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HARTFORD FINANCIAL SERVICES GROUP, INC. – 10-K –
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
The Hartford provides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company's future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the cautionary statements set forth on pages 4 and 5 of this Form 10-K. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in the following discussion and in Part I, Item 1A, Risk Factors, and those identified from time to time in our other filings with theSecurities and Exchange Commission . The Hartford undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. OnDecember 29, 2021 , the Company completed the sale of all of the issued and outstanding equity ofNavigators Holdings (Europe) N.V. , aBelgium holding company, and its subsidiaries,Bracht, Deckers & Mackelbert N.V. ("BDM") andAssurances Contintales Contintale Verzekeringen N.V. ("ASCO"), (collectively referred to as "Continental Europe Operations"). For discussion of reclassifications, acquisitions, and dispositions, see Note 1 - Basis of Presentation and Significant Accounting Policies, Note 2 - Business Acquisitions and Note 22 - Business Dispositions 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 2020 Form 10-K Annual Report.
Index
Description Page
Key Performance Measures and Ratios 39
The Hartford's Operations 44
Financial Highlights 48
Consolidated Results of Operations 49
Investment Results 52
Critical Accounting Estimates 54
Commercial Lines 76
Personal Lines 81
Property & Casualty Other Operations 85
Group Benefits 86
Hartford Funds 90
Corporate 92
Enterprise Risk Management 93
Capital Resources and Liquidity 111
Impact of New Accounting Standards 120
Throughout the MD&A, we use certain terms and abbreviations, the more commonly
used are summarized in the Acronyms section.
KEY PERFORMANCE MEASURES AND RATIOS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these ratios and measures are useful in understanding the underlying trends in 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 segments's revenues and expenses are based upon asset values.
These revenues and expenses increase or decrease with a rise or fall in AUM
whether caused by changes in the market or through net flows.
Book Value per Diluted Share excluding accumulated other comprehensive income
("AOCI")- This is a non-GAAP per share measure that is calculated by dividing
(a) common stockholders' equity, excluding AOCI, after tax, by (b) common shares
outstanding
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and dilutive potential common shares. The Company provides this measure to
enable investors to analyze the amount of the Company's net worth that is
primarily attributable to the Company's business operations. The Company
believes that excluding AOCI from the numerator is useful to investors because
it eliminates the effect of items that can fluctuate significantly from period
to period, primarily based on changes in interest rates. Book value per diluted
share is the most directly comparable U.S. GAAP measure.
Combined Ratio- The sum of the loss and loss adjustment expense ratio, the
expense ratio and the policyholder dividend ratio. This ratio is a relative
measurement that describes the related cost of losses and expenses for every
$100 of earned premiums. A combined ratio below 100 demonstrates underwriting
profit; a combined ratio above 100 demonstrates underwriting losses.
Core Earnings- The Hartford uses the non-GAAP measure core earnings as an
important measure of the Company's operating performance. The Hartford believes
that core earnings provides investors with a valuable measure of the performance
of the Company's ongoing businesses because it reveals trends in our insurance
and financial services businesses that may be obscured by including the net
effect of certain items. Therefore, the following items are excluded from core
earnings:
•Certain realized gains and losses - Some realized 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 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 other non-recurring M&A costs - These costs, including transaction costs incurred in connection with an acquired business, are incurred over a short period of time and do not represent an ongoing operating expense of the business. •Change in loss reserves upon acquisition of a business - These changes in loss reserves are excluded from core earnings because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition. •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 before tax income - These changes in valuation allowances are excluded from core earnings because they relate to non-core components of before 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 comparableU.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. 40
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Reconciliation of Net Income to Core Earnings
For the years ended
2021 2020 2019
Net income $ 2,365 $ 1,737 $ 2,085
Preferred stock dividends 21 21 21
Net income available to common stockholders $
2,344
Adjustments to reconcile net income available to common stockholders to
core earnings:
Net realized losses (gains) excluded from core earnings, before tax
(505) 18 (389)
Restructuring and other costs, before tax 1 104 - Loss on extinguishment of debt, before tax - - 90 Loss on reinsurance transactions, before tax
- - 91
Integration and other non-recurring M&A costs, before tax 58 51 91 Change in loss reserves upon acquisition of a business, before tax - - 97 Change in deferred gain on retroactive reinsurance, before tax 246 312 16 Income tax expense (benefit) [1] 34 (115) 2 Core earnings$ 2,178 $ 2,086 $ 2,062
[1] Primarily represents the federal income tax expense (benefit) related to
before tax items not included in core earnings and includes the effect of
changes in net deferred taxes due to changes in enacted tax rates.
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 comparableU.S. GAAP measure. The Company believes that core earnings margin provides investors with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the effect of buyouts and realized gains (losses) as well as other items excluded in the calculation of core earnings. Core earnings margin should not be considered as a substitute for net income margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important for investors to evaluate both core earnings margin and net income margin when reviewing performance. A reconciliation of net income 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. ForU.S. events, a catastrophe is an event that causes$25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers, as defined by the Property Claim Services office ofVerisk . For international events, the Company's approach is similar, informed, in part, by howLloyd's of London defines catastrophes.Lloyd's of London is an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The current accident year catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums. Expense Ratio- For the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses less fee income, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs ("DAC") and insurance operating costs and expenses, including certain centralized services costs and bad debt expense. DAC include commissions, taxes, licenses and fees and other incremental direct underwriting expenses and are amortized over the policy term.
The expense ratio for Group Benefits is expressed as the ratio of insurance
operating costs and other expenses including amortization of intangibles and
amortization of DAC, to premiums and other considerations, excluding buyout
premiums.
The expense ratio for Commercial Lines, Personal Lines and Group Benefits does not include integration and other transaction costs associated with an acquired business. Fee Income- Is largely driven from amounts earned as a result of contractually defined percentages of assets under management in our Hartford Funds business. These fees are generally earned on a daily basis. Therefore, the growth in assets under management either through net inflows or favorable market performance will have a favorable impact on fee income. Conversely, either net outflows 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
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adjustment expenses incurred for both the current and prior accident years.
Among other factors, the loss and loss adjustment expense ratio needed for the
Company to achieve its targeted return on equity ("ROE") fluctuates from year to
year based on changes in the expected investment yield over the claim settlement
period, the timing of expected claim settlements and the targeted returns set by
management based on the competitive environment.
The loss and loss adjustment expense ratio is affected by claim frequency and
claim severity, particularly for shorter-tail property lines of business, where
the emergence of claim frequency and severity is credible and likely indicative
of ultimate losses. Claim frequency represents the percentage change in the
average number of reported claims per unit of exposure in the 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.
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 and
expenses are based upon asset values. These revenues and expenses 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.
Policy Count Retention- Represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar period before considering policies cancelled subsequent to renewal. 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. Policy Count Retention, Net of Cancellations- Represents the ratio of the number of renewal policies issued net of cancellations during the current year period divided by the number of policies issued net of cancellations in the previous calendar period. 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.
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
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component represents the change in rate filed with and approved by state
regulators during the period and the amount of insurance represents the change
in the value of the rating base, such as model year/vehicle symbol for
automobiles, building replacement costs for property and wage inflation for
workers' compensation. A number of factors affect renewal written price
increases (decreases) including expected loss costs as projected by the
Company's pricing actuaries, rate filings approved by state regulators, risk
selection decisions made by the Company's underwriters and marketplace
competition. Renewal written price changes reflect the property and casualty
insurance market cycle. Prices tend to increase for a particular line of
business when insurance carriers have incurred significant losses in that line
of business in the recent past or the industry as a whole commits less of its
capital to writing exposures in that line of business. Prices tend to decrease
when recent loss experience has been favorable or when competition among
insurance carriers increases. Renewal written price statistics are subject to
change from period to period, based on a number of factors, including changes in
actuarial estimates and the effect of subsequent cancellations and non-renewals,
and modifications made to better reflect ultimate pricing achieved.
Return on Assets ("ROA"), Core Earnings-The Company uses this non-GAAP financial
measure to evaluate, and believes is an important measure of, the Hartford Funds
segment's operating performance. ROA, core earnings is calculated by dividing
annualized core earnings by a daily average AUM. ROA is the most directly
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.
