reflective of credit risk. The Company
enters into collateral arrangements in connection with its
derivatives positions and collateral is pledged to or held by, or on
behalf of, the Company to the extent the exposure is greater than
zero, subject to minimum transfer thresholds or negotiated
thresholds, if applicable. In accordance with industry standards
and the contractual requirements, collateral is typically settled on
the same business day. For further discussion, see the Derivative
Commitments section of Note 15 - Commitments and
Contingencies of Notes to Consolidated Financial Statements.
Use of Credit Derivatives
The Company may also use credit default swaps to manage credit
exposure or to assume credit risk to enhance yield.
Credit Risk Reduced Through Credit Derivatives
The Company uses credit derivatives to purchase credit
protection with respect to a single entity or referenced index. The
Company purchases credit protection through credit default
swaps to economically hedge and manage credit risk of certain
fixed maturity investments across multiple sectors of the
investment portfolio. As of December 31, 2020 and 2019, the
notional amount related to credit derivatives that purchase credit
protection was $6 and $124, respectively, while the fair value was
less than $(1) and $(3), respectively. These amounts do not
include positions that are in offsetting relationships.
Credit Risk Assumed Through Credit Derivatives
The Company also enters into credit default swaps that assume
credit risk as part of replication transactions. Replication
transactions are used as an economical means to synthetically
replicate the characteristics and performance of assets that are
permissible investments under the Company’s investment
policies. These swaps primarily reference investment grade single
corporate issuers and indexes. As of December 31, 2020 and
2019, the notional amount related to credit derivatives that
assume credit risk was $675 and $500, respectively, while the fair
value was $21 and $13, respectively. These amounts do not
include positions that are in offsetting relationships.
For further information on credit derivatives, see Note 7 -
Derivatives of Notes to Consolidated Financial Statements.
Credit Risk of Business Operations
A portion of the Company's Commercial Lines business is written
with large deductibles or under retrospectively-rated plans.
Under some commercial insurance contracts with a large
deductible, the Company is obligated to pay the claimant the full
amount of the claim and the Company is subsequently
reimbursed by the policyholder for the deductible amount. As
such, the Company is subject to credit risk until reimbursement is
made. Retrospectively-rated policies are utilized primarily for
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
to protect the firm from the economic impact associated with
changes in interest rates by setting portfolio duration targets that
are aligned with the duration of the liabilities that they support.
The Company analyzes interest rate risk using various models
including parametric models and cash flow simulation under
various market scenarios of the liabilities and their supporting
investment portfolios. Key metrics that the Company uses to
quantify its exposure to interest rate risk inherent in its invested
assets and the associated liabilities include duration, convexity
and key rate duration.
The Company utilizes a variety of derivative instruments to
mitigate interest rate risk associated with its investment portfolio
or to hedge liabilities. Interest rate caps, floors, swaps, swaptions,
and futures may be used to manage portfolio duration. Interest
rate swaps are primarily used to convert interest receipts or
payments to a fixed or variable rate. The use of such swaps
enables the Company to customize contract terms and conditions
to desired objectives and manage the duration profile within
established tolerances. Interest rate swaps are also used to hedge
the variability in the cash flows of a forecasted purchase or sale of
fixed rate securities due to changes in interest rates. As of
December 31, 2020 and 2019, notional amounts pertaining to
derivatives utilized to manage interest rate risk, including
offsetting positions, totaled $10.7 billion and $11.4 billion,
respectively, and primarily relate to hedging invested assets. The
fair value of these derivatives was $(69) and $(59) as of
December 31, 2020 and 2019, respectively.
Assets and Liabilities Subject to Interest Rate
Risk
Fixed income investments The fair value of fixed
income investments, which include fixed maturities, commercial
mortgage loans, and short-term investments, was $52.8 billion
and $49.3 billion at December 31, 2020 and 2019, respectively.
The weighted average duration of the portfolio, including
derivative instruments, was approximately 4.9 years and
5.0 years as of December 31, 2020 and 2019, 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.
workers' compensation coverage, whereby the ultimate premium
is adjusted based on actual losses incurred. Although the
premium adjustment feature of a retrospectively-rated policy
substantially reduces insurance risk for the Company, it presents
credit risk to the Company. The Company’s results of operations
could be adversely affected if a significant portion of such
policyholders failed to reimburse the Company for the deductible
amount or the amount of additional premium owed under
retrospectively-rated policies. The Company manages these
credit risks through credit analysis, collateral requirements, and
regular monitoring. For more information, see Note 8- Premiums
Receivable and Agents' Balances of Notes to the Consolidated
Financial Statements.
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse
changes in the value of assets and liabilities arising from
movements in interest rates. Interest rate risk encompasses
exposures with respect to changes in the level of interest rates,
the shape of the term structure of rates and the volatility of
interest rates. Interest rate risk does not include exposure to
changes in credit spreads.
Sources of Interest Rate Risk The Company has
exposure to interest rate risk arising from its fixed maturity
investments, commercial mortgage loans we invest in as well as
debt securities, preferred stock and similar securities issued by
the Company and discount rate assumptions associated with the
Company’s claim reserves and pension and other post retirement
benefit obligations as well as from assets that support the
Company's pension and other post-retirement benefit plans.
Impact Changes in interest rates from current levels can have
both favorable and unfavorable effects for the Company.
For a discussion of impacts resulting from the COVID-19
pandemic, refer to the Impact of COVID-19 on our financial
condition, results of operations and liquidity section of this
MD&A.
Change
in
Interest
Rates
Ý
Þ
Favorable Effects
Additional net investment
income due to reinvesting
at higher yields and
higher yields on variable
rate securities
Unfavorable Effects
Decrease in the fair value
of the fixed income
investment portfolio
Increase in the fair value
of the fixed income
investment portfolio
Lower interest expense
on variable rate debt
obligations
Higher interest expense
on variable rate debt
obligations
Lower net investment
income due to reinvesting
at lower yields and lower
yields on variable rate
securities
Acceleration in paydowns
and prepayments or calls
of certain mortgage-
backed and municipal
securities
Management The Company manages its exposure to
interest rate risk by constructing investment portfolios that seek
93
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Group life and disability product liabilities The
cash outflows associated with contracts issued by the Company's
Group Benefits segment, primarily group life and short and long-
term disability policy liabilities, are not interest rate sensitive but
vary based on timing. Though the aggregate cash flow payment
streams are relatively predictable, these products rely upon
actuarial pricing assumptions (including mortality and morbidity)
and have an element of cash flow uncertainty. As of December 31,
2020 and 2019, the Company had $8,653 and $8,667,
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.
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 19 -
Employee Benefit Plans of Notes to Consolidated Financial
Statements.) As of December 31, 2020 and 2019, the Company
had $669 and $732, 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
94
materially from those illustrated below due to the nature of the
estimates and assumptions used in the analysis. The Company’s
sensitivity analysis calculation assumes that the composition of
invested assets and liabilities remain materially consistent
throughout the year and that the current relationship between
short-term and long-term interest rates will remain constant over
time. As a result, these calculations may not fully capture the
impact of portfolio re-allocations, significant product sales or
non-parallel changes in interest rates.
Interest Rate Sensitivity of Group Benefits
Short and Long-term Disability Reserves and
Invested Assets Supporting Them
Change in Net Economic Value
as of December 31,
2020
2019 [1]
Basis point shift
-100
+100
-100
+100
Increase (decrease) in
economic value, before tax
[1] Prior year numbers have been updated to include the invested assets supporting
the surplus associated with group benefits short and long-term disability reserves.
$ 137 $ (133) $ 138 $ (140)
The carrying value of assets related to the businesses included in
the table above was $12.1 billion and $12.0 billion, as of
December 31, 2020 and 2019, respectively, and included fixed
maturities, commercial mortgage loans and short-term
investments. The assets 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, 2020 and 2019. 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,
2020
2019 [1]
Basis point shift
-100
+100
-100
+100
Increase (decrease) in
$ 2,054 $ (1,906) $ 1,893 $ (1,800)
fair value, before tax
[1] Prior year numbers have been updated to exclude the invested assets supporting
the surplus associated with group benefits short and long-term disability reserves.
The carrying value of fixed maturities, commercial mortgage
loans and short-term investments related to the businesses
included in the table above was $40.7 billion and $37.3 billion as
of December 31, 2020 and 2019, respectively.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Long-term Debt
A 100 basis point parallel decrease in the yield curve would result
in an increase in the fair value of long-term debt by $670 and
$607 as of December 31, 2020 and 2019, respectively. A 100
basis point parallel increase in the yield curve would result in a
decrease in the fair value of long-term debt by $551 and $499 as
of December 31, 2020 and 2019, 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.
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 liabilities, resulting in an increase in the unfunded
liabilities for pension and other post-retirement plan obligations
of $196 and $185 as of December 31, 2020 and 2019,
respectively. A 100 basis point parallel increase in the yield curve
would have the inverse effect and result in a decrease in the
unfunded liabilities for pension and other post-retirement plan
obligations of $148 and $138 as of December 31, 2020 and 2019,
respectively. Gains or losses due to changes in interest rates on
the pension and post-retirement plan obligations are recorded
within AOCI and are amortized into the actuarial loss component
of net periodic benefit cost when they exceed a threshold.
Discontinuation of LIBOR In July 2017, the U.K.
Financial Conduct Authority ("FCA") announced that by the end
of 2021 it intends to stop persuading or compelling banks to
report information used to set LIBOR, which could result in
LIBOR no longer being published after 2021 or a determination
by regulators that LIBOR is no longer representative of its
underlying market. The Company continues to monitor the
potential impacts of the discontinuation of LIBOR, which is used
as a benchmark or reference rate for certain investments and
derivatives the Company owns and floating rate debt the
Company has issued. In December 2020, based on feedback from
the banks that report information used to set LIBOR,
Intercontinental Exchange ("ICE") Benchmark Administration
released a consultation on the potential for banks to continue to
publish U.S. dollar LIBOR rates until the end of June 2023. Subject
to the results of the consultation, it is possible that some U.S.
dollar LIBOR rates will continue to be available for a limited
period beyond the end of 2021.
The Company has identified three principal types of outstanding
contracts that may be affected by the discontinuation of or
transition from LIBOR to an alternative reference rate,
including floating rate fixed maturity investments the Company
holds in its investment portfolio; derivative instruments that
hedge interest rate risk; and two classes of junior subordinated
debentures that the Company has issued and are currently
outstanding.
• Using our best estimate of expected future cash flows
including prepayments and maturities, the book value of
LIBOR referenced floating rate fixed maturities that the
Company owns as of December 31, 2020 and that the
Company expects to be outstanding at the end of 2021 is
approximately $3.6 billion. The Company has performed a
review of the LIBOR replacement language on these assets
and believes that greater than 85% have language that
supports a transition to a new standard benchmark rate. The
Company will continue to assess the remaining holdings and
work with counterparties, as appropriate, to determine
LIBOR replacement language or manage the assets in other
ways, such as through asset sales.
The notional amount of derivative instruments as of
December 31, 2020 with a floating rate component that
references LIBOR that the Company expects to be
outstanding at the end of 2021, considering maturities, is
$9.6 billion, with $9.4 billion being cleared through an
exchange or clearinghouse. The Company anticipates that
substantially all existing derivatives referencing LIBOR,
whether or not cleared through an exchange or clearing
house, will transition from LIBOR to SOFR or other market
alternative rates in line with new market standards currently
being developed and adopted.
The Company has issued $1.1 billion of junior subordinated
debentures that mature after 2021 with LIBOR referenced
floating interest rates. The Company is assessing options to
manage the risk associated with the transition away from
LIBOR related to these outstanding securities.
•
•
The uncertainty regarding the continued use and reliability of
LIBOR, including the timing of such transition, could reduce the
value of some of our floating rate fixed maturity investments and
increase the interest the Company pays on the junior
subordinated debentures.
There is also a risk that certain derivatives may no longer qualify
for hedge accounting if reference rates change on derivative
contracts but the reference interest rate of the instruments being
hedged do not change in a substantially similar manner,
particularly for cash flow hedges of floating rate investments the
Company owns and junior subordinated debentures the
Company has issued. The loss of hedge accounting could result in
the recognition of gains or losses on derivatives in the income
statement rather than in accumulated other comprehensive
income. The Company has adopted the FASB's temporary
guidance which allows The Hartford to account for contract
modifications made solely due to rate reform (such as replacing
LIBOR with another reference rate) as continuations of existing
contracts and to maintain hedge accounting when the hedging
effectiveness between the financial instrument and its hedge is
only affected by the change to a replacement rate. The guidance
expires for contract modifications made and hedge relationships
entered into or evaluated after December 31, 2022, after which,
there is uncertainty whether certain outstanding derivative
contracts will continue to qualify for hedge accounting either
because the replacement rate of the financial instrument being
hedged is not sufficiently matched to the reference rate of the
derivative contract or because replacement rate language for the
hedged instrument has not been determined.
Equity Risk
Equity risk is the risk of financial loss due to changes in the value
of global equities or equity indices.
Sources of Equity Risk The Company has exposure to
equity risk from invested assets, assets that support the
Company’s pension and other post-retirement benefit plans, and
fee income derived from Hartford Funds assets under
management. In addition, the Company has equity exposure
through its 9.7% ownership interest in the limited partnership,
Hopmeadow Holdings LP, that owns the life and annuity business
95
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
sold in 2018. For further information, see Note 22 - Business
Dispositions and Discontinued Operations of Notes to
Consolidated Financial Statements.
Impact The investment portfolio is exposed to losses from
market declines affecting equity securities and derivatives, which
could negatively impact the Company's reported earnings. In
addition, investments in limited partnerships and other
alternative investments generally have a level of correlation to
domestic equity market levels and can expose the Company to
losses in earnings if valuations decline; however, earnings impacts
are recognized on a lag as results from private equity investments
and other funds are generally reported on a three-month delay.
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 average daily assets under
management and the amount of fee income generated from those
assets. Increases in equity markets will generally have the inverse
impact.
For a discussion of impacts resulting from the COVID-19
pandemic, refer to the Impact of COVID-19 on our financial
condition, results of operations and liquidity section of this
MD&A.
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, at times, hedging of changes in equity indices. For
assets supporting pension and other post-retirement benefit
plans, the asset allocation mix is reviewed on a periodic basis. In
order to minimize risk, the pension plans maintain a listing of
permissible and prohibited investments and impose
concentration limits and investment quality requirements on
permissible investment options.
Assets and Liabilities Subject to Equity Risk
Investment portfolio The investment portfolio is
exposed to losses from market declines affecting equity securities
and derivatives, and certain alternative assets and limited
partnerships. Generally, declines in equity markets will reduce
the value of these types of investments and could negatively
impact the Company’s earnings while increases in equity will have
the inverse impact. For equity securities, the changes in fair value
are reported in net realized capital gains and losses. For
alternative assets and limited partnerships, the Company's share
of earnings for the period is recorded in net investment income,
though typically on a delay based on the availability of the
underlying financial statements. For a discussion of equity
sensitivity, see below.
Assets supporting pension and other post-
retirement benefit plans The Company may be
required to make additional plan contributions if equity
investments in the plan portfolios decline in value. For a
discussion of equity sensitivity, see below.
Declines in value are recognized as unrealized losses in AOCI.
Increases in equity markets are recognized as unrealized gains in
AOCI. Unrealized gains and losses in AOCI are amortized into the
actuarial loss component of net periodic benefit cost when they
exceed a threshold. For further discussion of equity risk
associated with the pension plans, see Note 19 - Employee
Benefit Plans of Notes to Consolidated Financial Statements.
Assets under management Assets under management
in Hartford Funds may decrease in value during equity market
declines, which would result in lower earnings because fee
income is earned based upon the value of assets under
management.
Equity Sensitivity
Investment portfolio and the assets supporting
pension and other post-retirement benefit plans
Included in the following tables are the estimated before tax
change in the economic value of the Company’s invested assets
and assets supporting pension and other post-retirement benefit
plans with sensitivity to equity risk. The calculation of the
hypothetical change in economic value below assumes a 20%
upward and downward shock to 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 of the potential hypothetical impact of such an
event and should not be construed as a prediction of future
market events. Actual results could differ materially from those
illustrated below due to the nature of the estimates and
assumptions used in the analysis. These calculations do not
capture the impact of portfolio re-allocations.
Equity Sensitivity [1]
As of December 31, 2020
As of December 31, 2019
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%
$
$
3,520 $
397 $
(397) $
3,295 $
440 $
(407)
1,573 $
240 $
(240) $
1,372 $
230 $
(230)
[1]Table excludes the Company's investment in Hopmeadow Holdings LP which is reported in other assets on the Company's Consolidated Balance Sheets.
96
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 approximately $60 as of December 31, 2020. The
selection of the 20% shock to the S&P 500 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 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 cash, fixed
maturities, equities, and derivative instruments. In addition, the
Company has non-U.S. subsidiaries, some with functional
currencies other than U.S. dollar, and which transact business in
multiple currencies resulting in assets and liabilities denominated
in foreign currencies.
Impact Changes in relative values between currencies can
create variability in cash flows and realized or unrealized gains
and losses on changes in the fair value of assets and liabilities. The
impact on the fair value of fixed maturities, AFS due to changes in
foreign currency exchange rates, in relation to functional
currency, is reported in unrealized gains or losses as part of other
comprehensive income. The realization of gains or losses
resulting from investment sales or from changes in investments
that record changes in fair value through the income statement
due to changes in foreign currency exchange rates is reflected
through net realized capital gains and losses.
In regards to insurance and reinsurance contracts that the
Company enters into for which we are obligated to pay losses in a
foreign currency, the impact of changes in foreign currency
exchange rates on assets and liabilities related to these contracts
is reflected through net realized capital gains and losses. These
assets or liabilities include, but are not limited to, cash and cash
equivalents, premiums receivable, reinsurance recoverables, and
unpaid losses and loss adjustment expenses. Additionally, the
Company translates the assets, liabilities, and income of non-U.S.
dollar functional currency legal entities into U.S. dollar. This
translation amount is reported as a component of other
comprehensive income.
Management The Company manages its foreign currency
exchange risk primarily through asset-liability matching and
through the use of derivative instruments. However, legal entity
capital is invested in local currencies in order to satisfy regulatory
requirements and to support local insurance operations. The
foreign currency exposure of non-U.S. dollar denominated
investments will most commonly be reduced through the sale of
the assets or through hedges using foreign currency swaps and
forwards.
Assets and Liabilities Subject to Foreign
Currency Exchange Risk
Investment portfolio The Company is exposed to foreign
exchange risk affecting non-U.S. dollar denominated cash, fixed
maturities, equities and derivative instruments. Changes in
relative values between currencies can positively or negatively
impact net realized capital gains and losses or unrealized gains
(losses) as part of other comprehensive income.
Assets supporting pension plan Changes in relative
values between currencies can positively or negatively impact
unrealized gains and losses in AOCI. Unrealized gains and losses
in AOCI are amortized into the actuarial loss component of net
periodic benefit cost when they exceed a threshold. As of
December 31, 2020 and 2019, the Company had pension plan
assets of $95 and $83, respectively, of non-U.S. dollar
investments in multiple currencies. These amounts are excluded
from the sensitivity analysis below.
Insurance contract related assets and
liabilities The Company has non-U.S. dollar denominated
insurance contracts and associated premiums receivable,
reinsurance recoverables and unpaid losses and loss adjustment
expenses, that are exposed to foreign exchange risk. For
contracts that are within U.S, dollar functional currency legal
entities, changes in foreign currency exchange rates can
positively or negatively impact net realized capital gains and
losses. For contracts within non-U.S. dollar functional currency
legal entities, changes in foreign currency exchange rates can
positively or negatively impact other comprehensive income.
Foreign Currency Sensitivity
For the Company’s primary currencies that create foreign
exchange risk, the following table provides the estimated impact
of a hypothetical 10% unfavorable change in exchange rates.
Actual results could differ materially due to the nature of the
estimates and assumptions used in the analysis. The amounts
presented are in U.S. dollars and before-tax.
December 31, 2020
Net assets (liabilities)
December 31, 2019
Net assets (liabilities)
Foreign Currency Sensitivity [1]
GBP
CAD
10%
Unfavorable
Change
296 $
189 $
(44)
336 $
173 $
(46)
$
$
[1]Amount excludes currencies where the value of net assets in U.S. dollar equivalent is less than 1% of total net assets of the Company.
97
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Financial Risk on U.S. Statutory Capital
U.S. Statutory surplus amounts and RBC ratios may increase or
decrease in any period depending upon a variety of factors and
may be compounded in extreme scenarios or if multiple factors
occur at the same time. At times the impact of changes in certain
market factors or a combination of multiple factors on RBC ratios
can be counterintuitive. Factors include:
•
•
A decrease in the value of certain fixed-income and equity
securities in our investment portfolio, due in part to credit
spreads widening or a decline in equity market levels, may
result in a decrease in statutory surplus and RBC ratios.
A decline in interest rates may reduce our net investment
income, which 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 RBC ratios.
Most of these factors are outside of the Company’s control.
Among other factors, rating agencies consider the level of
statutory capital and surplus of our U.S. insurance subsidiaries as
well as the level of a measure of GAAP capital held by the
Company in determining the Company’s financial strength and
credit ratings. Rating agencies may implement changes to their
internal models that have the effect of increasing or decreasing
the amount of 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. Accrued interest receivable related to fixed
maturities are recorded in other assets on the Consolidated
Balance Sheets and are not included in the amortized cost or fair
value of the fixed maturities. For further information refer to
Note 6 - Investments.
Fixed Maturities, AFS by Credit Quality
December 31, 2020
December 31, 2019
Amortized
Cost
Fair
Value
Percent of
Total Fair Value
Amortized
Cost
Fair
Value
Percent of
Total Fair Value
United States Government/Government agencies
$
4,872 $ 5,214
11.6 % $
5,478 $ 5,644
AAA
AA
A
BBB
BB & below
6,482
7,840
6,848
8,453
15.2 %
18.8 %
6,412
7,746
6,617
8,146
10,500
11,595
25.7 %
10,144
10,843
9,831
10,856
2,036
2,069
24.1 %
4.6 %
8,963
1,335
9,530
1,368
13.4 %
15.7 %
19.3 %
25.7 %
22.6 %
3.3 %
Total fixed maturities, AFS
$ 41,561 $ 45,035
100.0 % $ 40,078 $ 42,148
100.0 %
The fair value of fixed maturities, AFS increased as compared to
December 31, 2019, primarily due to net additions of corporate
securities and an increase in valuations as a result of a decline in
interest rates.
98
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Fixed Maturities, AFS by Type
December 31, 2020
December 31, 2019
Amortized
Cost
ACL
[1]
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Percent
of Total
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Asset-backed
securities ("ABS")
Consumer loans
$ 1,396 $ — $
35 $
— $ 1,431
3.2 % $ 1,350 $
16 $
(3) $ 1,363
Other
Collateralized loan
obligations ("CLOs")
CMBS
Agency [2]
Bonds
Interest only
Corporate
Basic industry
Capital goods
129
—
2,780
—
1,779
—
2,160
—
280
—
727
—
1,488
—
Consumer cyclical
1,434
(1)
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
2,878
—
1,474
(1)
4,523
(21)
2,651
—
747
—
1,999
—
480
—
842
—
1,084
—
7,480
—
1,829
—
1,755
—
27
—
355
—
4
7
117
159
10
69
148
108
314
147
398
370
85
250
37
77
109
831
92
41
2
9
—
133
0.3 %
111
(7) 2,780
6.2 %
2,186
(6) 1,890
4.2 %
(13) 2,306
5.1 %
(2)
288
0.6 %
1,878
2,108
224
(1)
795
1.8 %
539
(11) 1,625
3.6 %
1,495
(1) 1,540
3.4 %
991
(4) 3,188
7.1 %
(4) 1,616
3.6 %
(4) 4,896
10.9 %
(3) 3,018
6.7 %
(3)
829
1.8 %
2,372
1,550
3,977
2,360
743
—
2,249
5.0 %
2,019
—
—
517
1.1 %
389
919
2.0 %
1,057
(1) 1,192
2.6 %
815
—
8,311
18.5 %
7,948
(2) 1,919
4.3 %
(1) 1,795
4.0 %
—
—
29
0.1 %
364
0.8 %
2,409
1,786
40
540
1,264
—
141
—
1,405
3.1 %
1,191
U.S. Treasuries
Total fixed maturities,
AFS
2
5
43
86
12
31
72
57
137
96
192
208
44
132
17
66
45
692
57
17
3
20
75
Percent
of Total
Fair
Value
3.2 %
0.3 %
—
113
(8) 2,183
5.2 %
(7) 1,914
(4) 2,190
(2)
234
(1)
569
(9) 1,558
(1) 1,047
(3) 2,506
(3) 1,643
(4) 4,165
—
2,568
—
787
(4) 2,147
—
406
4.5 %
5.2 %
0.6 %
1.4 %
3.7 %
2.5 %
5.9 %
3.9 %
9.9 %
6.1 %
1.9 %
5.1 %
1.0 %
—
1,123
2.7 %
(1)
859
2.0 %
(1) 8,639
20.5 %
(1) 2,465
(2) 1,801
—
—
43
560
(1) 1,265
5.8 %
4.2 %
0.1 %
1.3 %
3.0 %
(63) $ 45,035
[1]Represents the ACL recorded following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation
100.0 % $ 40,078 $ 2,125 $
$ 41,561 $ (23) $ 3,560 $
(55) $ 42,148
100.0 %
and Significant Accounting Policies of Notes to Consolidated Financial Statements.
[2]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 fair value of fixed maturities, AFS increased as compared with
December 31, 2019, primarily due to net additions of corporate
securities and an increase in valuations as a result of a decline in
interest rates. The Company increased holdings in consumer
cyclical and non-cyclical, financial services and technology/
communication corporate bonds as well as in CLOs and taxable
municipal bonds, while reducing holdings in tax-exempt municipal
bonds, RMBS, and foreign government/government agencies.
Energy Exposure
Oil prices came under significant pressure during the first half of
2020, particularly during March and April, largely due to the
unprecedented reduction in demand stemming from the global
pandemic as well as a decision by Saudi Arabia to raise production
despite declining demand. The uncertain outlook caused credit
spreads to widen for corporate and sovereign issuers that
participate in the exploration, production, transportation and
refining of oil and gas. Subsequently, OPEC Plus' agreement to
reduce production in combination with recovering demand from
economic re-openings has contributed to a strong recovery in oil
prices to average levels for the post 2014 cycle. With the
stabilization of oil prices, credit spreads have recovered
99
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
meaningfully. Ultimately, the impact of price volatility in the
Company’s energy sector investments will be determined by the
durability of the recovery in energy prices and the ability of
issuers to maintain liquidity, manage indebtedness, and navigate
changing regulations and growing consolidation trends within the
industry.
The Company's direct exposure within its investment portfolio to
the energy sector totals approximately 3% of invested assets as of
December 31, 2020 and is primarily comprised of investment
grade corporate debt. These investments are diversified by issuer
and different sub-sectors of the energy market, with the highest
exposure to the midstream industry and the lowest to refining
services. The following table summarizes the Company's
exposure to the energy sector by security type and credit quality.
Exposure to Energy
December 31, 2020
December 31, 2019
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
$
1,170 $ 1,307 $
1,425 $ 1,516
304
21
309
21
125
45
127
45
1,495
1,637
1,595
1,688
189
—
189
5
214
—
214
6
232
9
241
20
254
10
264
21
$
1,689 $ 1,857 $
1,856 $ 1,973
Commercial & Residential Real Estate
The following table presents the Company’s exposure to CMBS
and RMBS by current credit quality included in the preceding
Fixed Maturities, AFS by Type table.
Corporate securities, AFS and Equity securities, at fair value
Investment grade
Below investment grade
Equity securities, at fair value
Total corporate, AFS and equity securities, at fair value
Foreign govt./govt agencies
Investment grade
Below investment grade
Total foreign govt./govt. agencies, AFS
Other
Total energy exposure
The Company manages the credit risk associated with the energy
sector within the investment portfolio on an on-going basis using
macroeconomic analysis and issuer credit analysis. The Company
considers alternate scenarios including oil prices remaining at low
levels for an extended period and/or declining significantly below
current levels. For additional details regarding the Company’s
management of credit risks, see the Credit Risk Section of this
MD&A. The Company has evaluated available-for-sale securities
with exposure to energy for a potential ACL as of December 31,
2020 and concluded that for all but one of the securities in an
unrealized loss position, it is more likely than not that the
Company will recover the entire amortized cost basis of the
securities. In addition, no other securities in the table above have
been identified as intent-to-sell, nor is the Company required to
sell. For additional details regarding the Company’s credit loss
assessment process, see the Credit Losses on Fixed Maturities,
AFS and Intent-to-Sell Impairments section below.
100
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, 2020
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]
$ 1,771 $ 1,882 $
8 $
8 $
— $
— $
— $
— $
— $
— $ 1,779 $ 1,890
Bonds
1,009
1,101
Interest Only
177
183
Total CMBS
2,957
3,166
RMBS
Agency
1,807
1,894
Non-Agency
1,034
1,063
541
90
639
22
371
3
25
582
93
683
25
380
3
26
423
430
170
179
8
7
4
4
431
437
174
183
—
313
2
114
429
—
315
2
116
433
—
36
2
102
140
—
36
2
105
143
17
1
18
—
1
20
14
1
15
—
1
22
113
134
116
139
2,160
2,306
280
288
4,219
4,484
1,829
1,919
1,755
1,795
27
355
29
364
3,966
4,107
—
1
—
1
2,842
2,958
421
434
$ 5,799 $ 6,124 $ 1,060 $ 1,117 $
860 $ 870 $
314 $ 326 $
152 $ 154 $ 8,185 $ 8,591
Exposure to CMBS and RMBS as of December 31, 2019
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
Alt-A
Sub-Prime
Total RMBS
Total CMBS &
RMBS
CMBS
Agency [1]
$ 1,878 $ 1,914 $
— $
— $
— $
— $
— $
— $
— $
— $ 1,878 $ 1,914
Bonds
1,013
1,055
Interest Only
150
158
Total CMBS
3,041
3,127
RMBS
Agency
2,386
2,441
Non-Agency
1,215
1,226
Alt-A
Sub-Prime
Total RMBS
—
9
—
9
561
67
628
23
300
8
56
576
70
646
24
304
8
57
3,610
3,676
387
393
416
438
118
121
—
—
5
5
416
438
123
126
—
—
257
257
4
167
428
4
173
434
—
13
8
164
185
—
13
9
171
193
—
2
2
—
1
20
144
165
—
1
1
—
1
22
150
173
2,108
2,190
224
234
4,210
4,338
2,409
2,465
1,786
1,801
40
540
43
560
4,775
4,869
Total CMBS &
RMBS
[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.
$ 6,651 $ 6,803 $ 1,015 $ 1,039 $
308 $ 319 $
844 $ 872 $
167 $ 174 $ 8,985 $ 9,207
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 commercial loans are originated by the
Company as high quality whole loans, and the Company may sell
participation interests in one or more loans to third parties. A loan
participation interest represents a pro-rata share in interest and
principal payments generated by the participated loan, and the
relationship between the Company as loan originator, lead
participant and servicer and the third party as a participant are
governed by a participation agreement.
As of December 31, 2020, mortgage loans had an amortized cost
of $4.5 billion and carrying value of $4.5 billion, with an ACL of
$38. As of December 31, 2019, mortgage loans had an amortized
cost of $4.2 billion and carrying value of $4.2 billion with no
valuation allowance. The increase in the allowance is attributable
to both the recognition of an ACL in connection with the adoption
of accounting guidance for credit losses on January 1, 2020 and
the result of the COVID-19 pandemic and its impacts on the
economic forecasts, as well as lower estimated property values
and operating income as compared to the prior year. For further
information refer to Note 1 - Basis of Presentation and Significant
Accounting Policies of Notes to Consolidated Financial
Statements.
The Company funded $647 of commercial mortgage loans with a
weighted average loan-to-value (“LTV”) ratio of 59% and a
weighted average yield of 3.2% during the twelve months ended
December 31, 2020. The Company continues to originate
commercial mortgage loans in high growth markets across the
country focusing primarily on institutional-quality industrial and
multi-family properties with strong LTV ratios. There were no
101
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
mortgage loans held for sale as of December 31, 2020 or
December 31, 2019.
municipal bonds by type and weighted average credit quality
included in the preceding Securities by Type table.
Municipal Bonds
The following table presents the Company’s exposure to
Available For Sale Investments in Municipal Bonds
December 31, 2020
December 31, 2019
Amortized
Cost
Fair Value
Weighted
Average
Credit Quality
Amortized
Cost
Fair Value
Weighted
Average
Credit Quality
$
1,082 $
889
1,441
1,273
905
732
644
394
401
102
701
1,232
940
1,636
1,407
985
824
694
464
450
109
762
6,593
7,331
AA+
AAA
A+
A+
AA-
AA
AA
AA
A+
AA+
A+
AA-
$
1,157 $
936
1,509
1,360
781
784
660
456
339
114
667
1,268
985
1,675
1,454
842
853
700
517
374
117
713
6,670
7,245
AA
AAA
A+
A+
AA-
AA
AA
AA
A
AA+
AA-
AA-
General Obligation
Pre-refunded [1]
Revenue
Transportation
Health Care
Leasing [2]
Education
Water & Sewer
Sales Tax
Power
Housing
Other
Total Revenue
Total Municipal
9,503
[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
8,564 $
8,763 $
9,498
AA-
AA-
$
$
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.
mid-sized non-public businesses with high growth potential, and
strong owner sponsorship, as well as limited exposure to public
markets.
Income or losses on investments in limited partnerships and
alternative investments are recognized on a lag as results from
private equity investments and other funds are generally
reported on a three-month delay.
As of December 31, 2020, the largest issuer concentrations were
the New York Dormitory Authority, the Commonwealth of
Massachusetts, and the New York City Municipal Water Finance
Authority, which each comprised less than 3% of the municipal
bond portfolio and were primarily comprised of general
obligation and revenue bonds. As of December 31, 2019, the
largest issuer concentrations were the New York Dormitory
Authority, the New York City Transitional Finance 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 17% of the fair value of the Company's
investment portfolio. While COVID-19 has had an impact on
many municipal issuers, the average credit quality of the
Company’s holdings is AA-, and the Company believes the issuers
in which it invests have multiple levers to maintain the strength of
their credit profile.
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
102
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Limited Partnerships and Other Alternative Investments - Net Investment Income
2020
Year Ended December 31,
2019
2018
Hedge funds
Real estate funds
Private equity funds
Other alternative investments [1]
Total
Amount
$
9
85
106
22
222
$
Yield
Amount
Yield
Amount
Yield
7.1% $
20.3%
12.4%
5.4%
12.3% $
5
70
126
31
232
7.2 % $
17.0 %
16.6 %
8.2 %
14.4 % $
4
58
144
(1)
205
9.3%
12.0%
22.5%
(0.2%)
13.2%
Investments in Limited Partnerships and Other Alternative Investments
December 31, 2020
December 31, 2019
Amount
Percent
Amount
Percent
Hedge funds
Real estate funds
Private equity and other funds
Other alternative investments [1]
$
158
563
944
417
2,082
7.6 % $
27.0 %
45.4 %
20.0 %
100.0 % $
94
407
851
406
1,758
5.3 %
23.2 %
48.4 %
23.1 %
100.0 %
Total
[1]Consists of an insurer-owned life insurance policy which is primarily invested in fixed income, private equity, and hedge funds.
$
Fixed Maturities, AFS — Unrealized Loss
Aging
The total gross unrealized losses were $63 as of December 31,
2020, and have increased $8 from December 31, 2019, primarily
due to wider credit spreads within higher yielding corporates and
CMBS. As of December 31, 2020, $49 of the gross unrealized
losses were associated with fixed maturities, AFS depressed less
than 20% of amortized cost. The remaining $14 of gross
unrealized losses were associated with fixed maturities, AFS
depressed greater than 20%. The fixed maturities, AFS depressed
more than 20% were primarily related to one variable-rate
coupon corporate issuer with a long-dated maturity date as well
as commercial real estate securities that were purchased at
tighter credit spreads.
As part of the Company’s ongoing investment monitoring process,
the Company has reviewed its fixed maturities, AFS in an
unrealized loss position and concluded that these fixed maturities
are temporarily depressed and are expected to recover in value
as the investments approach maturity or as market spreads
tighten. For these fixed maturities in an unrealized loss position
where an ACL has not been recorded, the Company’s best
estimate of expected future cash flows are sufficient to recover
the amortized cost basis of the investment. Furthermore, the
Company neither has an intention to sell nor does it expect to be
required to sell these investments. For further information
regarding the Company’s ACL analysis, see the Credit Losses on
Fixed Maturities, AFS and Intent-to-Sell Impairments section
below.
Unrealized Loss Aging for Fixed Maturities, AFS
December 31, 2020
December 31, 2019
Consecutive Months
Three months or less
Items
Amortized
Cost
ACL [1]
Unrealized
Loss
Fair
Value
Items
Amortized
Cost
Unrealized
Loss
Fair
Value
102 $
625 $
— $
(3) $
622
347 $
2,529 $
(15) $ 2,514
Greater than three to six months
Greater than six to nine months
Greater than nine to eleven months
Twelve months or more
46
8
186
205
367
6
1,275
994
—
—
(1)
—
(5)
(1)
362
114
5
50
15
(27) 1,247
712
190
24
(8)
(2)
(1)
704
188
23
(27)
967
345
1,440
(29) 1,411
Total
[1]Represents the ACL recorded following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation
(63) $ 3,203
871 $
547 $
3,267 $
4,895 $
(55) $ 4,840
(1) $
and Significant Accounting Policies.
103
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Unrealized Loss Aging for Fixed Maturities, AFS 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, 2020
December 31, 2019
Items
Amortized
Cost
Unrealized
Loss
Fair
Value
Items
Amortized
Cost
Unrealized
Loss
Fair
Value
2 $
2 $
(1) $
—
1
2
24
—
46
5
5
—
(10)
(1)
(2)
1
—
36
4
3
— $
— $
5
—
—
32
2
—
—
10
29 $
58 $
(14) $
44
37 $
12 $
— $
(1)
—
—
(4)
(5) $
—
1
—
—
6
7
Credit Losses on Fixed
Maturities, AFS and Intent-to-
Sell Impairments
For the year ended December 31, 2020
The Company recorded net credit losses on fixed maturities, AFS
of $28. The losses were primarily attributable to corporate fixed
maturities, mainly one private regional and commercial aircraft
lessor and to a lesser extent, one tax-exempt municipal bond
impacted by COVID-19. Unrealized losses on securities with ACL
recognized in other comprehensive income were $1. For further
information, refer to Note 6 - Investments of Notes to
Consolidated Financial Statements.
Intent-to-sell impairments of $5 were primarily related to one
corporate issuer in the energy sector and one issuer with
exposure to India.
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.
Future intent-to-sell impairments or credit losses may develop as
the result of changes in our 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. For a discussion of
impacts resulting from the COVID-19 pandemic, refer to the
Impact of COVID-19 on our financial condition, results of
operations and liquidity section of this MD&A.
For the year ended December 31, 2019
Impairments recognized in earnings were comprised of credit
impairments of $3 primarily related to two corporate securities
experiencing issuer-specific financial difficulties.
Non-credit impairments recognized in other comprehensive
income were $3.
ACL on Mortgage Loans
The Company reviews mortgage loans on a quarterly basis to
estimate the ACL with changes in the ACL recorded in net
realized capital gains and losses. Apart from an ACL recorded on
104
individual mortgage loans where the borrower is experiencing
financial difficulties, the Company records an ACL on the pool of
mortgage loans based on lifetime expected credit losses. For
further information, refer to Note 6 - Investments of Notes to
Consolidated Financial Statements.
For the year-ended December 31, 2020, the Company recorded
an increase in the ACL on mortgage loans of $19. The increase in
the allowance was due to the effects of the COVID-19 pandemic
and its impacts on the economic forecasts, as well as lower
estimated property values and operating income as compared to
the prior year. The Company did not record an ACL on any
individual mortgage loans.
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
operating and growth needs over the next twelve months.
SUMMARY OF CAPITAL
RESOURCES AND LIQUIDITY
Capital available to the holding company
as of December 31, 2020:
•
$1.8 billion in fixed maturities, short-term investments,
investment sales receivable and cash at the 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. As of December 31, 2020,
there were no borrowings outstanding.
An intercompany liquidity agreement that allows for short-
term advances of funds among the HFSG Holding Company
and certain affiliates of up to $2.0 billion for liquidity and
other general corporate purposes. As of December 31, 2020,
there were no borrowings outstanding.
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
2021 expected dividends and other
sources of capital:
The future payment of dividends from our subsidiaries is
dependent on several factors including the extent to which
COVID-19 impacts our business, results of operations, financial
condition and liquidity
•
P&C - The Company's U.S. property and casualty insurance
subsidiaries have dividend capacity of $1.7 billion for 2021,
with $850 to $900 of net dividends expected in 2021.
• Group Benefits - HLA has dividend capacity of $295 in 2021
with $250 to $295 of dividends expected in 2021.
• Hartford Funds - HFSG Holding Company expects to receive
$125 to $150 in dividends from Hartford Funds in 2021.
Expected liquidity requirements for the
next twelve months as of December 31,
2020:
•
$215 of interest on debt.
•
•
$21 dividends on preferred stock, subject to the discretion of
the Board of Directors.
$500 of common stockholders' dividends, subject to the
discretion of the Board of Directors and before share
repurchases.
Equity repurchase program:
In December, 2020, the Company announced a $1.5 billion share
repurchase authorization by the Board of Directors, which is
effective from January 1, 2021 through December 31, 2022. The
Company’s 2019 share repurchase program expired on
December 31, 2020.
Liquidity Requirements and
Sources of Capital
The Hartford Financial Services Group,
Inc. ("HFSG Holding Company")
The liquidity requirements of the holding company of The
Hartford Financial Services Group, Inc. will primarily be met by
HFSG Holding Company’s fixed maturities; short-term
investments and cash; and dividends, principally from its
subsidiaries.
The Company maintains sufficient liquidity and has a variety of
contingent liquidity resources to manage liquidity across a range
of economic scenarios. To date, the impact of the pandemic and
resulting economic downturn on net operating cash flows have
been relatively modest. The amount of such impacts will
ultimately depend on the length and severity of the pandemic and
its effects on the economy. We continue to expect to successfully
manage our liquidity throughout the pandemic.
In parts of the second and third quarters of 2020, the Company
waived late payment fees for a period of time for business and
personal insurance customers and temporarily suspended the
policy cancellation process for policyholders of our Commercial
Lines, Personal Lines and Group Benefits segments. Due to those
actions and the economic effects of the pandemic, we
experienced an increase in uncollectible premiums receivable
and, accordingly, increased our current expected credit loss
allowance on premiums receivable by $40 before tax for the year
ended December 31, 2020.
The HFSG Holding Company expects to continue to receive
dividends from its operating subsidiaries in the future and
manages capital in its operating subsidiaries to be sufficient under
significant economic stress scenarios . Dividends from
subsidiaries and other sources of funds at the holding company
may be used to repurchase shares under the authorized share
repurchase program at the discretion of management.
Under significant economic stress scenarios that could arise due
to the COVID-19 pandemic, the Company has the ability to meet
short-term cash requirements, if needed, by borrowing under its
revolving credit facility or by having its insurance subsidiaries
take collateralized advances under a facility with the Federal
Home Loan Bank of Boston (“FHLBB”). The Company could also
choose to have its insurance subsidiaries sell certain highly liquid,
high quality fixed maturities or the Company could issue debt in
the public markets under its shelf registration. No borrowings or
advances have occurred to date.
During the second quarter of 2020, fixed maturities, with a value
of $63 as of December 31, 2020, were deposited by Hartford Fire
Insurance Company into a Lloyd’s trust account to provide
required capital to The Hartford’s Lloyd’s Syndicate. During the
fourth quarter of 2020, additional fixed maturities, with a value of
$112 as of December 31, 2020, were deposited by Hartford Fire
Insurance Company into this trust account. This transaction
provided required capital to The Hartford's Lloyd's syndicate, by
which we reduced the amount of letters of credit under the
Lloyd's Letter of Credit Facility supporting Lloyd's capital
requirements. This was in accordance with the Lloyd's
requirements reducing the maximum amount of letters of credit
permitted to support Lloyd's capital requirements as of the end of
2020. As of December 31, 2020, a total of $175 of fixed
maturities were held by Hartford Fire Insurance Company in this
trust account.
In July 2020, the Company contributed €18 million to Navigators
Holdings (Europe) N.V., a Belgium holding company.
In September 2020, the Company received a $30 dividend from
its retained equity interest in the legal entity that acquired the life
and annuity business sold in May 2018.
Through December 30, 2020, HFSG Holding Company received
cash tax receipts of $533, including realization of net operating
losses and refunds of prior period AMT credits.
Debt
On March 30, 2020, The Hartford repaid at maturity the
$500 principal amount of its 5.5% senior notes.
For additional information on Debt, see Note 14 - Debt of Notes
to Consolidated Financial Statements.
Equity
In December, 2020, the Company announced a $1.5 billion share
repurchase authorization by the Board of Directors which is
effective from January 1, 2021 through December 31, 2022.
105
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
During the period from January 1, 2021 through February 18,
2021, the Company repurchased 1.1 million shares for $56. The
timing of any future repurchases will be dependent upon several
factors, including the market price of the Company's securities,
the Company's capital position, consideration of the effect of any
repurchases on the Company's financial strength or credit
ratings, and other considerations.
Under the previous $1.0 billion share repurchase authorization
that was effective through December 31, 2020, the Company
repurchased 2.7 million and 3.4 million shares for $150 and $200
during the years ended 2020 and 2019, respectively. The
Company’s 2019 share repurchase program expired on
December 31, 2020.
For further information, see Note 16 - Equity of Notes to
Consolidated Financial Statements.
Dividends
The Hartford's Board of Directors declared the following
quarterly dividends since October 1, 2020:
Common Stock Dividends
Declared
Record
October 21, 2020 December 1, 2020
Payable
January 5, 2021 $
Amount
per share
0.325
February 4, 2021
March 1, 2021
April 2, 2021 $
0.35
Preferred Stock Dividends
Declared
October 21, 2020
Record
February 1, 2021
Payable
February 16, 2021 $
Amount
per share
375.00
February 18, 2021
May 1, 2021
May 17, 2021 $
375.00
There are no current restrictions on HFSG Holding Company's
ability to pay dividends to its stockholders.
For a discussion of restrictions on dividends to HFSG Holding
Company from its insurance subsidiaries, see the following
"Dividends from Subsidiaries" discussion. For a discussion of
potential restrictions on the HFSG Holding Company's ability to
pay dividends, see Part I, Item 1A, — Risk Factors for the risk
factor "Our ability to declare and pay dividends is subject to
limitations."
Dividends from Subsidiaries
Dividends to HFSG Holding Company from its insurance
subsidiaries are restricted by insurance regulation. Upon the
acquisition of Navigators Group, the Company’s principal
insurance subsidiaries are domiciled in the United States, the
United Kingdom and Belgium.
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 statutory policyholder
surplus as of December 31 of the preceding year or (ii) net income
(or net gain from operations, if such company is a life insurance
company) for the twelve-month period ending on the thirty-first
day of December last preceding, in each case determined under
106
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.
Property casualty insurers domiciled in New York, including
Navigators Insurance Company ("NIC") and Navigators Specialty
Insurance Company ("NSIC"), generally may not, without notice
to and approval by the state insurance commissioner, pay
dividends out of earned surplus in any twelve‑month period that
exceeds the lesser of (i) 10% of the insurer’s statutory
policyholders’ surplus as of the most recent financial statement
on file, or (ii) 100% of its adjusted net investment income, as
defined, for the same twelve month period. As part of the New
York state insurance commissioner's approval of the Navigators
Group acquisition, and as is common practice, any dividend from
NIC and NSIC before May 2021 will require prior approval from
the state insurance commissioner.
The insurance holding company laws of the other jurisdictions in
which 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.
Corporate members of Lloyd's Syndicates may pay dividends to
its parent to the extent of available profits that have been
distributed from the syndicate in excess of the Funds at Lloyd's
("FAL") capital requirement. The FAL is determined based on the
syndicate’s solvency capital requirement under the Solvency II
capital adequacy model, the current regulatory framework
governing UK domiciled insurers, plus a Lloyd’s specific economic
capital assessment.
Insurers domiciled in the United Kingdom may pay dividends to
their parent out of their statutory profits subject to restrictions
imposed under U.K. Company law and Solvency II. Belgium
domiciled insurers may only pay dividends if, at the end of their
previous fiscal year, the total amount of their assets, as reduced
by its provisions and debts, are in excess of certain minimum
capital thresholds calculated under Belgian law.
In 2020, HFSG Holding Company received $350 of dividends
from HLA and $127 from Hartford Funds. In addition, HFSG
Holding Company received $900 of net dividends from P&C
subsidiaries in 2020 which excludes $50 of P&C dividends that
were subsequently contributed to a run-off P&C subsidiary and
$78 of P&C dividends related to interest payments on an
intercompany note owed by Hartford Holdings, Inc. ("HHI") to
Hartford Fire Insurance Company.
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
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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 May 17,
2019 that permits it to offer and sell debt and equity securities
during the three-year life of the registration statement.
For further information regarding Shelf Registrations, see Note
14 - Debt of Notes to Consolidated Financial Statements.
Revolving Credit Facilities
The Company has a senior unsecured five-year revolving credit
facility (the "Credit Facility") that provides up to $750 of
unsecured credit through March 29, 2023. As of December 31,
2020, no borrowings were outstanding, no letters of credit were
issued under the Credit Facility and the Company was in
compliance with all financial covenants.
Commercial Paper
On December 17, 2020, the Board of Directors terminated the
HFSG Holding Company's commercial paper program, under
which the maximum borrowings available were $750. The
Company maintains sufficient liquidity and continues to have a
variety of other contingent liquidity resources to meet its short-
term liquidity requirements.
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
$2.0 billion for liquidity and other general corporate purposes.
The Connecticut Department of Insurance ("CTDOI") granted
approval for certain affiliated insurance companies that are
parties to the agreement to treat receivables from a parent,
including the HFSG Holding Company, as admitted assets for
statutory accounting purposes.
As of December 31, 2020, there were no amounts outstanding at
the HFSG Holding Company.
Collateralized Advances with Federal Home
Loan Bank of Boston
The Company’s subsidiaries, Hartford Fire Insurance Company
(“Hartford Fire”) and HLA, are 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. Advances may be
used to support general corporate purposes, which would be
presented as short- or long-term debt, or to earn incremental
investment income, which would be presented in other liabilities
consistent with other collateralized financing transactions. As of
December 31, 2020, there were no advances outstanding. The
Connecticut Department of Insurance permits Hartford Fire and
HLA to pledge up to $1.2 billion and $0.6 billion in qualifying
assets, respectively, without prior approval, to secure FHLBB
advances in 2021. For further information regarding the
Company's collateralized advances with Federal Home Loan Bank
of Boston, see Note 14 - Debt of Notes to Consolidated Financial
Statements.
Lloyd's Letter of Credit Facilities
As a result of the acquisition of Navigators Group, The Hartford
had two letter of credit facility agreements: the Club Facility and
the Bilateral Facility, which were used to provide a portion of the
capital requirements at Lloyd's. As of September 30, 2020,
uncollateralized letters of credit with an aggregate face amount
of $165 and £60 million, or $78, were outstanding under the Club
Facility and £18 million, or $23, was outstanding under the $25
Bilateral Facility. These agreements terminated on November 5,
2020.
On November 5, 2020, The Hartford entered into a new
committed credit facility agreement with a syndicate of lenders
(the “Club Facility”). The Club Facility has two tranches with one
tranche extending a $104 commitment and the other tranche
extending a £85 million ($116 as of December 31, 2020)
commitment. In addition, on November 5, 2020, The Hartford
entered into a new non-committed $25 credit facility with a
lender (the “Bilateral Facility”). The term of both of these facilities
is two years. The purpose of these facilities is to issue letters of
credit to provide Funds at Lloyd’s to support underwriting
capacity provided by the Navigators Corporate Underwriters
Limited to the Lloyd’s Syndicate for the 2021 and 2022
underwriting years of account (and prior open years). As of
December 31, 2020, letters of credit with an aggregate face
amount of $104 and £85 million, or $116, were outstanding
under the Club Facility and no letters of credit were outstanding
under the Bilateral Facility.
Among other covenants, the Club Facility and Bilateral Facility
contain financial covenants regarding The Hartford’s
consolidated net worth and financial leverage and that limit the
amount of letters of credit that can support Funds at Lloyd’s,
consistent with Lloyd’s requirements. As of December 31, 2020,
The Hartford was in compliance with all financial covenants of
both facilities.
Pension Plans and Other
Postretirement Benefits
While the Company has significant discretion in making voluntary
contributions to the U. S. qualified defined benefit pension plan,
minimum contributions are mandated in certain circumstances
pursuant to the Employee Retirement Income Security Act of
1974, as amended by the Pension Protection Act of 2006, the
Worker, Retiree, and Employer Recovery Act of 2008, the
Preservation of Access to Care for Medicare Beneficiaries and
Pension Relief Act of 2010, the Moving Ahead for Progress in the
21st Century Act of 2012 (MAP-21) and Internal Revenue Code
regulations. The Company made contributions to the U. S.
qualified defined benefit pension plan of approximately $70, $70
and $101 in 2020, 2019 and 2018, respectively. No contributions
were made to the other postretirement plans in 2020, 2019 and
2018. The Company’s 2020, 2019 and 2018 required minimum
funding contributions were immaterial. The Company does not
have a 2021 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 2021. The Company will monitor the funded
status of the U.S. qualified defined benefit pension plan during
2021 to make this determination.
107
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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. For
further information, refer to Note 15 - Commitments and
Contingencies of Notes to Consolidated Financial Statements.
As of December 31, 2020, 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 provide sufficient liquidity to
meet anticipated demands over the next twelve months. For
information about the impact of COVID-19 on the Company's
cash flows see Part I, Item 1A, Risk Factors of this Annual Report.
For a discussion and tabular presentation of the Company’s
current contractual obligations by period, refer to Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations
within the Capital Resources and Liquidity section of the MD&A.
The principal sources of operating funds are premiums, fees
earned from assets under management and investment income,
while investing cash flows primarily originate from maturities and
sales of invested assets. The primary uses of funds are to pay
claims, claim adjustment expenses, commissions and other
underwriting and insurance operating costs, to pay taxes, to
purchase new investments and to make dividend payments to the
HFSG Holding Company.
The Company’s insurance operations consist of property and
casualty insurance products (collectively referred to as
“Property & Casualty Operations”) and Group Benefits.
The Company's insurance operations hold fixed maturity
securities including a significant short-term investment position
(securities with maturities of one year or less at the time of
purchase) to meet liquidity needs. Liquidity requirements that are
unable to be funded by the Company's insurance operations'
short-term investments would be satisfied with current operating
funds, including premiums or investing cash flows, which includes
proceeds received through the sale of invested assets. A sale of
invested assets could result in significant realized capital losses.
The following tables represent the fixed maturity holdings,
including the aforementioned cash and short-term investments
available to meet liquidity needs, for each of the Company’s
insurance operations.
Property & Casualty
Fixed maturities
Short-term investments
Cash
Less: Derivative collateral
Total
As of
December 31, 2020
$
$
34,173
1,086
120
77
35,302
Group Benefits Operations
Fixed maturities
Short-term investments
Cash
Less: Derivative collateral
Total
As of
December 31, 2020
$
$
10,521
254
13
42
10,746
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 15 - Commitments and Contingencies of Notes to
Consolidated Financial Statements.
108
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Aggregate Contractual Obligations as of December 31, 2020
Payments due by period
Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
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]
Total
[1]The following points are significant to understanding the cash flows estimated for obligations (gross of reinsurance) under property and casualty contracts:
7,157 $
1,403
47
215
2,233
45
11,100 $
29,989 $
10,407
243
9,371
2,814
45
52,869 $
7,865 $
3,457
81
427
444
—
12,274 $
3,901 $
1,514
52
427
127
—
6,021 $
$
$
11,066
4,033
63
8,302
10
—
23,474
• 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, 2020, the
total property and casualty reserves in the above table are gross of a reserve discount of $367.
• Amounts shown do not consider $5.7 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, 2020, the total group life and disability obligations in
the above table are gross of a reserve discount of $1.4 billion.
[3]Includes undiscounted lease payments on operating lease agreements, including leases that have not yet commenced. See Note 21 - Leases of Notes to Consolidated Financial
Statements for additional discussion on lease commitments.
[4] Long-term debt obligations include payments of contractual principal and interest through final maturity. Contractual interest payments are based on stated rates for fixed rate
notes and based on prevailing rates at December 31, 2020 for the period of time the Company’s junior subordinated debentures have floating rates. Interest payments do not
consider the impact of future rate movements. Payments exclude amounts associated with an interest rate swap of the Company’s $500 junior subordinated debenture. See Note
14 - Debt of Notes to Consolidated Financial Statements for additional discussion of long-term debt obligations.
[5]Includes $1.1 billion in commitments to purchase investments including approximately $804 of limited partnership and other alternative investments, $79 of private debt and
equity securities, and $236 of mortgage loans. Of the $1.1 billion in commitments to purchase investments, $149 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. In addition, $904 relates to commitments to purchase investments which are reflected on the Company’s Consolidated
Balance Sheets. The remaining balance relates to contractual commitments to purchase various goods and services such as maintenance, human resources, and information
technology in the normal course of business, as well as unfunded tax credit investments. Purchase obligations exclude contracts that are cancellable without penalty or contracts
that do not specify minimum levels of goods or services to be purchased.
[6]Includes cash collateral of $30 which the Company has accepted in connection with the Company’s derivative instruments. Since the timing of the return of the collateral is
uncertain, the return of the collateral has been included in the payments due in less than 1 year.
Capitalization
Short-term debt (includes current maturities of long-term debt)
$
—
$
Capital Structure
December 31,
2020
December 31,
2019
Long-term debt
Total debt
Common stockholders' equity, excluding AOCI, net of tax
Preferred stock
AOCI, net of tax
Total stockholders’ equity
Total capitalization
Debt to stockholders’ equity
Debt to capitalization
4,352
4,352
17,052
334
1,170
$
$
18,556
22,908
$
$
500
4,348
4,848
15,884
334
52
16,270
21,118
23%
19%
30%
23%
Change
(100%)
—%
(10%)
7%
—%
NM
14%
8%
Total capitalization increased $1,790, or 8%, as of December 31,
2020 compared to December 31, 2019 primarily due to an
increase in AOCI and net income in excess of stockholder
dividends, partially offset by a paydown of debt.
For additional information on AOCI, net of tax, including
109
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
unrealized capital gains from securities, see Note 18 - Changes in
and Reclassifications From Accumulated Other Comprehensive
Income (Loss) and Note 6 - Investments of Notes to Consolidated
Cash Flow [1][2]
Net cash provided by operating activities
Net cash used for investing activities
Net cash used for financing activities
Financial Statements. For additional information on debt, see
Note 14 - Debt of Notes to Consolidated Financial Statements.
2020
2019
2018
$
$
$
3,871 $
(2,066) $
(1,778) $
3,489 $
(2,148) $
(1,191) $
2,843
(1,962)
(1,467)
Cash and restricted cash— end of year
[1]Cash activities in 2018 include cash flows from Discontinued Operations; see Note 22 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial
239 $
262 $
$
121
Statements for information on cash flows from Discontinued Operations.
[2]Cash activities in 2020 include cash flows related to Continental Europe Operations classified as held for sale beginning in the third quarter of 2020. See Note 2 - Business
Acquisition and Disposition of Notes to Consolidated Financial Statements for discussion of this transaction.
Year ended December 31, 2020 compared
to the year ended December 31, 2019
Net cash provided by operating activities
increased as compared to the prior year period primarily driven
by the inclusion of Navigators Group for the full year in 2020,
subrogation benefit distributions collected of $227 arising from
the PG&E settlement agreement, a decrease in claims paid for
Group Benefits and P&C excluding Navigators, lower operating
expenses paid and the deferral of paying payroll taxes as a result
of the Coronavirus Aid, Relief and Economic Security (“CARES”)
Act, partially offset by lower P&C premiums received excluding
Navigators and a lower refund of AMT credits.
Cash used for investing activities decreased
primarily due to the acquisition of Navigators Group for $1.9
billion in 2019, an increase in net proceeds from equity securities,
and a decrease in net payments from mortgage loans, partially
offset by a change from net proceeds to net payments from short-
term investments, and an increase in net purchases of
partnerships and fixed maturities.
Cash used for financing activities increased
primarily due to a decrease in proceeds from issuing debt and a
larger net decrease in securities loaned or sold under agreements
to repurchase, partially offset by a decrease in repayments of
debt.
Operating cash flows for the year ended December 31,
2020 have been adequate to meet liquidity requirements.
Equity Markets
For a discussion of the potential impact of the equity markets on
capital and liquidity, see the Financial Risk on Statutory Capital
and Liquidity Risk section in this MD&A.
Ratings
Ratings are an important factor in establishing a competitive
position in the insurance marketplace and impact the Company's
ability to access financing and its cost of borrowing. There can be
no assurance that the Company’s ratings will continue for any
given period of time, or that they will not be changed. In the event
the Company’s ratings are downgraded, the Company’s
competitive position, ability to access financing, and its cost of
borrowing, may be adversely impacted.
On June 19, 2020, A.M. Best raised its financial strength rating on
Hartford Life and Accident Insurance Company ("HLA") to A+
from A. The upgrade is reflective of the support provided by The
Hartford, as well as the group benefits business' growing
contribution to consolidated revenue and earnings and the
overall diversification it provides.
Insurance Financial Strength Ratings as of
February 18, 2021
A.M. Best
Standard
& Poor's Moody's
A+
A+
A+
A+
A+
A
A1
A2
Not
Rated
Hartford Fire Insurance
Company
Hartford Life and Accident
Insurance Company
Navigators Insurance
Company
Other Ratings:
The Hartford Financial
Services Group, Inc.:
Senior debt
a-
BBB+
Baa1
These ratings are not a recommendation to buy, sell 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. Each
agency’s rating should be evaluated independently of any other
agency’s rating. The system and the number of rating categories
can vary across rating agencies.
Among other factors, rating agencies consider the level of
statutory capital and surplus of our U.S. insurance subsidiaries as
well as the level of a measure of GAAP capital held by the
Company in determining the Company's financial strength and
credit ratings. Rating agencies may implement changes to their
capital formulas that have the effect of increasing the amount of
capital we must hold in order to maintain our current ratings. See
Part I, Item 1A. Risk Factors — “Downgrades in our financial
strength or credit ratings may make our products less attractive,
increase our cost of capital and inhibit our ability to refinance our
debt.”
110
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Statutory Capital
U.S. Statutory Capital Rollforward for the Company's Insurance Subsidiaries
Property and Casualty
Insurance Subsidiaries [1] [2]
Group Benefits Insurance
Subsidiary
Total
U.S. statutory capital at January 1, 2020
$
Statutory income
Contributions from (dividends to) parent [3]
Other items
Net change to U.S. statutory capital
10,208 $
1,598
(898)
(113)
587
2,644 $
310
(350)
(3)
(43)
12,852
1,908
(1,248)
(116)
544
U.S. statutory capital at December 31, 2020
13,396
[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
10,795 $
2,601 $
$
Company.
[2]Excludes insurance operations in the U.K. and Continental Europe.
[3]P&C insurance subsidiaries dividends to Parent of $898 includes $900 of net dividends from P&C subsidiaries, offset by $2 related to the interest on the HHI note.
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 these
amounts are then subject to further admissibility tests 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, under
U.S. STAT, most investments are carried at amortized cost
with only certain securities carried 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.
•
The deferred gain on retroactive reinsurance for losses
ceded to the Navigators and A&E ADC agreements is
recognized within a special category of surplus under U.S.
STAT but is recognized within other liabilities under U.S.
GAAP.
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 U.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 expect to
maintain capital levels in excess of the minimum levels required
by the applicable regulatory authorities.
Sensitivity
In any particular period, statutory capital amounts and RBC ratios
may increase or decrease depending upon a variety of factors.
The amount of change in the statutory capital or RBC ratios can
vary based on individual factors and may be compounded in
extreme scenarios or if multiple factors occur at the same time. At
times the impact of changes in certain market factors or a
combination of multiple factors on RBC ratios can be
counterintuitive. For further discussion on these factors, see
111
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
MD&A - Enterprise Risk Management, Financial Risk on Statutory
Capital.
Statutory capital at the insurance subsidiaries has been
maintained at capital levels commensurate with the Company's
desired RBC ratios and ratings from rating agencies. The amount
of statutory capital can increase or decrease depending on a
number of factors affecting insurance results including, among
other factors, the level of catastrophe claims incurred, the
amount of reserve development, the effect of changes in interest
rates on investment income and the discounting of loss reserves,
and the effect of realized gains and losses on investments.
Contingencies
Legal Proceedings
For a discussion regarding contingencies related to The
Hartford’s legal proceedings, see the information contained
under “Litigation” and “Run-off Asbestos and Environmental
Claims,” in Note 15 - 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
COVID-19 Global Pandemic
State and federal retroactive business interruption
coverage and other insurance regulatory relief
initiatives - State and federal lawmakers are continuing to
consider legislation and regulation in response to COVID-19.
There have been proposals to impose retroactive coverage of
COVID-19 claims under existing business interruption coverage
provisions. If such proposals were enacted, they could represent a
material exposure for the Company. Further, some states have
adopted, or are considering incorporating, a presumption that if
certain workers become infected with COVID-19, such infection
would constitute an occupational disease triggering workers’
compensation coverage. In addition, state insurance regulators,
including California, New Jersey and New York, have encouraged
(and in some cases required) insurers to offer immediate relief to
policyholders including refunding and offering discounts for
drivers, incorporating flexible payment solutions for families,
individuals, and businesses, providing additional time to make
payments, waiving insurance premium late fees, pausing
cancellation of coverage for personal and commercial policies due
to non-payment and policy expiration, and suspending personal
automobile exclusions for restaurant employees who are
transitioning to meal delivery services using their personal
automobile policy as coverage. The Hartford has offered
consumer financial relief including a 15 percent refund on
policyholders’ April and May 2020 personal automobile insurance
premiums, waived late payments fees for a period of time for
business and personal insurance customers and temporarily
suspended policy cancellations for policyholders of our
Commercial Lines, Personal Lines and Group Benefits segments.
As the COVID-19 global pandemic continues, regulators may
require us to or we may elect to provide additional consumer and/
or business financial relief. The duration and scope of such
regulatory/Company actions are uncertain, and the impacts of
such actions could adversely affect the Company’s insurance
business.
Federal pandemic risk insurance - Congress is
considering possible action for future pandemic risk insurance
coverage through a risk sharing mechanism between insurers and
the federal government. Timing for any Congressional action with
respect to these efforts is uncertain at this time. If such a program
were to be enacted, it could represent a significant obligation for
the company in terms of deductible and co-share obligations.
Federal emergency leave legislation - On March 18,
2020, the Families First Coronavirus Response Act ("FFCRA")
was signed into law by the President, and was effective from April
1, 2020 to December 31, 2020. This legislation included a number
of funding provisions and worker protections including mandated
emergency paid sick leave and paid family and medical leave
programs. For private employers with fewer than 500 employees,
and most public employers, new programs were put in place to
guarantee individuals 10 days of paid sick leave, and up to 10
weeks of paid family and medical leave to deal directly with
COVID-19. Eligible employers have access to a tax credit to
reimburse for costs related to the emergency leave programs. On
December 27, 2020, the Consolidated Appropriations Act of
2021 was signed into law and included a bipartisan COVID-19
relief bill. Although the mandatory paid leave provisions from the
FFCRA expired on December 31, 2020, the new law extends
FFCRA tax credits through March 31, 2021, for covered
employers that voluntarily continue to offer paid leave under the
FFCRA framework. The Hartford is providing support for the
administration of the family and medical leave component of the
FFCRA for our Group Benefits customers. Congress also
approved a $2 trillion Coronavirus Aid, Relief and Economic
Security ("CARES") Act. The bill, signed into law on March 27,
2020, focused on providing financial support for small businesses,
individuals, emergency workers, airlines and other industries of
national security. The CARES Act included several technical
corrections to the emergency leave programs and created
advance refunding credits, which allow the U.S. Treasury to
develop regulations or guidance to permit advancement of the
tax credit for both the emergency paid sick leave and paid family
and medical leave. While any further Congressional action could
trigger a significant increase in claims volume and compliance
requirements for Group Benefits, the timing of additional
legislation is unclear at this time.