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and Results of Operations
Reconciliation of Net Income to Underwriting Gain (Loss)
For the years ended
2021 2020 2019
Commercial Lines
Net income $
1,757
Adjustments to reconcile net income to underwriting gain (loss):
Net servicing income
(13) (4) (2) Net investment income (1,502) (1,160) (1,129) Net realized losses (gains) (260) 60 (271) Other expense 18 35 38 Loss on reinsurance transaction - - 91 Income tax expense 402 176 270 Underwriting gain (loss)$ 402 $ (37) $ 189 Personal Lines Net income (loss) $
385
Adjustments to reconcile net income to underwriting gain (loss):
Net servicing income
(19) (14) (13) Net investment income (157) (157) (179) Net realized losses (gains) (29) 5 (43) Other expense - 1 1 Income tax expense 95 184 76 Underwriting gain$ 275 $ 737 $ 160 P&C Other Ops Net Income $
(95)
Adjustments to reconcile net income to underwriting gain (loss):
Net investment income
(75) (55) (84) Net realized losses (gains) (13) 1 (20) Other expense (income) 1 (1) - Income tax expense (benefit) (28) (46) 12 Underwriting loss$ (210) $ (269) $ (31) Written and Earned Premiums- Written premium represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Premiums are considered earned and are included in the financial results on a pro rata basis over the policy period. Management believes that written premium is a performance measure that is useful to investors as it reflects current trends in the Company's sale of property and casualty insurance products. Written and earned premium are recorded net of ceded reinsurance premium. Traditional life and disability insurance type products, such as those sold by Group Benefits, collect premiums from policyholders in exchange for financial protection for the policyholder from a specified insurable loss, such as death or disability. These premiums, together with net investment income earned, are used to pay the contractual obligations under these insurance contracts. Two major factors, new sales and persistency, impact premium growth. Sales can increase or decrease in a given year based on a number of factors including, but not limited to, customer demand for the Company's product offerings, pricing competition, distribution channels and the Company's reputation
and ratings. Persistency refers to the percentage of premium remaining in-force
from year-to-year.
THE HARTFORD'S OPERATIONS The Hartford conducts business principally in five reporting segments including Commercial Lines, Personal Lines,Property & Casualty Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category reserves for run-off structured settlement and terminal funding agreement liabilities, restructuring costs, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, certain M&A costs, 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 a portion of the invested assets ofTalcott Resolution Life, Inc. and its subsidiaries as well as 44 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations certain affiliates. In addition, up untilJune 30, 2021 , Corporate included a 9.7% ownership interest inHopmeadow Holdings LP , the legal entity that acquired Talcott Resolution inMay 2018 (Hopmeadow Holdings, LP ,Talcott Resolution Life Inc. , and its subsidiaries are collectively referred to as "Talcott Resolution"). The sale of Talcott Resolution to a new investor was completed onJune 30, 2021 . The Company received a total of$217 in connection with the sale of its 9.7% ownership interest, resulting in a realized gain of$46 before tax in 2021. 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 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 withAARP , which is effective throughDecember 31, 2032 . This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand. 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 written and earned premiums
Despite the rollout of vaccines and states largely lifting restrictions allowing business to re-open, the COVID-19 pandemic continues to pose a threat to the economic recovery of theU.S. and other countries in which we operate. As one of the largest providers of small business insurance in theU.S. , we were negatively affected by economic effects of the pandemic on small businesses beginning in March of 2020. An 45 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
improvement in economic conditions in 2021 has contributed to an increase of 11% in our small commercial written premiums. Our middle & large commercial business was also negatively affected by COVID-19 and written premium has rebounded with an increase of 12% in 2021. Overall, Commercial Lines written premium increased$1,072 , or 12%, in 2021 with growth in workers' compensation, small commercial package business, general liability,U.S. wholesale,U.S. financial lines and global reinsurance.
Personal Lines written premium declined 1% in 2021 due to the effect of
non-renewed premium exceeding new business, partially offset by the effect of
premium credits given in the second quarter of 2020.
In Group Benefits, fully insured ongoing premium increased 4% in 2021, primarily
due to higher in-force employer group
disability premiums and higher supplemental health product premiums.
Impact to direct benefits, losses and loss adjustment expenses from COVID-19
claims
Total pandemic-related losses were higher in 2021 compared to 2020 driven by
higher excess mortality in our group life business and an increase in
pandemic-related short-term disability claims, partially offset by a reduction
of P&C COVID-19 incurred losses.
For the year ended
December 31,
2021 2020
Excess mortality claims on group life $ 583 $ 239
COVID-19 short-term disability claims [1] 31 (9)
Workers' compensation COVID-19 claims 20 66
Global specialty financial lines and other 11 71
Commercial property - 141
Total direct COVID-19 and excess mortality claims $
645 $ 508
[1]The year endedDecember 31, 2020 included both short-term disability andNew York paid family leave claims related to COVID-19 and lower incurred losses due to fewer elective procedures during the early stages of the pandemic more than offset direct COVID-19 incurred losses. Excess mortality in the group life business includes both claims where COVID-19 is specifically listed as the cause of death and indirect impacts of the pandemic such as causes of death due to patients deferring regular treatments of chronic conditions. The incidence of excess mortality claims is subject to significant uncertainty as it is dependent on a number of factors difficult to predict including, among others, the ultimate vaccination rate of the population, the potential spread of new COVID-19 variants, the effectiveness of the vaccines against new variants, the effectiveness of other treatments to prevent serious illness and death, the percentage of those infected who are of working age and the strain on the health care system preventing timely treatment of chronic illnesses. Within P&C, direct COVID-19 incurred losses in 2021 were predominantly on workers' compensation claims incurred in the first quarter. 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. Apart from COVID-19 workers' compensation claims, net of favorable frequency, and incurred losses within financial lines, P&C COVID-19 incurred losses in 2020 primarily included$141 for property claims. There were no COVID-19 P&C property losses incurred in 2021. 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.
Other impacts from COVID-19
In Personal Lines automobile, miles driven and average claim severity increased in 2021, which has increased automobile loss costs. In addition, as the effects of favorable claim frequency from lower miles driven during the pandemic have been factored into rates, we have experienced lower earned pricing increases resulting in a higher automobile loss ratio in 2021 than in 2020. Refer to Personal Lines Results of Operations for discussion of pricing and loss cost trends for the year endedDecember 31, 2021 . As we emerge from the pandemic, inflationary pressures in the economy have resulted in increased claim severity in 2021 in automobile and property lines of business in both Commercial Lines and Personal Lines. As expectations of inflationary pressures have increased, interest rates rose in 2021 and higher interest rates reduce the fair value of our investments in fixed maturity securities, available for sale ("AFS"). Aided by some improvement in the economy and the effect of the government's economic stimulus payments to our customers, in 2021, we recorded a decrease of$47 in the allowance for credit losses ("ACL") on premiums receivable, reflecting a lower expectation of credit losses, though there remains an elevated risk of uncollectible premiums receivable relative to historical trends if economic conditions do not improve further.
As we emerge from the pandemic, we expect travel costs and certain employee
benefits costs will increase relative to the lower level of those costs we have
incurred in 2020 and 2021.
For information about resources the Company has to manage capital and liquidity,
refer to the Capital Resources & Liquidity section of MD&A.
For additional information about the potential economic impacts to the Company
of the COVID-19 pandemic, see the risk factor "The pandemic caused by the spread
of COVID-19 has disrupted our operations and may have a material adverse
46
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
impact on our business results, financial condition, results of operations
and/or liquidity" in Item 1A of Part I.
Operational transformation and cost reduction plan
In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, onJuly 30, 2020 , the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next.Through reduction of its headcount, IT investments to further enhance our capabilities, and other activities, relative to 2019, the Company expects to achieve a reduction in annual insurance operating costs and other expenses of approximately$540 by 2022 and$625 by 2023.
To achieve those expected savings, we expect to incur approximately
the course of the program, with
expensed cumulatively throughDecember 31, 2021 , and expected expenses of$89 in 2022,$38 in 2023 and$57 after 2023, with the expenses after 2023 consisting mostly of amortization of internal use software and capitalized real estate costs. Included in the estimated costs of$401 , we expect to incur restructuring costs of approximately$130 , including$48 of employee severance, and approximately$82 of other costs, including consulting expenses, lease termination expenses and the cost to retire certain IT applications. Restructuring costs are reported as a charge to net income but not in core earnings. The following table presents Hartford Next program costs incurred, including restructuring costs, and expense savings relative to 2019 realized in 2021 and expected annual costs and expense savings relative to 2019 for the full year in 2022 and 2023: Hartford Next Costs and Expense Savings Estimate for Estimate for 2020 2021 2022 2023 Employee severance$ 73 $ (25) $ - $ - IT costs to retire applications 2 9 10 - Professional fees and other expenses 29 17 15 - Estimated restructuring costs 104 1 25 - Non-capitalized IT costs 30 46 45 22 Other costs 19 17 14 6 Amortization of capitalized IT development costs [1] - - 4 9 Amortization of capitalized real estate [2] - - 1 1 Estimated costs within core earnings 49 63 64 38 Total Hartford Next program costs 153 64 89 38 Cumulative savings relative to 2019 beginning (106) (423) (540) (625) July 1, 2020 Net expense (savings) before tax$ 47 $
(359)
Net expense (savings) before tax: To be accounted for within core earnings$ (57) $ (360) $ (476) $ (587) Restructuring costs recognized outside of core 104 1 25 -
earnings
Net expense (savings) before tax$ 47 $
(359)
[1]Does not include approximately
[2]Does not include approximately
47 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
2021 FINANCIAL HIGHLIGHTS
Net Income Available to Net Income Available to Common Book Value per
Common Stockholders Stockholders per Diluted Share Diluted Share
[[Image Removed: hig-20211231_g16.jpg]] [[Image Removed: hig-20211231_g17.jpg]]
[[Image Removed: hig-20211231_g18.jpg]]
Ý Increased
Ý Increased
+ A change from net realized + Increase in net income
+ Net income in excess of common
losses in the 2020 period to available to common
stockholder dividends and
gains in the 2021 period stockholders
share repurchases
+ Increase in net investment + Share repurchases
+ Decrease in dilutive shares
income
from the prior year
+ Decrease in P&C COVID-19 - Increase in dilutive shares
incurred losses under stock-based
compensation largely due to
an increase in the quarterly
+ Higher earned premiums in average stock price
- Decrease in common
Commercial Lines and a lower
stockholders' equity largely
P&C underlying loss ratio
due to decrease in AOCI,
before COVID-19
driven by a decline in net
+ Lower restructuring costs
unrealized gains on available
+ Increase in earnings from
for sale securities
Hartford Funds
- Higher excess mortality losses
in group life and COVID-19
losses in group disability
- A change from net favorable to
net unfavorable P&C prior
accident year reserve
development
- Higher current accident year
catastrophes
- An increase in personal
automobile claim frequency and
severity
- Lower income from the former
Talcott Resolution investment
Property & Casualty Group
Benefits Net Income
Investment Yield, After Tax Combined Ratio
Margin
[[Image Removed: hig-20211231_g19.jpg]][[Image Removed: hig-20211231_g20.jpg]][[Image Removed: hig-20211231_g21.jpg]]
Ý Increased 50 bps Þ Improved 0.1 points Þ Decreased 2.5 points
+ Greater returns on limited + Decrease in COVID-19 incurred - Higher excess mortality in
partnerships and other losses group life
alternative investments
- Lower reinvestment rates and + Lower current accident year - A higher group disability loss
lower yield on variable rate loss ratio before COVID-19 in ratio primarily due to higher
securities global specialty and workers' short-term and long-term
compensation disability claim incidence
- A change to unfavorable prior - A higher expense ratio
accident year reserve
development + Higher net investment income
- Higher current accident year + Greater net realized gains
catastrophes
- Higher personal automobile
claim frequency and severity
- An increase in underwriting
expenses
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
CONSOLIDATED RESULTS OF OPERATIONS
The Consolidated Results of Operations should be read in conjunction with the
Company's Consolidated Financial Statements and the related Notes as well
as with the segment operating results sections of the MD&A.
Consolidated Results of Operations
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Earned premiums $ 17,999 $ 17,288 $ 16,923 4 % 2 %
Fee income 1,488 1,277 1,301 17 % (2 %)
Net investment income 2,313 1,846 1,951 25 % (5 %)
Net realized gains (losses) 509 (14) 395 NM (104 %)
Other revenues 81 126 170 (36 %) (26 %)
Total revenues 22,390 20,523 20,740 9 % (1 %)
Benefits, losses and loss adjustment expenses 12,729 11,805 11,472
8 % 3 % Amortization of deferred policy acquisition costs 1,680 1,706 1,622 (2 %) 5 %
Insurance operating costs and other expenses 4,779 4,480 4,580
7 % (2 %) Loss on extinguishment of debt - - 90 - % (100 %) Loss on reinsurance transactions - - 91 - % (100 %) Interest expense 234 236 259 (1 %) (9 %) Amortization of other intangible assets 71 72 66 (1 %) 9 % Restructuring and other costs 1 104 - (99 %) NM Total benefits, losses and expenses 19,494 18,403 18,180 6 % 1 % Income before income taxes 2,896 2,120 2,560 37 % (17 %) Income tax expense 531 383 475 39 % (19 %) Net income 2,365 1,737 2,085 36 % (17 %) Preferred stock dividends 21 21 21 - % - %
Net income available to common stockholders
37 % (17 %)
Year ended
Net income available to common stockholders increased by
by:
•A$523 before tax change from net realized losses in 2020 to net realized gains in 2021, primarily driven by changes in valuation and sales of equity securities from losses in the 2020 period to gains in the 2021 period;
•An increase in net investment income of
returns on limited partnerships and other alternative investments;
• A
operational transformation and cost reduction plan;
•An increase in earnings from Hartford Funds; and
•An increase in P&C underwriting results of$36 before tax, with a reduction in COVID-19 incurred losses, a lower Commercial Lines underlying loss and loss adjustment expense ratio before COVID-19 and the effect of earned premium growth largely offset by a change to net unfavorable prior accident year reserve development, higher personal automobile loss costs and higher underwriting expenses.
These increases were partially offset by:
•A
impacts to short-term-disability losses; and
•Lower income from the Talcott Resolution investment, which was divested on
30, 2021
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.
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and Results of Operations
REVENUE
Earned Premiums
[[Image Removed: hig-20211231_g22.jpg]]
[1]For the years ended 2020 and 2019, the total includes
respectively, recorded in Corporate other revenue.
Earned premiums increased primarily due to:
•An increase in P&C reflecting a 7% increase in Commercial Lines and a 2% decrease in Personal Lines. Contributing to the increase in Commercial Lines was the effect of higher audit and endorsement premiums as the result of higher insured exposures given the economic recovery in 2021. For Personal Lines, the effect of non-renewals outpacing new business was partially offset by the effect of$81 in COVID-related premium credits in the 2020 period; and •An increase in Group Benefits earned premium of 3% year over year due to an increase in group disability and higher supplemental health product premiums, partially offset by the effect of buyout premium in the 2020 period. Fee income increased, largely driven by Hartford Funds as a result of higher daily average assets under management due to an increase in equity market levels and net inflows.
Other revenues decreased by
tax from the Talcott Resolution investment, which was divested on
Net investment income increased primarily due to:
•Greater income from limited partnerships and other alternative investments
primarily driven by higher valuations and cash distributions within private
equity funds and sales of underlying investments within real estate funds;
•A higher level of invested assets;
Net Investment Income
[[Image Removed: hig-20211231_g23.jpg]]
•Greater income from non-routine income items, including yield adjustments on
prepayable securities; and
•Higher yield from equity investments.
These increases were partially offset by:
•A lower yield on fixed maturity investments resulting from reinvesting at lower
rates and a lower yield on floating rate investments.
Net realized gains (losses) changed from net losses in the 2020 period to net
gains in the 2021 period, primarily driven by:
•Gains on equity securities in the 2021 period driven by appreciation in value compared to losses on equity securities in the 2020 period, partially offset by net realized gains in the 2020 period upon termination of derivatives used to hedge against a decline in equity market levels; •A net reduction in ACL on mortgage loans and fixed maturities in the 2021 period due to an improved economic outlook, compared to increases in the ACL on mortgage loans and fixed maturities in the 2020 period;
•A
9.7% previously owned interest in Talcott Resolution;
•A lower level of losses in 2021 than in 2020 related to the sale of the
Continental Europe Operations; and
•Higher net realized gains on sales of fixed maturity securities.
For further discussion of investment results, see MD&A - Investment Results, Net
Realized Gains and MD&A - Investment Results, Net Investment Income.