Federal tax legislation - In response to the COVID-19
Global Pandemic, Congress, various states and other global
jurisdictions have passed various pieces of legislation which
contain various changes to the tax laws in order to aid impacted
businesses and individuals, as well as provide economic stimulus.
The Company deferred the employer’s portion of the Social
Security tax on wages from March 27, 2020 to year-end 2020.
Such deferred amounts would be due and payable over a two-
year period, 50% by December 31, 2021 and 50% by December
31, 2022. Refer to Note 13 of Notes to Consolidated Financial
Statements for information about the impact of these new tax
laws on the Company. The U.S. Treasury and IRS continue to
develop guidance implementing these new tax law provisions, and
Congress may consider additional technical corrections to these
laws. 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.
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
112
Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
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, the Tax Cuts and Jobs Act of
2017 ("TCJA") was enacted. The TCJA made significant reforms
to the U.S. tax code. The major areas of interest to the Company
included the reduction of the corporate tax rate from 35% to 21%
and the repeal of the corporate alternative minimum tax (AMT)
and the refunding of AMT credits. The U.S. Treasury and IRS
continue to develop guidance implementing TCJA, and Congress
may consider additional technical corrections to the law. In
addition, President Biden has indicated he will propose to
increase the corporate tax rate to as high as 28% and revisit other
aspects of TCJA. 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 TCJA, see the risk factor entitled "Changes in
federal or state tax laws could adversely affect our business,
financial condition, results of operations and liquidity" under
"Risk Factors" in Part I.
Guaranty Fund and Other Insurance-
related Assessments
For a discussion regarding Guaranty Fund and Other Insurance-
related Assessments, see Note 15 - 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.
113
Part II - Item 9A. Controls and Procedures
Item 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure
controls and procedures
The Hartford's management assessed its internal controls over
financial reporting as of December 31, 2020 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, 2020.
Changes in internal
control over financial
reporting
There were no changes in the Company's internal control over
financial reporting that occurred during the Company's fourth
fiscal quarter of 2020 that have materially affected, or are
reasonably likely to materially affect, the Company's internal
control over financial reporting. We have not experienced any
material impact to our internal controls over financial reporting
despite the fact that most employees of the Company and of our
vendors have had to work from home during the COVID-19
pandemic though we will continue to assess the impact on the
design and operating effectiveness of our internal controls.
Attestation report of the
Company’s registered
public accounting firm
The Hartford's independent registered public accounting firm,
Deloitte & Touche LLP, has issued their attestation report on the
Company's internal control over financial reporting which is set
forth below.
The Company's principal executive officer and its principal
financial officer, based on their evaluation of the Company's
disclosure controls and procedures (as defined in Exchange Act
Rule 13a-15(e)) have concluded that the Company's disclosure
controls and procedures are effective for the purposes set forth
in the definition thereof in Exchange Act Rule 13a-15(e) as of
December 31, 2020.
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.
114
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 (the
“Company”) as of December 31, 2020, 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, 2020, 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, 2020, of the Company and our report dated February 19, 2021,
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 19, 2021
115
Part III - Item 10. Directors, Executive Officers and Corporate Governance of The Hartford
Item 10. DIRECTORS, 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 2021 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 Annual Report
under the captions and subcaptions “Board and Governance
Matters”, and “Director Nominees" 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 10,
2021:
Name
Age
Position with The Hartford and Business Experience For the Past Five Years
Jonathan R.
Bennett
56 Executive Vice President and Head of Group Benefits (August 2019 - Present); Chief Financial Officer
and Head of Strategy for Property and Casualty and Group Benefits (October, 2012-August 2019)
William A. Bloom
57 Executive Vice President of Operations and Technology (August 2014 - present); President of Global
Kathleen M.
Bromage
Client Services, EXL (July 2010-July 2014)
63 Chief Marketing and Communications Officer (June 2015-present)
Beth A. Costello
53 Executive Vice President and Chief Financial Officer (July 2014-present)
Douglas G. Elliot
60 President (July 2014-present)
Scott R. Lewis
58 Senior Vice President and Controller (May 2013-present)
Robert W. Paiano
59 Executive Vice President and Chief Risk Officer (June 2017-Present); Senior Vice President & Treasurer
(July 2010-May 2017)
David C. Robinson
55 Executive Vice President and General Counsel (June 2015-present)
Lori A. Rodden
50 Executive Vice President Chief Human Resources Officer (October 2019-present); Senior Vice President
and Lead Human Resources Business Partner for Property & Casualty, Group Benefits, Claims and
Actuarial (April 2016 to October 2019) and Vice President and Lead Human Resources for Middle
Market, Large Commercial, Sales & Distribution and underwriting (November 2014 to April 2016)
Amy M.
Stepnowski
52 Executive Vice President Chief Investment Officer (August 2020-Present); President of Hartford
Investment Management Company (August 2020-Present); Managing Director and Head of Public
Credit Research Hartford Investment Management Company (September 2008-August 2020)
116
Part IV. Item 15. Index to Consolidated Financial Statements and Notes
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
DESCRIPTION
Report of Independent Registered Public Accounting Firm
FINANCIAL STATEMENTS
Consolidated Statements of Operations — For the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Comprehensive Income (Loss) — For the Years Ended December 31, 2020, 2019 and 2018
Consolidated Balance Sheets — As of December 31, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity — For the Years Ended December 31, 2020, 2019 and 2018
Consolidated Statements of Cash Flows — For the Years Ended December 31, 2020, 2019 and 2018
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of Presentation and Significant Accounting Policies
Note 2 - Business Acquisitions
Note 3 - Earnings (Loss) per Share
Note 4 - Segment Information
Note 5 - Fair Value Measurements
Note 6 - Investments
Note 7 - Derivatives
Note 8 - Premiums Receivable
Note 9 - Reinsurance
Note 10 - Deferred Policy Acquisition Costs
Note 11 - Goodwill & Other Intangible Assets
Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses
Note 13 - Reserve for Future Policy Benefits
Note 14 - Debt
Note 15 - Commitments and Contingencies
Note 16 - Equity
Note 17 - Income Taxes
Note 18 - Accumulated Other Comprehensive Income (Loss), Net of Tax
Note 19 - Employee Benefit Plans
Note 20 - Stock Compensation Plans
Note 21 - Leases
Note 22 - Business Dispositions and Discontinued Operations
Note 23 - Restructuring and Other Costs
Note 24 - Quarterly Results (Unaudited)
PAGE
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117
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 (the
"Company") as of December 31, 2020 and 2019, 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, 2020, 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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2020, 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, 2020, 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 19,
2021, 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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were
communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the
financial statements and (2) involved especially challenging, subjective, or complex audit judgments. The communication of critical audit
matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical
audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Unpaid Losses and Loss Adjustment Expenses - Refer to Notes 1 and 12 to the financial statements
Critical Audit Matter Description
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 claims that have been incurred but not reported and include estimates of all
losses and loss adjustment expenses associated with processing and settling these claims. 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.
Given the subjectivity of estimating the ultimate cost to settle the liabilities for reported and unreported claims due to uncertainties caused
by various factors including frequency and severity of claims as well as changes in the legislative and regulatory environment, performing
audit procedures to evaluate whether unpaid losses and loss adjustment expenses were appropriately recorded as of December 31, 2020,
required a high degree of auditor judgment and an increased extent of effort, including the need to involve our actuarial specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the unpaid losses and loss adjustment expenses included the following, among others:
• We tested the effectiveness of controls related to the unpaid losses and loss adjustment expenses, including controls over inputs,
methods, and assumptions used in the Company's estimation processes.
• We tested the underlying data that served as the basis for the Company’s analysis, including historical claims.
• With the assistance of our actuarial specialists, we evaluated the methods and assumptions used by the Company to estimate the
unpaid losses and loss adjustment expenses by:
118
•
•
Comparing the Company’s prior year assumptions of expected development of ultimate loss to actual losses incurred
during the current year to identify potential management bias in the determination of the unpaid losses and loss
adjustment expenses.
Assessing the reasonableness of the Company’s analysis, and for selected reserving lines, developing independent
estimates of the unpaid losses and loss adjustment expenses and comparing such estimates to the Company’s estimates.
Investments in Fixed Maturities Classified as Available-for-Sale - Refer to Notes 5 and 6 to the financial statements
Critical Audit Matter Description
Investments in fixed maturities classified as available-for-sale are reported at fair value in the financial statements. The investments without
readily determinable fair values were valued using significant unobservable inputs, such as credit spreads and interest rates beyond the
observable curve, that involved considerable judgment by the Company.
Given the Company used models and unobservable inputs to estimate the fair value of investments in fixed maturities classified as available-
for-sale, performing audit procedures to evaluate these inputs required a high degree of auditor judgment and an increased extent of effort,
including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the models and unobservable inputs used by the Company to estimate the fair value of investments in fixed
maturities classified as available-for-sale included the following, among others:
• We tested the effectiveness of controls over the valuation of investments in fixed maturities classified as available-for-sale,
including controls over inputs, methods, and assumptions used in the Company’s estimation processes.
• On a sample basis, we tested the accuracy and completeness of the investments owned as of December 31, 2020, and the relevant
security attributes used in the determination of their fair values.
• With the assistance of our fair value specialists, for a sample of investments, we tested the mathematical accuracy of the fair value
calculation and developed independent estimates of the fair value and compared our estimates to the Company’s estimates. In
addition to developing independent estimates, we obtained an understanding of the models and inputs used by the Company and
assessed those models and inputs for reasonableness. Such assessment included comparing inputs to external sources or
developing independent inputs.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 19, 2021
We have served as the Company’s auditor since 2002.
119
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)
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
Restructuring and other costs
Total benefits, losses and expenses
Income from continuing operations before income taxes
Income tax expense
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Preferred stock dividends
Net income available to common stockholders
Income from continuing operations, net of tax, available to common stockholders per common
share
Basic
Diluted
Net income available to common stockholders per common share
Basic
Diluted
For the years ended December 31,
2020
2019
2018
$
17,288 $
16,923 $
15,869
1,277
1,846
(14)
126
1,301
1,951
395
170
1,313
1,780
(112)
105
20,523
20,740
18,955
11,805
1,706
4,480
—
—
236
72
104
11,472
1,622
4,580
90
91
259
66
—
11,165
1,384
4,281
6
—
298
68
—
18,403
18,180
17,202
2,120
383
1,737
—
2,560
475
2,085
—
1,737 $
2,085 $
21
21
1,753
268
1,485
322
1,807
6
1,716 $
2,064 $
1,801
4.79 $
4.76 $
4.79 $
4.76 $
5.72 $
5.66 $
5.72 $
5.66 $
4.13
4.06
5.03
4.95
$
$
$
$
$
$
See Notes to Consolidated Financial Statements.
120
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
(in millions)
Net income
Other comprehensive income (loss):
For the years ended December 31,
2020
2019
2018
$
1,737 $
2,085 $
1,807
Change in net unrealized gain on fixed maturities
1,150
1,660
(2,180)
Change in unrealized losses on fixed maturities for which an allowance for credit
losses ("ACL") has been recorded
Change in other-than-temporary impairment ("OTTI") losses recognized in other
comprehensive income ("OCI")
Change in net gain on cash flow hedging instruments
Change in foreign currency translation adjustments
Change in pension and other postretirement plan adjustments
OCI, net of tax
Comprehensive income (loss)
1
3
9
1
14
4
(45)
1,118
(48)
1,631
$
2,855 $
3,716 $
(1)
(25)
(8)
(23)
(2,237)
(430)
See Notes to Consolidated Financial Statements.
121
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
(in millions, except for share and per share data)
Assets
Investments:
As of December 31,
2020
2019
Fixed maturities, available-for-sale, at fair value (amortized cost of $41,561 and $40,078, and ACL of $23 and
$—)
$ 45,035 $ 42,148
Equity securities, at fair value
Mortgage loans (net of ACL of $38 and $—)
Limited partnerships and other alternative investments
Other investments
Short-term investments
Total investments
Cash
Restricted Cash
Premiums receivable and agents' balances (net of ACL of $152 and $145)
Reinsurance recoverables (net of allowance for uncollectible reinsurance of $108 and $114)
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 15)
Stockholders’ Equity
1,438
4,493
2,082
201
3,283
1,657
4,215
1,758
331
2,921
56,532
53,030
151
88
4,268
6,011
789
46
1,911
1,122
950
2,066
177
185
77
4,384
5,527
785
299
1,913
1,181
1,070
2,366
—
$ 74,111 $ 70,817
$ 37,855 $ 36,517
638
701
6,629
—
4,352
5,222
158
635
755
6,635
500
4,348
5,157
—
55,555
54,547
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 13,800 shares issued at December 31, 2020
and December 31, 2019, aggregate liquidation preference of $345
334
334
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at December
31, 2020 and December 31, 2019
Additional paid-in capital
Retained earnings
Treasury stock, at cost — 26,434,682 and 25,352,977 shares
Accumulated other comprehensive income, net of tax
Total stockholders' equity
Total liabilities and stockholders’ equity
4
4
4,322
4,312
13,918
12,685
(1,192)
(1,117)
1,170
52
18,556
16,270
$ 74,111 $ 70,817
See Notes to Consolidated Financial Statements.
122
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
(in millions, except for share and per 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
Issuance of shares for warrant exercise
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
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
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 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
Cash dividends declared per preferred share
See Notes to Consolidated Financial Statements.
123
For the years ended December 31,
2020
2019
2018
$
334 $
334 $
—
334
4
—
334
4
—
334
334
4
4,312
4,378
4,379
(96)
106
—
(100)
114
(80)
(110)
123
(14)
4,322
4,312
4,378
12,685
11,055
9,642
(18)
—
12,667
11,055
1,737
2,085
(21)
(465)
(21)
(434)
5
9,647
1,807
(6)
(393)
13,918
12,685
11,055
(1,117)
(1,091)
(1,194)
(150)
112
(37)
—
(200)
135
(41)
80
—
132
(43)
14
(1,192)
(1,117)
(1,091)
52
—
52
1,118
1,170
(1,579)
—
(1,579)
1,631
52
663
(5)
658
(2,237)
(1,579)
$ 18,556 $ 16,270 $ 13,101
13,800
13,800
—
—
13,800
13,800
—
13,800
13,800
359,570
359,151
356,835
(2,661)
(3,412)
—
2,298
2,906
2,856
(718)
(796)
—
1,721
(849)
309
358,489
359,570
359,151
$
1.30 $
1.20 $
1.10
$ 1,500.00 $ 1,500.00 $ 412.50
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
(in millions)
Operating Activities
Net income
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Net realized capital losses (gains)
Amortization of deferred policy acquisition costs
Additions to deferred policy acquisition costs
Depreciation and amortization
Loss on extinguishment of debt
Loss (gain) on sale of business
Other operating activities, net
Change in assets and liabilities:
Increase in reinsurance recoverables
Net change in accrued and deferred income taxes
Increase 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
Equity securities at fair value
Mortgage loans
Partnerships
Payments for the purchase of:
Fixed maturities, available-for-sale
Equity securities at fair value
Mortgage loans
Partnerships
Net proceeds from (payments for) derivatives
Net additions to property and equipment
Net proceeds from (payments for) from 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 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 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 return of shares under incentive and stock compensation plans
Treasury stock acquired
Dividends paid on preferred stock
Dividends paid on common stock
Net cash used for financing activities
Foreign exchange rate effect on cash
Net increase (decrease) in cash and restricted cash, including cash classified within assets held for sale
Less: Net increase (decrease) in cash classified as assets held for sale
Net increase (decrease) in cash and restricted cash
Cash and restricted cash — beginning of period
Cash and restricted cash — end of period
Supplemental Disclosure of Cash Flow Information
Income tax received
Interest paid
See Notes to Consolidated Financial Statements.
124
For the years ended December 31,
2020
2019
2018
$
1,737 $
2,085 $
1,807
(34)
1,706
(1,666)
562
—
48
85
(540)
459
1,426
88
3,871
19,534
1,485
948
167
(21,112)
(962)
(1,264)
(491)
112
(114)
(368)
(1)
—
—
(2,066)
60
(102)
—
—
(587)
(500)
—
—
(21)
(150)
(21)
(457)
(1,778)
8
35
58
(23)
262
(395)
1,622
(1,635)
451
90
—
76
(81)
886
768
(378)
3,489
18,499
1,553
771
238
(19,881)
(1,316)
(1,275)
(303)
32
(105)
1,491
49
—
(1,901)
(2,148)
123
(124)
—
—
(323)
(1,583)
1,376
—
(6)
(200)
(21)
(433)
(1,191)
(9)
141
—
141
121
$
$
$
239 $
262 $
71 $
232 $
396 $
261 $
165
1,442
(1,404)
467
6
(202)
408
(323)
(103)
493
87
2,843
24,700
1,230
483
433
(23,173)
(1,500)
(983)
(481)
(224)
(122)
(3,460)
20
1,115
—
(1,962)
1,814
(9,210)
6,949
(2)
(621)
(826)
490
334
(16)
—
—
(379)
(1,467)
(10)
(596)
(537)
(59)
180
121
9
292
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 as well as
in the United Kingdom, continental Europe and other
international locations (collectively, “The Hartford”, the
“Company”, “we” or “our”).
On September 30, 2020, the Company entered into a definitive
agreement to sell all of the issued and outstanding equity of
Navigators Holdings (Europe) N.V., a Belgium holding company,
and its subsidiaries, Bracht, Deckers & Mackelbert N.V. (“BDM”)
and Assurances Contintales Contintale Verzekeringen N.V.
(“ASCO”), (collectively referred to as "Continental Europe
Operations"). For further discussion of this transaction, see Note
22 - Business Dispositions and Discontinued Operations.
On May 23, 2019, the Company completed the acquisition of The
Navigators Group, Inc. ("Navigators Group"), a global specialty
underwriter, for $70 a share, or $2.137 billion in cash, including
transaction expenses.
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.
For further discussion of these transactions, see Note 2 - Business
Acquisitions and Note 22 - Business Dispositions and
Discontinued Operations.
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. Intercompany transactions
and balances between The Hartford and its subsidiaries and
affiliates 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
125
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;
and contingencies relating to corporate litigation and regulatory
matters.
The novel strain of coronavirus, specifically identified as the
Coronavirus Disease 2019 (“COVID-19”), has created significant
uncertainty in the global economy. There have been no
comparable recent events that provide guidance as to the effect a
global pandemic of this scale may have. As a result, the ultimate
impact of COVID-19 and the extent to which COVID-19
continues to impact the Company’s business, results of
operations and financial condition will depend on the duration
and severity of the pandemic, the duration and severity of the
economic downturn and the degree to which federal, state and
local government actions to mitigate the economic impact of
COVID-19 are effective. Our estimates, judgments and
assumptions related to COVID-19 could ultimately differ over
time.
Reclassifications
Certain reclassifications have been made to prior year financial
information to conform to the current year presentation.
Adoption of New Accounting
Standards
Reclassification of Effect of Tax Rate
Change from AOCI to Retained
Earnings
On January 1, 2018, the Company adopted the Financial
Accounting Standards Board's ("FASB") 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
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
126
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.
Qualitative information about the nature, timing of recognition
and cash flows for the Company’s revenues subject to the
updated guidance is disclosed below under Significant Accounting
Policies-Revenue Recognition and quantitative information is
disclosed in Note 4 - Segment Information.
Hedging Activities
On January 1, 2019, the Company adopted the FASB's updated
guidance for hedge accounting through a cumulative effect
adjustment of less than $1 to reclassify cumulative
ineffectiveness on cash flow hedges from retained earnings to
AOCI. 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 is reported
in the same income statement line with the effective hedge
results and the hedged transaction. For cash flow hedges, the
ineffectiveness is recognized in earnings only when the hedged
transaction affects earnings; otherwise, the ineffectiveness gains
or losses remain in AOCI. Under previous accounting, total hedge
ineffectiveness was reported separately in realized capital gains
and losses apart from the hedged transaction. The adoption did
not affect the Company’s financial position or cash flows or have a
material effect on net income.
Leases
On January 1, 2019, the Company adopted the FASB’s updated
lease guidance. Under the updated guidance, 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. Prior to
the new guidance, future minimum lease payments on operating
leases were commitments that were not recognized as liabilities
on the balance sheet. Leases are 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 is classified as a financing lease and the Company
recognizes 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 is an operating lease and the lease cost is recognized as
rental expense over the lease term on a straight-line basis. Leases
with a term of one year or less are also expensed over the lease
term but not recognized on the balance sheet. On adoption, The
Hartford recorded a lease payment obligation of $160 for
outstanding leases and a right of use asset of $150, which is net of
$10 in lease incentives received, with no change to comparative
periods. As permitted by the new guidance, as of the
implementation date, the Company did not reassess whether
expired or existing contracts are leases or contain leases, did not
change the classification of expired or existing operating leases,
and did not reassess initial direct costs for existing leases to
determine if deferred costs should be written-off or recorded on
adoption. The adoption did not impact net income or cash flows.
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill
On January 1, 2020, the Company adopted the FASB's updated
guidance on testing goodwill for impairment with no effect at
adoption. The updated guidance requires impairment of goodwill
if the carrying value of the reporting unit is greater than the
estimated fair value, with the amount of the impairment not to
exceed the carrying value of the reporting unit’s goodwill.
Goodwill is reviewed for impairment at least annually and more
frequently if events occur or circumstances change that would
indicate that a triggering event for a potential impairment has
occurred. Under the updated guidance, changes in market-based
factors are more likely to result in a goodwill impairment than
under the prior accounting guidance, whether a reporting unit's
fair value is estimated using an income approach or a market
approach. For example, changes in the weighted average cost of
capital that is used to discount expected cash flows under the
income approach or changes in market-based factors such as peer
company price to earnings multiples or price to book multiples
under a market approach can significantly affect changes to the
estimated fair value of each reporting unit and such changes
could result in impairments that have a material effect on our
results of operations and financial condition.
Financial Instruments - Credit Losses
On January 1, 2020, the Company adopted the FASB’s updated
guidance for recognition and measurement of credit losses on
financial instruments. The new guidance replaces the “incurred
loss” approach with an “expected loss” model for recognizing
credit losses for financial instruments carried at other than fair
value. Under the new model, for financial instruments carried at
other than fair value, such as mortgage loans, reinsurance
recoverables and receivables, an allowance for credit losses
("ACL") is recognized which is an estimate of credit losses
expected over the life of financial instruments. Under the prior
accounting model an ACL was recognized using an incurred loss
approach. The new guidance also requires that we estimate a
liability for credit losses ("LCL") on off balance sheet credit
exposures such as financial guarantees and mortgage loan
commitments that the Company cannot unconditionally cancel.
Credit losses on fixed maturities, AFS carried at fair value
continue to be measured based on the present value of expected
future cash flows compared to amortized cost; however, the
losses are now recognized through an ACL and no longer as an
adjustment to the amortized cost. Recoveries of credit losses on
fixed maturities, AFS are now recognized as reversals of the ACL
and no longer accreted as investment income through an
adjustment to the investment yield. The ACL 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
the ACL 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 adopted the guidance effective January 1, 2020,
through a cumulative-effect adjustment that decreased retained
earnings by $18, representing a net increase to the ACL and LCL,
after tax. No ACL was recognized at adoption for fixed maturities,
AFS; rather, these investments are evaluated for an ACL
prospectively. The Company does not have any purchased
financial assets with a more than insignificant amount of credit
deterioration since original issuance.
Impact of Adoption on Consolidated Balance
Sheet
Balance as of January 1, 2020
Cumulative
Effect of
Accounting
Change
Adjusted
Opening
Balance
Opening
Balance
Mortgage loans
$
4,215
$
4,215
ACL on mortgage
loans
Mortgage loans, net
of ACL
Premiums receivable
and agents’ balances
ACL on premiums
receivable and agents'
balances
Premiums receivable
and agents' balances,
net of ACL
Reinsurance
recoverables
ACL and allowance for
disputed amounts on
reinsurance
recoverables
Reinsurance
recoverables, net of
allowance for
uncollectible
reinsurance
Deferred income tax
asset, net
— $
(19)
(19)
4,215
4,529
(19)
4,196
4,529
(145)
23
(122)
4,384
5,641
23
4,407
5,641
(114)
(2)
(116)
5,527
(2)
5,525
299
5
304
Other liabilities
(5,157)
(25)
(5,182)
Retained Earnings
$ 12,685 $
(18) $
12,667
Summary of Adoption Impacts
Net increase to ACL and LCL
Net tax effects
Net decrease to retained earnings
$
$
(23)
5
(18)
Reference Rate Reform
On March 12, 2020, the Company adopted the FASB’s temporary
guidance, which allows The Hartford to account for contract
modifications made solely due to rate reform (such as replacing
LIBOR with another reference rate) as continuations of existing
contracts and to maintain hedge accounting when the hedging
effectiveness between a financial instrument and its hedge is only
affected by the change to a replacement rate. As a result, The
Hartford will not recognize gains and losses during the transition
period of LIBOR to an alternative reference rate that would
otherwise have arisen from accounting assessments and
remeasurements. The guidance expires for contract modifications
made and hedge relationships entered into or evaluated after
December 31, 2022. The Company is not required to measure the
127
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
effect of adoption on its financial position, cash flows or net
income because the guidance provides relief from accounting for
the effects of the change to a replacement rate.
Significant Accounting Policies
The Company’s significant accounting policies are as follows:
Mortgage Loan Modification
In 2020, The Hartford adopted the Coronavirus Aid, Relief, and
Economic Security Act (the “CARES Act”) Section 4013, which
allows financial institutions the option to suspend the
requirement to disclose and account for loan modifications as
troubled debt restructurings for loan modifications related to the
COVID-19 pandemic occurring between March 1, 2020 and the
earlier of 60 days after the end of the national emergency or
January 1, 2022. The Company’s adoption of Section 4013 of the
CARES Act had no impact on our results of operations, financial
position or cash flows because The Hartford has not granted
significant concessions to borrowers on its mortgage loans that
would have been disclosed and accounted for as troubled debt
restructurings.
Future Adoption of New
Accounting Standards
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 $638 as of
December 31, 2020. 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, 2023,
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.
Revenue Recognition
Premium Revenue from Direct Insurance and
Assumed Reinsurance
Property and casualty premiums are earned on a pro rata basis
over the policy period and include accruals for policies that have
been written by agents but not yet reported to us, as well as
ultimate premium revenue anticipated under auditable and
retrospectively rated policies. We estimate the amount of
premium not yet reported based on current and historical trends
of the business being written. Such estimates are regularly
reviewed and updated and any resulting adjustments are included
in the current year's results. Unearned premiums represent the
premiums applicable to the unexpired terms of policies in force,
or period of risk.
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.
An estimated ACL is recorded on the basis of periodic evaluations
of balances due from insureds and considering historical credit
loss information, adjusted for current economic conditions and
effective January 1, 2020, reasonable and supportable forecasts
when appropriate . The Company records total credit loss
expenses related to premiums receivable in insurance operating
costs and other expenses. Write-offs of premiums receivable and
agents' balances and any related ACL are recorded in the period
in which the balance is deemed uncollectible. Refer to Note 8 -
Premiums Receivable and Agents' Balances for further discussion
regarding the allowance for doubtful accounts included in
premiums receivable and agents’ balances.
Revenue from Non-Insurance Contracts with
Customers
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 earns 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 are collected monthly.
128
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 The Hartford’s former life and annuity
business. 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 are provided for a limited period following sale. The
transition service revenues are recognized as other revenues in
the period in which the services are provided with payments
collected monthly.
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 7%, 9% and 10% of total net
written premiums for the years ended December 31, 2020, 2019
and 2018, respectively. Participating dividends to property and
casualty policyholders were $29, $30 and $23 for the years
ended December 31, 2020, 2019 and 2018, 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
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. Mortgage loans are recorded at the outstanding principal
balance adjusted for amortization of premiums or discounts and
net of an ACL. 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
129
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. Accordingly, income for the
years ended December 31, 2020, 2019, and 2018 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
for which the Company has provided seed money and reports the
underlying investments at fair value with changes in the fair value
recognized in income consistent with accounting requirements
for investment companies. Also included in other investments are
derivative instruments which are carried at fair value, overseas
deposits which are measured at fair value using the net asset
value as a practical expedient and equity fund investments.
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 equity securities and
derivatives contracts that do not qualify, or are not designated, as
a hedge for accounting purposes. Prior to January 1, 2020,
impairments of fixed maturities and changes in mortgage loan
valuation allowances were recognized as net realized capital
losses as discussed in Note 6 -Investments. Effective January 1,
2020, the Company records net credit losses on fixed maturities,
AFS and changes in the ACL on mortgage loans as a component of
net realized capital gains and losses. For further information, see
Financial Instruments - Credit Losses discussion above.
Net Investment Income
Interest income from fixed maturities and mortgage loans is
recognized when earned on the constant effective yield method
based on the 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. For certain other asset-backed
securities, including securities that previously had an ACL and
interest only 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. Prior to January 1, 2020, for impaired fixed
maturities, the Company accreted the new amortized cost to the
estimated future cash flows over the expected remaining life of
the investment by prospectively adjusting the effective yield, if
necessary. Effective January 1, 2020, the Company no longer
records credit losses as adjustments to the amortized cost of the
fixed maturity but rather records an ACL. Future changes in the
ACL resulting from improvements in expected future cash flows
are not recorded as adjustments to yield through net investment
income but are recorded through net realized capital gains
(losses). For fixed maturities with an ACL, net investment income
is recognized at the original effective rate and accretion of the
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ACL is recognized through net realized capital gains (losses). For
further information, see Financial Instruments - Credit Losses
discussion above. The Company’s non-income producing
investments were not material for the years ended December 31,
2020, 2019 and 2018.
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 engage
in income generation covered call transactions and replication
transactions. The types of instruments may include swaps, caps,
floors, forwards, futures and options to achieve the following
Company-approved objectives:
•
•
•
•
to hedge risk arising from interest rate, equity market,
commodity market, credit spread and issuer default, price or
currency exchange rates or volatility;
to manage liquidity;
to control transaction costs;
to enter into income generation covered call transactions
and 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. 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. 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
130
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
management purposes are reported in current period earnings as
net realized capital gains and losses.
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 flows 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 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.
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 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
131
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 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, if applicable. 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 and Restricted Cash
Cash represents cash on hand and demand deposits with banks or
other financial institutions. Restrictions on cash primarily relate
to funds that are held to support regulatory and contractual
obligations.
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.
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
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
reported in benefits, losses and loss adjustment expenses in the
Company's Consolidated Statements of Operations.
The Company periodically evaluates the recoverability of its
reinsurance recoverable assets and establishes an allowance for
uncollectible reinsurance. 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 allowance for uncollectible
reinsurance comprises an ACL and an allowance for disputed
balances. Based on this analysis, the Company may adjust the
allowance for uncollectible reinsurance or charge off reinsurer
balances that are determined to be uncollectible. The Company
records credit losses related to reinsurance recoverables in
benefits losses and loss adjustment expenses. Write-offs of
reinsurance recoverables and any related ACL are recorded in the
period in which the balance is deemed uncollectible. Expected
recoveries are included in the estimate of the ACL.
Retroactive reinsurance agreements, including adverse
development covers, are reinsurance agreements under which
our reinsurer agrees to reimburse us as a result of past insurable
events. For these agreements, the consideration paid in excess of
the estimated ultimate losses recoverable under the agreement
at inception is recognized as a loss on reinsurance transaction.
The benefit of subsequent adverse development ceded up to the
total consideration paid is recognized as ceded losses and loss
adjustment expenses. The excess of the estimated amounts
ultimately recoverable under the agreement over the
consideration paid is recognized as a deferred gain liability and
amortized into income over the period the ceded losses are
recovered in cash from the reinsurer. The amount of the deferred
gain liability is recalculated each period based on cumulative
recoveries not yet collected relative to the latest estimate of
ultimate losses recoverable. Ceded loss reserves under
retroactive agreements were $1.1 billion and $747, and the
deferred gain liability reported in other liabilities was $328 and
$16, as of December 31, 2020 and 2019, respectively. In any
given period, the change in deferred gain included in net income
includes amortization of the deferred gain based on the
percentage of ultimate ceded losses collected plus any change in
the deferred gain liability due to changes in the estimated
ultimate losses recoverable. The effect on income from change in
the deferred gain was a charge to earnings of $312 and $16 for
the years ended December 31, 2020 and 2019, respectively.
There was no deferred gain in 2018.
Deferred Policy Acquisition Costs
DAC represents 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. Prior to January 1, 2020, the goodwill impairment
test followed a two-step process. In the first step, the fair value of
a reporting unit was 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 consist of Commercial Lines, Personal
Lines, Group Benefits, and Hartford Funds. If the carrying value of
a reporting unit exceeded its fair value, the second step of the
impairment test was performed for purposes of measuring the
impairment. In the second step, the fair value of the reporting unit
was 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 exceeded the implied
goodwill value, an impairment loss was recognized in an amount
equal to that excess. Effective January 1, 2020, the goodwill
impairment test is based on the first step only and, as such,
goodwill is impaired up to the amount that the carrying value of
the reporting unit exceeds the fair value. For further information,
see Adoption of New Accounting Standards - Goodwill discussion
above.
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, the weighted
average cost of capital used for purposes of discounting and, for
the Hartford Funds segment, assets under management.
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
132
Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. Finite-lived intangible assets are impaired if the
carrying amount is not recoverable from undiscounted cash flows.
Indefinite-lived intangible assets are impaired if the carrying
amount exceeds fair value. Impaired intangible assets are written
down to 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 recognized principally on the
straight-line method. Accumulated depreciation was $2.1 billion
and $1.9 billion as of December 31, 2020 and 2019, respectively.
Depreciation expense was $313, $283, and $232 for the years
ended December 31, 2020, 2019 and 2018, respectively.
Unpaid Losses and Loss Adjustment
Expenses
For property and casualty and group life and disability insurance
and assumed reinsurance 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 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 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
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.
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 12 - Reserve for
Unpaid Losses and Loss Adjustment Expenses.
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;
however, the U.S. dollar is the functional currency of Lloyd's
Syndicate 1221 ("Lloyd's Syndicate"), the Lloyd's Syndicate for
which the Company is the sole corporate member, in the U.K.
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.