50
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and Results of Operations
BENEFITS, LOSSES AND EXPENSES
P&C Losses and LAE Incurred
[[Image Removed: hig-20211231_g24.jpg]]
Benefits, losses and loss adjustment expenses increased due to:
•An increase in incurred losses for Property & Casualty of
by:
•An unfavorable change of$335 in P&C net prior accident year reserve development. Prior accident year reserve development in the 2021 period was a net unfavorable$199 before tax, driven by reserve increases for sexual molestation and sexual abuse claims, primarily to reflect claims made against theBoy Scouts of America ("BSA"), partially offset by reserve decreases in workers' compensation, catastrophes, package business, personal automobile, commercial property, and bond. Prior accident year development in the 2021 period also included adverse reserve development ceded to NICO under an adverse development cover ("ADC") of$155 before tax for A&E reserves and$91 before tax for Navigators reserves related to 2018 and prior accident years, both of which the Company recognized a deferred gain under retroactive reinsurance accounting. Prior accident year reserve development in 2020 was a favorable$136 before tax, driven by$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 Corporation and Pacific Gas and Electric Company (together, "PG&E"). Reserve development in 2020 also included a$254 before tax reserve increase for sexual molestation and abuse claims, a$208 before tax increase in A&E reserves and a$102 before tax of adverse development for Navigators related to 2018 and prior accident years. While$220 of A&E and$102 of Navigators' reserve development in 2020 has been economically ceded to Group Benefits Losses and LAE Incurred [[Image Removed: hig-20211231_g25.jpg]] 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. For further discussion, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements; •An increase in current accident year catastrophe losses of$58 , before tax. Catastrophe losses in the 2021 period were principally from hurricane Ida and February winter storms, as well as from tornado, wind and hail events inTexas , the Midwest and Southeast. Catastrophe losses in 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; and •An increase in P&C current accident year ("CAY") loss and loss adjustment expenses before catastrophes primarily due to the effect of higher earned premiums in commercial lines, higher personal automobile claim frequency and severity, and higher non-catastrophe property losses partially offset by a$247 before tax decrease in COVID-19 incurred losses and lower current accident year loss ratios before COVID-19 in global specialty, workers' compensation and general liability. •An increase in Group Benefits of$475 primarily driven by a$344 before tax increase in excess mortality claims in group life, the effect of an increase in earned premiums and higher short-term and long-term disability claim incidence especially compared to the favorable incidence levels experienced during the early stages of the pandemic. The increased claim incidence was partially offset by a higher 51
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations favorable New York Paid Family Leave adjustment recognized in the 2021 period. 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.
Amortization of deferred policy acquisition costs decreased from the prior year
period driven, in part, by a decrease in Personal Lines due to lower earned
premiums.
Insurance operating costs and other expenses increased due to:
•Higher variable costs of the Hartford Funds business due to higher daily
average assets under management;
•Higher variable incentive compensation costs;
•An increase in supplemental and contingent commissions;
•Increased costs in Group Benefits to handle elevated claim levels resulting from the pandemic, higher technology costs and increasedAARP direct marketing costs in Personal Lines; and
•Legal and consulting costs associated with the unsolicited proposals from Chubb
Limited ("Chubb") to acquire the Company.
These increases were partially offset by:
•Lower staffing and other costs driven by the Company's Hartford Next
operational transformation and cost reduction plan; and
•A decrease in the ACL on uncollectible premiums receivable in Property &
Casualty and Group Benefits in the 2021 period compared to an increase in the
2020 period due to the economic impacts of COVID-19.
Restructuring and other costs decreased as the prior year period included
severance costs related to the Company's Hartford Next operational
transformation and cost reduction plan. For further discussion of impacts
resulting from the Hartford Next initiative, see MD&A - The Hartford's
Operations, 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 increased primarily due to an increase in income before tax.
For further discussion of income taxes, see Note 17 - Income Taxes of Notes to
Consolidated Financial Statements.
INVESTMENT RESULTS
Composition of Invested Assets
December 31, 2021 December 31, 2020
Amount Percent Amount Percent
Fixed maturities, available-for-sale ("AFS"), at fair value
74.2 %$ 45,035 79.7 % Equity securities, at fair value 2,094 3.6 % 1,438 2.5 % Mortgage loans (net of ACL of$29 and$38 ) 5,383 9.3 % 4,493 7.9 % Limited partnerships and other alternative investments 3,353 5.8 % 2,082 3.7 % Other investments [1] 375 0.7 % 201 0.4 % Short-term investments 3,697 6.4 % 3,283 5.8 % Total investments$ 57,749 100.0 %$ 56,532 100.0 %
[1] Primarily consists of fixed maturities, at fair value using the fair value
option ("FVO"), equity fund investments, overseas deposits, consolidated
investment funds and derivative instruments which are carried at fair value.
December 31, 2021 compared toDecember 31, 2020 Total investments increased primarily due to an increase in limited partnerships and other alternative investments, mortgage loans, and equity securities, partially offset by a decrease in fixed maturities, AFS.
Limited partnerships and other alternative investments increased primarily
driven by increased valuations and additional investments in real estate joint
ventures.
Mortgage loans increased largely due to funding of industrial, multifamily, and
retail commercial whole loans.
Equity securities increased due to net purchases and appreciation in value due
to higher equity market levels.
Fixed maturities, AFS decreased primarily due to a decrease in valuations due to
higher interest rates, partially offset by tighter credit spreads. The decline
was also due to the reinvestment into other asset classes.
52
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Net Investment Income
For the years ended
2021 2020 2019
(Before tax) Amount Yield [1] Amount Yield [1] Amount Yield [1]
Fixed maturities [2] $ 1,349 3.1 % $ 1,442 3.4 % $ 1,559 3.8 %
Equity securities 73 4.9 % 39 3.7 % 46 3.4 %
Mortgage loans 181 3.7 % 172 3.9 % 165 4.4 %
Limited partnerships and other alternative
investments 732 31.8 % 222 12.3 % 232 14.4 %
Other [3] 58 42 32
Investment expense (80) (71) (83)
Total net investment income $ 2,313 4.3 % $ 1,846 3.6 % $ 1,951 4.1 %
Total net investment income excluding limited
partnerships and other alternative investments $ 1,581 3.1 % $ 1,624 3.3 % $ 1,719 3.7 %
[1]Yields calculated using annualized net investment income divided by the
monthly average invested assets at amortized cost, as applicable, excluding
repurchase agreement and securities lending collateral, if any, and derivatives
book value.
[2]Includes net investment income on short-term investments.
[3]Primarily includes 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
Total net investment income increased primarily due to:
•Greater income from limited partnerships and other alternative investments
primarily driven by higher valuations and cash distributions within private
equity funds and sales of underlying investments within real estate funds;
•A higher level of invested assets;
•Greater income from non-routine items, including yield adjustments on
prepayable securities; and
•A higher yield from equity investments.
These increases were partially offset by a lower yield on fixed maturities
resulting from reinvesting at lower rates and a lower yield on floating rate
investments.
Annualized net investment income yield, excluding limited partnerships and other alternative investments, was down primarily due to lower reinvestment rates, partially offset
by greater income from non-routine income items and a higher yield on equity
securities.
Average reinvestment rate, on fixed maturities and mortgage loans, excluding certainU.S. Treasury securities, for the year-endedDecember 31, 2021 , was 2.6% which was below the average yield of sales and maturities of 3.0% for the same period. Average reinvestment rate for the year-endedDecember 31, 2020 , was 2.5% which was below the average yield of sales and maturities of 3.4%. For the 2022 calendar year, we expect the annualized net investment income yield, excluding limited partnerships and other alternative investments, to be lower than the portfolio yield earned in 2021 due to lower reinvestment rates. The estimated impact on annualized net investment income yield is subject to variability due to evolving market conditions, active portfolio management, and the level of non-routine income items, such as make-whole payments, prepayment penalties on mortgage loans and yield adjustments on prepayable securities. 53 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net Realized Gains (Losses) For the years ended December 31, (Before tax) 2021 2020 2019 Gross gains on sales of fixed maturities$ 319 $ 255 $ 234 Gross losses on sales of fixed maturities (89) (50) (56) Equity securities [1] 227 (214) 254 Net credit losses on fixed maturities, AFS [2] 4 (28) Change in ACL on mortgage loans [3] 9 (19) Intent-to-sell impairments [2] - (5) -
Net other-than-temporary impairment ("OTTI") losses recognized in
earnings
(3) Valuation allowances on mortgage loans 1 Other, net [4] 39 47 (35) Net realized gains (losses) $
509
[1]The net unrealized gains on equity securities still held as of the end of the period and included in net realized gains (losses) were$155 ,$53 , and$164 for the years endedDecember 31, 2021 , 2020, and 2019, respectively. [2]Due to the adoption of accounting guidance for credit losses onJanuary 1, 2020 , realized 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 and Intent-to-Sell Impairments 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 onJanuary 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]Includes gains (losses) on non-qualifying derivatives for 2021, 2020, and 2019 of$12 ,$104 , and$(24) , respectively, gains (losses) from transactional foreign currency revaluation of$(1) ,$(1) and (9), respectively, and a loss of$21 and$48 , respectively, on the sale of Continental Europe Operations for the years endedDecember 31, 2021 and 2020. For the year-endedDecember 31, 2021 , there was also a gain of$46 on the sale of the Company's previously owned interest in Talcott Resolution. Year endedDecember 31, 2021 Gross gains and losses on sales were primarily due to net sales of corporate securities and tax-exempt municipals, in addition to sales ofU.S. treasuries for duration and risk management.