133
Note 2 - Business Acquisitions
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. BUSINESS ACQUISITIONS
Navigators Group
On May 23, 2019, The Hartford acquired 100% of the
outstanding shares of Navigators Group for $70 a share, or
$2.121 billion, comprised of cash of $2.098 billion and a liability
for cash awards to replace share-based awards of $23. The
acquisition of the specialty underwriter expands product
offerings and geographic reach, and adds underwriting and
industry talent to strengthen the Company’s value proposition to
agents and customers. At acquisition, the Company recorded
provisional estimates of the fair value of the assets acquired and
liabilities assumed. In the second quarter of 2020, The Hartford
finalized its provisional estimates and recorded additional assets
of $9 and liabilities of $7 with a net reduction in goodwill of $2.
The measurement period adjustments, determined as if the
accounting had been completed as of the acquisition date, had no
effect on the Consolidated Statements of Operations for the
twelve months ended December 31, 2020. 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.
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
Preliminary Values as
of May 23, 2019 (as
previously reported)
Measurement Period
Adjustments
Adjusted Values as of
May 23, 2019
Assets
Cash and invested assets
Premiums receivable
Reinsurance recoverables
Prepaid reinsurance premiums
Other intangible assets
Property and equipment
Other assets
Total Assets Acquired
Liabilities
Unpaid losses and loss adjustment expenses
Unearned premiums
Long-term debt
Deferred income taxes, net
Other liabilities
Total Liabilities Assumed
Net identifiable assets acquired
Goodwill [1]
Net Assets Acquired
[1] Non-deductible for income tax purposes.
$
3,848 $
492
1,100
238
580
83
99
6,440
2,823
1,219
284
48
568
4,942
1,498
623
$
2,121 $
3 $
6
(3)
—
—
—
3
9
—
—
—
(1)
8
7
2
(2)
— $
3,851
498
1,097
238
580
83
102
6,449
2,823
1,219
284
47
576
4,949
1,500
621
2,121
134
Note 2 - Business Acquisitions
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Intangible Assets Recorded in Connection
with the Acquisition
Asset
Amount
Weighted
Average
Expected Life
$
180
Value of in-force contracts -
Property and Casualty ("P&C")
Distribution relationships
Trade name
Total finite life intangibles
Capacity of Lloyd's Syndicate
Licenses
Total indefinite life intangibles
302
17
499
66
15
81
1
15
10
10
Total other intangible assets
$
580
The value of in-force contracts represents the estimated profits
relating to the unexpired contracts in force net of related prepaid
reinsurance at the acquisition date through expiry of the
contracts. The value of distribution relationships was estimated
using net cash flows expected to come from the renewals of in-
force contracts and new business sold through existing
distribution partners less costs to service the related policies. The
value of the trade name was estimated using an assumed cost of a
market-based royalty fee applied to net cash flows expected to
come from business marketed as Navigators, a brand of The
Hartford. Lloyd's of London is an insurance market-place
operating worldwide ("Lloyd's"). Lloyd's does not underwrite
risks. Corporate members accept underwriting risks through the
syndicates that they form. The Company accepts risks as the sole
corporate member of Lloyd's Syndicate. The value of the capacity
of Lloyd’s Syndicate was estimated using net cash flows
attributable to Navigators Group's right to underwrite business
up to an approved level of premium in the Lloyd’s market. The
values for in-force contracts, the distribution relationships, trade
name and the capacity of the Lloyd's Syndicate were estimated
using a discounted cash flow method. Significant inputs to the
valuation models include estimates of expected new business,
premium retention rates, investment returns, claim costs,
expenses and discount rates based on a weighted average cost of
capital. The value of licenses to write insurance in over 50 U.S.
jurisdictions was estimated based on recent transactions for shell
companies.
Property and equipment includes real estate owned and right of
use assets under leases that were valued based on current values
and market rental rates, software that was valued based on
estimated replacement cost and furniture and equipment. These
will be amortized over periods consistent with the Company’s
policy.
The fair value of unpaid losses and loss adjustment expenses net
of related reinsurance recoverables was estimated based on the
present value of expected future net unpaid loss and loss
adjustment expense payments discounted using a risk-free
interest rate as of the acquisition date plus a risk margin. The
discount and risk margin amounts substantially offset.
Debt assumed in the transaction was valued based on the
principal and interest payments discounted at the current market
135
yield. This debt was paid off in August 2019. For further
discussion of this transaction, see Note 14 - Debt.
The $621 of goodwill recognized is largely attributable to the
acquired employee workforce and underwriting talent,
leverageable operating platform, improved investment yield and
economies of scale. Goodwill is allocated to the Company's
Commercial Lines reporting segment.
Immediately after closing on the acquisition of Navigators Group,
effective May 23, 2019, the Company purchased an aggregate
excess of loss reinsurance agreement covering adverse reserve
development (“Navigators ADC”) from National Indemnity
Company ("NICO") on behalf of Navigators Insurance Company
and certain of its affiliates (collectively, “Navigators Insurers”).
Under the Navigators ADC, the Navigators Insurers paid NICO a
reinsurance premium of $91 in exchange for reinsurance
coverage of $300 of adverse net loss reserve development that
attaches $100 above the Navigators Insurers' existing net loss
and allocated loss adjustment reserves as of December 31, 2018
subject to the treaty of $1.816 billion for accidents and losses
prior to December 31, 2018. In addition to recognizing a $91
before tax charge to earnings in 2019 for the Navigators ADC
reinsurance premium, the Company recognized a charge against
earnings of $97 before tax in the second quarter of 2019 as a
result of a review of Navigators Insurers’ net acquired reserves
upon acquisition of the business. Navigators Insurers had
previously recognized $52 before tax of adverse reserve
development in the first quarter of 2019, including $32 of
adverse development subject to the Navigators ADC. As such,
reserve development of $97 before tax recognized upon
acquisition of the business included $68 remaining of the $100
Navigators ADC retention for 2018 and prior accident years and
$29 of adverse reserve development related to the 2019 accident
year which is not covered by the Navigators ADC.
On 2018 and prior accident year reserves subject to the
Navigators ADC, the Company recognized a total of $84 of
adverse development in 2019, including the $68 of reserve
development recorded upon acquisition of the business. The $84
of prior accident year reserve development was net of a $91 net
reinsurance benefit recognized under the Navigators ADC. While
the Company has ceded $209 of losses to the ADC through
December 31, 2020, which has been recognized as a reinsurance
recoverable, $118 of the ceded losses has been recognized as a
deferred gain within other liabilities since the Navigators ADC
has been accounted for as retroactive reinsurance and
cumulative losses ceded of $209 exceed the ceded premium paid
of $91. As the Company has ceded $209 of the $300 available
limit, there is $91 of remaining limit available as of December 31,
2020.
Since the acquisition date of May 23, 2019, the revenues and net
losses of the business acquired have been included in the
Company's Consolidated Statements of Operations in the
Commercial Lines reporting segment with revenues of $1.0 billion
and net losses of $167 during the period from the acquisition date
to December 31, 2019, including the $91 before tax ($72 net of
tax) of premium paid for the Navigators ADC, a charge of $97
before tax ($77 net of tax) for the increase in acquired reserves
following the acquisition, a charge of $16 before tax ($13 net of
tax) for the deferred gain on retroactive reinsurance and net
investment income of $67 before tax ($54 net of tax). During
2020, the Company increased reserves subject to the Navigators
Note 2 - Business Acquisitions
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ADC by an additional $102 before tax ($81 net of tax) which was
recognized as an increase to deferred gain within incurred losses.
See Note 12 - Reserve for Unpaid Losses and Loss Adjustment
Expenses, for additional information.
The Company recognized $17 of acquisition related costs for the
twelve months ended December 31, 2019. These costs are
included in insurance operating costs and other expenses in the
Consolidated Statement of Operations.
The following table presents supplemental unaudited pro forma
amounts of revenue and net income for the year ended December
31, 2019 and 2018 for the Company as though the business was
acquired on January 1, 2018. Pro forma adjustments include the
revenue and earnings of Navigators Group for each period as well
as amortization of identifiable intangible assets acquired.
Pro Forma Results for the Year Ended
December 31
2019 Supplemental (unaudited)
combined pro forma
2018 Supplemental (unaudited)
combined pro forma
$
$
Revenue
Earnings
21,416 $
2,080
20,398 $
1,828
3. EARNINGS (LOSS) PER COMMON SHARE
Computation of Basic and Diluted Earnings per Common Share
(In millions, except for per share data)
Earnings
Income from continuing operations, net of tax
Less: Preferred stock dividends
Income from continuing operations, net of tax, available to common stockholders
Income from discontinued operations, net of tax, available to common stockholders
Net income available to common stockholders
Shares
Weighted average common shares outstanding, basic
Dilutive effect of warrants [1]
Dilutive effect of stock-based awards under compensation plans
Weighted average common shares outstanding and dilutive potential common shares [2]
Earnings per common share
Basic
Income from continuing operations, net of tax, available to common stockholders
Income from discontinued operations, net of tax, available to common stockholders
Net income available to common stockholders
Diluted
Income from continuing operations, net of tax, available to common stockholders
Income from discontinued operations, net of tax, available to common stockholders
Net income available to common stockholders
[1]On June 26, 2019 the Capital Purchase Program warrants issued in 2009 expired.
[2]For additional information, see Note 16 - Equity and Note 20 - Stock Compensation Plans.
For the years ended December 31,
2020
2019
2018
$
1,737 $
2,085 $
1,485
21
21
1,716
—
1,716 $
2,064
—
2,064 $
358.3
—
2.3
360.6
360.9
0.5
3.5
364.9
4.79 $
—
4.79 $
4.76 $
—
4.76 $
5.72 $
—
5.72 $
5.66 $
—
5.66 $
6
1,479
322
1,801
358.4
1.9
3.8
364.1
4.13
0.90
5.03
4.06
0.89
4.95
$
$
$
$
$
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.
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.
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 repurchasable 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.
136
Note 4 - Segment Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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"). In addition, Corporate
includes a 9.7% ownership interest in the legal entity that
acquired the life and annuity business sold in 2018. For further
discussion of continued involvement in the life and annuity
business sold, see Note 22 - Business Dispositions and
Discontinued Operations.
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.
4. SEGMENT INFORMATION
The Company 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.
Over 95% of the Company’s revenues are generated in the United
States (“U.S.”). The remaining revenues are generated in Europe
and other international locations.
We report our results of operations consistent with the manner in
which our chief operating decision maker ("CODM") reviews the
business to assess performance, make operating decisions and
allocate resources. The Company’s reporting segments, as well as
the Corporate category, are as follows:
Commercial Lines
Commercial Lines provides workers’ compensation, property,
automobile, general liability, umbrella, professional liability, bond,
marine, livestock and assumed reinsurance to businesses in the
U.S. and internationally, 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. This agreement provides an important competitive
advantage given the size of the 50 plus population and the
strength of the AARP brand. During the second quarter of 2020,
the Company extended this agreement through December 31,
2032.
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 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 discontinued
operations related to the life and annuity business sold in May
2018, reserves for run-off structured settlement and terminal
funding agreement liabilities, restructuring costs, capital raising
activities (including debt financing and related interest expense),
transaction expenses incurred in connection with an acquisition,
certain purchase accounting adjustments related to goodwill and
137
Note 4 - Segment Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues
Net Income
For the years ended
December 31,
2020
2019
2018
Earned premiums and fee income:
Commercial Lines
Workers’ compensation
$ 3,034 $ 3,314 $ 3,341
Liability
Marine
1,401
1,064
251
147
653
—
Package business
1,540
1,471
1,364
Property
Professional liability
Bond
Assumed reinsurance
Automobile
793
595
274
298
754
728
447
261
180
713
618
254
241
—
610
Commercial Lines
Personal Lines
Property & Casualty Other
Operations
Group Benefits
Hartford Funds
Corporate
Net income
For the years ended
December 31,
2020
2019
2018
$
856 $ 1,192 $ 1,212
718
318
(32)
(168)
383
170
61
536
149
(222)
(171)
15
340
148
124
$ 1,737 $ 2,085 $ 1,807
Preferred stock dividends
21
21
6
Net income available to
common stockholders
$ 1,716 $ 2,064 $ 1,801
Total Commercial Lines
8,940
8,325
7,081
Net Investment Income
Personal Lines
Automobile
Homeowners
2,081
2,248
2,398
961
987
1,041
Total Personal Lines [1]
3,042
3,235
3,439
Property & Casualty Other
Operations
—
2
—
Group Benefits
Group disability
Group life
Other
2,832
2,828
2,746
2,434
2,521
2,611
270
254
241
Group Benefits
Hartford Funds
Corporate
For the years ended
December 31,
2020
2019
2018
Commercial Lines
$ 1,160 $ 1,129 $
997
Personal Lines
Property & Casualty Other
Operations
157
179
155
55
448
4
22
84
486
7
66
90
474
5
59
Total Group Benefits
5,536
5,603
5,598
Net investment income
$ 1,846 $ 1,951 $ 1,780
Hartford Funds
Mutual fund and ETP
Talcott Resolution life and
annuity separate accounts [2]
Total Hartford Funds
Corporate
903
907
932
86
989
58
92
100
999
1,032
60
32
Total earned premiums and fee
income
18,565
18,224
17,182
Total net investment income
1,846
1,951
1,780
Net realized capital gains (losses)
Other revenues
Total revenues
(14)
126
395
170
(112)
105
$ 20,523 $ 20,740 $ 18,955
[1]For 2020, 2019 and 2018, AARP members accounted for earned premiums of
$2.8 billion, $2.9 billion and $3.0 billion, respectively.
[2]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.
Amortization of DAC
For the years ended
December 31,
2020
2019
2018
Commercial Lines
$ 1,397 $ 1,296 $ 1,048
Personal Lines
Group Benefits
Hartford Funds
Corporate
244
259
275
50
14
1
54
12
1
45
16
—
Total amortization of DAC
$ 1,706 $ 1,622 $ 1,384
138
Note 4 - Segment Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Amortization of Other Intangible Assets
Assets
Commercial Lines
Personal Lines
Property & Casualty Other
Operations
Group Benefits
Hartford Funds
Corporate
Total assets
As of December 31,
2020
2019
$
45,482 $
42,041
5,969
6,310
3,505
14,732
662
3,761
74,111 $
$
3,560
14,595
634
3,677
70,817
For the years ended
December 31,
2020
2019
2018
Commercial Lines
$
28 $
18 $
Personal Lines
Group Benefits
Corporate
4
40
—
6
41
1
4
4
60
—
Total amortization of other
intangible assets
$
72 $
66 $
68
Income Tax Expense (Benefit)
Commercial Lines
Personal Lines
Property & Casualty Other
Operations
Group Benefits
Hartford Funds
Corporate
For the years ended
December 31,
2020
2019
2018
$
176 $
270 $
267
184
76
(19)
(46)
88
44
12
126
37
(7)
84
38
(63)
(46)
(95)
Total income tax expense
$
383 $
475 $
268
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 non-insurance revenues with customers
Revenue Line Item
2020
2019
2018
For the years ended December 31,
Fee income
$
30 $
35 $
Fee income
Other revenues
Fee income
Fee income
Fee income
Fee income
Other revenues
34
81
175
901
88
49
2
37
83
180
911
88
50
20
34
40
84
175
947
85
32
21
$
1,360 $
1,404 $
1,418
139
Note 5 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Level 3
The fair value hierarchy levels are as follows:
Level 1
Level 2
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, 2020
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
Equity securities, at fair value
Derivative assets
Credit derivatives
Foreign exchange derivatives
Interest rate derivatives
Total derivative assets [1]
Short-term investments
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
1,564 $
— $
1,564 $
2,780
4,484
20,273
919
9,503
4,107
1,405
45,035
1,438
21
1
1
23
—
—
—
—
—
—
529
529
872
—
—
—
—
3,283
2,663
2,420
4,407
19,392
913
9,503
3,726
876
42,801
496
21
1
1
23
590
—
360
77
881
6
—
381
—
1,705
70
—
—
—
—
30
Total assets accounted for at fair value on a recurring basis
$
49,779 $
4,064 $
43,910 $
1,805
Liabilities accounted for at fair value on a recurring basis
Derivative liabilities
Foreign exchange derivatives
Interest rate derivatives
Total derivative liabilities [2]
$
Total liabilities accounted for at fair value on a recurring basis
$
140
(14) $
(70)
(84)
(84) $
— $
—
—
— $
(14) $
(70)
(84)
(84) $
—
—
—
—
Note 5 - Fair Value Measurements
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, 2019
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS
CLOs
CMBS
Corporate
Foreign government/government agencies
Municipal
RMBS
U.S. Treasuries
Total fixed maturities
Equity securities, at fair value
Derivative assets
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Total
$
1,476 $
— $
1,461 $
2,183
4,338
17,396
1,123
9,498
4,869
1,265
42,148
1,657
—
—
—
—
—
—
330
330
1,401
2,088
4,329
16,664
1,120
9,498
4,309
935
40,404
183
15
95
9
732
3
—
560
—
1,414
73
—
—
—
1,028
2,759 $
11
1
12
2,921
46,738 $
Credit derivatives
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
(15)
Equity derivatives
—
Foreign exchange derivatives
—
Interest rate derivatives
(15)
Total derivative liabilities [2]
(22)
Contingent consideration [3]
(37)
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
11
1
12
1,878
42,477 $
(15)
(2)
(60)
(78)
(22)
(100) $
(1) $
—
(2)
(60)
(63)
—
(63) $
— $
—
—
—
—
—
— $
—
—
—
15
1,502
(1) $
$
$
$
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.
In connection with the acquisition of Navigators Group, the
Company has overseas deposits in Other Invested Assets of $54
and $38 as of December 31, 2020 and December 31, 2019,
respectively, which are measured at fair value using the net asset
value as a practical expedient.
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
141
Note 5 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
•
•
used in pricing the securities are observable. However, some
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, 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 significant 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 incorporates 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 process for determining the fair value of investments is
monitored by the Valuation Committee, which is a cross-
functional group of senior management within the Company. The
purpose of the Valuation Committee is to provide oversight of the
pricing policy, procedures and controls, including approval of
valuation methodologies and pricing sources. The Valuation
Committee reviews market data trends, pricing statistics and
trading statistics to ensure that prices are reasonable and
consistent with our fair value framework. Controls and
procedures used to assess third-party pricing services are
reviewed by the Valuation Committee, including the results of
annual due-diligence reviews. Controls include, but are not
limited to, reviewing daily and monthly price changes, stale prices,
and missing prices and comparing new trade prices to third-party
pricing services, weekly price changes to published bond prices of
a corporate bond index, and daily OTC derivative market
valuations to counterparty valuations. The Company has a
dedicated pricing unit that works with trading and investment
professionals to challenge the price received by a third party
pricing source if the Company believes that the valuation
received does not accurately reflect the fair value. New valuation
models and changes to current models require approval by the
Valuation Committee. In addition, the Company’s enterprise-wide
Operational Risk Management function 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.
142
Note 5 - Fair Value Measurements
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, CLOs, 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 and private bank loans:
• 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
• 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
• Independent broker quotes
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
Not applicable
• Independent broker quotes
• Equity volatility
Not applicable
• Independent broker quotes
• Interest rate volatility
143
Note 5 - Fair Value Measurements
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, 2020
Impact of
Increase in
Input
on Fair
Value [2]
Weighted
Average [1]
CLOs [3]
CMBS [3]
Corporate [4]
RMBS [3]
CLOs [3]
CMBS [3]
Corporate [4]
RMBS [3]
$ 340 Discounted
cash flows
Spread
304 bps
305 bps
304 bps
Decrease
$ 20 Discounted
cash flows
Spread (encompasses prepayment,
default risk and loss severity)
255 bps
975 bps
688 bps
Decrease
$ 749 Discounted
cash flows
$ 364 Discounted
cash flows
Spread
110 bps
692 bps
293 bps
Decrease
Spread [6]
7 bps
937 bps
119 bps
Decrease
Constant prepayment rate [6]
Constant default rate [6]
Loss severity [6]
As of December 31, 2019
Spread
$ 95 Discounted
cash flows
$
1 Discounted
cash flows
Spread (encompasses prepayment,
default risk and loss severity)
$ 633 Discounted
cash flows
$ 560 Discounted
cash flows
Spread
Spread [6]
Constant prepayment rate [6]
Constant default rate [6]
Loss severity [6]
—%
2%
—%
10%
6%
100%
5%
3%
84%
246 bps
246 bps
246 bps
9 bps
1,832 bps
161 bps
93 bps
788 bps
236 bps
5 bps
—%
1%
—%
233 bps
11%
6%
100%
79 bps
6%
3%
70%
Decrease
[5]
Decrease
Decrease
Decrease
Decrease
Decrease
Decrease
Decrease
[5]
Decrease
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 [1]
Fair
Value
Predominant
Valuation
Technique
Significant
Unobservable Input Minimum Maximum
As of December 31, 2019
Weighted
Average [2]
Impact of
Increase in Input
on Fair Value [3]
Equity options
$ (15) Option model
Equity volatility
13 %
28 %
17 %
Increase
[1]As of December 31, 2020, the fair values of the Company's level 3 derivatives were less than $1 and are excluded from the table.
[2]The weighted average is determined based on the fair value of the derivatives.
[3]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.
The tables above exclude certain 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
144
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
Note 5 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the year ended December 31, 2020, 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 required the Company to make payments to former owners
of Lattice of up to $60 contingent upon growth in exchange-
traded products ("ETP") assets under management ("AUM") over
a period of four years beginning on the date of acquisition. The
contingent consideration was 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 had been discounted back to
the valuation date using a risk-adjusted discount rate of 10.0%.
The risk-adjusted discount rate is an internally generated and
significant unobservable input to fair value.
In January 2020, we made a third payment of $10 after Lattice
AUM reached $3.0 billion. Given the dramatic market declines
and outflow in March, 2020, Lattice AUM declined to $2.3 billion
as of March 30, 2020 and the Company reduced the remaining
contingent consideration liability to zero, recognizing an $11.9
before tax reduction in expense in first quarter 2020. The earn
out period ended on July 29, 2020 with no additional
consideration payable.
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 within 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.
145
Note 5 - Fair Value Measurements
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, 2020
Total realized/
unrealized gains
(losses)
Fair value
as of
January 1,
2020
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, 2020
Assets
Fixed Maturities, AFS
ABS
CLOs
CMBS
Corporate
Foreign Govt./Govt. Agencies
Municipal
RMBS
Total Fixed Maturities, AFS
Equity Securities, at fair value
Short-term investments
Total Assets
Liabilities
Derivatives, net [4]
Equity
Total Derivatives, net [4]
Contingent Consideration
$
15 $
— $
(1) $
43 $
— $
— $
— $
(57) $
95
9
732
3
—
560
1,414
73
15
1,502
(15)
(15)
(22)
—
—
(31)
—
(3)
—
(34)
(10)
—
(44)
36
36
12
1
3
31
—
2
(11)
25
—
—
25
—
—
—
389
79
272
6
—
66
855
6
30
891
—
—
—
(43)
(5)
—
—
—
13
(82)
(22)
(143)
(36)
486
(430)
—
—
(182)
(373)
—
(15)
—
(6)
(7)
—
7
—
(3)
—
(45)
381
(49)
506
(639)
1,705
—
—
1
—
—
—
70
30
(388)
(49)
507
(639)
1,805
(21)
(21)
10
—
—
—
—
—
—
—
—
—
—
360
77
881
6
—
—
—
—
—
Total Liabilities
$
(37) $
48 $
— $
— $
(11) $
— $
— $
— $
146
Note 5 - Fair Value Measurements
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, 2019
Total realized/
unrealized gains
(losses)
Fair value
as of
January 1,
2019
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, 2019
Assets
Fixed Maturities, AFS
ABS
CLOs
CMBS
Corporate
Foreign Govt./Govt. Agencies
RMBS
Total Fixed Maturities, AFS
Equity Securities, at fair value
Derivatives, net [4]
Interest rate
Total Derivatives, net [4]
Short-term investments
Total Assets
Liabilities
Derivatives, net [4]
Equity
Total Derivatives, net [4]
Contingent Considerations
$
10 $
— $
— $
20 $
(1) $
— $
— $
(14) $
100
12
520
3
920
1,565
77
1
1
—
1,643
3
3
(35)
(32) $
—
—
(4)
—
1
(3)
—
(1)
(1)
—
(4)
(18)
(18)
(7)
—
1
16
—
(8)
9
—
—
—
—
9
—
—
—
329
34
354
—
134
871
9
—
—
15
895
—
—
—
(127)
(4)
(59)
—
(214)
(405)
—
—
—
—
(6)
—
(88)
—
(35)
(129)
(13)
—
—
—
(405)
(142)
—
—
20
—
—
—
—
—
61
—
—
61
—
—
—
—
61
—
—
—
(201)
(34)
(68)
—
(238)
(555)
—
—
—
—
—
—
—
15
95
9
732
3
560
1,414
73
—
—
15
(15)
(15)
(22)
(37)
(555)
1,502
Total Liabilities
$
(25) $
— $
— $
20 $
— $
— $
— $
[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.
Transfers into and out of Level 3 for the year ended December 31, 2020, were primarily related to private securities that were priced using internal matrix pricing in the prior
period, but changed to broker pricing in the current period and inversely, private securities that were priced using broker pricing in the prior period, but changed to internal matrix
pricing in the current period.
[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.
147
Note 5 - Fair Value Measurements
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,
2020
2019
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]
Changes in Unrealized
Gain/(Loss) included in
OCI [3]
$
Assets
Fixed Maturities, AFS
CLOs
CMBS
Corporate
Foreign Govt./Govt. Agencies
RMBS
Total Fixed Maturities, AFS
Equity Securities, at fair value
Derivatives, net
Equity
Interest rate
Total Derivatives, net
Total Assets
Liabilities
Contingent Consideration
— $
—
(21)
—
—
(21)
(9)
—
—
—
(30)
12
1 $
4
24
—
(10)
19
—
—
—
—
19
—
— $
—
(2)
—
—
(2)
1
(18)
(1)
(19)
(20)
(7)
—
1
15
1
(7)
10
—
—
—
—
10
—
$
Total Liabilities
[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.
12 $
(7) $
— $
—
Changes in interest rate derivatives are reported in changes in net gain on cash flow hedging instruments in the Consolidated Statements of Comprehensive Income.
Financial Instruments Not Carried at Fair Value
Financial Assets and Liabilities Not Carried at Fair Value
Assets
Mortgage loans
Liabilities
December 31, 2020
December 31, 2019
Fair Value
Hierarchy
Level
Carrying
Amount [1] Fair Value
Fair Value
Hierarchy
Level
Carrying
Amount [1] Fair Value
Level 3 $
4,493 $
4,792
Level 3 $
4,215 $
4,350
Other policyholder funds and benefits payable
Senior notes [2]
Junior subordinated debentures [2]
Level 3 $
701 $
Level 2 $
3,262 $
Level 2 $
1,090 $
703
4,363
1,107
Level 3 $
763 $
Level 2 $
3,759 $
Level 2 $
1,089 $
765
4,456
1,153
[1] As of December 31, 2020, carrying amount of mortgage loans is net of ACL of $38.
[2] Included in long-term debt in the Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
148
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. INVESTMENTS
(Before tax)
Fixed maturities [1]
Equity securities
Mortgage loans
Limited partnerships and other alternative investments
Other investments [2]
Investment expenses
Net Investment Income
For the years ended December 31,
2020
2019
2018
$
1,442 $
1,559 $
1,459
39
172
222
42
(71)
46
165
232
32
(83)
32
141
205
20
(77)
Total net investment income
[1]Includes net investment income on short-term investments.
[2]Primarily includes changes in fair value of certain equity fund investments and income from derivatives that qualify for hedge accounting and are used to hedge fixed maturities.
1,846 $
1,951 $
$
1,780
(Before tax)
Gross gains on sales
Gross losses on sales
Equity securities [1]
Net credit losses on fixed maturities, AFS [2]
Change in ACL on mortgage loans [3]
Intent-to-sell impairments
Net OTTI losses recognized in earnings
Valuation allowances on mortgage loans
Other, net [4]
Net Realized Capital Gains (Losses)
For the years ended December 31,
2020
2019
2018
$
255 $
(50)
(214)
(28)
(19)
(5)
47
234 $
(56)
254
—
(3)
1
(35)
114
(172)
(48)
—
(1)
—
(5)
Net realized capital gains (losses)
[1] The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of December 31, 2020, were $53 for the
395 $
(14) $
(112)
$
year-ended December 31, 2020. The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of
December 31, 2019, were $164 for the year-ended December 31, 2019. The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related
to equity securities still held as of December 31, 2018, were $(80) for the year-ended December 31, 2018.
[2]Due to the adoption of accounting guidance for credit losses on January 1, 2020, realized capital losses previously reported as OTTI are now presented as credit losses which are
net of any recoveries. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
[3] Represents the change in ACL recorded during the period following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note
1 - Basis of Presentation and Significant Accounting Policies.
[4]Includes gains (losses) on non-qualifying derivatives for 2020, 2019, and 2018 of $104, $(24), and $(12), respectively, gains (losses) from transactional foreign currency
revaluation of $(1), $(9) and $1, respectively, and a loss of $48 from the sale of the Continental Europe Operations for the year ended December 31, 2020.
Sales of AFS Securities
For the years ended December 31,
2020
2019
2018
Fixed maturities, AFS
Sale proceeds
$ 15,059 $ 14,421 $ 21,327
Gross gains
Gross losses
$
$
254 $
233 $
90
(50) $
(56) $
(169)
Sales of AFS securities in 2020 were primarily a result of tactical
changes to the portfolio driven by changing market conditions
and to a lesser extent duration and liquidity management.
Accrued Interest Receivable on Fixed
Maturities, AFS and Mortgage Loans
As of December 31, 2020 and December 31, 2019, the Company
reported accrued interest receivable related to fixed maturities,
AFS of $327 and $334, respectively, and accrued interest
receivable related to mortgage loans of $14 and $14,
respectively. These amounts are recorded in other assets on the
Consolidated Balance Sheets and are not included in the carrying
value of the fixed maturities or mortgage loans. The Company
does not include the current accrued interest receivable balance
when estimating the ACL. The Company has a policy to write-off
accrued interest receivable balances that are more than 90 days
past due. Write-offs of accrued interest receivable are recorded
as a credit loss component of net realized capital gains and losses.
149
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Interest income on fixed maturities and mortgage loans is accrued
unless it is past due over 90 days or management deems the
interest uncollectible.
Recognition and Presentation of
Intent-to-Sell Impairments and ACL
on Fixed Maturities, AFS
The Company will record an "intent-to-sell impairment" as a
reduction to the amortized cost of fixed maturities, AFS in an
unrealized loss position if the Company intends to sell or it is
more likely than not that the Company will be required to sell the
fixed maturity before a recovery in value. A corresponding charge
is recorded in net realized capital losses equal to the difference
between the fair value on the impairment date and the amortized
cost basis of the fixed maturity before recognizing the
impairment.
When fixed maturities are in an unrealized loss position and the
Company does not record an intent-to-sell impairment, the
Company will record an ACL for the portion of the unrealized loss
due to a credit loss. Any remaining unrealized loss on a fixed
maturity after recording an ACL is the non-credit amount and is
recorded in OCI. The ACL is the excess of the amortized cost over
the greater of the Company's best estimate of the present value
of expected future cash flows or the security's fair value. Cash
flows are discounted at the effective yield that is used to record
interest income. The ACL cannot exceed the unrealized loss and,
therefore, it may fluctuate with changes in the fair value of the
fixed maturity if the fair value is greater than the Company's best
estimate of the present value of expected future cash flows. The
initial ACL and any subsequent changes are recorded in net
realized capital gains and losses. The ACL is written off against
the amortized cost in the period in which all or a portion of the
related fixed maturity is determined to be uncollectible.
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/or 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
fundamentals, instrument-specific developments including
changes in credit ratings, industry earnings multiples and the
issuer’s ability to restructure, access capital markets, 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 ratios ("LTVs"),
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, 2020, the Company recorded an OTTI loss on
fixed maturities for which the Company did not expect to recover
the entire amortized cost basis. For these securities, the excess of
the amortized cost basis over its fair value was separated into the
portion representing a credit OTTI, which was recorded in net
realized capital losses, and the remaining non-credit amount,
which was recorded in OCI. The Company’s best estimate of
discounted expected future cash flows became the new cost basis
and accreted prospectively into net investment income over the
estimated remaining life of the security.
ACL on Fixed Maturities, AFS by Type
(Before tax)
Balance, beginning of year
Credit losses on fixed maturities where an allowance was not previously recorded
Reduction due to sales
Net increases (decreases) on fixed maturities where an allowance was previously recorded
Balance as of end of period
Year ended 2020
Corporate Municipal
Total
$
— $
— $
36
(4)
(9)
3
(3)
—
$
23 $
— $
—
39
(7)
(9)
23
150
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cumulative Credit Impairments on Fixed Maturities, AFS
(Before tax)
Balance as of beginning of period
$
Additions for credit impairments recognized on [1]:
Fixed maturities not previously impaired
Fixed maturities previously impaired
Reductions for credit impairments previously recognized on:
Fixed maturities that matured or were sold during the period
Balance as of end of period
[1]These additions are included in the net OTTI losses recognized in earnings in the Consolidated Statements of Operations.
$
Fixed Maturities, AFS
Fixed Maturities, AFS, by Type
For the years ended December 31,
2019
2018
(19) $
(3)
—
3
(19) $
(25)
—
(1)
7
(19)
December 31, 2020
Gross
Unrealized
Gains
Gross
Unrealized
Losses
ACL [1]
December 31, 2019
Fair
Value
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Non-
Credit
OTTI [2]
Amortized
Cost
$
1,525 $
— $
39 $
— $ 1,564 $
1,461 $
18 $
(3) $ 1,476 $
ABS
CLOs
CMBS
2,780
4,219
—
—
7
286
(7) 2,780
(21) 4,484
2,186
4,210
Corporate
18,401
(23)
1,926
(31) 20,273
16,435
Foreign govt./govt.
agencies
Municipal
RMBS
U.S. Treasuries
842
8,564
3,966
1,264
—
—
—
—
77
940
144
141
—
919
(1) 9,503
(3) 4,107
—
1,405
1,057
8,763
4,775
1,191
5
141
986
66
737
97
75
(8) 2,183
(13) 4,338
(25) 17,396
—
1,123
(2) 9,498
(3) 4,869
(1) 1,265
—
—
(4)
—
—
—
—
—
Total fixed maturities,
AFS
[1]Represents the ACL recorded following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation
(63) $ 45,035 $ 40,078 $
(55) $ 42,148 $
$ 41,561 $
2,125 $
3,560 $
(23) $
(4)
and Significant Accounting Policies.