Equity securities net gains were primarily driven by appreciation in value due
to higher equity market levels and gains realized on exit of private equity
direct investments.
Other, net gains and losses included a gain of$46 on the sale of the Company's 9.7% retained interest in Talcott Resolution, sold onJune 30, 2021 , and a loss of$21 related to the sale of the Company's Continental Europe Operations, which was completed onDecember 29, 2021 . Also included were gains of$7 on credit derivatives driven by a decrease in credit spreads. Year endedDecember 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 ofU.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 gains on certain 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
Operations which the Company agreed to sell in September of 2020.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity withU.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability:
•property and casualty insurance product reserves, net of reinsurance;
•group benefit LTD reserves, net of reinsurance;
•evaluation of goodwill for impairment;
•valuation of investments and derivative instruments including evaluation of
credit losses on fixed maturities, AFS and ACL on mortgage loans; and
•contingencies relating to corporate litigation and regulatory matters.
54 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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. 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.
|PROPERTY & CASUALTY INSURANCE PRODUCT RESERVES, NET OF REINSURANCE
P&C Loss and Loss Adjustment Expense Reserves, Net of Reinsurance, by Segment as
of December 31, 2021
[[Image Removed: hig-20211231_g26.jpg]]
Loss and LAE Reserves, Net of Reinsurance as of December 31, 2021
Property & Total Property
Casualty &
Other Casualty
Commercial Lines Personal Lines Operations Insurance % Total Reserves-net
Workers' compensation $ 11,259 $ - $ - $ 11,259 44.4%
General liability 4,960 - - 4,960 19.5%
Marine 303 - - 303 1.2%
Package business [1] 1,924 - - 1,924 7.6%
Commercial property 530 - - 530 2.1%
Automobile liability 1,175 1,390 - 2,565 10.1%
Automobile physical damage 14 40 - 54 0.2%
Professional liability 1,261 - - 1,261 5.0%
Bond 434 - - 434 1.7%
Homeowners - 364 - 364 1.4%
Asbestos and environmental 110 10 604 724 2.9%
Assumed reinsurance 285 - 96 381 1.5%
All other 171 3 435 609 2.4%
Total reserves-net 22,426 1,807 1,135 25,368 100.0%
Reinsurance and other recoverables 4,480 37 1,564 6,081
Total reserves-gross $ 26,906 $ 1,844 $ 2,699 $ 31,449
[1]Commercial Lines policy packages that include property and general liability
coverages are generally referred to as the package line of business.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
For descriptions of the coverages provided under the lines of business shown
above, see Part I - Item1, Business.
Overview of Reserving for Property and Casualty Insurance Claims
It typically takes many months or years to pay claims incurred under a property
and casualty insurance product; accordingly, the Company must establish reserves
at the time the loss is incurred. Most of the Company's policies provide for
occurrence-based coverage where the loss is incurred when a claim event happens
like an automobile accident, house or building fire or injury to an employee
under a workers' compensation policy. Some of the Company's policies, mostly for
directors and officers insurance and errors and omissions insurance, are
claims-made policies where the loss is incurred in the period the claim event is
reported to the Company even if the loss event itself occurred in an earlier
period.
Loss and loss adjustment expense reserves provide for the estimated ultimate
costs of paying claims under insurance policies written by the Company, less
amounts paid to date. These reserves include estimates for both claims that have
been reported and those that have not yet been reported, and include estimates
of all expenses associated with processing and settling these claims. 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 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 and specialty 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 losses 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 $96 as of December 31, 2021 , comprised of $42 related to
Commercial Lines, $1 related to
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Personal Lines and $53 related to Property & Casualty Other Operations.
The Company's estimate of reinsurance recoverables, net of an allowance for
uncollectible reinsurance, is subject to similar risks and uncertainties as the
estimate of the gross reserve for unpaid losses and loss adjustment expenses for
direct and assumed exposures.
Review of Reserve Adequacy- The Hartford regularly reviews the appropriateness
of reserve levels at the line of business or more detailed level, taking into
consideration the variety of trends that impact the ultimate settlement of
claims. For Property & Casualty Other Operations, asbestos and environmental
("Run-off A&E") reserves are reviewed by type of event rather than by line of
business.
Reserve adjustments, which may be material, are reflected in the operating
results of the period in which the adjustment is 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 losses 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 property, automobile physical damage, automobile
liability, package property business, and workers' compensation. Other reserves,
including most general liability and professional liability lines, are reviewed
semi-annually. Certain additional reserves are also reviewed semi-
annually or annually, including reserves for losses incurred in accident years
older than twelve years for Personal Lines and older than twenty years for
Commercial Lines, as well as reserves for bond, assumed reinsurance, latent
exposures such as construction defects, and unallocated loss adjustment
expenses. For reserves that are reviewed semi-annually or annually, management
monitors the emergence of paid and reported losses in the intervening quarters
and, if necessary, performs a reserve review to determine whether the reserve
estimate should change.
An expected loss ratio is used in initially recording the reserves for both
short-tail and long-tail lines of business. This expected loss ratio is
determined by starting with the average loss ratio of recent prior accident
years and adjusting that ratio for the effect of expected changes to earned
pricing, loss frequency and severity, mix of business, ceded reinsurance and
other factors. For short-tail lines, IBNR for the current accident year is
initially recorded as the product of the expected loss ratio for the period,
earned premium for the period and the proportion of losses expected to be
reported in future calendar periods for the current accident period. For
long-tailed lines, IBNR reserves for the current accident year are initially
recorded as the product of the expected loss ratio for the period and the earned
premium for the period, less reported losses for the period.
As losses emerge or develop in periods subsequent to a given accident year,
reserving actuaries use other methods to estimate ultimate unpaid losses in
addition to the expected loss ratio method. These primarily include paid and
reported loss development methods, frequency/severity techniques and the
Bornhuetter-Ferguson method (a combination of the expected loss ratio and paid
development or reported development method). Within any one line of business,
the methods that are given more influence vary based primarily on the maturity
of the accident year, the mix of business and the particular internal and
external influences impacting the claims experience or the methods. The output
of the reserve reviews are reserve estimates 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, 2021
and 2020, 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, up to a
$1.5 billion limit, and the other covered adverse development on Navigators
Insurers' existing net loss and allocated loss adjustment reserves as of
December 31, 2018 , up to a $300 limit. Under both agreements,
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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.
Preferred Reserving Methods by Line of Business
Commercial property, These short-tailed lines are fast-developing and paid and reported development
homeowners and techniques are used as these methods use historical data to develop paid and
automobile physical reported loss development patterns, which are then applied to cumulative paid
damage 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.
Personal automobile For personal automobile liability, and bodily injury in particular, in addition
liability 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 reviews and often relies on
Berquist-Sherman techniques which
adjust these patterns to reflect current settlement
rates and case reserving
practices. The Company generally uses the reported
development method for older
accident years and a combination of reported
development, frequency/severity
and Berquist-Sherman methods for more recent
accident years. For older accident
periods, reported losses are a good indicator of
ultimate losses given the high
percentage of ultimate losses reported to date. For
more recent periods, the
frequency/severity techniques are not affected as
much by changes in case
reserve practices and changing disposal rates and
the Berquist-Sherman
techniques specifically adjust for these changes.
Commercial automobile The Company performs a variety of techniques, including the paid and reported
liability
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 supplements the
expected loss ratio method and
paid and reported development methods with others
such as individual claim
reviews and frequency and severity techniques.
General liability, bond For these long-tailed lines of business, the Company generally relies on the
and large deductible expected loss ratio and reported development techniques. The Company generally
workers' compensation 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 and in
some bond lines individual claim reviews are used.
Workers' compensation 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.
Marine For marine liability, the Company generally relies
on the expected loss ratio,
Berquist-Sherman, and reported development
techniques. The Company generally
weights these techniques together, relying more
heavily on the expected loss
ratio method at early ages of development and then
shifts towards
Berquist-Sherman and then more towards the reported
development method as 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.