[2]Represents the amount of cumulative non-credit impairment losses recognized in OCI on fixed maturities that also had credit impairments. These losses are included in gross
unrealized losses as of December 31, 2019.
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 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.
December 31, 2020
December 31, 2019
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
1,411 $
1,432 $
1,082 $
7,832
7,622
12,206
29,071
12,490
8,286
8,354
14,028
32,100
12,935
7,200
7,395
11,769
27,446
12,632
$
41,561 $
45,035 $
40,078 $
1,090
7,401
7,803
12,988
29,282
12,866
42,148
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
151
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the Company's stockholders' equity, other than the U.S.
government and certain U.S. government agencies as of
December 31, 2020 or December 31, 2019. As of December 31,
2020, other than U.S. government and certain U.S. government
agencies, the Company’s three largest exposures by issuer were
Apple Inc., the IBM Corporation, and the New York State
Dormitory Authority each of which comprised less than 1% of
total invested assets. As of December 31, 2019, other than U.S.
government and certain U.S. government agencies, the
Company’s three largest exposures by issuer were the
Government of the United Kingdom, the New York State
Unrealized Losses on Fixed Maturities, AFS
Dormitory Authority, and Wells Fargo & Company each of which
comprised less than 1% of total invested assets. The Company’s
three largest exposures by sector as of December 31, 2020 were
the municipal sector, the financial services sector, and the CMBS
sector which comprised approximately 17%, 9% and 8%,
respectively, of total invested assets. The Company’s three
largest exposures by sector as of December 31, 2019 were the
municipal, RMBS, and CMBS sectors which comprised
approximately 18%, 9% and 8%, respectively, of total invested
assets.
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of December 31,
2020
Less Than 12 Months
12 Months or More
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
ABS
CLOs
CMBS
Corporate
Foreign govt./govt. agencies
Municipal
RMBS
U.S. Treasuries
Total fixed maturities, AFS in an
unrealized loss position
Fair Value
$
44 $
758
410
466
24
34
461
39
— $
(2)
(17)
(13)
—
(1)
(3)
—
— $
715
19
212
—
—
21
—
— $
(5)
(4)
(18)
—
—
—
—
Total
44 $
1,473
429
678
24
34
482
39
Unrealized
Losses
—
(7)
(21)
(31)
—
(1)
(3)
—
(63)
$
2,236 $
(36) $
967 $
(27) $
3,203 $
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of December 31,
2019
Less Than 12 Months
12 Months or More
Total
ABS
CLOs
CMBS
Corporate
Foreign govt./govt. agencies
Municipal
RMBS
U.S. Treasuries
Total fixed maturities, AFS in an
unrealized loss position
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
398 $
679
538
789
101
222
614
88
(3) $
(2)
(7)
(9)
—
(2)
(3)
—
9 $
923
20
328
29
—
68
34
— $
(6)
(6)
(16)
—
—
—
(1)
Fair Value
407 $
1,602
558
1,117
130
222
682
122
$
3,429 $
(26) $
1,411 $
(29) $
4,840 $
Unrealized
Losses
(3)
(8)
(13)
(25)
—
(2)
(3)
(1)
(55)
As of December 31, 2020, fixed maturities, AFS in an unrealized
loss position consisted of 547 instruments, primarily in the
corporate sectors, most notably travel, leisure, gaming, energy
and financial services issuers, and CMBS which were depressed
largely due to widening of credit spreads since the purchase date.
As of December 31, 2020, 95% of these fixed maturities were
depressed less than 20% of cost or amortized cost. The increase
in gross unrealized losses during 2020 was primarily attributable
to wider credit spreads within higher yielding corporates and
CMBS.
Most of the fixed maturities depressed for twelve months or
more relate to the corporate sector. Corporate fixed maturities
were primarily depressed because current market spreads are
wider than at the respective purchase dates, with certain
securities also depressed because of their variable-rate coupons
and long-dated maturities. The Company neither has an intention
to sell nor does it expect to be required to sell the fixed maturities
outlined in the preceding discussion. The decision to record credit
losses on fixed maturities, AFS in the form of an ACL requires us
to make qualitative and quantitative estimates of expected future
cash flows. Given the uncertainty about the ultimate impact of
the COVID-19 pandemic on issuers of these securities, actual
cash flows could ultimately deviate significantly from our
expectations resulting in realized losses in future periods.
152
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Mortgage Loans
ACL on Mortgage Loans
The Company reviews mortgage loans on a quarterly basis to
estimate the ACL with changes in the ACL recorded in net
realized capital gains and losses. Apart from an ACL recorded on
individual mortgage loans where the borrower is experiencing
financial difficulties, the Company records an ACL on the pool of
mortgage loans based on lifetime expected credit losses. The
Company utilizes a third-party forecasting model to estimate
lifetime expected credit losses at a loan level under multiple
economic scenarios. The scenarios use macroeconomic data
provided by an internationally recognized economics firm that
generates forecasts of varying economic factors such as GDP
growth, unemployment and interest rates. The economic
scenarios are projected over 10 years. The first two to four years
of the 10-year period assume a specific modeled economic
scenario (including moderate upside, moderate recession and
severe recession scenarios) and then revert to historical long-
term assumptions over the remaining period. Using these
economic scenarios, the forecasting model projects property-
specific operating income and capitalization rates used to
estimate the value of a future operating income stream. The
operating income and the property valuations derived from
capitalization rates are compared to loan payment and principal
amounts to create debt service coverage ratios ("DSCRs") and
loan-to-value ratios ("LTVs") over the forecast period. The model
overlays historical data about mortgage loan performance based
on DSCRs and LTVs and projects the probability of default,
amount of loss given a default and resulting expected loss
through maturity for each loan under each economic scenario.
Economic scenarios are probability-weighted based on a
statistical analysis of the forecasted economic factors and
qualitative analysis. The Company records the change in the ACL
on mortgage loans based on the weighted-average expected
credit losses across the selected economic scenarios.
In response to significant economic stress experienced as a result
of the COVID-19 pandemic, during 2020 the Company increased
the weight of both a moderate and severe recession in our
estimate of the ACL. The Company continues to monitor
economic uncertainty including rising COVID-19 infections
leading to short-term lockdowns and the corresponding impact
that this might have on the mortgage loan portfolio.
We expect the impact on our mortgage loan portfolio will be
impacted by borrower behavior in response to the economic
stress. Borrowers with lower LTVs have an incentive to continue
to make payments of principal and/or interest in order to
preserve the equity they have in the underlying commercial real
estate properties. As property values decline, borrowers have
less incentive to continue to make payments.
When a borrower is experiencing financial difficulty, including
when foreclosure is probable, the Company measures an ACL on
individual mortgage loans. The ACL is established for any shortfall
between the amortized cost of the loan and the fair value of the
collateral less costs to sell. Estimates of collectibility from an
individual borrower 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. As of
December 31, 2020, the Company did not have any mortgage
loans for which an ACL was established on an individual basis.
Prior to January 1, 2020, for mortgage loans that were deemed
impaired, a valuation allowance was established for the
difference between the carrying amount and estimated fair value,
which was generally the Company's share of the fair value of the
collateral. A valuation allowance also may have been recorded for
an individual loan or for a group of loans that had an LTV ratio of
90% or greater, a low DSCR or other lower credit quality
characteristics. Changes in valuation allowances were recognized
as net realized capital losses.
There were no mortgage loans held-for-sale as of December 31,
2020 or December 31, 2019. As of December 31, 2020, the
Company had no mortgage loans that have had extensions or
restructurings other than what is allowable under the original
terms of the contract.
ACL on Mortgage Loans
For the years ended
December 31,
2020
2019
2018
ACL as of beginning of period
$ — $
1 $
1
Cumulative effect of accounting
changes [1]
Adjusted beginning ACL
Current period provision (release)
19
19
19
1
(1)
ACL as of December 31,
$
38 $ — $
[1] Represents the adjustment to the ACL recorded on adoption of accounting
guidance for credit losses on January 1, 2020. For further information refer to
Note 1 - Basis of Presentation and Significant Accounting Policies.
1
—
1
The increase in the allowance for the year-ended December 31,
2020, is the result of the COVID-19 pandemic and its impacts on
the economic forecasts, as discussed above, as well as lower
estimated property values and operating income as compared to
the prior year.
The weighted-average LTV ratio of the Company’s mortgage loan
portfolio was 55% as of December 31, 2020, while the weighted-
average LTV ratio at origination of these loans was 60%. LTV
ratios compare the loan amount to the value of the underlying
property collateralizing the loan with property values based on
appraisals updated no less than annually. 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 and are updated no
less than annually through reviews of underlying properties.
153
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Mortgage Loans LTV & DSCR by Origination Year as of December 31, 2020
2020
2019
2018
2017
2016
2015 & Prior
Total
Amortized
Cost
Avg.
DSCR
Amortized
Cost
Avg.
DSCR
Amortized
Cost
Avg.
DSCR
Amortized
Cost
Avg.
DSCR
Amortized
Cost
Avg.
DSCR
Amortized
Cost
Avg.
DSCR
Amortized
Cost [1]
Avg.
DSCR
$
28 1.62x $
243 1.58x $
212 1.33x $
45 2.02x $
51 1.92x $
115 1.74x $
694 1.59x
659 2.56x
676 2.85x
410 2.25x
446 1.89x
235 2.99x 1,411 3.01x 3,837 2.69x
Loan-to-
value
65% - 80%
Less than
65%
Total
mortgage
loans
[1] Amortized cost of mortgage loans excludes ACL of $38.
687 2.52x $
$
919 2.51x $
622 1.94x $
491 1.90x $
286 2.80x $ 1,526 2.92x $ 4,531 2.52x
Mortgage Loans LTV & DSCR
Loan-to-value
65% - 80%
Less than 65%
Total mortgage loans
December 31, 2019
Amortized Cost
Avg. DSCR
$
$
376
3,839
4,215
1.53x
2.56x
2.46x
Mortgage Loans by Region
December 31, 2020 December 31, 2019
Amortized
Cost [1]
Percent
of Total
Amortized
Cost
Percent
of Total
East North Central $
Middle Atlantic
Mountain
New England
Pacific
South Atlantic
West North Central
West South Central
Other [2]
Total mortgage
loans
290
291
254
397
6.4 % $
6.4 %
5.6 %
8.8 %
1,001
22.1 %
1,038
22.9 %
44
433
783
1.0 %
9.5 %
17.3 %
270
319
109
344
906
944
46
439
838
6.4 %
7.5 %
2.6 %
8.2 %
21.5 %
22.4 %
1.1 %
10.4 %
19.9 %
$ 4,531
100.0 % $ 4,215
100.0 %
[1] Amortized cost of mortgage loans excludes ACL of $38.
[2]Primarily represents loans collateralized by multiple properties in various regions.
Mortgage Loans by Property Type
December 31, 2020 December 31, 2019
Amortized
Cost [1]
Percent
of Total
Amortized
Cost
Percent
of Total
Commercial
Industrial
Multifamily
Office
Retail
Single Family
Other
$ 1,339
1,498
774
788
92
40
29.5 % $ 1,167
1,313
33.1 %
723
17.1 %
735
17.4 %
137
2.0 %
140
0.9 %
Total mortgage
loans
[1] Amortized cost of mortgage loans excludes ACL of $38.
$ 4,531
100.0 % $ 4,215
27.7 %
31.2 %
17.2 %
17.4 %
3.2 %
3.3 %
100.0 %
154
Past-Due Mortgage Loans
Mortgage loans are considered past due if a payment of principal
or interest is not received according to the contractual terms of
the loan agreement, which typically includes a grace period. As of
December 31, 2020 and December 31, 2019, the Company held
no mortgage loans considered past due.
Mortgage Servicing
The Company originates, sells and services commercial mortgage
loans on behalf of third parties and recognizes servicing fee
income over the period that services are performed. As of
December 31, 2020, under this program, the Company serviced
mortgage loans with a total outstanding principal of $6.9 billion,
of which $3.7 billion was serviced on behalf of third parties and
$3.2 billion was retained and reported in total investments on the
Company's Consolidated Balance Sheets. As of December 31,
2019, the Company serviced mortgage loans with a total
outstanding principal balance of $6.4 billion, of which $3.5 billion
was serviced on behalf of third parties and $2.9 billion was
retained and reported in total investments on the Company's
Consolidated Balance Sheets. Servicing rights are carried at the
lower of cost or fair value and were $0 as of December 31, 2020
and December 31, 2019, because servicing fees were market-
level fees at origination and remain adequate to compensate the
Company for servicing the loans.
Purchased Financial Assets
with Credit Deterioration
Purchased financial assets with credit deterioration ("PCD") are
purchased financial assets with a “more-than-insignificant”
amount of credit deterioration since origination. PCD assets are
assessed only at initial acquisition date and for any investments
identified, the Company records an allowance at acquisition with
a corresponding increase to the amortized cost basis. As of
December 31, 2020, the Company held no PCD fixed maturities,
AFS or mortgage 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
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2020 and 2019, 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, 2020 and 2019 is limited to
the total carrying value of $1.3 billion and $1.1 billion,
respectively, which are included in limited partnerships and other
alternative investments in the Company's Consolidated Balance
Sheets. As of December 31, 2020 and 2019, the Company has
outstanding commitments totaling $768 and $851, 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 and are reported in fixed maturities, available-
for-sale. The Company has not provided financial or other
support with respect to these investments other than its original
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, Other Collateral
Transactions and Restricted
Investments
The Company may at times enter into securities financing
transactions as a way to earn additional income or manage
liquidity, primarily through securities lending and repurchase
agreements.
Securities Lending and Repurchase
Agreements
December
31, 2020
December
31, 2019
Fair Value
Fair Value
Securities Lending Transactions:
Gross amount of securities on loan
Gross amount of associated liability for
collateral received [1]
$
$
— $
606
— $
621
Repurchase agreements:
Gross amount of recognized receivables
for reverse repurchase agreements
[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 $0 and $34 which are
excluded from the Company's Consolidated Balance Sheets as of December 31,
2020 and 2019, respectively.
30 $
$
15
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. As of December 31,
2020, the Company does not have any securities on loan as part
of a securities lending program.
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. The maturity of these transactions is generally ninety days
or less. Repurchase agreements include master netting provisions
that provide both parties 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.
155
Note 6 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, see Note 22 - Business Dispositions
and Discontinued Operations.
The Company recognized total equity method income of $244,
$267, and $214 for the years ended December 31, 2020, 2019
and 2018, respectively. Equity method income is reported in net
investment income, except amounts related to strategic
investments classified in other assets which are reported in other
revenues. For investments accounted for under the equity
method, the Company’s maximum exposure to loss as of
December 31, 2020 is limited to the total carrying value of $2.0
billion. In addition, the Company has outstanding commitments
totaling $804 to fund limited partnership investments as of
December 31, 2020. 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 2020, 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
$339.6 billion and $329.4 billion as of December 31, 2020 and
2019, respectively. Aggregate total liabilities of the investees
totaled $181.5 billion and $191.2 billion as of December 31, 2020
and 2019, respectively. Aggregate net investment income of the
investees totaled $954, $618, and $773 for the periods ended
December 31, 2020, 2019 and 2018, respectively. Aggregate net
income excluding net investment income of the investees totaled
$7.4 billion, $13.4 billion and $12.3 billion for the periods ended
December 31, 2020, 2019 and 2018, respectively. As of, and for
the period ended, December 31, 2020, the aggregated
summarized financial data reflects the latest available financial
information.
Under repurchase agreements, the Company transfers collateral
of U.S. government and government agency securities and
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 under specified conditions 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 maturity of these transactions is generally
within one year. The agreements require additional collateral to
be transferred to the Company under specified conditions 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.
Other Collateral Transactions
As of December 31, 2020 and 2019, the Company pledged
collateral of $34 and $37, respectively, of U.S. government
securities and municipal 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.
Other Restricted Investments
The Company is required by law to deposit securities with
government agencies in certain states in which it conducts
business. As of December 31, 2020 and 2019, the fair value of
securities on deposit was $2.6 billion and $2.3 billion,
respectively.
In addition, as of December 31, 2020, the Company held fixed
maturities and short-term investments of $661 and $26,
respectively, in trust for the benefit of syndicate policyholders,
held fixed maturities of $175 in a Lloyd's trust account to provide
a portion of the required capital, and maintained other
investments of $54 primarily consisting of overseas deposits in
various countries with Lloyd's to support underwriting activities
in those countries. As of December 31, 2019, the Company held
fixed maturities and short-term investments of $447 and $189,
respectively, in trust and other investments of $38 primarily
consisting of overseas deposits in various countries with Lloyd's.
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
156
Note 7 - Derivatives
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 or income generation covered call transactions.
Derivative instruments are used to manage risk associated with
interest rate, equity market, credit spread, issuer default, price,
and currency exchange rate 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. 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 or debt instruments
issued.
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 variable-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 14 - Debt.
Foreign currency swaps are used to convert foreign currency-
denominated cash flows related to certain investment receipts 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
157
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 or the Company 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
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, 2020 and
2019, the notional amount of interest rate swaps in offsetting
relationships was $7.6 billion.
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 or equity securities.
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 covered call options on
equity securities to generate additional return.
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.
Note 7 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Balance Sheet Presentation
Net Derivatives
Asset Derivatives Liability Derivatives
Notional Amount
Fair Value
Fair Value
Fair Value
Dec 31,
2020
Dec 31,
2019
Dec 31,
2020
Dec 31,
2019
Dec 31,
2020
Dec 31,
2019
Dec 31,
2020
Dec 31,
2019
$ 2,340 $ 2,040 $
— $
— $
— $
1 $
— $
286
270
2,626
2,310
(13)
(13)
(1)
(1)
3
3
Hedge Designation/ Derivative Type
Cash flow hedges
Interest rate swaps
Foreign currency swaps
Total cash flow hedges
Non-qualifying strategies
Interest rate contracts
3
4
3
—
—
13
5
15
36
(16)
(16)
(1)
(4)
(5)
(73)
(62)
—
—
—
(5)
(1)
(3)
—
(5)
—
(30)
(78)
(101)
— $
(2)
—
(1)
Interest rate swaps and futures
8,335
9,338
(69)
(59)
4
Foreign exchange contracts
Foreign currency swaps and forwards
269
464
—
(1)
—
Credit contracts
Credit derivatives that purchase credit protection
Credit derivatives that assume credit risk [1]
Credit derivatives in offsetting positions
6
675
218
124
500
29
—
21
—
Equity contracts
Equity index swaps and options
Total non-qualifying strategies
—
941
—
9,503
11,396
(48)
(3)
13
—
(15)
(65)
—
21
5
—
30
Total cash flow hedges and non-qualifying strategies
$ 12,129 $ 13,706 $
(61) $
(66) $
33 $
40 $
(94) $
(106)
Balance Sheet Location
Fixed maturities, available-for-sale
$
269 $
244 $
— $
— $
— $
— $
Other investments
Other liabilities
9,585
1,277
23
12
25
13
2,275
12,185
(84)
(61) $
(78)
(66) $
8
33 $
27
40 $
(92)
(94) $
(105)
(106)
Total derivatives
[1]The derivative instruments related to this strategy are held for other investment purposes.
$ 12,129 $ 13,706 $
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.
158
Note 7 - Derivatives
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)
Gross Amounts
Offset in the
Statement of
Financial Position
Derivative
Assets [1]
(Liabilities) [2]
Accrued
Interest and
Cash Collateral
(Received) [3]
Pledged [2]
Financial Collateral
(Received) Pledged
[4]
Net Amount
As of December 31, 2020
Other investments
Other liabilities
As of December 31, 2019
Other investments
Other liabilities
$
$
$
$
33 $
(94) $
40 $
(106) $
31 $
(6) $
37 $
(23) $
23 $
(84) $
12 $
(78) $
(21) $
(4) $
(9) $
(5) $
1 $
(83) $
1 $
(73) $
1
(5)
2
(10)
[1]Included in other investments in the Company's Consolidated Balance Sheets.
[2]Included in other liabilities in the Company's Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty.
[3]Included in other investments in the Company's Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty.
[4]Excludes collateral associated with exchange-traded derivative instruments.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash
flow hedges, 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. All components of each derivative’s gain or loss were
included in the assessment of hedge effectiveness.
Interest rate swaps
Foreign currency swaps
Total
Gain (Loss) Recognized in OCI
Year Ended December 31,
2020
2019
2018
$
$
38 $
(8)
30 $
18 $
8
26 $
5
7
12
Gain (Loss) Reclassified from AOCI into Income
Year Ended December 31,
2020
2019
2018
Net
Realized
Capital
Gain/(Loss)
Net
Investment
Income
Interest
Expense
Net
Realized
Capital
Gain/(Loss)
Net
Investment
Income
Interest
Expense
Net
Realized
Capital
Gain/(Loss)
Net
Investment
Income
Interest
Expense
Interest rate swaps
Foreign currency swaps
Total
Total amounts presented on the
Consolidated Statement of
Operations
$
$
$
— $
(1)
(1) $
29 $
(7) $
5
—
34 $
(7) $
2 $
—
2 $
4 $
3
7 $
1 $
—
1 $
6 $
—
6 $
30 $
—
30 $
—
—
—
(14) $
1,846 $
236 $
395 $
1,951 $
259 $
(112) $
1,780 $
298
As of December 31, 2020, 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 $35.
This expectation is based on the anticipated interest payments on
hedged investments in fixed maturity securities and long-term
debt that will occur over the next twelve months. At that time, the
Company will recognize the deferred net gains (losses) as an
adjustment to net investment income and interest expense over
the term of the investment cash flows.
During the years ended December 31, 2020, 2019, and 2018, 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.
159
Note 7 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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).
Non-Qualifying Strategies Recognized within Net Realized Capital Gains (Losses)
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
Foreign exchange contracts
Foreign currency swaps and forwards
For the Year Ended December 31,
2020
2019
2018
$
21 $
(35) $
(3)
2
2
76
3
(5)
32
(17)
1
—
(14)
2
3
Total [1]
[1]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option.
$
104 $
(24) $
(12)
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.
160
Note 7 - Derivatives
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, 2020
Single name credit default swaps
Investment grade risk exposure
$
175 $
9 5 years
Corporate Credit
A-
$
— $
Basket credit default swaps [4]
Investment grade risk exposure
Investment grade risk exposure
Below investment grade risk
exposure
500
100
9
Total [5]
$
784 $
Single name credit default swaps
12 5 years
Corporate Credit
BBB+
1 8 years
CMBS Credit
AAA
Less than
1 year
(4)
18
As of December 31, 2019
CMBS Credit
CCC+
—
100
9
$
109 $
Investment grade risk exposure
$
100 $
3 5 years
Corporate Credit
A-
$
— $
Basket credit default swaps [4]
Investment grade risk exposure
400
10 5 years
Corporate Credit
BBB+
Investment grade risk exposure
Below investment grade risk
exposure
1
14
Less than
1 year
Less than
1 year
—
(5)
CMBS Credit
A
CMBS Credit
CCC-
—
1
14
Total [5]
[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
515 $
15 $
$
8
$
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.
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, 2020
and 2019, the Company pledged cash collateral associated with
derivative instruments having a fair value of $0 and less than $1,
respectively. 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, 2020 and 2019, the Company
also pledged securities collateral associated with derivative
instruments with a fair value of $90 and $78, respectively, which
have been included in fixed maturities on the Consolidated
Balance Sheets. The counterparties generally have the right to
sell or re-pledge these securities.
In addition, as of December 31, 2020 and 2019 , the Company has
pledged initial margin of securities related to OTC-cleared and
161
exchange traded derivatives with a fair value of $83 and $88,
respectively, which are included within fixed maturities on the
Company's Consolidated Balance Sheets.
As of December 31, 2020 and 2019, the Company accepted cash
collateral associated with derivative instruments of $24 and $16,
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
accepted securities collateral as of December 31, 2020 and 2019
with a fair value of $1 and $1, respectively, which the Company
has the ability to sell or repledge. As of December 31, 2020 and
2019, the Company had no repledged securities and no securities
held as collateral have been sold. In addition, as of December 31,
2020 and 2019, non-cash collateral accepted was held in separate
custodial accounts and was not included in the Company’s
Consolidated Balance Sheets.
—
—
(1)
4
3
—
—
—
5
5
Note 8 - Premiums Receivable and Agents' Balances
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. PREMIUMS RECEIVABLE AND AGENTS' BALANCES
is adjusted based on actual losses incurred. Although the
premium adjustment feature of a retrospectively-rated policy
substantially reduces insurance risk for the Company, it presents
credit risk to the Company. The Company’s results of operations
could be adversely affected if a significant portion of such
policyholders failed to reimburse the Company for the deductible
amount or the amount of additional premium owed under
retrospectively-rated policies. The Company manages these
credit risks through credit analysis, collateral requirements, and
oversight.
The ACL for receivables for loss within a deductible and
retrospectively-rated policy premiums is estimated as the amount
of the receivable exposed to loss multiplied by estimated factors
for probability of default and the amount of loss given a default.
The probability of default is assigned based on each
policyholder's credit rating, or a rating is estimated if no external
rating is available. Credit ratings are reviewed and updated at
least annually. The exposure amount is estimated net of collateral
and other credit enhancement, considering the nature of the
collateral, potential future changes in collateral values, and
historical loss information for the type of collateral obtained. The
probability of default factors are historical corporate defaults for
receivables with similar durations estimated through multiple
economic cycles. Credit ratings are forward-looking and consider
a variety of economic outcomes. The loss given default factors are
based on a study of historical recovery rates for general creditors
through multiple economic cycles. The Company's evaluation of
the required ACL for receivables for loss within a deductible and
retrospectively-rated policy premiums considers the current
economic environment as well as the probability-weighted
macroeconomic scenarios similar to the approach used for
estimating the ACL for mortgage loans. See Note 6 - Investments.
In response to significant economic stress experienced as a result
of the COVID-19 pandemic during 2020, the Company increased
the weight of both a moderate and severe recession scenario in
our estimate of the ACL for losses within a deductible and
retrospectively-rated policy premiums. However, overall, the ACL
on receivables for losses within a deductible and retrospectively-
rated policy premiums has decreased for the year, primarily due
to a decline in the related receivable balance.
Premiums Receivable and Agents' Balances
Premiums receivable, excluding receivables for
losses within a deductible and retrospectively-
rated policy premiums
Receivables for loss within a deductible and
retrospectively-rated policy premiums, by
credit quality:
AAA
AA
A
BBB
BB
Below BB
Total receivables for losses within a
deductible and retrospectively-rated policy
premiums
Total Premiums Receivable and Agents'
Balances, Gross
ACL
As of
December
31, 2020
$
3,851
—
142
62
185
115
65
569
4,420
(152)
Total Premiums Receivable and Agents'
Balances, Net of ACL
$
4,268
ACL on Premiums Receivable and
Agents' Balances
Premium receivable and agents' balances, excluding receivables
for losses within a deductible and retrospectively-rated policy
premiums, are primarily comprised of premiums due from
policyholders, which are typically collectible within one year or
less. The Company had an immaterial amount of receivables with
a due date of more than one year that are past-due. Balances are
considered past due when amounts that have been billed are not
collected within contractually stipulated time periods.
For these balances, the ACL is estimated based on an aging of
receivables and recent historical credit loss and collection
experience, adjusted for current economic conditions and
reasonable and supportable forecasts, when appropriate. In
response to significant economic stress experienced as a result of
the COVID-19 pandemic during 2020, the Company increased
the expected loss factors used to estimate the ACL based on
collections experience during past moderate and severe
recessions as well as experience during periods when we
provided policyholders additional time to make premiums
payments.
A portion of the Company's Commercial Lines business is written
with large deductibles or under retrospectively-rated plans.
Under some commercial insurance contracts with a large
deductible, the Company is obligated to pay the claimant the full
amount of the claim and the Company is subsequently
reimbursed by the policyholder for the deductible amount. As
such, the Company is subject to credit risk until reimbursement is
made. Retrospectively-rated policies are utilized primarily for
workers' compensation coverage, whereby the ultimate premium
162
Note 8 - Premiums Receivable and Agents' Balances
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Rollforward of ACL on Premiums Receivable and Agents' Balances for the Year Ended December
31, 2020
Premiums Receivable and
Agents' Balances, Excluding
Receivables for Loss within a
Deductible and Retrospectively-
Rated Policy Premiums
Receivables for Loss within a
Deductible and Retrospectively-
Rated Policy Premiums
Total
Beginning ACL
$
Cumulative effect of accounting
change [1]
Adjusted beginning ACL
Current period provision (release)
Current period gross write-offs
Current period gross recoveries
85 $
(2)
83
78
(49)
5
60 $
(21)
39
(4)
—
—
145
(23)
122
74
(49)
5
Ending ACL
152
117 $
[1]Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. The adjusted beginning ACL was based on the Company's
historical loss information adjusted for current conditions and the forecasted economic environment at the time the guidance was adopted. For further information refer to Note 1
- Basis of Presentation and Significant Accounting Policies.
35 $
$
9. 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.
The Company has two adverse development cover (“ADC”)
reinsurance agreements in place, both of which are accounted for
as retroactive reinsurance. One agreement covers substantially
all asbestos and environmental ("A&E") reserve development for
2016 and prior accident years ("A&E ADC") and the other covers
substantially all reserve development of Navigators Insurance
Company and certain of its affiliates for 2018 and prior accident
years (the Navigators ADC). For more information on ADC
agreements, see Note 1 -Basis of Presentation and Significant
Accounting Policies, and Note 12 -Reserve for Unpaid Losses and
Loss Adjustment Expenses.
Property and Casualty ceded losses, which reduce losses and loss
adjustment expenses incurred, were $1,156, $826 and $661 for
the years ended December 31, 2020, 2019 and 2018,
respectively.
Group Benefits ceded losses, which reduce losses and loss
adjustment expenses incurred, were $63, $73 and $116 for the
years ended December 31, 2020, 2019 and 2018, respectively.
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.
163
Note 9 - Reinsurance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reinsurance Recoverables by Credit Quality Indicator as of December 31, 2020
Property and
Casualty
Group Benefits
Corporate
Total
AM Best Financial Strength Rating
$
1,598 $
1,788
— $
230
— $
305
A++
A+
A
A-
B++
Below B++
Total Rated by AM Best
Mandatory (Assigned) and Voluntary Risk Pools
Captives
Other not rated companies
Gross Reinsurance Recoverables
Allowance for uncollectible reinsurance
Net Reinsurance Recoverables
$
Balances are considered past due when amounts that have been
billed are not collected within contractually stipulated time
periods, generally 30, 60 or 90 days. There were no write-offs for
the period ended December 31, 2020.
To manage reinsurer credit risk, a reinsurance security review
committee evaluates the credit standing, financial performance,
management and operational quality of each potential reinsurer.
In placing reinsurance, the Company considers the nature of the
risk reinsured, including the expected liability payout duration,
and establishes limits tiered by reinsurer credit rating.
Where its contracts permit, the Company secures future claim
obligations with various forms of collateral or other credit
enhancement, 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.
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.
The allowance for uncollectible reinsurance comprises an ACL
and an allowance for disputed balances. The ACL is estimated as
the amount of reinsurance recoverables exposed to loss
multiplied by estimated factors for the probability of default and
the amount of loss given a default. The probability of default is
assigned based on each reinsurer's credit rating, or a rating is
estimated if no external rating is available. Credit ratings are
reviewed on a quarterly basis and any significant changes are
reflected in an updated estimate. The probability of default
factors are historical insurer and reinsurer defaults for liabilities
164
638
37
666
21
4,748
259
305
254
5,566
(105)
5,461 $
—
9
—
1
240
—
—
5
245
(1)
244 $
—
—
3
—
308
—
—
—
308
(2)
306 $
1,598
2,323
638
46
669
22
5,296
259
305
259
6,119
(108)
6,011
with similar durations to the reinsured liabilities as estimated
through multiple economic cycles. Credit ratings are forward-
looking and consider a variety of economic outcomes. The loss
given default factors are based on a study of historical recovery
rates for general creditors of corporations through multiple
economic cycles or, in the case of purchased annuities funding
structured settlements accounted for as reinsurance, historical
recovery rates for annuity contract holders.
As shown in the table above, a portion of the total gross
reinsurance recoverable balance relates to the Company’s
participation in various mandatory (assigned) and voluntary risk
pools. Reinsurance recoverables due from pools are backed by
the financial position of all insurance companies participating in
the pools and the credit backing the reinsurance recoverable is
not limited to the financial strength of each pool. The mandatory
pools generally are funded through policy assessments or
surcharges and if any participant in the pool defaults, remaining
liabilities are apportioned among the other members.
The Company's evaluation of the required ACL for reinsurance
recoverables considers the current economic environment as well
as macroeconomic scenarios similar to the approach used to
estimate the ACL for mortgage loans. See Note 6 - Investments.
Insurance companies, including reinsurers, are regulated and hold
risk-based capital to mitigate the risk of loss due to economic
factors and other risks. Non-U.S. reinsurers are either subject to a
capital regime substantively equivalent to domestic insurers or
we hold collateral to support collection of reinsurance
recoverables. As a result, there is limited history of losses from
insurer defaults. In response to significant economic stress
experienced as a result of the COVID-19 pandemic during 2020,
the Company increased the weight of both a moderate and severe
recession in our estimate of the ACL for reinsurance
recoverables. The Company expects the impact of the COVID-19
pandemic to reinsurers to be somewhat mitigated by their
regulated capital and liquidity positions.
Note 9 - Reinsurance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Allowance for Uncollectible Reinsurance
For the year ended December 31, 2020
Property and Casualty Group Benefits
$
Corporate
Total
Beginning allowance for uncollectible reinsurance
Beginning allowance for disputed amounts
Beginning ACL
Cumulative effect of accounting change [1]
Adjusted beginning ACL
Current period provision (release)
Current period gross recoveries
Ending ACL
Ending allowance for disputed amounts
Ending allowance for uncollectible reinsurance
[1] Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of
Presentation and Significant Accounting Policies
114 $
66
48
—
48
3
1
52
53
105 $
— $
—
—
1
1
—
—
1
—
1 $
— $
—
—
1
1
1
—
2
—
2 $
$
114
66
48
2
50
4
1
55
53
108
Insurance Revenues
Property and Casualty Insurance Revenue
Premiums Written
Direct
Assumed
Ceded
Net
Premiums Earned
Direct
Assumed
Ceded
Net
For the years ended December 31,
2019
2018
2020
$
$
$
$
12,537 $
577
(1,209)
11,905 $
12,551 $
540
(1,173)
11,918 $
12,190 $
371
(978)
11,583 $
12,010 $
416
(936)
11,490 $
10,784
217
(593)
10,408
10,824
221
(599)
10,446
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,
2020
2019
2018
$
$
5,245 $
387
(96)
5,536 $
4,122 $
1,572
(91)
5,603 $
3,615
2,044
(61)
5,598
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.