Assumed reinsurance and Standard methods, such as expected loss ratio, Berquist-Sherman and reported
all other
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. Policy quarter and policy
year loss reserve estimates
are then converted to an accident year basis.
Allocated loss For some lines of business (e.g., professional liability, assumed reinsurance,
adjustment expenses and the acquired Navigators Group book of business), ALAE and losses are
("ALAE") analyzed together. For most lines of business,
however, ALAE is analyzed
separately, using paid development techniques and a
ratio of paid ALAE to paid
loss is applied to loss reserves to estimate unpaid
ALAE.
Unallocated loss ULAE is analyzed separately from loss and ALAE. For most lines of business,
adjustment expenses future ULAE costs to be paid are projected based on an expected claim handling
("ULAE") 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.
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-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The recorded reserve for losses and loss adjustment expenses represents the Company's best estimate of the ultimate settlement amount of unpaid losses and loss adjustment expenses. In applying judgment, the best estimate is selected after considering the estimates derived from a number of actuarial methods, giving more weight to those methods deemed more predictive of ultimate unpaid losses and loss adjustment expenses. The Company does not produce a statistical range or confidence interval of reserve estimates and, since reserving methods with more credibility are given greater weight, the selected best estimate may differ from the mid-point of the various estimates produced by the actuarial methods used. Assumptions used in arriving at the selected actuarial indications consider a number of factors, including the immaturity of emerged claims in recent accident years, emerging trends in the recent past, and the level of volatility within each line of business. Adjustments to reserves of prior accident years 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 2021, 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 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, per-and
polyfluoroalkyl substances ("PFAS"), 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. For additional information related to the
Company's settlement agreement with
the Boy Scouts of America , see Note 12 - Reserve for Unpaid Losses and Loss
Adjustment Expenses in the Notes to Consolidated Financial Statements. 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 security class action suits can result in reserve volatility for
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, such as due to inflation in labor and
materials because of supply chain disruptions affecting repair costs. Changes in
claim practices increase the uncertainty in the interpretation of case reserve
data, which
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-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations increases the uncertainty in recorded reserve levels. Severity trends have increased in recent accident years, in part driven by more expensive parts associated with new automobile technology, causing additional uncertainty about the reliability of past patterns. In addition, the introduction of new products and class plans has led to a different mix of business by type of insured than the Company experienced in the past. Such changes in mix increase the uncertainty of the reserve projections, since historical data and reporting patterns may not be applicable to the new business. Assumed reinsurance- While the pricing and reserving processes can be challenging and idiosyncratic for insurance companies, the inherent uncertainties of setting prices and estimating such reserves are even greater for the reinsurer. This is primarily due to the longer time between the date of an occurrence and the reporting of claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing pricing and reserving practices among ceding companies. In addition, trends that have affected development of liabilities in the past may not necessarily occur or impact liability development in the same manner or to the same degree in the future. As a result, actual losses and LAE may deviate, perhaps substantially, from the expected estimates. International business- In addition to several of the line-specific trends listed above, the International business acquired through theNavigators Group book of business may have additional uncertainty due to geopolitical, foreign currency, and trade dispute risks. COVID-19 impacts- As further explained under the "Impact of COVID-19 on our financial condition, results of operations and liquidity" section of this MD&A, the Company incurred$31 of COVID-19 claims in 2021 within P&C, including in workers' compensation and financial lines. Under workers' compensation, we have experienced 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. Under financial lines, we have experienced COVID-19 related claims under employment practices liability insurance policies. These claims tend to be low severity and we are monitoring emerging trends related to return to work and vaccine mandates. We continue to monitor exposure under director's and officer's insurance policies. In addition to the direct impacts of COVID-19 mentioned above, we are monitoring for indirect impacts as well. This past year we have seen inflationary pressure on building material and labor costs due to supply chain disruption because of the pandemic. This has the potential to impact homeowners and commercial property severity and lengthen reporting patterns due to claim settlement delays. Supply chain disruption as a result of the pandemic has also had an impact on the automobile industry impacting physical damage severities. Reserve estimates for COVID-19 claims are difficult to estimate. In establishing reserves for COVID-19 incurred claims throughDecember 31, 2021 , we have provided IBNR at a higher percentage of ultimate estimated incurred losses than usual as we expect longer claim reporting patterns given the 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 directors' and officers' ("D&O"), errors and omissions ("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. Changes in the legal environment and litigation process, including but not limited to court delays and closings, may also have potential impacts on development patterns for liability lines. Catastrophes- Within Commercial Lines and Personal Lines, the Company is exposed to incurred losses from catastrophe events, primarily for damage to property. Reserves for hurricanes, tropical storms, tornado/hail, wildfires, earthquakes and other catastrophe events are subject to significant uncertainty about the number and average severity of claims arising from those events, particularly in cases where the event occurs near the end of a financial reporting period when there is limited information about the extent of damages. For example, after a catastrophe event, it may take a period of time before we are able to access the impacted areas limiting the ability of our claims adjusting staff to inspect losses, make estimates and determine the damages that are covered by the policy. To estimate catastrophe losses, we consider information from claim notices received to date, third party data, visual images of the affected area where we have exposures and our own historical experience of loss reporting patterns for similar events. 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. The Company does not use statistical loss distributions or confidence levels in the process of determining 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., PFAS 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
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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 potential
reserve development 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. Moreover, the variation discussed does not
represent a complete statistical range of potential reserve outcomes, and
factors exist beyond the key indicators considered which have the potential to
drive additional variation to the Company's reserves.
Possible Change in Key Reserves, Net of
Indicator December 31, 2021 Reserve Development
Personal Automobile +/- 2.5 points to the $1.4 billion +/- $65
Liability annual assumed change in
loss cost severity for the
two most recent accident
years
Commercial Automobile +/- 2.5 points to the $1.2 billion +/- $30
Liability annual assumed change in
loss cost severity for the
two most recent accident
years
Workers' Compensation 2% change in paid loss $11.3 billion +/- $400
development patterns
General Liability 8% change in reported loss $5.0 billion +/- $500
development patterns
Reserving for Asbestos and Environmental Claims
How A&E Reserves are Set- The process for establishing reserves for asbestos and environmental claims first involves estimating the required reserves gross of ceded reinsurance and then estimating reinsurance recoverables. In establishing reserves for gross asbestos claims, the Company evaluates its insureds' estimated liabilities for such claims by examining exposures for individual insureds and assessing how coverage applies. The Company considers a variety of factors, including the jurisdictions where underlying claims have been brought, past, pending and anticipated future claim activity, the level of plaintiff demands, disease mix, past settlement values of similar claims, dismissal rates, allocated loss adjustment expense, and potential impact of other defendants being in bankruptcy.
Similarly, the Company reviews exposures to establish gross environmental
reserves. The Company considers several factors in estimating environmental
liabilities, including historical values of similar claims, the number of sites
involved, the insureds' alleged activities at each site, the alleged
environmental damage, the respective shares of liability of
potentially responsible parties, the appropriateness and cost of remediation,
the nature of governmental enforcement activities or mandated remediation
efforts and potential impact of other defendants being in bankruptcy.
After evaluating its insureds' probable liabilities for asbestos and/or
environmental claims, the Company evaluates the insurance coverage in place for
such claims. The Company considers its insureds' total available insurance
coverage, including the coverage issued by the Company. The Company also
considers relevant judicial interpretations of policy language, the nature of
how policy limits are enforced on multi-year policies and applicable coverage
defenses or determinations, if any.
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,
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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, 2021 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 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, 2021
Property & Total Property &
Personal Casualty Other Casualty
Commercial Lines Lines Operations Insurance
Beginning liabilities for unpaid losses and loss
adjustment expenses, gross $ 25,058 $ 1,836 $ 2,728 $ 29,622
Reinsurance and other recoverables 4,271 28 1,426 5,725
Beginning liabilities for unpaid losses and loss
adjustment expenses, net 20,787 1,808 1,302 23,897
Provision for unpaid losses and loss adjustment
expenses
Current accident year before catastrophes 5,407 1,840 - 7,247
Current accident year ("CAY") catastrophes 496 168 - 664
Prior accident year development ("PYD") [1] 141 (144) 202 199
Total provision for unpaid losses and loss adjustment
expenses
6,044 1,864 202 8,110
Change in deferred gain on retroactive reinsurance
included in other liabilities [1]
(91) - (155) (246) Payments (4,316) (1,865) (214) (6,395) Foreign currency adjustment 2 - - 2 Ending liabilities for unpaid losses and loss adjustment expenses, net 22,426 1,807 1,135 25,368 Reinsurance and other recoverables 4,480 37 1,564 6,081 Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 26,906$ 1,844 $ 2,699$ 31,449 Earned premiums and fee income $ 9,575$ 2,986 Loss and loss expense paid ratio [2] 45.1
62.5
Loss and loss expense incurred ratio 63.4
63.1
Prior accident year development (pts) [3] 1.5
(4.9)
[1]Prior accident year development does not include the benefit of a portion of
losses ceded under the Navigators and A&E ADCs 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.