165
Note 10 - Deferred Policy Acquisition Costs
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. DEFERRED POLICY ACQUISITION COSTS
Changes in DAC
Balance, beginning of period
Deferred costs
Amortization — DAC
Add back amortization of value of business acquired [1]
DAC transferred to assets held for sale
For the years ended December 31,
2020
2019
2018
$
785 $
670 $
1,666
(1,706)
47
(3)
1,635
(1,622)
102
—
650
1,404
(1,384)
—
—
Balance, end of period
[1] While the value of in-force contracts acquired from the Navigators Group acquisition is included in other intangible assets, the amortization of that asset is recorded as DAC
789 $
785 $
$
670
amortization.
11. GOODWILL & OTHER INTANGIBLE ASSETS
Goodwill Carrying Value as of December 31, 2020
Balance at December 31, 2018
Goodwill related to acquisitions [2]
Balance at December 31, 2019
Measurement period adjustments [2]
Commercial
Lines
Personal
Lines
Hartford
Funds
Group
Benefits
Corporate [1]
Total
$
$
38 $
623
661 $
(2)
119 $
180 $
723 $
230 $
—
—
—
—
119 $
180 $
723 $
230 $
—
—
—
—
1,290
623
1,913
(2)
Balance at December 31, 2020
[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
659 $
180 $
119 $
723 $
230 $
$
1,911
goodwill within Corporate as of December 31, 2020, 2019, and 2018 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 Navigators Group, refer to Note 2 - Business Acquisitions .
The annual goodwill assessment for The Hartford's reporting
units was completed as of October 31, 2020, 2019, and 2018,
which resulted in no write-downs of goodwill in the respective
years then ended. In 2020, all reporting units passed their annual
impairment test with a significant margin.
166
Note 11 - Goodwill & Other Intangible Assets
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Other Intangible Assets
As of December 31, 2020
As of December 31, 2019
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Amortized Intangible Assets:
Value of in-force contracts [1]
$
203 $
Customer relationships
Marketing agreement with Aetna
Distribution Agreement [2]
Distribution and Agency relationships &
Other [3]
Total Finite Life Intangibles
Total Indefinite Life Intangible Assets [4]
636
16
79
340
1,274
95
(172) $
(134)
(3)
(65)
(45)
(419)
—
31 $
203 $
(125) $
502
13
14
295
855
95
636
16
79
340
1,274
95
(92)
(2)
(61)
(19)
(299)
—
78
544
14
18
321
975
95
1,070
Total Other Intangible Assets
[1]On May 23, 2019, the Company acquired Navigators Group and recorded a value of in-force-contracts intangible asset of $180 which will be amortized over 3 years. For further
1,369 $
1,369 $
950 $
(419) $
(299) $
$
discussion on the value of in-force-contracts related to the acquisition of Navigators Group, refer to Note 2 - Business Acquisitions .
[2]On May 28, 2020, the Company amended its distribution agreement to, among other changes in terms, extend the agreement. As a result of this extension in term, The Hartford
reassessed the useful life of the distribution agreement to amortize over a remaining life of approximately 6.5 years.
[3]On May 23, 2019, the Company acquired Navigators Group and recorded other intangible assets of $302 for distribution relationships and $17 for the trade name. The
distribution relationships and trade name will be amortized over 15 years and 10 years, respectively. For further discussion on the value of distribution relationships and trade
name related to the acquisition of Navigators Group, refer to Note 2 - Business Acquisitions .
[4]On May 23, 2019, the Company acquired Navigators Group and recorded an indefinite life intangible asset of $66 related to the capacity to write business through its Lloyd's
Syndicate and recorded an indefinite life intangible of $15 for licenses . For further discussion on the indefinite life intangible assets related to the acquisition of Navigators Group,
refer to Note 2 - Business Acquisitions .
Expected Pre-tax Amortization Expense [1] for
Acquired Intangibles as of December 31, 2020
2021
2022
2023
2024
Value of In-force
Contracts
Other Intangible
Assets
$
$
$
$
21 $
10 $
— $
— $
71
70
70
70
2025
[1]In the Consolidated Statements of Operations, the amortization of value of in-
— $
$
70
force contracts is reported in amortization of deferred policy acquisition costs and
the amortization of other intangible assets is reported in amortization of other
intangible assets.
167
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. 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,
2020
2019
2018
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$
28,261 $
24,584 $
Reinsurance and other recoverables
Beginning liabilities for unpaid losses and loss adjustment expenses, net
Navigators Group acquisition
Provision for unpaid losses and loss adjustment expenses
Current accident year
Prior accident year development [1]
Total provision for unpaid losses and loss adjustment expenses
Change in deferred gain on retroactive reinsurance included in other liabilities [1]
Payments
Current accident year
Prior accident years
Total payments
Net reserves transferred to liabilities held for sale
Foreign currency adjustment
Ending liabilities for unpaid losses and loss adjustment expenses, net
Reinsurance and other recoverables
5,275
22,986
—
7,794
(136)
7,658
(312)
(2,214)
(4,190)
(6,404)
(45)
14
23,897
5,725
4,232
20,352
2,001
7,463
(65)
7,398
(16)
(2,374)
(4,374)
(6,748)
—
(1)
22,986
5,275
23,775
3,957
19,818
—
7,107
(167)
6,940
—
(2,452)
(3,954)
(6,406)
—
—
20,352
4,232
Ending liabilities for unpaid losses and loss adjustment expenses, gross
[1]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and A&E ADC which, under retroactive reinsurance accounting, is
29,622 $
28,261 $
24,584
$
deferred and is recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the two adverse development cover reinsurance
agreements, refer to Adverse Development Covers discussion below.
Property and Casualty Insurance Products Reserves, Net of Reinsurance, that are Discounted
Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts $
1,334
$
1,331
$
1,331
For the years ended December 31,
2020
2019
2018
Amount of discount
Carrying value of liability for unpaid losses and loss adjustment expenses
Discount accretion included in losses and loss adjustment expenses
$
$
367
967
36
$
$
388
943
33
$
$
388
943
40
2.68 %
2.91 %
2.98 %
Weighted average discount rate
Range of discount rates
Reserves are discounted at rates in effect at the time claims were
incurred, ranging from 0.83% for accident year 2020 to 14.03%
for accident year 1981.
The reserves recorded for the Company’s property and casualty
insurance products at December 31, 2020 represent the
Company’s best estimate of its ultimate liability for losses and
loss adjustment expenses related to losses covered by policies
written by the Company. However, because of the significant
uncertainties surrounding reserves it is possible that
management’s estimate of the ultimate liabilities for these claims
0.83 %-
14.03 % 1.76 % - 14.03 % 1.77 % - 14.15 %
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
168
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
Workers’ compensation
Workers’ compensation discount
accretion
General liability
Marine
Package business
Commercial property
Professional liability
Bond
Assumed reinsurance
For the years ended
December 31,
2020 2019 2018
$ (110) $ (120) $ (164)
35
33
40
237
61
52
3
8
—
(58)
(47)
(26)
(4)
(11)
(12)
(14) 29
(12)
(19)
(3)
2
(6)
3
—
Automobile liability - Commercial Lines
27
27
(15)
Automobile liability - Personal Lines
(61)
(38)
(18)
Homeowners
Net asbestos reserves
Net environmental reserves
Catastrophes
Uncollectible reinsurance
7
3
(25)
(2) —
—
—
—
—
(529)
(42)
(49)
(8)
(30) 22
Other reserve re-estimates, net
54
46
38
Prior accident year development,
including full benefit for the ADC cession (448)
(81) (167)
Change in deferred gain on retroactive
reinsurance included in other liabilities [1]
312
16
—
$ (136) $ (65) $ (167)
Total prior accident year development
[1] The change in deferred gain for the year ended December 31, 2020 included
$210 of adverse development on A&E reserves in excess of ceded premium paid and
included $102 of adverse development on Navigators 2018 and prior accident year
reserves, within professional liability, marine, general liability, prior accident year
catastrophes, and assumed reinsurance.
2020 re-estimates of prior accident year
reserves
Workers’ compensation reserves were reduced on
national account business within middle & large commercial,
driven by lower than previously estimated claim severity for the
2015 and prior accident years, including on captives business, and
were reduced in small commercial due to lower than expected
claim severity for the 2013 to 2018 accident years.
General liability reserves were increased primarily due
to a $254 increase in reserves for sexual molestation and sexual
169
abuse claims related to cases brought against religious and other
organizations that were insureds of the Company, partly offset by
a decrease in reserves for other mass torts and extra contractual
liability claims. The sexual molestation and sexual abuse
exposures may involve potentially long latency periods and may
implicate coverage in multiple policy periods, which can raise
complex coverage issues with significant effects on the ultimate
scope of coverage. This increase in reserves reflects an increase in
claim incidence largely due to reviver statutes, which is legislation
passed in a number of states that provides an opportunity for
claimants to file claims for a period of time despite the fact that
the original statute of limitations had expired. The reserve
increase in 2020 was principally from claims asserted against the
Boy Scouts of America (“Boy Scouts”). The reserve increase for
Boy Scouts was partially driven by the impact of claim filings on
and around the November 16, 2020 deadline to file claims in the
Boy Scouts’ Chapter 11 bankruptcy. Various subsidiaries of the
Company issued primary, umbrella and excess general liability
policies to the Boy Scouts for various policies periods between
1971 and 1983, including seven years of primary coverage from
1971 through 1977. However, it is the Company’s position that
the 1976 and 1977 primary policy years were fully released and
all the Company’s obligations extinguished by virtue of a prior
settlement agreement with Boy Scouts. Further, the Company
disputes the extent of its obligations to Boy Scouts and the
validity of certain claims filed against Boy Scouts in the
bankruptcy. As such, there are significant uncertainties regarding
the ultimate number and severity of the claims against Boy
Scouts, the potential for additional reviver activity, and the
inherent risks associated with legal determinations to be made by
the bankruptcy court and in coverage litigation.
In addition, general liability reserve increases on construction
account business were largely offset by decreases in ULAE
reserves. Reserves were increased for guaranteed cost
construction business for accident years 2014 to 2019 as
incurred losses are developing higher than previously expected
for premises and operations claims and product liability claims,
partly due to a change in industry mix and a heavier concentration
of losses in California than initially assumed, as well as increased
reserves for middle market and complex liability claims for
accident year 2018 largely due to higher than expected severity.
Also contributing were increases in reserves on primary layer
construction account business within global specialty, mainly
related to accident years 2015 to 2017, which is included as a
component of the change in deferred gain under retroactive
reinsurance in the above table.
Marine reserves were increased principally due to an
increase in domestic marine liability, mostly in accident years
2017 and 2018 due to a higher number of large losses. The
increase in marine reserves is included as a component of the
change in deferred gain under retroactive reinsurance in the
above table.
Package business reserves decreased for accident
years 2014 to 2017 largely due to lower estimates of allocated
loss adjustment expenses.
Commercial property reserves were decreased for
accident year 2019 due to favorable developments on marine and
middle market property claims.
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Professional liability reserves were decreased
primarily due to lower estimated severity on non-security class
action D&O claims and fewer than expected E&O claims with
financial institutions for the 2011 to 2018 accident years,
partially offset by an increase in D&O reserves for the 2019
accident year driven by higher frequency of class action lawsuits
and an increase in large Syndicate D&O losses for the 2016 and
2017 accident years. These Syndicate reserve increases within
global specialty are included as a component of the change in
deferred gain under retroactive reinsurance in the above table.
Bond reserves were reduced within contract surety driven
by both favorable loss development on the 2015 to 2017 accident
years and higher than expected loss recoveries on older accident
years
Assumed reinsurance reserves were increased for
accident year 2018 mostly due to higher accident and health
reserve estimates for medical professionals on assumed casualty
business. These reserve increases are included as a component of
the change in deferred gain under retroactive reinsurance in the
above table.
Automobile liability reserves were decreased in
Personal Lines principally due to lower than previously expected
AARP Direct automobile liability claim severity for the 2017 to
2019 accident years. Automobile liability reserves were
increased in Commercial Lines primarily due to higher than
expected large losses within middle & large commercial,
predominantly within the 2015 to 2019 accident years.
Catastrophes reserves were reduced, primarily due to a
reduction in estimated reserves for 2017 and 2018 California
wildfires and a reduction in estimated catastrophes for wind and
hail events in the 2017 to 2019 accident years, partially offset by
an increase in reserves for 2019 typhoons Hagibis and Faxai in
Asia. The reduction in reserves for the 2017 and 2018 wildfires
was largely due to recognizing a $289 subrogation benefit in the
second quarter of 2020 from PG&E Corporation and Pacific Gas
and Electric Company (together, “PG&E”) as well as a reduction in
gross estimated losses on those wildfires.
In December, 2019, the judge overseeing the bankruptcy of
PG&E approved an $11 billion settlement of insurance
subrogation claims to resolve all such claims arising from the
2017 Northern California wildfires and 2018 Camp wildfire. That
settlement was contingent upon, among other things, the judge
entering an order confirming PG&E’s chapter 11 bankruptcy plan
(“PG&E Plan”) incorporating the settlement agreement. On June
20, 2020, the bankruptcy court judge approved the PG&E Plan
and PG&E subsequently transferred the $11 billion settlement
amount to a trust designed to allocate and distribute the
settlement among subrogation holders, including certain of the
Company’s insurance subsidiaries. In the second quarter of 2020,
the Company recorded an estimated $289 subrogation benefit
though the ultimate amount it collects will depend on how the
Company’s ultimate paid claims subject to subrogation compare
to other insurers’ ultimate paid claims subject to subrogation.
Uncollectible reinsurance reserves were reduced
due to higher than expected recoveries from reinsurers in older
accident years.
Asbestos and environmental reserves were
reviewed in fourth quarter 2020 resulting in a $218 increase in
reserves before ADC reinsurance, including $127 for asbestos
and $91 for environmental. Of the $218 increase in A&E reserves,
the Company ceded $220 to the A&E ADC resulting in a net
reserve release of $2. Of the $220 of adverse development ceded
to the A&E ADC, the Company recognized a $210 deferred gain
on retroactive reinsurance, representing the amount of losses
ceded to the ADC in excess of ceded premium paid. For additional
information related to the adverse development cover with
NICO, see the Adverse Development Covers section below and
Note 15 - Commitments and Contingencies.
Other reserve re-estimates, net, primarily
represents an increase in unallocated loss adjustment expense
('ULAE") reserves in Property & Casualty Other Operations that
was largely driven by an increase in gross asbestos and
environmental reserves.
2019 re-estimates of prior accident year
reserves
Workers’ compensation reserves were reduced,
principally in small commercial driven by lower than previously
estimated claim severity for the 2014 through 2017 accident
years and, to a lesser extent, in national accounts due to lower
estimated claim severity, primarily for accident years 2013 and
prior.
General liability reserves were increased, primarily due
to reserve increases in small commercial for accident years 2017
and 2018 due to higher frequency of high-severity bodily injury
claims, reserve increases in middle & large commercial for
accident years 2015 to 2018 due to higher estimated severity, as
well as increased estimated severity on the acquired Navigators
Group book of business related to U.S. construction, premises
liability, products liability and excess casualty, mostly related to
accident years 2014 to 2017. In addition, an increase in reserves
for mass torts for 2009 and prior accident years was offset by a
decrease in reserves for extra contractual liability claims for more
recent accident years, including the 2018 accident year.
Marine reserves were increased, principally related to
pollution exposure from the 1980s and 1990s related to the
Navigators Group book of business.
Package business reserves were decreased, primarily
due to favorable emergence on property claims related to
accident years 2016 through 2018 and due to favorable
development of loss adjustment expenses on general liability
claims for 2017 and prior accident years.
Commercial property reserves were decreased,
principally due to favorable emergence of reported losses,
including on the acquired Navigators Group book of business,
related to offshore energy in accident years 2017 to 2018 and
construction engineering across accident years 2015 to 2018.
Professional liability reserves were increased,
primarily due to increased securities litigation and large loss
activity, including wrongful termination and discrimination
claims, related to accident years 2017 and 2018 and increased
estimated frequency and severity of directors’ and officers’
reserves on the Navigators Group book of business, principally
170
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 the
Adverse Development Covers section below and Note 15 -
Commitments and Contingencies.
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
Other Operations that was principally driven by an increase in
expected claim handling costs associated with asbestos and
environmental and mass tort claims.
for the 2014 to 2018 accident years. Partially offsetting the
increase was a decrease in average severity on public company
directors’ and officers’ claim reserves and errors and omissions
claim reserves for accident years 2014 and prior.
Automobile liability reserves were decreased in
Personal Lines and increased in Commercial Lines. The decrease
in Personal Lines was due to the emergence of lower estimated
severity in automobile liability for accident year 2017. The
increase in Commercial Lines was due to higher estimated
severity on national accounts, principally in accident years 2017
and 2018, and higher estimated severity for accident year 2018 in
small commercial and middle market, partially offset by lower
estimated severity for 2017 and prior accident years in small
commercial and middle market.
Catastrophes reserves were reduced, primarily as a
result of lower estimated net losses from 2017 hurricanes Harvey
and Irma and the 2017 California wildfires. While gross loss
reserve estimates for the 2018 California wildfires were also
reduced, this was largely offset by a reduction in reinsurance
recoverables resulting in very little change to estimated net
losses from those wildfires.
Uncollectible reinsurance reserves were reduced
due to higher than expected recoveries from reinsurers in older
accident years.
Other reserve re-estimates, net, primarily
represents an increase in unallocated loss adjustment expense
('ULAE") reserves in Property & Casualty Other Operations that
was driven by an increase in gross asbestos and environmental
reserves, as well as higher than anticipated ULAE costs in recent
years, prompting an increase in the projected ULAE run rate.
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 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.
171
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Adverse Development Covers
The Company has an adverse development cover reinsurance
agreement with NICO, a subsidiary of Berkshire Hathaway Inc., to
reinsure loss development after 2016 on substantially all of the
Company’s asbestos and environmental reserves (the “A&E
ADC”). Under the A&E 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
A&E reserves as of December 31, 2016 of approximately $1.7
billion including reserves for A&E exposure for accident years
prior to 1986 that are reported in Property & Casualty Other
Operations ("Run-off A&E") and reserves for A&E exposure for
accident years 1986 and subsequent from policies underwritten
prior to 2016 that are reported in ongoing Commercial Lines and
Personal Lines. The $650 reinsurance premium was placed into a
collateral trust account as security for NICO’s claim payment
obligations to the Company. The Company has retained the risk
of collection on amounts due from other third-party reinsurers
and continues to be responsible for claims handling and other
administrative services, subject to certain conditions. The A&E
ADC covers substantially all the Company’s A&E reserve
development up to the reinsurance limit.
Under retroactive reinsurance accounting, net adverse A&E
reserve development 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 have been recognized as a dollar-for-dollar offset
to direct losses incurred. Cumulative ceded losses exceeding the
$650 reinsurance premium paid result in a deferred gain. As of
December 31, 2020, the Company has incurred $860 in
cumulative adverse development on asbestos and environmental
reserves that have been ceded under the A&E ADC treaty with
NICO with $640 of available limit remaining under the A&E ADC.
As a result, the Company has recorded a $210 deferred gain
within other liabilities, representing the difference between the
reinsurance recoverable of $860 and ceded premium paid of
$650. The deferred gain is 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 will
result in charges against earnings, which may be significant.
Immediately after closing on the acquisition of Navigators Group,
effective May 23, 2019, the Company purchased the Navigators
ADC, an aggregate excess of loss reinsurance agreement covering
adverse reserve development, from NICO on behalf of Navigators
Insurers. Under the Navigators ADC, the Navigators Insurers paid
NICO a reinsurance premium of $91 in exchange for reinsurance
coverage of $300 of adverse net loss reserve development that
attaches $100 above the Navigators Insurers' existing net loss
and allocated loss adjustment reserves as of December 31, 2018
subject to the treaty of $1.816 billion for accidents and losses
prior to December 31, 2018.
As of December 31, 2020, the Company has recorded a
reinsurance recoverable under the Navigators ADC of $209 as
estimated cumulative loss development on the 2018 and prior
accident year reserves of $309 exceed the $100 deductible.
While the reinsurance recoverable is $209, the Company has also
recorded a $118 cumulative deferred gain within other liabilities
since, under retroactive reinsurance accounting, ceded losses in
excess of the $91 of ceded premium paid must be recognized as a
deferred gain. Of the $118 of cumulative ceded losses in excess of
ceded premium paid, $102 was recognized as a deferred gain in
2020 and $16 was recognized as a deferred gain in 2019. As the
Company has ceded $209 of the $300 available limit, there is $91
of remaining limit available as of December 31, 2020.
172
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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, 2020
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
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
$
18,864 $
(10,633) $
2,671 $
336 $
(352) $
10,886 $
1,970 $
12,856
713
137
General liability
Marine
Package business
Commercial property
Commercial automobile
liability
Commercial automobile
physical damage
Professional liability
Bond
Assumed Reinsurance
6,201
1,379
6,940
3,365
(2,946)
(1,128)
(5,248)
(2,936)
3,804
(2,775)
176
2,164
635
1,198
(167)
(1,080)
(310)
(986)
Personal automobile liability
11,463
(10,153)
Personal automobile physical
damage
Homeowners
Other ongoing business
Asbestos and environmental [1]
Other operations [1]
1,279
6,770
(1,262)
(6,435)
18
66
28
16
4
65
28
3
29
5
6
208
938
349
10
94
18
21
—
35
28
3
60
3
31
—
—
—
—
—
—
—
—
—
—
—
—
(2)
—
164
(15)
—
—
4,105
279
1,852
475
1,066
13
1,184
381
218
1,399
25
372
191
938
513
740
216
17
221
4,845
495
1,869
696
78
1,144
(1)
689
13
41
28
—
3
294
1,429
(13)
12
1,873
394
259
1,427
25
375
485
2,367
500
29,622
Total P&C
[1]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, sexual molestation and sexual abuse 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.
(46,059) $
23,897 $
64,238 $
5,147 $
5,725 $
(367) $
938 $
$
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 cumulative incurred
losses displayed in the above table include the full reinsurance
benefit of ceding $209 of losses to the Navigators ADC even
though $118 of that benefit has been recorded as a deferred gain
within other liabilities and recognized as a charge to earnings
within incurred loss and loss adjustment expenses included in the
consolidated statement of operations. The $209 of Navigators
Insurers losses ceded to the Navigators ADC included in the
following triangles $53 for general liability, $53 for professional
liability, $24 for assumed reinsurance, $12 for commercial
automobile, $38 for marine and $5 for commercial property and
included $24 for older accident years and lines of business that
are not in the following triangles.
The following loss triangles present historical loss development
for incurred and paid claims by accident year, including loss
development on Navigators Insurers reserves prior to and after
the May 23, 2019 acquisition date. Because the loss triangles
include pre-acquisition date changes in ultimate incurred loss
estimates for Navigators Insurers’ reserves, changes in reserve
development evident in the incurred loss triangles may differ
from prior accident year development recorded by the Company
as shown in the (Favorable) Unfavorable Prior Accident Year
Development table above as that only includes changes in
Navigators Insurers’ reserves post acquisition. In addition, the
incurred loss triangles include reserve development on both
catastrophe and non-catastrophe claims whereas the (Favorable)
Unfavorable Prior Accident Year Development table above
shows the total amount of catastrophe reserve development
across all lines of business on a single line.
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. For marine, commercial property, professional liability
and assumed reinsurance lines, the Company has provided nine
years of claims development as data for earlier periods was not
available for the Lloyds syndicate. IBNR reserves shown in loss
triangles include reserve for incurred but not reported claims as
well as reserves for expected development on reported claims.
Incurred and cumulative paid losses in currencies other than the
173
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. dollar have been converted into U.S. dollars using the
exchange rates as of December 31, 2020.
Workers' Compensation
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2011 $ 2,013 $ 2,099 $ 2,204 $ 2,206 $ 2,221 $ 2,224 $ 2,232 $ 2,242 $ 2,239 $ 2,235 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
2,185
2,207
2,207
2,181
2,168
2,169
2,154
2,146
2,135
2,020
1,981
1,920
1,883
1,861
1,861
1,850
1,831
1,869
1,838
1,789
1,761
1,713
1,692
1,679
1,873
1,835
1,801
1,724
1,714
1,699
1,772
1,772
1,780
1,767
1,748
1,862
1,869
1,840
1,822
1,916
1,917
1,915
1,937
1,935
1,865
$ 18,864
291
325
378
437
477
574
753
854
1,033
1,412
177,961
171,494
151,422
126,217
113,966
112,058
111,510
117,999
117,698
84,062
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 $ 371 $ 841 $ 1,156 $ 1,368 $ 1,518 $ 1,622 $ 1,690 $ 1,746 $ 1,786 $ 1,811
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
359
809
1,106
1,313
1,436
1,529
1,587
1,644
1,678
304
675
275
917
1,071
1,175
1,260
1,304
1,339
598
261
811
576
255
960
1,041
1,099
1,137
778
579
261
909
1,004
1,068
779
575
283
908
1,003
778
624
291
900
837
637
223
$ 10,633
174
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2011 $ 431 $ 420 $ 408 $ 405 $ 404 $ 416 $ 417 $ 426 $ 420 $ 416 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
423
402
455
399
442
506
392
456
475
556
410
484
481
560
613
408
488
494
554
583
626
421
502
513
594
607
614
692
413
505
522
633
633
613
669
821
407
508
515
647
632
616
697
826
937
$ 6,201
40
50
62
78
110
176
258
395
638
850
22,394
16,597
13,867
14,722
15,382
16,479
15,943
16,881
15,191
9,265
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 $
15 $
61 $ 123 $ 200 $ 255 $ 303 $ 330 $ 348 $ 362 $ 368
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
13
55
13
101
53
15
170
141
42
10
233
233
130
55
12
280
320
214
156
52
15
305
372
304
278
131
67
21
323
398
358
409
283
156
83
29
332
422
402
477
368
255
177
100
45
$ 2,946
175
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Marine
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves [1]
Claims
Reported
2012 $ 195 $ 220 $ 180 $ 169 $ 163 $ 164 $ 168 $ 164 $ 164 $
2013
2014
2015
2016
2017
2018
2019
2020
Total
149
152
163
134
160
158
136
158
146
140
140
165
146
143
160
135
164
148
138
187
144
138
169
133
148
175
161
144
140
167
138
150
174
154
142
150
$ 1,379
2
(3)
(3)
(5)
(7)
(12)
(12)
20
76
6,782
6,623
7,122
10,114
13,112
15,498
13,808
7,989
3,451
[1]IBNR reserves are negative for some accident years as all losses ceded to the Navigators ADC are ceded as IBNR even though the gross losses being ceded
include both reported losses and IBNR components. In addition, the collection of subrogation lags payment of the losses.
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net
of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2012 $
51 $ 101 $ 125 $ 139 $ 148 $ 152 $ 155 $ 159 $ 158
2013
2014
2015
2016
2017
2018
2019
2020
Total
42
82
41
100
81
40
112
116
85
35
119
131
116
80
48
121
151
126
106
111
37
126
156
134
122
142
104
36
133
159
139
132
154
138
83
32
$ 1,128
176
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2011 $ 810 $ 792 $ 790 $ 800 $ 808 $ 814 $ 813 $ 812 $ 807 $ 807 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
736
725
579
728
565
566
731
573
578
582
736
585
601
588
655
735
586
602
585
638
695
739
592
603
583
632
702
719
732
586
603
588
625
692
724
813
732
587
593
581
611
657
688
769
915
$ 6,940
24
30
29
44
56
78
114
169
256
412
61,097
59,871
43,620
43,207
42,121
43,922
46,366
44,273
41,800
56,548
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 $ 377 $ 555 $ 621 $ 684 $ 727 $ 748 $ 762 $ 772 $ 774 $ 776
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
286
486
225
560
339
226
616
414
345
212
652
467
416
332
225
673
504
468
383
353
235
687
522
507
445
410
372
237
694
541
525
486
465
447
402
254
697
549
535
505
500
496
451
413
326
$ 5,248
177
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2012 $ 369 $ 333 $ 334 $ 335 $ 337 $ 335 $ 334 $ 333 $ 332 $
2013
2014
2015
2016
2017
2018
2019
2020
Total
268
252
293
254
281
299
252
282
301
406
249
280
302
420
577
248
279
301
399
516
450
247
280
305
406
455
437
476
247
280
304
408
438
424
437
495
$ 3,365
—
—
—
1
1
6
26
21
162
26,860
21,610
21,025
21,020
23,758
24,332
21,630
20,791
18,628
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net
of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2012 $ 182 $ 296 $ 317 $ 326 $ 331 $ 331 $ 331 $ 330 $ 330
2013
2014
2015
2016
2017
2018
2019
2020
Total
161
223
170
238
250
179
243
270
257
215
242
279
285
342
229
244
279
296
378
379
188
245
279
302
396
412
344
214
245
280
303
401
428
379
349
221
$ 2,936
178
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2011 $ 272 $ 310 $ 356 $ 356 $ 366 $ 365 $ 363 $ 362 $ 363 $ 363 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
311
377
311
391
318
309
402
334
317
308
395
341
331
358
385
389
340
337
372
393
372
387
339
341
356
390
383
349
388
335
334
356
391
379
396
417
388
334
333
359
392
383
405
431
416
$ 3,804
6
6
8
8
12
25
37
86
194
321
39,302
36,052
32,239
29,609
28,541
29,145
26,279
24,402
24,604
14,930
Cumulative Paid Losses & Allocated Loss Adjustment Expense, Net of
Reinsurance
For the years ended December 31
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 $
63 $ 133 $ 211 $ 274 $ 316 $ 339 $ 348 $ 353 $ 354 $ 355
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
65
143
62
234
130
59
307
202
131
62
346
259
197
142
65
359
295
252
207
147
60
372
311
299
267
232
134
62
376
321
309
314
303
211
153
63
378
323
318
335
339
285
239
153
50
$ 2,775
179
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2018
2019
2020
IBNR
Reserves
Claims
Reported
2018 $
62 $
62 $
61 $
2019
2020
Total
63
64
51
$
176
1
1
2
20,561
19,828
13,796
Cumulative Paid Losses &
Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Accident
Year
2018
2019
2020
2018 $
54 $
60 $
2019
2020
Total
56
60
62
45
$
167
180
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2012 $ 242 $ 238 $ 238 $ 218 $ 221 $ 221 $ 219 $ 225 $ 217 $
2013
2014
2015
2016
2017
2018
2019
2020
Total
207
195
187
187
183
164
174
181
174
183
174
178
179
176
205
173
179
190
203
203
248
171
182
214
197
232
281
298
171
183
207
196
226
277
317
370
$ 2,164
11
22
26
40
53
63
101
196
325
7,036
5,972
6,717
7,215
8,345
9,362
9,913
9,297
6,236
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net
of Reinsurance
For the years ended December 31,
(Unaudited)
Claims
Made
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2012 $
17 $
67 $ 100 $ 139 $ 155 $ 168 $ 172 $ 175 $ 175
2013
2014
2015
2016
2017
2018
2019
2020
Total
10
44
8
67
38
9
88
74
40
8
116
108
85
51
11
131
131
107
88
48
15
137
135
125
112
88
73
21
143
146
141
125
123
130
78
19
$ 1,080
181
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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)
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2011 $
74 $
78 $
78 $
76 $
71 $
71 $
71 $
71 $
72 $
71 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
71
70
64
61
58
71
55
55
67
67
49
48
66
67
61
49
49
67
63
61
63
45
39
59
60
61
90
68
48
35
59
54
56
101
68
72
48
34
60
48
52
94
72
73
83
$ 635
9
13
14
13
17
29
34
37
60
77
2,135
1,728
1,463
1,386
1,394
1,335
1,682
1,573
1,514
1,505
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 $
12 $
40 $
52 $
57 $
58 $
60 $
60 $
60 $
61 $
62
35
20
46
32
22
53
23
13
4
$ 310
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
12
25
3
26
9
18
24
17
31
9
26
19
40
20
2
26
19
43
24
12
5
34
19
43
31
15
46
6
35
20
45
34
20
55
16
3
182
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assumed Reinsurance
Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2012 $ 107 $
99 $
93 $
88 $ 115 $ 120 $ 119 $ 120 $ 120 $
2013
2014
2015
2016
2017
2018
2019
2020
Total
115
119
119
103
142
102
105
122
92
89
102
118
94
91
129
102
115
94
98
153
129
103
116
95
100
162
128
181
104
116
96
102
157
130
190
183
$ 1,198
—
—
—
—
(1)
—
(14)
38
110
1,441
1,647
1,760
1,497
1,626
1,966
1,960
2,025
833
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net
of Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2012
2013
2014
2015
2016
2017
2018
2019
2020
2012 $
38 $
77 $
83 $
85 $ 112 $ 118 $ 118 $ 119 $ 119
2013
2014
2015
2016
2017
2018
2019
2020
Total
53
83
66
91
119
42
98
106
65
36
100
109
77
66
44
101
112
83
84
116
25
103
113
91
90
135
112
62
103
114
94
95
145
134
132
50
$ 986
183
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2011 $ 1,181 $ 1,170 $ 1,180 $ 1,173 $ 1,166 $ 1,154 $ 1,154 $ 1,153 $ 1,153 $ 1,153 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
1,141
1,149
1,146
1,142
1,133
1,130
1,130
1,130
1,129
1,131
1,145
1,144
1,153
1,152
1,153
1,157
1,156
1,146
1,153
1,198
1,200
1,199
1,202
1,201
1,195
1,340
1,338
1,330
1,331
1,328
1,407
1,402
1,393
1,397
1,395
1,277
1,275
1,228
1,214
1,108
1,104
1,072
1,018
1,010
805
$ 11,463
4
5
7
8
15
28
50
105
220
400
221,891
210,757
205,480
209,013
216,871
215,797
187,408
155,821
138,430
90,933
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 $ 447 $ 826 $ 1,006 $ 1,088 $ 1,126 $ 1,140 $ 1,145 $ 1,146 $ 1,146 $ 1,148
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
441
818
442
986
1,067
1,104
1,114
1,120
1,122
1,123
816
1,002
1,091
1,121
1,135
1,142
1,144
430
843
1,032
1,125
1,165
1,182
1,186
475
935
1,142
1,243
1,292
1,304
505
968
1,188
1,308
1,345
441
836
1,033
1,123
359
710
323
888
654
238
$ 10,153
184
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2018
2019
2020
IBNR
Reserves
Claims
Reported
2018 $
509 $
498 $
488 $
2019
2020
Total
445
442
349
$ 1,279
1
—
305,389
276,688
(6)
199,623
Cumulative Paid Losses &
Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Accident
Year
2018
2019
2020
2018 $
474 $
491 $
2019
2020
Total
427
488
441
333
$ 1,262
185
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
IBNR
Reserves
Claims
Reported
2011 $ 955 $ 920 $ 919 $ 916 $ 914 $ 911 $ 908 $ 907 $ 907 $ 907 $
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
774
741
673
741
638
710
741
637
707
690
739
634
702
703
669
738
632
700
690
673
866
738
630
698
684
663
889
903
738
629
698
684
658
884
910
501
737
630
698
684
658
783
673
475
525
$ 6,770
—
—
1
—
1
2
6
179,405
142,855
113,546
121,914
119,981
119,742
124,581
(11)
102,603
27
89
83,915
82,246
Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of
Reinsurance
For the years ended December 31,
(Unaudited)
Accident
Year
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2011 $ 709 $ 871 $ 891 $ 899 $ 903 $ 905 $ 908 $ 907 $ 908 $ 907
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
547
696
467
719
590
526
727
611
663
487
731
622
684
645
481
734
626
691
665
621
538
735
627
695
674
640
747
484
736
628
697
680
649
795
712
318
736
628
697
681
653
757
616
425
335
$ 6,435
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 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
186
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ultimate losses and loss adjustment expenses. 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 actuarial indications.
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. The Berquist-Sherman technique is also used
for automobile liability, marine and assumed reinsurance. 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. For most of
the lines acquired through the Navigators Group book of
business, loss and ALAE are reviewed on a combined basis.
Reserves for 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. The
Company also considers the magnitude of the difference between
the actuarial indication and the recorded reserves.
Cumulative number of reported claims
For most property and casualty lines, 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. For some property and casualty lines, such as marine and
assumed reinsurance, a claim count represents each reported
claim regardless of the number of features. For assumed
bordereau business and business written on binders, one claim
count is posted for each bordereau received, which could account
for multiple claims.
187
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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)
Reserve Line
1st
Year
2nd
Year
3rd
Year
4th
Year
5th
Year
6th
Year
7th
Year
8th
Year
9th
Year
Workers' compensation
15.2%
19.1%
12.4%
8.3%
5.7%
4.2%
General liability
Marine
Package business
Commercial property
2.9%
8.2%
14.6%
18.4%
16.2%
10.9%
26.1%
32.4%
18.4%
37.5%
21.7%
10.0%
53.6%
30.9%
7.6%
8.4%
8.6%
3.2%
7.0%
6.0%
0.9%
Commercial automobile liability
16.2%
20.8%
20.9%
17.7%
11.4%
Commercial automobile physical damage
88.2%
10.1%
(0.5%)
Professional liability
5.4%
19.0%
18.2%
14.5%
10.4%
Bond
Assumed Reinsurance
Personal automobile liability
12.7%
24.3%
11.7%
36.3%
38.7%
8.8%
35.5%
33.2%
15.8%
4.9%
4.9%
7.6%
2.4%
8.0%
3.1%
Personal automobile physical damage
96.5%
3.2%
(0.7%)
10th
Year
1.1%
1.5%
1.7%
2.8%
(0.5%)
2.3%
4.5%
3.9%
1.2%
0.3%
0.3%
(0.1%)
(0.1%)
1.1%
0.5%
0.2%
2.0%
1.2%
0.3%
0.1%
—%
0.1%
2.1%
(0.1%)
0.1%
0.1%
2.6%
6.6%
2.2%
2.1%
0.2%
2.7%
3.9%
5.3%
1.0%
0.5%
2.8%
2.9%
0.3%
4.9%
6.3%
0.1%
2.5%
1.1%
Homeowners
71.8%
22.7%
1.2%
0.4%
0.6%
0.3%
0.1%
0.1%
—%
—%
Group Life, Disability and Accident Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$
8,256 $
8,445 $
8,512
For the years ended December 31,
2020
2019
2018
Reinsurance recoverables [1]
Beginning liabilities for unpaid losses and loss adjustment expenses, net
Aetna U.S. group life and disability business acquisition [2]
Provision for unpaid losses and loss adjustment expenses
Current incurral year
Prior year's discount accretion
Prior incurral year development [3]
Total provision for unpaid losses and loss adjustment expenses [4]
Payments
Current incurral year
Prior incurral years
Total payments
Ending liabilities for unpaid losses and loss adjustment expenses, net
Reinsurance recoverables
247
8,009
—
4,511
209
(445)
4,275
(2,288)
(2,000)
(4,288)
7,996
237
239
8,206
—
4,385
219
(410)
4,194
(2,277)
(2,114)
(4,391)
8,009
247
209
8,303
42
4,470
227
(324)
4,373
(2,377)
(2,135)
(4,512)
8,206
239
Ending liabilities for unpaid losses and loss adjustment expenses, gross
[1] Includes a cumulative effect adjustment of $(1) representing an adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. See
8,233 $
8,256 $
$
8,445
Note 1 - Basis of Presentation and Significant Accounting Policies.
[2]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.
[3]Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
[4]Includes unallocated loss adjustment expenses of $178, $178 and $194 for the years ended December 31, 2020, 2019 and 2018, respectively, that are recorded in insurance
operating costs and other expenses in the Consolidated Statements of Operations.
188
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Life, Disability and Accident Products Reserves, Net of Reinsurance, that are Discounted
Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts
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,
2020
2019
2018
$
$
8,380
$
8,636
$
(1,353)
(1,401)
7,027
$
7,235
$
8,957
(1,505)
7,452
3.4 %
3.4 %
3.4 %
2.1 % -
8.0 % 2.1 % -
8.0 % 2.1 % -
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.
2020 re-estimates of prior incurral year
reserves
Group disability- Prior period reserve estimates
decreased by approximately $365 largely driven by group long-
term disability lower claim incidence and higher recoveries on
prior incurral year claims, and a refund on the New York Paid
Family Leave program.
Group life and accident (including group life
premium waiver)- Prior period reserve estimates
decreased by approximately $65 largely driven by lower-than-
previously expected claim incidence in group life premium waiver.
Supplemental Accident & Health- Prior period
reserve estimates decreased by approximately $15 driven by
lower-than-expected emergence of prior year claims, especially
for voluntary critical Illness and voluntary accident products.
2019 re-estimates of prior incurral year
reserves
Group disability- Prior period reserve estimates
decreased by approximately $340 largely driven by group long-
term disability claim incidence lower than prior assumptions and
strong recoveries on prior incurral year claims, including the
impact of updating long-term disability ("LTD") recovery
probabilities to be based on more recent experience. New York
Paid Family Leave also experienced favorable claim emergence
including an experience refund.
Group life and accident (including group life
premium waiver)- Prior period reserve estimates
decreased by approximately $60 largely driven by lower-than-
previously expected claim incidence in group life premium waiver.
2018 re-estimates of prior incurral year
reserves
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.
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.
189
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
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, 2020
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
$
14,411 $
(8,420) $
1,554 $
182 $
(1,233) $
6,494 $
227 $
6,721
Group life and accident,
excluding premium waiver
Group short-term disability
Group life premium waiver
Group supplemental health
5,888
(5,283)
163
117
688
31
4
4
10
—
(17)
—
(103)
—
755
121
595
31
3
—
2
5
758
121
597
36
Total Group Benefits
$
20,299 $
(13,703) $
2,553 $
200 $
(1,353) $
7,996 $
237 $
8,233
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
Group Long-Term Disability
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.
Undiscounted Incurred 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
2019
2020
IBNR
Reserves
Claims
Reported
2011 $ 1,917 $ 1,761 $ 1,660 $ 1,659 $ 1,669 $ 1,660 $ 1,649 $ 1,638 $ 1,631 $ 1,615 $
—
37,347
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
1,829
1,605
1,660
1,539
1,479
1,636
1,532
1,429
1,473
1,595
1,530
1,429
1,430
1,442
1,651
1,515
1,416
1,431
1,422
1,481
1,597
1,504
1,413
1,431
1,420
1,468
1,413
1,647
1,486
1,399
1,408
1,401
1,437
1,358
1,387
1,650
1,479
1,385
1,395
1,385
1,417
1,316
1,309
1,424
1,686
$ 14,411
—
35,626
—
30,611
—
31,756
—
32,527
1
33,244
2
30,883
6
28,364
38
27,136
885
15,861
190
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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
2019
2020
2011 $
118 $
508 $
743 $
886 $
996 $
1,087 $
1,167 $
1,231 $
1,286 $
1,324
108
483
102
708
443
103
835
664
448
108
2012
2013
2014
2015
2016
2017
2018
2019
2020
Total
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
2018
2019
2020
IBNR
Reserves
Claims
Reported
2018 $ 1,952 $ 1,940 $ 1,950 $
10
52,500
2019
2020
Total
1,902
1,866
2,072
$ 5,888
19
57,109
401
46,597
Cumulative Paid Losses &
Allocated Loss Adjustment
Expenses, Net of Reinsurance
For the years ended
December 31,
(Unaudited)
Incurral
Year
2018
2019
2020
2018 $ 1,532 $ 1,916 $ 1,929
2019
2020
Total
1,471
1,830
1,524
$ 5,283
933
791
675
460
112
1,014
1,080
881
801
687
479
109
954
884
806
705
452
105
1,138
1,016
960
891
819
658
447
101
1,185
1,067
1,025
962
907
757
639
454
100
$
8,420
Group life, disability and accident reserves,
including IBNR
The majority of Group Benefits’ reserves are for 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 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.
191
Note 12 - Reserves For Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
1st
Year
2nd
Year
3rd
Year
4th
Year
5th
Year
6th
Year
7th
Year
8th
Year
9th
Year
10th
Year
(Unaudited)
Group long-term disability
7.4 % 25.2 % 15.6 %
8.5 %
6.4 %
5.4 %
4.6 %
3.9 %
3.3 %
2.3 %
Group life and accident, excluding
premium waiver
77.0 % 19.5 %
0.7 %
13. RESERVE FOR FUTURE POLICY BENEFITS
Changes in Reserves for Future Policy Benefits [1]
Liability balance, as of January 1, 2020
Incurred
Paid
Change in unrealized investment gains and losses
Liability balance, as of December 31, 2020
Reinsurance recoverable asset, as of January 1, 2020
Incurred
Paid
Reinsurance recoverable asset, as of December 31, 2020
Liability balance, as of January 1, 2019
Incurred
Paid
Change in unrealized investment gains and losses
Liability balance, as of December 31, 2019
Reinsurance recoverable asset, as of January 1, 2019
Incurred
Paid
$
$
$
$
$
$
$
Reinsurance recoverable asset, as of December 31, 2019
[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.
192
635
85
(85)
3
638
31
(2)
(1)
28
642
86
(102)
9
635
27
4
—
31
Note 14 - Debt
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Senior Notes
On March 30, 2020, The Hartford repaid at maturity the
$500 principal amount of its 5.5% senior notes.
In the Navigators Group acquisition, the Company assumed $265
par value 5.75% Senior notes due on October 15, 2023 with a fair
value of $284 as of the acquisition date.
On August 19, 2019, The Hartford issued $600 of 2.8% senior
notes (“2.8% Notes”) due August 19, 2029 and $800 of 3.6%
senior notes (“3.6% Notes”) due August 19, 2049 for net proceeds
of approximately $1.38 billion, after deducting underwriting
discounts and expenses. Under both senior note issuances,
interest is payable semi-annually in arrears on August 19 and
February 19, commencing February 19, 2020. The Hartford, at its
option, can redeem the 2.8% Notes and the 3.6% Notes at any
time, in whole or 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 rate
plus a basis point spread, plus any accrued and unpaid interest,
except the make-whole amount is not applicable within the final
three months of maturity for the 2.8% Notes and the final six
months of maturity for the 3.6% Notes. The spread over the
comparable maturity US Treasury rates for determining the
make-whole amount is 20 and 25 basis points for the 2.8% Notes
and 3.6% Notes, respectively.
After receiving proceeds from the issuance of the 2.8% Notes and
3.6% Notes, in third quarter 2019, The Hartford repaid $265 of
5.75% senior notes due 2023 that had been assumed in the
Navigators Group acquisition and $800 of 5.125% senior notes
due 2022 of the Hartford Financial Services Group, Inc., and
recognized a loss on extinguishment of debt of $90.
On January 15, 2019, The Hartford repaid at maturity the $413
principal amount of its 6.0% senior notes.
14. DEBT
The Company’s long-term debt securities are issued by HFSG
Holding Company, 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.
Short-term and Long-term Debt by Issuance
As of December 31,
2020
2019
Revolving Credit Facilities
$
— $
—
Senior Notes and Debentures
5.5% Notes, due 2020
2.8% Notes, due 2029
5.95% Notes, due 2036
6.625% Notes, due 2040
6.1% Notes, due 2041
6.625% Notes, due 2042
4.3% Notes, due 2043
4.4% Notes, due 2048
3.6% Notes, due 2049
Junior Subordinated Debentures
7.875% Notes, due 2042
3 Month LIBOR + 2.125% Notes, due
2067 [1]
8.125% Notes, due 2068
—
600
300
295
409
178
300
500
800
600
500
—
500
600
300
295
409
178
300
500
800
600
500
—
Total Notes and Debentures
4,482
4,982
Unamortized discount and debt issuance
cost [2]
Total Debt
Less: Current maturities
(130)
(134)
4,352
4,848
—
500
Long-Term Debt
[1]In April 2017, the Company entered into an interest rate swap agreement
$ 4,352 $ 4,348
expiring February 15, 2027 to effectively convert the variable interest payments
for this debenture into fixed interest payments of approximately 4.39%.
[2]This amount includes unamortized discount of $75 and $76 as of December 31,
2020 and 2019, 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 $236, $259 and $298 on debt for the years
ended December 31, 2020, 2019 and 2018, respectively.
Shelf Registrations
On May 17, 2019, the Company filed with the Securities and
Exchange Commission an automatic shelf registration statement
(Registration No. 333-231592) 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, guarantees, preferred stock,
193
Note 14 - Debt
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Junior Subordinated
Debentures
Junior Subordinated Debentures by Issuance
as of December 31, 2020
Issue
Face Value
7.875%
Debentures
3 Month LIBOR
+ 2.125%
$
600
$
Interest Rate [1]
7.875 % [2]
Call Date
Interest Rate Subsequent to
Call Date [2]
April 15,
2022
3 Month
LIBOR +
5.596%
500
[3]
[4]
N/A
February
15,
2022
3 Month
LIBOR +
2.125% [5]
Final Maturity
[1]Interest rate in effect until call date.
[2]Payable quarterly in arrears.
[3]Debentures were issued on the original call date of February 15, 2017. The
April 15,
2042
February 12,
2067
interest rate is variable and resets quarterly.
[4]Although the original call date was February 15, 2017, a 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, unless consent
from covered bondholders is obtained.
[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.
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
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 3 Month LIBOR plus
2.125% debenture, the Company entered into a Replacement
Capital Covenant ("RCC") for the benefit of holders of one or
194
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 July 2017, the U.K. Financial Conduct Authority ("FCA")
announced that, by the end of 2021, it intends to stop persuading
or compelling banks to report information used to set LIBOR,
which could result in LIBOR no longer being published after 2021
or a determination by regulators that LIBOR is no longer
representative of its underlying market. In December 2020,
based on feedback from the banks that report information used
to set LIBOR and following discussions with the FCA, the
administrator of LIBOR, ICE Benchmark Administration, released
a consultation on the potential for it to continue publication of the
most widely-used U.S. dollar LIBOR rates until the end of June
2023. Subject to the results of the consultation, it is possible that
some U.S. dollar LIBOR rates will continue to be available for a
limited period beyond the end of 2021.The Company continues to
monitor and assess the potential impacts of the discontinuation of
LIBOR on its outstanding junior subordinated debentures.
Long-Term Debt
Long-term Debt Maturities (at par value) as of
December 31, 2020
2021 - Current maturities
2022
2023
2024
2025
Thereafter
$
$
$
$
$
$
—
—
—
—
—
4,482
Revolving Credit Facilities
The Company has a senior unsecured five-year revolving credit
facility (“Credit Facility”) that provides up to $750 of unsecured
credit through March 29, 2023. 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, 2020, no borrowings were outstanding, no
letters of credit were issued under the Credit Facility and the
Company was in compliance with all financial covenants.
Note 14 - Debt
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 permits
Hartford Fire and HLA to pledge up to $1.2 billion and $0.6 billion
in qualifying assets, respectively, without prior approval, to
secure FHLBB advances in 2021. The pledge limit is determined
quarterly based on statutory admitted assets and capital and
surplus of Hartford Fire and HLA, respectively.
As of December 31, 2020, there were no advances outstanding
under the FHLBB facility.
Lloyd's Letter of Credit
Facilities
As a result of the acquisition of Navigators Group, The Hartford
had two letter of credit facility agreements: the Club Facility and
the Bilateral Facility, which were used to provide a portion of the
capital requirements at Lloyd's. As of September 30, 2020,
uncollateralized letters of credit with an aggregate face amount
of $165 and £60 million, or $78, were outstanding under the Club
Facility and £18 million, or $23, was outstanding under the $25
Bilateral Facility. These agreements terminated on November 5,
2020.
On November 5, 2020, The Hartford entered into a new
committed credit facility agreement with a syndicate of lenders
(the “Club Facility”). The Club Facility has two tranches with one
tranche extending a $104 commitment and the other tranche
extending a £85 million ($116 as of December 31, 2020)
commitment. In addition, on November 5, 2020, The Hartford
entered into a new non-committed $25 credit facility with a
lender (the “Bilateral Facility”). The term of both of these facilities
is two years. The purpose of these facilities is to issue letters of
credit that may be treated as Funds at Lloyd’s to support
underwriting capacity provided by the Navigators Corporate
Underwriters Limited to the Lloyd’s Syndicate 1221 for the 2021
and 2022 underwriting years of account (and prior open years).
As of December 31, 2020, letters of credit with an aggregate face
amount of $104 and £85 million, or $116, were outstanding
under the Club Facility and no letters of credit were outstanding
under the Bilateral Facility.
Among other covenants, the Club Facility and Bilateral Facility
contain financial covenants regarding The Hartford’s
consolidated net worth and financial leverage and that limit the
amount of letters of credit that can support Funds at Lloyd’s,
consistent with Lloyd’s requirements. As of December 31, 2020,
The Hartford was in compliance with all financial covenants of
both facilities.
Commercial Paper
On December 17, 2020, the Board of Directors terminated the
HFSG Holding Company's commercial paper program, under
which the maximum borrowings available were $750.
Collateralized Advances with
Federal Home Loan Bank of
Boston
The Company’s subsidiaries, Hartford Fire Insurance Company
(“Hartford Fire”) and HLA, are 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 presents the liability for advances
195
Note 15 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. 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.
commercial insurance policies issued by the Hartford Writing
Companies for alleged losses resulting from the shutdown or
suspension of their businesses due to the spread of COVID-19.
More than 230 such lawsuits have been filed, of which more than
50 purport to be filed on behalf of broad nationwide or statewide
classes of policyholders. These lawsuits have been filed in state
and federal courts in roughly 31 states. Although the allegations
vary, the plaintiffs generally seek a declaration of insurance
coverage, damages for breach of contract in unspecified amounts,
interest, and attorney’s fees. Many of the lawsuits also allege that
the insurance claims were denied in bad faith or otherwise in
violation of state laws and seek extra-contractual or punitive
damages.
The Company and its subsidiaries deny the allegations and intend
to defend vigorously. The Hartford Writing Companies maintain
that they have no coverage obligations with respect to these suits
for business income allegedly lost by the plaintiffs due to the
COVID-19 pandemic based on the clear terms of the applicable
insurance policies. Although the policy terms vary depending,
among other things, upon the size, nature, and location of the
policyholder’s business, in general, the claims at issue in these
lawsuits were denied because the claimant identified no direct
physical damage or loss to property at the insured premises, and
the governmental orders that led to the complete or partial
shutdown of the business were not due to the existence of any
direct physical loss or damage in the immediate vicinity of the
insured premises and did not prohibit access to the insured
premises, as required by the terms of the insurance policies. In
addition, the vast majority of the policies at issue expressly
exclude from coverage any loss caused directly or indirectly by
the presence, growth, proliferation, spread or activity of a virus,
subject to a narrow set of exceptions not applicable in connection
with this pandemic, and contain a pollution and contamination
exclusion that, among other things, expressly excludes from
coverage any loss caused by material that threatens human
health or welfare.
In addition to the inherent difficulty in predicting litigation
outcomes, the COVID-19 pandemic business income coverage
lawsuits present numerous uncertainties and contingencies that
are not yet known, including how many policyholders will
ultimately file claims, the number of lawsuits that will be filed, the
extent to which any state or nationwide classes will be certified,
and the size and scope of any such classes. The legal theories
advocated by plaintiffs vary significantly by case as do the state
laws that govern the policy interpretation. Many of these lawsuits
remain in the earliest stages of litigation, many complaints are in
the process of being amended, some have been dismissed
voluntarily and may be refiled, while others have been dismissed
through rulings in favor of the Hartford Writing Companies.
Accordingly, little discovery has occurred. Some policyholders
have appealed dismissals in favor of the Hartford Writing
Companies; none of these appeals has been fully briefed at this
time. In addition, business income calculations depend upon a
wide range of factors that are particular to the circumstances of
each individual policyholder and, here, virtually none of the
plaintiffs have submitted proofs of loss or otherwise quantified or
factually supported any allegedly covered loss, and, in any event,
the Company’s experience shows that demands for damages
often bear little relation to a reasonable estimate of potential
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 related to sexual
molestation and sexual abuse claims discussed in Note 12,
Reserve for Unpaid Losses and Loss Adjustment Expense, and in
the following discussion under the caption “COVID-19 Pandemic
Business Income Insurance Coverage Litigation” and under the
caption “Run-off 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. In addition to the
matter described below, these actions include putative class
actions seeking certification of a state or national class. Such
putative class actions have alleged, for example, underpayment of
claims or improper sales or 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.
COVID-19 Pandemic Business Income
Insurance Coverage Litigation
Like many others in the property and casualty insurance industry,
beginning in April 2020, various direct and indirect subsidiaries of
the Company (collectively the "Hartford Writing Companies”),
and in some instances the Company itself, have been served as
defendants in lawsuits seeking insurance coverage under
196
Note 15 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
loss. Accordingly, management cannot now reasonably estimate
the possible loss or range of loss, if any. Nonetheless, given the
large number of claims and potential claims, the indeterminate
amounts sought, and the inherent unpredictability of litigation, it
is possible that adverse outcomes, if any, in the aggregate, could
have a material adverse effect on the Company’s consolidated
operating results.
Run-off Asbestos and Environmental
Claims
The Company continues to receive A&E 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.
The vast majority of the Company's exposure to A&E relates to
Run-off A&E, reported within the P&C Other Operations
segment. In addition, since 1986, the Company has written
asbestos and environmental exposures under general liability
policies and pollution liability under homeowners policies, which
are reported in the Commercial Lines and Personal Lines
segments.
Prior to 1986, the Company wrote several different categories of
insurance contracts that may cover A&E 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.
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 A&E 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
197
the monetary amount being sought by the claimant from the
insured.
The reporting pattern for assumed reinsurance claims, including
those related to A&E 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.
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.
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 A&E
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 A&E
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 A&E 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.
For its Run-off A&E, as of December 31, 2020, the Company
reported $702 of net asbestos reserves and $87 of net
environmental reserves. In addition, the Company has recorded a
$210 deferred gain within other liabilities for losses economically
ceded to NICO but for which the benefit is not recognized in
earnings until later periods. While the Company believes that its
current Run-off 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.
The Company’s A&E ADC reinsurance agreement with NICO
reinsures substantially all A&E reserve development for 2016 and
prior accident years, including Run-off A&E and A&E reserves
included in Commercial Lines and Personal Lines. The A&E ADC
has a coverage limit of $1.5 billion above the Company’s existing
net A&E reserves as of December 31, 2016 of approximately $1.7
billion. As of December 31, 2020, the Company has incurred $860
in cumulative adverse development on A&E reserves that have
been ceded under the A&E ADC treaty with NICO, leaving $640
of coverage available for future adverse net reserve
development, if any. Cumulative adverse development of A&E
claims for accident years 2016 and prior could ultimately exceed
Note 15 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. For more information on the A&E
ADC, refer to Note 12, Reserve for Unpaid Losses and Loss
Adjustment Expenses.
Unfunded Commitments
As of December 31, 2020, the Company has outstanding
commitments totaling $1,119, of which $804 is primarily
committed to fund limited partnerships 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, $79 of the outstanding
commitments relate to various funding obligations primarily
associated with private debt and equity securities. The remaining
outstanding commitments of $236 relate to mortgage loans. Of
the $1,119 in total outstanding commitments, $149 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
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, 2020 and 2019 the liability balance was $83 and
$89, respectively. As of December 31, 2020 and 2019 amounts
related to premium tax offsets of $0 and $2, 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
198
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, 2020 was $86. For this $86, the legal entities have
posted collateral of $90 in the normal course of business. Based
on derivative market values as of December 31, 2020, a
downgrade of one level below the current financial strength
ratings by either Moody’s or S&P would not require additional
assets to be posted as collateral. A downgrade of two levels below
the current financial strength ratings by either Moody’s or S&P
would require an additional $2 of assets to be posted as collateral.
These collateral amounts could change as derivative market
values change, as a result of changes in our hedging activities or to
the extent changes in contractual terms are negotiated. The
nature of the additional collateral that we would post, if required,
would be 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 timely payment of contractual
claims under certain life, accident and health and annuity
contracts issued by its former life and annuity business with most
of the guaranteed contracts issued between 1990 and 1997 (the
"Talcott Guarantees"). Upon the sale of the life and annuity
business in May 2018, the purchaser indemnified the Company
for any liability arising under the guarantees. The Talcott
Guarantees cover contractual obligations only but otherwise
have no limitation as to maximum potential future payments.
Prior to January 1, 2020, the Company had not recorded a
liability because the likelihood of any payment under the Talcott
Guarantees is remote. Upon adoption of new credit loss guidance
on January 1, 2020, the Company estimated a liability for credit
loss ("LCL") of $25. For further information refer to Note 1 - Basis
of Presentation and Significant Accounting Policies.
The LCL is calculated for the estimated amount payable under
guaranteed contracts multiplied by the probability of default and
the amount of loss given a default. The probability of default is
assigned by credit rating of the applicable insurance company
that issued the contract and is based on historical insurance
industry defaults for liabilities with similar durations estimated
Note 15 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
through multiple economic cycles. Credit ratings are current and
forward-looking and consider a variety of economic outcomes.
Because annuities represent the majority of the contracts issued,
the loss given default factors are based on a historical study of
annuity policyholder recoveries from insolvent estate assets. The
Company's exposure is expected to run off over a period that will
include more than one economic cycle.
The Company's evaluation of the required LCL for the Talcott
Guarantees considers the current economic environment as well
16. EQUITY
Capital Purchase Program
("CPP") Warrants
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 expired on June 26, 2019.
The declaration of common stock dividends by the Company in
excess of a threshold triggered 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 (“Warrant Share
Number”). Accordingly, the CPP warrant exercise price was
$8.836 and the Warrant Share Number was 1.1 as of December
31, 2018. The exercise price was 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 were exercised and notice was delivered
to the warrant agent. CPP warrant exercises were 1.9 million and
0.3 million during the years ended December 31, 2019 and 2018,
respectively.
Equity Repurchase Program
The Hartford’s $1.0 billion equity repurchase program authorized
by its Board of Directors in February 2019, expired on December
31, 2020. For the years ended December 31, 2020 and 2019, The
Hartford repurchased $150 (2.7 million shares) and $200
(3.4 million shares), respectively, of common stock under this
program.
In December, 2020, the Company announced a $1.5 billion share
repurchase authorization by the Board of Directors which is
effective from January 1, 2021 through December 31, 2022. The
timing of any future repurchases will be dependent upon several
factors, including the market price of the Company's securities,
the Company's capital position, consideration of the effect of any
repurchases on the Company's financial strength or credit
ratings, and other considerations.
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 (“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
199
as macroeconomic scenarios similar to the approach used to
estimate the ACL for mortgage loans. See Note 6 - Investments. In
response to significant economic stress experienced as a result of
the COVID-19 pandemic, the Company increased the weight of
both a moderate and severe recession scenario in our estimate of
the LCL as of December 31, 2020. The Company has never
experienced a loss on financial guarantees of this nature and we
believe the risk of loss is remote.
and has no maturity date. Dividends are recorded when declared.
Dividends are payable, if declared, quarterly in arrears on the
15th day of February, May, August and November of each year. 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.
Statutory Results
The U.S. 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 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, recognize a deferred gain on
retroactive reinsurance within a special surplus account rather
than as other liabilities, 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
as "statutory capital".
Note 16 - Equity
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
U.S. Statutory Net Income
For the years ended
December 31,
2020
2019
2018
Group Benefits Insurance
Subsidiary
Property and Casualty Insurance
Subsidiaries
Life and annuity business sold in
May, 2018
Total
$
310 $
513 $
390
1,598
1,391
1,114
—
—
196
$ 1,908 $ 1,904 $ 1,700
U.S. Statutory Capital
As of December 31,
2020
2019
Group Benefits Insurance
Subsidiary
Property and Casualty Insurance
Subsidiaries
Total
$
2,601 $
2,644
10,795
10,208
$
13,396 $
12,852
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 expect to
maintain capital levels in excess of the minimum levels required
by the applicable regulatory authorities.
Dividend Restrictions
Dividends to HFSG Holding Company from its insurance
subsidiaries are restricted by insurance regulation. Upon the
acquisition of Navigators Group, the Company’s principal
insurance subsidiaries are domiciled in the United States, the
United Kingdom and Belgium.
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 statutory policyholder
surplus as of December 31 of the preceding year or (ii) net income
200
(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.
Property casualty insurers domiciled in New York, including
Navigators Insurance Company ("NIC") and Navigators Specialty
Insurance Company ("NSIC"), generally may not, without notice
to and approval by the state insurance commissioner, pay
dividends out of earned surplus in any twelve‑month period that
exceeds the lesser of (i) 10% of the insurer’s statutory
policyholders’ surplus as of the most recent financial statement
on file, or (ii) 100% of its adjusted net investment income, as
defined, for the same twelve month period. As part of the New
York state insurance commissioner's approval of the Navigators
Group acquisition, and as is common practice, any dividend from
NIC and NSIC before May 2021 will require prior approval from
the state insurance commissioner.
Corporate members of Lloyd's Syndicates may pay dividends to
its parent to the extent of available profits that have been
distributed from the syndicate in excess of the FAL capital
requirement. The FAL is determined based on the syndicate’s
solvency capital requirement of the syndicate under the Solvency
II capital adequacy model, the current regulatory framework
governing UK domiciled insurers, plus a Lloyd’s specific economic
capital assessment.
Insurers domiciled in the United Kingdom may pay dividends to
its parent out of its statutory profits subject to restrictions
imposed under U.K. Company law and Solvency II. Belgium
domiciled insurers may only pay dividends if, at the end of its
previous fiscal year, the total amount of its assets, as reduced by
its provisions and debts, are in excess of certain minimum capital
thresholds calculated under Belgian law.
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 , liquidity requirements of the individual operating
company and are also dependent on the extent to which
COVID-19 impacts our business, results of operations, financial
condition, and liquidity.
In 2020, the Company received $350 of dividends from HLA and
$127 from Hartford Funds. In addition, HFSG Holding Company
received $900 of net dividends from P&C subsidiaries in 2020
which excludes $50 of P&C dividends that were subsequently
contributed to a run-off P&C subsidiary and $78 of P&C
dividends related to interest payments on an intercompany note
owed by Hartford Holdings, Inc. ("HHI") to Hartford Fire
Insurance Company.
The Company’s property and casualty insurance subsidiaries have
dividend capacity of $1.7 billion for 2021, with $850 to $900 of
net dividends expected in 2021.
Note 16 - Equity
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
HLA has dividend capacity of $295 in 2021 with $250 to $295 of
dividends expected in 2021.
There are no current restrictions on HFSG Holding Company's
ability to pay dividends to its stockholders.
17. INCOME TAXES
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 from continuing operations
before income taxes included income from domestic operations
of $2,222, $2,644 and $1,753 for the years ended December 31,
2020, 2019 and 2018, and income (losses) from foreign
operations of $(102), $(84) and $0 for the years ended December
31, 2020, 2019 and 2018.
Income Tax Expense
Income tax expense (benefit)
Current - U.S. federal
Foreign
Total current
Deferred - U.S. federal
Foreign
Total deferred
For the years ended
December 31,
2020
2019
2018
$ 410 $
8 $
(18)
—
410
—
8
—
(18)
(20) 476
286
(7)
(9)
—
(27) 467
286
Total income tax expense
$ 383 $ 475 $ 268
Restricted Net Assets
The Company's insurance subsidiaries had net assets of $17.5
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, 2020.
for the years ended December 31, 2020, 2019 and 2018,
respectively, and are included in other expenses. The Hartford
has not recorded state deferred taxes, including net deferred tax
assets from state operating loss carryforwards because the
Company does not expect to earn state taxable income to utilize
such state tax benefits.