[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.
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Current Accident Year Catastrophe Losses for the Year EndedDecember 31, 2021 , Net of Reinsurance Commercial Personal Lines Lines Total Wind and hail $ 157 $ 94$ 251 Winter storms [1] 151 18 169 Hurricanes and Tropical Storms 151 43 194 Wildfires 9 23 32 Losses ceded to the aggregate catastrophe treaty [2] (29) (10) (39) Catastrophes before assumed reinsurance 439 168 607 Global assumed reinsurance business [3] 57 - 57 Total catastrophe losses $ 496 $ 168$ 664 [1]Includes catastrophe losses from the February winter storms inTexas and other areas within Commercial Lines and Personal Lines of$206 and$24 , respectively, gross of reinsurance, and$151 and$18 , respectively, net of reinsurance under the Company's per occurrence property catastrophe treaty covering events other than earthquakes and named hurricanes and tropical storms. The reinsurance covers 70% of up to$250 of losses in excess of$100 from such events occurring within a seven day time period, subject to a$50 annual aggregate deductible. These recoveries do not inure to the benefit of the aggregate property catastrophe treaty reinsurers. For further information on the treaty, refer to Enterprise Risk Management - Insurance Risk section of this MD&A. [2]For further information on the aggregate catastrophe treaty, refer to Enterprise Risk Management - Insurance Risk section of this MD&A. [3]Catastrophe losses incurred on global assumed reinsurance business are not covered under the Company's aggregate property catastrophe treaty. For further information on the treaty, refer to Enterprise Risk Management - Insurance Risk section of this MD&A. Unfavorable (Favorable) Prior Accident Year Development for the
Year Ended
Property &
Personal Casualty Other Total Property &
Commercial Lines Lines Operations Casualty Insurance
Workers' compensation $ (190) $ - $ - $ (190)
Workers' compensation discount accretion 35 - - 35
General liability 454 - - 454
Marine 1 - - 1
Package business (91) - - (91)
Commercial property (26) - - (26)
Professional liability (2) - - (2)
Bond (26) - - (26)
Assumed reinsurance (6) - - (6)
Automobile liability 9 (90) - (81)
Homeowners - 3 - 3
Net asbestos and environmental reserves - - - -
Catastrophes (97) (57) - (154)
Uncollectible reinsurance (5) - (1) (6)
Other reserve re-estimates, net (6) - 48 42
Prior accident year development before change
in deferred gain 50 (144) 47 (47)
Change in deferred gain on retroactive
reinsurance included in other liabilities 91 - 155 246
Total prior accident year development $ 141 $ (144) $ 202 $ 199
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
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Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid
Losses and LAE for the Year Ended December 31, 2020
Property & Total Property &
Personal Casualty Other Casualty
Commercial Lines Lines Operations Insurance
Beginning liabilities for unpaid losses and loss
adjustment expenses, gross $ 23,363 $ 2,201 $ 2,697 $ 28,261
Reinsurance and other recoverables [1] 4,029 68 1,178 5,275
Beginning liabilities for unpaid losses and loss
adjustment expenses, net 19,334 2,133 1,519 22,986
Provision for unpaid losses and loss adjustment
expenses
Current accident year before catastrophes 5,493 1,695 - 7,188
Current accident year catastrophes 397 209 - 606
Prior accident year development [2] 44 (438) 258 (136)
Total provision for unpaid losses and loss
adjustment expenses 5,934 1,466 258 7,658
Change in deferred gain on retroactive reinsurance
included in
other liabilities [2] (102) - (210) (312)
Payments (4,348) (1,791) (265) (6,404)
Net reserves transferred to liabilities held for
sale (45) - - (45)
Foreign currency adjustment 14 - - 14
Ending liabilities for unpaid losses and loss
adjustment expenses, net 20,787 1,808 1,302 23,897
Reinsurance and other recoverables 4,271 28 1,426 5,725
Ending liabilities for unpaid losses and loss
adjustment expenses, gross $ 25,058 $ 1,836 $ 2,728 $ 29,622
Earned premiums and fee income $ 8,940 $
3,042
Loss and loss expense paid ratio [3] 48.6
58.9
Loss and loss expense incurred ratio 66.5
48.7
Prior accident year development (pts) [4] 0.5
(14.6)
[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 recorded on adoption of accounting guidance for credit losses onJanuary 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 ADCs 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 EndedDecember 31, 2020 , Net of Reinsurance Commercial Personal Lines Lines Total Wind and hail $ 167 $ 97$ 264 Civil Unrest 105 - 105 Hurricanes and Tropical Storms 96 51 147 Wildfires 21 61 82 Other 8 - 8 Total catastrophe losses $ 397 $ 209$ 606 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 2017Northern 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. OnJune 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 64
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations subrogation. In 2020, the Company received distributions, net of attorney costs, of$227 . Unfavorable (Favorable) PriorAccident Year Development for the
Year Ended
Property &
Personal Casualty Other Total Property &
Commercial Lines Lines Operations Casualty Insurance
Workers' compensation $ (110) $ - $ - $ (110)
Workers' compensation discount accretion 35 - - 35
General liability 237 - - 237
Marine 3 - - 3
Package business (58) - - (58)
Commercial property (4) - - (4)
Professional liability (14) - - (14)
Bond (19) - - (19)
Assumed reinsurance (6) - - (6)
Automobile liability 27 (61) - (34)
Homeowners - 7 - 7
Net asbestos and environmental reserves - - (2) (2)
Catastrophes (149) (380) - (529)
Uncollectible reinsurance - - (8) (8)
Other reserve re-estimates, net - (4) 58 54
Prior accident year development before change
in deferred gain (58) (438) 48 (448)
Change in deferred gain on retroactive
reinsurance included in other liabilities 102 - 210 312
Total prior accident year development $ 44 $ (438) $ 258 $ (136)
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Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid
Losses and LAE for the Year Ended December 31, 2019
Property & Total Property &
Personal Casualty Other Casualty
Commercial Lines Lines Operations Insurance
Beginning liabilities for unpaid losses and loss
adjustment expenses, gross $ 19,455 $ 2,456 $ 2,673 $ 24,584
Reinsurance and other recoverables 3,137 108 987 4,232
Beginning liabilities for unpaid losses and loss
adjustment expenses, net 16,318 2,348 1,686 20,352
Navigators Group Acquisition 2,001 - - 2,001
Provision for unpaid losses and loss adjustment
expenses
Current accident year before catastrophes 4,913 2,087 - 7,000
Current accident year catastrophes 323 140 - 463
Prior accident year development [1] (44) (42) 21 (65)
Total provision for unpaid losses and loss
adjustment expenses 5,192 2,185 21 7,398
Change in deferred gain on retroactive reinsurance
included in
other liabilities [1] (16) - - (16)
Payments (4,161) (2,400) (187) (6,748)
Foreign currency adjustment (1) - - (1)
Ending liabilities for unpaid losses and loss
adjustment expenses, net 19,333 2,133 1,520 22,986
Reinsurance and other recoverables 4,030 68 1,177 5,275
Ending liabilities for unpaid losses and loss
adjustment expenses, gross $ 23,363 $ 2,201 $ 2,697 $ 28,261
Earned premiums and fee income $ 8,325 $
3,235
Loss and loss expense paid ratio [2] 50.0
74.2
Loss and loss expense incurred ratio 62.6
68.3
Prior accident year development (pts) [3] (0.5)
(1.3)
[1]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and A&E ADCs 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. [2]The "loss and loss expense paid ratio" represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income. [3]"Prior accident year development (pts)" represents the ratio of prior accident year development to earned premiums. Current Accident Year Catastrophe Losses for the Year EndedDecember 31, 2019 , Net of Reinsurance Commercial Personal Lines Lines Total Wind and hail $ 157 $ 102$ 259 Winter storms 54 18 72 Tropical storms 18 5 23 Hurricanes 20 4 24 Wildfires 4 4 8 Tornadoes 53 7 60 Typhoons 16 - 16 Other 1 - 1 Total catastrophe losses $ 323 $ 140$ 463 66
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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
Property &
Personal Casualty Other Total Property &
Commercial Lines Lines Operations Casualty Insurance
Workers' compensation $ (120) $ - $ - $ (120)
Workers' compensation discount accretion 33 - - 33
General liability 61 - - 61
Marine 8 - - 8
Package business (47) - - (47)
Commercial property (11) - - (11)
Professional liability 29 - - 29
Bond (3) - - (3)