Deferred Tax Assets (Liabilities)
As of December 31,
2020
2019
Deferred tax assets
Loss reserves and tax discount
$
312 $
214
Unearned premium reserve and
other underwriting related
reserves
Investment-related items
Employee benefits
Net operating loss carryover
Other
384
125
282
11
34
385
130
287
84
27
Total deferred tax assets
1,148
1,127
Valuation allowance
Deferred tax assets, net of
valuation allowance
(4)
(4)
1,144
1,123
Income Tax Rate Reconciliation
Deferred tax liabilities
Deferred acquisition costs
(120)
(143)
Tax provision at U.S. Federal
statutory rate
Tax-exempt interest
Increase in deferred tax
valuation allowance
Sale of business
Carryback benefit
Tax law change
Other
For the years ended
December 31,
2020
2019
2018
$
445 $
538 $
368
(46)
(56)
(66)
9
(8)
(5)
(6)
(6)
2
—
—
—
(9)
—
—
—
(39)
5
Provision for income taxes
$
383 $
475 $
268
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 Company predominantly pays non-income state taxes as a
percentage of premiums written which are accounted for as
policy acquisition costs. State income taxes were $3, $5 and $4
Net unrealized gains on
investments
Other depreciable and
amortizable assets
Total deferred tax liabilities
(758)
(458)
(220)
(1,098)
(223)
(824)
299
Net deferred tax asset
$
46 $
For the year ended December 31, 2020, the Company has utilized
all US net operating loss carryforwards as a reduction of 2020
current tax liability. The Company has foreign net operating
losses of $11 for which a valuation allowance of $4 has been
established. While the foreign net operating losses ("NOLs") do
not expire, this assessment reflects uncertainty in the Company's
ability to generate sufficient taxable income in the near term in
those specific jurisdictions.
Management has assessed the need for a valuation allowance
against its deferred tax assets based on tax character and
jurisdiction. In making the assessment, 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 fixed income securities with
201
Note 17 - Income Taxes
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
Uncertain Tax Positions
Rollforward of Unrecognized Tax Benefits
For the years ended
December 31,
2020
2019
2018
Balance, beginning of period
Gross increases - tax positions in
prior period
Gross decreases - tax positions in
prior period
Gross increases - tax positions in
current period
$
14 $
14 $
—
—
1
—
—
—
Balance, end of period
$
15 $
14 $
9
5
—
—
14
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 in other assets on the balance sheet.
Other Tax Matters
On March 27, 2020, as part of the business stimulus package in
response to the COVID-19 pandemic, the U.S. government
enacted the Coronavirus Aid, Relief, and Economic Security
("CARES") Act. The CARES Act established new tax provisions
including, but not limited to: (1) five-year carryback of net
operating losses generated in 2018, 2019 and 2020; (2)
accelerated refund of alternative minimum tax ("AMT") credit
carryforwards; and (3) retroactive changes to allow accelerated
depreciation for certain depreciable property.
The legislation results in a benefit of $6 related to the ability to
carryback non-insurance losses to recover taxes paid in prior
years as described below. The changes to AMT recovery periods
do not impact the Company due to the fact that the Company has
received a refund or reduction of regular tax payable for all the
remaining AMT credits in 2020.
For the year ended December 31, 2020 the Company recorded a
tax benefit of $11 related to the expected carryback of losses
from the Navigators Group 2019 pre-acquisition tax returns to
recover taxes paid in prior years at the previous statutory tax rate
of 35%, of which $6 was by virtue of the non-insurance carryback
provision of the CARES Act.
Included in 2018 is a benefit of $39, primarily due to the
elimination of the sequestration fee on alternative minimum tax
credits included in the Tax Cuts and Jobs Act ("TCJA").
For the year ended December 31, 2020 the Company recorded a
tax benefit of $8 related to the excess tax over GAAP basis on the
sale of the continental Europe operations. Refer to Note 22 -
Business Dispositions and Discontinued Operations.
The federal audits for the Company have been completed
through 2013, and the Company is not currently under federal
examination for any open years. The statute of limitations is
closed through the 2016 tax year with the exception of NOL
carryforwards utilized in open tax years. Management believes
that adequate provision has been made in the Company's
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 net interest income of $1, $1 and $0 for
the years ended December 31, 2020, 2019 and 2018. The
Company has no interest payable as of December 31, 2020, 2019
and 2018. 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.
18. CHANGES IN AND RECLASSIFICATIONS FROM
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in AOCI, Net of Tax for the Year Ended December 31, 2020
Changes in
Net
Unrealized
Gain on Fixed
Maturities
Unrealized
loss on
Fixed
Maturities
with ACL
Net Gain
(Loss) on
Cash Flow
Hedging
Instruments
Foreign
Currency
Translation
Adjustments
Pension and
Other
Postretirement
Plan
Adjustments
AOCI,
net of tax
Beginning balance
$
1,684 $
(3) $
9 $
34 $
(1,672) $
52
OCI before reclassifications
Amounts reclassified from AOCI
OCI, net of tax
Ending balance
1,285
(135)
1,150
1
—
1
24
(21)
3
9
—
9
(92)
1,227
47
(109)
(45)
1,118
$
2,834 $
(2) $
12 $
43 $
(1,717) $
1,170
202
Note 18 - Accumulated Other Comprehensive Income (Loss), Net of Tax
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in AOCI, Net of Tax for the Year Ended December 31, 2019
Changes in
Net
Unrealized
Gain on Fixed
Maturities
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
$
24 $
(4) $
(5) $
30 $
(1,624) $
(1,579)
OCI before reclassifications [2]
Amounts reclassified from AOCI
OCI, net of tax
Ending balance
1,797
(137)
1,660
1
—
1
22
(8)
14
4
—
4
(82)
1,742
34
(111)
(48)
1,631
$
1,684 $
(3) $
9 $
34 $
(1,672) $
52
Changes in AOCI, Net of Tax for the Year ended December 31, 2018
Changes in
Net
Unrealized
Gain on Fixed
Maturities
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
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
1,931 $
273
2,204 $
(2,245)
65
(2,180)
(3) $
—
(3) $
—
(1)
(1)
18 $
2
20 $
8
(33)
(25)
34 $
(1,317) $
663
4
(284)
(5)
38 $
(1,601) $
658
(8)
—
(8)
(61)
(2,306)
38
69
(23)
(2,237)
Ending balance
[1]Includes reclassification to retained earnings of $88 of stranded tax effects and $93 of net unrealized gains, net of tax, related to equity securities. Refer to Note 1 - Basis of
(1,624) $
24 $
30 $
(4) $
(5) $
$
(1,579)
Presentation and Significant Accounting Policies.
[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.
203
Note 18 - Accumulated Other Comprehensive Income (Loss), Net of Tax
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,
2020
For the year
ended
December 31,
2019
For the year
ended
December 31,
2018
Affected Line Item in the
Consolidated Statement of
Operations
Net Unrealized Gain on Fixed Maturities
Fixed maturities, AFS
$
171 $
174 $
(80) Net realized capital gains (losses)
Unrealized Loss on Fixed Maturities with ACL [1]
Fixed maturities, AFS
Net Gains on Cash Flow Hedging Instruments
Interest rate swaps
Interest rate swaps
Interest rate swaps
Foreign currency swaps
Foreign currency swaps
Pension and Other Postretirement Plan
Adjustments
Amortization of prior service credit
Amortization of actuarial loss
$
$
$
$
$
$
171
36
—
174
37
—
(80) Total before tax
(17) Income tax expense
Income from discontinued operations,
net of tax
(2)
135 $
137 $
(65) Net income
— $
— $
— Net realized capital gains (losses)
—
—
—
—
—
—
— Total before tax
—
Income tax expense
Income from discontinued operations,
net of tax
1
— $
— $
1 Net income
— $
29
(7)
(1)
5
26
5
—
2 $
6 Net realized capital gains (losses)
4
1
—
3
10
2
—
30 Net investment income
— Interest expense
— Net realized capital gains (losses)
— Net investment income
36 Total before tax
8
Income tax expense
Income from discontinued operations,
net of tax
5
21 $
8 $
33 Net income
7 $
7 $
(67)
(60)
(13)
(47)
(50)
(43)
(9)
(34)
Insurance operating costs and other
expenses
7
Insurance operating costs and other
expenses
(55)
(48) Total before tax
(10) Income tax expense
(38) Net income
Total amounts reclassified from AOCI
$
109 $
111 $
(69) Net income
[1] Prior to January 1, 2020, includes OTTI in OCI on fixed maturities, AFS. See Note 1 - Basis of Presentation and Significant Accounting Policies.
19. 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
compensation and a dollar-for-dollar matching contribution of up
to 6.0% of eligible compensation contributed by the employee
204
Note 19 - Employee Benefit Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 $153, $156 and $134 for the years
ended December 31, 2020, 2019 and 2018, 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, 2020, 2019 and 2018 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 (“Pension 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 Pension 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
are a function of 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 2.65% and 2.36%
were the appropriate discount rates as of December 31, 2020 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, for the
pension plan, the Company anticipates an allocation of
approximately 60% in fixed income securities and 40% in non
fixed income securities (global equities, hedge funds and private
market alternatives) to derive an expected long-term rate of
return. For the other post-retirement plans, the Company
anticipates an allocation of approximately 70% in fixed income
securities and 30% in non fixed income securities. Based upon
these analyses, management determined the long-term rate of
return assumption to be 6.00% and 5.60% for the Company's
pension and other postretirement obligations, respectively, for
the year ended December 31, 2020 and 6.45% and 6.00% for the
Company's pension and other postretirement obligations,
respectively, for the year ended December 31, 2019. To
determine the Company's 2021 expense, the Company has
assumed an expected long-term rate of return on plan assets of
5.40% and 4.90% 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,
2020
2019
2020
2019
Discount rate
2.65 % 3.33 % 2.36 % 3.15 %
Weighted Average Assumptions Used in
Calculating the Net Periodic Benefit Cost for
Pension Plans
For the years ended
December 31,
2020
2019
2018
3.33 % 4.35 % 3.73 %
6.00 % 6.45 % 6.60 %
Discount rate
Expected long-term rate of
return on plan assets
205
Note 19 - Employee Benefit Plans
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,
2020
2019
2018
3.15 % 4.23 % 3.55 %
5.60 % 6.00 % 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,
2020
2019
2018
7.00 % 7.00 % 6.50 %
N/A
N/A
N/A
4.50 % 4.50 % 4.50 %
2033
2033
2028
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,
2020
2019
2020
2019
Benefit obligation —
beginning of year
Service cost
Interest cost
Plan participants’
contributions
Actuarial loss (gain)
Amendments
Changes in
assumptions
Benefits and expenses
paid
Benefit obligation —
end of year
$ 4,498 $ 4,000 $
223 $
220
4
127
—
12
—
4
159
—
48
—
—
6
11
(2)
—
—
8
13
6
(2)
437
488
16
19
(203)
(201)
(34)
(41)
$ 4,875 $ 4,498 $
220 $
223
Changes in assumptions in 2020 primarily included a $434
increase in the benefit obligation for pension benefits as a result
of a decrease in the discount rate from 3.33% as of the
December 31, 2019 valuation to 2.65% as of the December 31,
2020 valuation. Changes in assumptions in 2019 included a $508
increase in the benefit obligation for pension benefits as a result
of a decrease in the discount rate from 4.35% as of the December
31, 2018 valuation to 3.33% as of the December 31, 2019
valuation.
The cash balance plan pension benefit obligation was $443 and
$420 as of December 31, 2020 and 2019, respectively. The
interest crediting rate was 3.30% in 2020, 2019, and 2018.
206
Note 19 - Employee Benefit Plans
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,
2020
2019
2020
2019
Fair value of plan
assets — beginning of
year
Actual return on plan
assets
Employer
contributions [1]
Benefits paid [2]
Expenses paid
Foreign exchange
adjustment
Fair value of plan
assets — end of year
$ 3,914 $ 3,344 $
75 $
85
568
701
70
70
6
5
12
—
(177)
(176)
(23)
(22)
(12)
(26)
—
1
—
—
—
—
$ 4,363 $ 3,914 $
63 $
75
Funded status — end
of year
[1]Employer contributions in 2020 and 2019 to the U.S. qualified defined benefit
(512) $
(157) $
(584) $
$
(148)
pension plan were discretionary, made in cash, and did not include contributions
of the Company’s common stock.
[2]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
$186 and $161 as of December 31, 2020 and 2019, 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 $4,549 and
$4,075 as of December 31, 2020 and 2019, respectively, and the
funded status of pension benefits would have been $(326) and
$(423) as of December 31, 2020 and 2019, respectively.
Defined Benefit Pension Plans with an
Accumulated Benefit Obligation in Excess of
Plan Assets
As of December 31,
2020
2019
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
$
$
$
4,875 $
4,875 $
4,363 $
4,498
4,498
3,914
Amounts Recognized in the Consolidated
Balance Sheets
Pension Benefits
Other
Postretirement
Benefits
As of December 31,
2020
2019
2020
2019
Other liabilities
$
512 $
584 $
157 $
148
Service cost
Interest cost
Expected return on plan assets
Amortization of prior service credit
Amortization of actuarial loss
Net periodic cost (benefit)
Net Periodic Cost (Benefit)
Pension Benefits
Other Postretirement Benefits
For the years ended December 31,
2020
2019
2018
2020
2019
2018
$
4 $
4 $
4 $
— $
— $
127
(215)
—
60
159
(226)
—
44
142
(227)
—
49
6
(4)
(7)
7
8
(4)
(7)
6
$
(24) $
(19) $
(32) $
2 $
3 $
Amounts Recognized in Other Comprehensive Income (Loss)
Amortization of actuarial loss
Amortization of prior service credit
Net loss arising during the year
Prior service cost (credit)
Total
Pension Benefits
Other Postretirement Benefits
For the years ended December 31,
2020
2019
2018
2020
2019
2018
$
60 $
44 $
49 $
7 $
6 $
—
(106)
—
—
(88)
—
—
(91)
—
(7)
(11)
—
(7)
(18)
2
$
(46) $
(44) $
(42) $
(11) $
(17) $
207
—
7
(7)
(7)
6
(1)
6
(6)
3
—
3
Note 19 - Employee Benefit Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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,
2020
2019
2018
2020
2019
2018
$
(2,098) $
(2,052) $
(2,008) $
(136) $
(132) $
(120)
—
—
—
60
67
$
(2,098) $
(2,052) $
(2,008) $
(76) $
(65) $
72
(48)
Pension Plan Assets
Investment Strategy and Target Allocation
The overall investment strategy of the Pension 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 Pension Plan rests with The Hartford’s Pension 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 Pension Plan.
Target Asset Allocation
Pension Plans
Other
Postretirement Plans
Minimum Maximum Minimum Maximum
Equity securities
5 %
35 %
15 %
45 %
Fixed income
securities
Alternative
assets
50 %
70 %
55 %
85 %
— %
45 %
— %
— %
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 Pension 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 needs of the Pension Plan, the investment preferences
and risk tolerance of the Pension 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 Pension Plan assets to better match the
duration of the benefit obligation.
208
Note 19 - Employee Benefit Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension Plan Assets at Fair Value
Asset Category
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
Short-term investments:
$
75 $
25 $
— $
100 $
34 $
54 $
— $
88
As of December 31, 2020
As of December 31, 2019
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
—
—
—
—
—
—
—
513
271
2,303
39
2,342
41
47
16
30
137
—
—
—
1
—
9
—
—
161
—
—
42
47
25
30
137
161
513
271
—
—
—
—
—
—
—
429
261
2,058
61
101
17
32
96
—
1
—
27
2,085
—
—
1
—
1
131
—
—
61
101
18
32
97
131
430
261
$
859 $
2,599 $
210 $
3,668 $
724 $
2,420 $
160 $
3,304
451
224
358
212
3,874
Total pension plan assets at
fair value
[1]Includes ABS, municipal bonds, and CDOs.
[2]Excludes approximately $20 and $40 as of December 31, 2020 and 2019, respectively, of investment receivables net of investment payables that are excluded from this
4,343 $
2,599 $
2,420 $
724 $
210 $
859 $
160 $
$
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.
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 Pension 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 Pension 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.
209
Note 19 - Employee Benefit Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
Assets
Fair Value as of January 1, 2020
Realized gains (losses), net
Changes in unrealized gains, net
Purchases
Settlements
Sales
Transfers into Level 3
Transfers out of Level 3
Fair Value as of December 31, 2020
Fair Value as of January 1, 2019
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
$
27 $
— $
1 $
131 $
1 $
160
$
$
—
1
14
—
(3)
—
—
39 $
14 $
3
2
7
—
(3)
4
—
—
—
1
—
—
—
—
1 $
1 $
—
—
—
—
(1)
—
—
—
—
9
—
—
—
(1)
9 $
2 $
—
—
—
—
(1)
—
—
—
4
32
—
(6)
—
—
161 $
133 $
—
4
—
—
(6)
—
—
(1)
1
—
—
—
—
(1)
— $
1 $
—
—
—
—
—
—
—
(1)
6
56
—
(9)
—
(2)
210
151
3
6
7
—
(11)
4
—
Fair Value as of December 31, 2019
[1]"Other" includes U.S. Treasuries, Other fixed income and CMBS investments.
During the year ended December 31, 2020, 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.
During the year ended December 31, 2019, transfers into and
(out) of Level 3 are primarily attributable to the appearance of or
$
27 $
— $
1 $
131 $
1 $
160
lack thereof 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
Pension Plan’s assets as of December 31, 2020 and 2019.
Other Postretirement Plan Assets at Fair Value
As of December 31, 2020
As of December 31, 2019
Asset Category
Short-term investments
Fixed Income Securities:
Corporate
RMBS
U.S. Treasuries
CMBS
Other fixed income
Equity Securities:
Large-cap
Level 1
Level 2
Level 3
Total
Level 1
Level 2
Level 3
Total
$
2 $
— $
— $
2 $
3 $
— $
— $
—
—
—
—
—
17
16
9
16
1
2
—
—
—
—
—
—
—
16
9
16
1
2
17
—
—
—
—
—
19
18
12
20
1
2
—
—
—
—
—
—
—
Total other postretirement
plan assets at fair value
$
19 $
44 $
— $
63 $
22 $
53 $
— $
3
18
12
20
1
2
19
75
There was no Company common stock included in the other
postretirement benefit plan assets as of December 31, 2020 and
2019.
Concentration of Risk
In order to minimize risk, the Pension Plan maintains a listing of
permissible and prohibited investments. In addition, the Pension
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.
210
Note 19 - Employee Benefit Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Pension Plan does not have any material
exposure to any concentration risk of a single issuer.
Expected Employer Contributions
The Company does not have a 2021 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 2021. The Company will monitor the funded
status of the U.S. qualified defined benefit pension plan during
2021 to make this determination.
Benefit Payments
Amounts of Benefits Expected to be Paid
over the next Ten Years from Pension and
other Postretirement Plans as of
December 31, 2020
Pension
Benefits
Other
Postretirement
Benefits
2021
2022
2023
2024
2025
$
223 $
229
235
242
246
2026 - 2030
Total
1,252
2,427 $
$
22
20
18
17
15
59
151
20. 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 2020, 2019 and 2018, the Company issued
shares from treasury in satisfaction of stock-based compensation.
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-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,
2020
2019
2018
Stock-based compensation plans
expense
$
116 $
125 $
130
Income tax benefit
(20)
(21)
(27)
Excess tax benefit on awards
vested, exercised and expired
Total stock-based
compensation plans expense,
net of tax
(1)
(6)
(5)
$
95 $
98 $
98
The Company did not capitalize any cost of stock-based
compensation. As of December 31, 2020, the total compensation
cost related to non-vested awards not yet recognized was $68,
which is expected to be recognized over a weighted average
period of 2 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.
211
Stock Plan
Future stock-based awards may be granted under The Hartford's
2020 Stock Incentive Plan (the "Stock Incentive Plan") other than
the Subsidiary Stock Plan and the Employee Stock Purchase Plan
described below. The Stock Incentive 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 2020 Stock Plan, that may be issued to Company
employees and third-party service providers during the 10-year
duration of the Stock Incentive Plan is the sum of 11,250,000
shares, any shares cancelled subsequent to February 29, 2020,
plus any shares used for tax withholding purposes. 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
Stock Incentive Plan and such shares shall be added to the
maximum limit. As of December 31, 2020, there were 11,735,111
shares available for future issuance.
The fair values of awards granted under the Stock Incentive 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 because the employees receive accelerated
vesting upon retirement and therefore the vesting period is
Note 20 - Stock Compensation Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Stock Incentive 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 “Plan Valuation Model”) that incorporates
the possibility of early exercise of options into the valuation. The
Plan Valuation Model also incorporates the Company’s historical
termination and exercise experience to determine the option
value.
The Plan 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 Plan
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 Plan 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,
2020
2.6%
2019
2.5%
2018
1.8%
22.2 % - 36.2%
20.7 % - 36.7%
20.8 % - 36.5%
30.9%
29.3%
29.0%
1.3 % - 1.6%
2.4 % - 2.6%
1.5 % - 2.9%
6.6 years
5.9 years
5.7 years
Non-qualified Stock Option Activity Under the Stock Incentive Plan
Number of
Options
(in
thousands)
Weighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
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
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, 2020,
2019, and 2018 was $12.97, $11.71 and $14.04, respectively. The
total intrinsic value of options exercised during the years ended
December 31, 2020, 2019 and 2018 was $2, $16, and $14,
respectively.
For the year ended December 31, 2020
5,846 $
998 $
(128) $
(23) $
— $
6,693 $
6,693 $
4,793 $
43.43
55.27
24.15
51.27
—
45.54
63.59
42.62
5.8 $
5.8 $
4.7 $
34
33
34
Share Awards
Share awards granted under the Stock Incentive 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.
Restricted stock are shares of The Hartford's common stock with
212
Note 20 - Stock Compensation Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 an
employee's 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 2020,
2019 and 2018.
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 an employee's retirement eligibility date or three
years.
Performance share awards granted prior to 2020 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. Performance share awards
granted in 2020 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. 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 Plan 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
For the years ended December 31,
2019
2018
2020
Volatility of common stock
Average volatility of peer companies
Average correlation coefficient of peer companies
Risk-free spot rate
Term
Total Share Awards
19.6%
19.4%
20.8%
18.0 % - 31.0%
16.0 % - 27.0%
17.0 % - 25.0%
51.0%
1.2%
50.0%
2.4%
54.0%
2.4%
3.0 years
3.0 years
3.0 years
Non-vested Share Award Activity Under the Stock Incentive Plan
Non-vested shares
Non-vested at beginning of year
Granted
Performance based adjustment, net
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, 2020
3,912 $
1,323 $
50.83
54.64
(1,224) $
(145) $
3,866 $
49.19
52.71
52.58
770 $
391 $
(73) $
(276) $
(22) $
790 $
52.31
55.62
50.09
50.90
53.54
54.82
The weighted average grant-date fair value per share of
restricted stock units and restricted stock granted during the
years ended December 31, 2020, 2019, and 2018 was $54.64,
$50.49 and $53.11, respectively. The weighted average grant-
date fair value per share of performance shares granted during
the years ended December 31, 2020, 2019, and 2018 was $55.62,
$54.07 and $50.26, respectively.
213
Note 20 - Stock Compensation Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, 2020,
there were 3,743,847 shares available for future issuance. During
the years ended December 31, 2020, 2019 and 2018, 340,653
shares, 213,472 shares, and 219,661 shares were sold,
respectively. The weighted average per share fair value of the
discount under the ESPP was $1.99, $2.82 and $2.56 during the
years ended December 31, 2020, 2019 and 2018, 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.
Supplemental Operating Lease Information
Operating cash flows for
operating leases (for the
twelve months ended)
Right-of-use asset
obtained in exchange for
new operating lease
liabilities
Weighted-average
remaining lease term in
years for operating leases
Weighted-average
discount rate for operating
leases
For the years ended December 31,
2020
2019
$
54
$
50
49
42
7 years
6 years
3.1 %
3.5 %
The total fair value of shares vested during the years ended
December 31, 2020, 2019 and 2018 was $73, $102 and $114,
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, 2020, 2019
and 2018.
Subsidiary Stock Plan
In 2013 the Company established a subsidiary stock-based
compensation plan similar to the Stock Incentive Plan, except that
it awards non-public subsidiary stock as compensation. The
Company recognized stock-based compensation plan expense of
$11, $11 and $9 in the years ended December 31, 2020, 2019
and 2018, 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, 2020, the Company repurchased $10 in subsidiary
stock.
21. LEASES
The Hartford has operating leases for real estate and equipment.
The right-of-use asset as of December 31, 2020 and 2019 was
$209 and $191, respectively, and is included in property and
equipment, net, in the Consolidated Balance Sheet. The lease
liability as of December 31, 2020 and 2019 was $221 and $201,
respectively, and is included in other liabilities in the
Consolidated Balance Sheet. Variable lease costs include changes
in interest rates on variable rate leases primarily for automobiles.
Components of Lease Expense
For the years ended December 31,
2020
2019
Operating lease cost
$
52 $
—
—
(5)
49
2
1
(5)
Short-term lease cost
Variable lease cost
Sublease income
Total lease costs
included in insurance
operating costs and
other expenses
$
47 $
47
The total rental expense recognized in accordance with prior
lease guidance was $56 in 2018, which excludes sublease rental
income of $4 in 2018.
214
Note 21 - Leases
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Maturities of Operating Lease Liabilities as of
December 31, 2020
2021
2022
2023
2024
2025
Thereafter
Total lease payments
Less: Discount on lease payments to present
value
Total lease liability
Operating
Leases
$
$
47
42
39
30
22
63
243
22
221
22. BUSINESS DISPOSITIONS AND DISCONTINUED
OPERATIONS
sold which increased subsequent to the date the Company
entered into the sale 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.
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 has been managing invested assets of the life and
annuity business sold in May 2018 for an initial term of five years
and provided transition services through February, 2020.
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 $42 and $66, before tax, of
income in 2020 and 2019, respectively. Cash inflows for
dividends received from Hopmeadow Holdings LP were $30 and
$67, respectively. Other 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.
Sale of life and annuity
business
On May 31, 2018, the Company’s wholly-owned subsidiary,
Hartford Holdings, Inc, 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
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.
After having recognized a loss on sale within discontinued
operations of approximately $3.3 billion in 2017, the Company
recognized 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
215
Note 22 - Business Dispositions and Discontinued Operations
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Major Classes of Assets and Liabilities
Transferred to the Buyer in Connection with
the Sale
Reconciliation of the Major Line Items
Constituting Pretax Profit (Loss) of
Discontinued Operations
Carrying Value as of
Closing
For the year ended
December 31,
2018
Assets
Cash and investments
Reinsurance recoverables
Loss accrual [1]
Other assets
Separate account assets
Total assets held for sale
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
Total liabilities held for sale
$
27,058
20,718
(3,044)
2,907
110,773
158,412
14,308
28,680
142
2,222
110,773
156,125
[1]Represents the estimated accrued loss on sale of the Company's life and annuity
business.
Revenues
Earned premiums
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
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
$
[1]Corporate allocated overhead has been included in continuing operations.
39
382
519
(68)
872
535
58
157
750
122
2
120
202
322
Cash Flows from Discontinued Operations
included in the Consolidated Statement of
Cash Flows
For the year ended
December 31,
2018
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]
[1]Excludes return of capital to parent of $619 for 2018.
$
$
$
603
463
(737)
216
Note 22 - Business Dispositions and Discontinued Operations
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Sale of Continental Europe
Operations
On September 30, 2020, the Company entered into a definitive
agreement to sell our Continental Europe Operations. The
transaction is expected to close by the second quarter of 2021,
subject to customary closing conditions, including regulatory
approvals. The complete sale of the Continental Europe
Operations consists of multiple arrangements designed as a single
transaction. The assets and liabilities of the Continental Europe
Operations have been classified as held for sale in the Company's
Consolidated Balance Sheets as of December 31, 2020.
Total consideration less costs to sell is estimated to be
approximately $14, resulting in an estimated loss on the sale of
approximately $48, before tax, which has been recorded within
net realized capital gains (losses) for the year ended December
31, 2020 in the Consolidated Statements of Operations. The
Company also recorded related income tax benefits of $18, for an
estimated after tax loss of $30 on the sale, for the year ended
December 31, 2020. The accrual for the estimated before tax loss
is included as a reduction of the carrying value of assets held for
sale in the Company's Consolidated Balance Sheets as of
December 31, 2020. The Continental Europe Operations are
reported under the Commercial Lines segment. The estimate of
consideration less costs to sell of $14 includes an estimate of
consideration that is contingent on how the ultimate amounts
required to settle claims on 2020 and prior accident years, as
determined at the end of 2024, compare with recorded reserves
as currently estimated. The contingent consideration has been
estimated at its fair value of $12 and could increase or decrease
depending on how ultimate losses develop. Any change in the
estimated fair value of contingent consideration in a future period
would increase or decrease the estimated loss on sale in that
period.
Carrying Value of Assets and Liabilities to be Transferred in Connection With the Sale [1]
Assets
Investments and cash
Reinsurance recoverables and other
Total assets held for sale
Liabilities
Unpaid losses and loss adjustment expenses
Unearned premiums
Other liabilities
As of
December
31, 2020
$
142
35
177
84
31
43
Total liabilities held for sale
158
[1] As of December 31, 2020, the estimated fair value of the disposal group is $14 based on the estimated consideration to be received less cost to sell. Within the disposal group, as
of December 31, 2020, investments in fixed maturities and short-term investments, which are measured at fair value on a recurring basis, had a fair value of $84, of which $1 was
based on quoted prices in active markets for identical assets and $83 was based on significant observable inputs. The remaining fair value less costs to sell for the disposal group is
($70), which is measured on a nonrecurring basis using significant unobservable inputs. See Note 5—Fair Value Measurements for more information.
$
23. RESTRUCTURING AND OTHER COSTS
In recognition of the need to become more cost efficient and
competitive along with enhancing the experience we provide to
agents and customers, on July 30, 2020 the Company announced
an operational transformation and cost reduction plan it refers to
as Hartford Next. Hartford Next is intended to reduce annual
insurance operating costs and other expenses through reduction
of the Company's headcount, investment in information
technology ("IT") to further enhance our capabilities, and other
activities. The activities are expected to be substantially complete
by the end of 2022.
costs in the Consolidated Statement of Operations and unpaid
restructuring costs are included in other liabilities in the
December 31, 2020 Consolidated Balance Sheet. Subsequent to
December 31, 2020, the Company expects to incur additional
costs including, amortization of right of use assets and other lease
exit costs, other IT costs to retire applications, professional fees
and other expenses. Total restructuring and other costs are
expected to be approximately $158, before tax, and will be
recognized in Corporate for segment reporting.
Termination benefits related to workforce reductions and
professional fees are included within restructuring and other
217
Note 23 - Restructuring and Other Costs
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restructuring and Other Costs, Before Tax
Severance benefits
IT costs
Professional fees and other expenses
Total restructuring and other costs, before tax
Incurred in the Year
Ended December 31,
2020 [1]
Total Amount
Expected to be
Incurred
$
$
73 $
2
29
104 $
73
26
59
158
[1] Amounts incurred for the twelve months ended December 31, 2020 are the cumulative incurred under the restructuring program.
Accrued Restructuring and Other Costs
Balance, beginning of period
Incurred
Payments
Balance, end of period
Year Ended December 31, 2020
Severance
Benefits and
Related Costs
IT Costs
Professional
Fees and Other
Total
Restructuring
and Other
Costs Liability
$
$
— $
73
(19)
54 $
— $
2
(2)
— $
— $
29
(29)
— $
—
104
(50)
54
24. QUARTERLY RESULTS (UNAUDITED)
Current and Historical Quarterly Results of the Company
Revenues
Benefits, losses and expenses
Net income
Less: Preferred stock dividends
Three months ended
March 31,
June 30,
September 30,
December 31,
2020
2019
2020
2019
2020
2019
2020
2019
$ 4,956 $ 4,940 $ 5,068 $ 5,092 $ 5,171 $ 5,347 $ 5,328 $ 5,361
4,612
4,165
4,476
4,636
4,639
4,694
4,676
4,685
$ 273 $ 630 $ 468 $ 372 $ 459 $ 535 $ 537 $ 548
5
5
5
—
6
11
5
5
Net income available to common stockholders
$ 268 $ 625 $ 463 $ 372 $ 453 $ 524 $ 532 $ 543
Net income available to common stockholders per common share
Basic
Diluted
$ 0.75 $ 1.74 $ 1.29 $ 1.03 $ 1.26 $ 1.45 $ 1.48 $ 1.51
$ 0.74 $ 1.71 $ 1.29 $ 1.02 $ 1.26 $ 1.43 $ 1.47 $ 1.49
218
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HELPING EVERYDAY KIDS
BECOME EVERYDAY HEROES.
The Hartford has been committed to fire prevention and safety since our
founding as a fire insurance company in 1810. To bring this resolve to life,
we created the Junior Fire Marshal® program in 1947 to teach children how
to prevent fires and what to do if a fire starts.
Junior Fire Marshal is one of the oldest corporate-sponsored public education
programs in the country. Since its inception, more than 111 million children
have been deputized as Junior Fire Marshals and proudly worn our signature
red fire helmets in recognition of the accomplishment.
We’re proud of the program’s legacy, but know that more can be done to
prevent the devastation caused by fires. Across the country, a home fire
occurs every 87 seconds—a startling reminder about the importance of
teaching children the basics of personal fire safety.
In 2020, to ensure that as many kids as possible can learn life-saving fire
safety lessons, we launched the Junior Fire Marshal Training Academy, a
fun, interactive online program available to teachers, families and
communities everywhere.
Above and on the cover:
children participating in Junior
Fire Marshal fire safety activities.
MORE THAN 111
MILLION CHILDREN
have learned about fire prevention and safety and
been deputized as Junior Fire Marshals since 1947.
FIRE SAFETY EDUCATION GRANTS
will be provided by The Hartford to public school districts and
fire departments in the top 150 cities with the highest home fire risk.
MILLIONS MORE CHILDREN
will learn fire safety, become Junior Fire Marshals, and go from everyday
kids to everyday heroes.
THE JUNIOR FIRE MARSHAL
TRAINING ACADEMY
includes a one-of-a-kind, standards-aligned fire safety and prevention
curriculum, as well as a digital companion for smartboards and tablets.
DOING WHAT’S RIGHT ALLOWS US TO 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.
Highest ranked insurance company, America’s Most “JUST” Companies,
JUST Capital and Forbes (2021)
World’s Most Ethical Companies®, Ethisphere Institute (2020)
Best Place to Work for Lesbian, Gay, Bisexual and Transgender (LGBT)
Equality, Human Rights Campaign, Corporate Equality Index (2021)
Military Friendly Employer, Military Times (2021)
2021 Bloomberg Financial Services Gender-Equality Index (BFGEI)
America’s Best Employers For Diversity, Forbes (2020)
100% Disability Equality Index, Best Place to Work (2020)
Named to the Dow Jones Sustainability Indices (2020)
LEARN MORE AT TheHartford.com/our-company
FOLLOW THE HARTFORD ON
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.
21-EN-564962 © March 2021 The Hartford
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