Assumed reinsurance 3 - - 3
Automobile liability 27 (38) - (11)
Homeowners - 3 - 3
Net asbestos and environmental reserves - - - -
Catastrophes (40) (2) - (42)
Uncollectible reinsurance (5) - (25) (30)
Other reserve re-estimates, net 5 (5) 46 46
Total prior accident year development (60) (42) 21 (81)
Change in deferred gain on retroactive
reinsurance included in other liabilities 16 - - 16
Total prior accident year development $ (44) $ (42) $ 21 $ (65)
For discussion of the factors contributing to unfavorable (favorable) for the
prior accident year reserve development 2021, 2020, and 2019 periods, 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.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
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Run-off A&E Summary as of December 31, 2021
Asbestos Environmental Total Run-off A&E
Gross
Direct $ 1,247 $ 394 $ 1,641
Assumed Reinsurance 460 68 528
Total 1,707 462 2,169
Ceded- other than NICO (444) (68) (512)
Total net reserves, before ceded losses to NICO 1,263 394 1,657
Ceded - NICO A&E ADC "Run-off"[1] (1,053)
Net $ 604
[1]Including $1,053 of ceded losses for Run-off A&E and a ($38 ) reduction in
ceded losses for Commercial Lines and Personal Lines, cumulative net incurred
losses of $1,015 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 Total Run-off A&E
2021
Beginning net reserves before reinsurance
recoverable from NICO $ 1,268 $ 419 $ 1,687
Losses and loss adjustment expenses incurred before
ceding to NICO A&E ADC
104 51 155 Losses and loss adjustment expenses paid (112) (76) (188) Reclassification of allowance for uncollectible reinsurance [1] 3 - 3
Ending net reserves before reinsurance recoverable
from NICO
1,263 394 1,657 Reinsurance recoverable from NICO A&E ADC (1,053) Ending net reserves $ 604
2020
Beginning net reserves before reinsurance recoverable from NICO$ 1,308 $ 346 $ 1,654
Losses and loss adjustment expenses incurred before
ceding to NICO A&E ADC
130 106 236 Losses and loss adjustment expenses paid (172) (33) (205) Reclassification of allowance for uncollectible reinsurance [1] 2 - 2
Ending net reserves before reinsurance recoverable
from NICO
1,268 419 1,687 Reinsurance recoverable from NICO A&E ADC (898) Ending net reserves $ 789
2019
Beginning net reserves before reinsurance recoverable from NICO$ 1,342 $ 321 $ 1,663
Losses and loss adjustment expenses incurred before
ceding to NICO A&E ADC
76 56 132 Losses and loss adjustment expenses paid (111) (32) (143) Reclassification of allowance for uncollectible reinsurance [1] 1 1 2
Ending net reserves before reinsurance recoverable
from NICO
1,308 346 1,654 Reinsurance recoverable from NICO A&E ADC (660) Ending liability - net $ 994
[1]Related to the reclassification of an allowance for uncollectible reinsurance
from the "all other" category of P&C Other Operations reserves.
A&E Adverse Development Cover EffectiveDecember 31, 2016 , the Company entered into an A&E ADC reinsurance agreement with NICO, a subsidiary of Berkshire, to reduce uncertainty about potential adverse development. Under the A&E ADC, the Company paid a reinsurance premium of$650 for NICO to assume adverse net loss and allocated loss adjustment expense reserve development up to$1.5 billion above the Company's existing net A&E reserves as ofDecember 31, 2016 of approximately$1.7 billion , including both Run-off A&E and A&E reserves in Commercial Lines and Personal Lines. The$650 reinsurance premium was placed in a collateral trust account as security for NICO's claim payment obligations to the Company. The Company has retained the risk of collection on amounts due from other third-party reinsurers and continues to be responsible for claims handling and other administrative services, subject to certain conditions. The A&E ADC covers substantially all the Company's A&E reserve development up to the reinsurance limit. Under retroactive reinsurance accounting, net adverse A&E reserve development afterDecember 31, 2016 results in an offsetting reinsurance recoverable up to the$1.5 billion limit. Cumulative ceded losses up to the$650 reinsurance 68 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 ofDecember 31, 2021 , the Company has incurred a cumulative$1,015 in adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, including$1,053 for Run-off A&E reserves, partially offset by a$38 reduction for A&E reserves in Commercial Lines and Personal Lines. As such,$485 of coverage is available for future adverse net reserve development, if any. As a result, the Company has recorded a$365 deferred gain within other liabilities, representing the difference between the reinsurance recoverable of$1,015 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. SinceDecember 31, 2016 , asbestos and environmental net reserves have been declining since all adverse development has been ceded to NICO, up to a limit of$1.5 billion 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 attachment point of$1.7 billion which was based on the carrying value of net reserves as ofDecember 31, 2016 . Accordingly, the payment of losses without any current collection of recoveries from NICO has reduced the Company's net loss reserves which decreases the net survival ratios such that, unadjusted, the net survival ratios would not be representative of the true number of years of average loss payments covered by the reserves. Therefore, the net survival ratios presented in the table below are calculated before considering the effect of the A&E ADC reinsurance agreement but net of other reinsurance in place. Net and Gross Survival Ratios Asbestos Environmental One year net survival ratio 11.3 5.2 Three year net survival ratio 9.6 8.4 One year gross survival ratio 10.9 4.2 Three year gross survival ratio 9.4 7.4 Run-off A&E Paid and Incurred Losses and LAE Development Asbestos Environmental Total A&E Paid Losses & Incurred Losses
Incurred Losses Paid Losses & Incurred Losses
LAE & LAE Paid Losses & LAE & LAE LAE & LAE 2021 Gross$ 157 $ 148 $ 109 $ 55$ 266 $ 203 Ceded- other than NICO (45) (44) (33) (4) (78) (48) Net - Gross of ADC 112 104 76 51 188 155 Ceded - NICO A&E ADC - (155) Net$ 188 $ - 2020 Gross$ 252 $ 170 $ 40 $ 141$ 292 $ 311 Ceded- other than NICO (80) (40) (7) (35) (87) (75) Net - Gross of ADC 172 130 33 106 205 236 Ceded - NICO A&E ADC - (238) Net$ 205 $ (2) 2019 Gross$ 131 $ 115 $ 39 $ 95$ 170 $ 210 Ceded- other than NICO (20) (39) (7) (39) (27) (78) Net - Gross of ADC 111 76 32 56 143 132 Ceded - NICO A&E ADC - (132) Net$ 143 $ - Annual Reserve Reviews Review of Asbestos and Environmental ReservesThe 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 2021, the Company reviewed all
of its open direct domestic insurance accounts exposed to asbestos and
environmental liability, as well as assumed reinsurance accounts.
69 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 2021 comprehensive annual reviews As a result of the 2021 fourth quarter review, the Company increased estimated asbestos reserves before NICO reinsurance by$106 , including$104 in P&C Other Operations, primarily due to an increase in claim settlement rates, claim settlement values, and defense costs, which more than offset the impact of a decline in claim filing frequency. Also contributing was an increase in the Company's estimated share of liability under pending or potential cost sharing agreements and settlements. The increase in asbestos reserves was offset by a$106 reinsurance recoverable under the NICO treaty. As a result of the 2021 fourth quarter review, the Company increased estimated environmental reserves before NICO reinsurance by$49 , including$51 in P&C Other Operations, primarily due to the settlement of a large coal ash remediation claim, an increase in legal defense costs and higher site remediation costs. The increase in environmental reserves was offset by a$49 reinsurance recoverable under the NICO treaty. The total$155 increase in asbestos and environmental reserves in P&C Other Operations was offset by a$155 reinsurance recoverable under the NICO treaty. Since cumulative losses ceded to the A&E ADC exceed the$650 of ceded premium paid, the Company recognized a$155 increase in deferred gain on retroactive reinsurance, resulting in the Company recording a charge to earnings of$155 in 2021. 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 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 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
2020, consisting of the
development on A&E reserves not subject to the NICO treaty.
For information regarding the 2019 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 2020 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 ofDecember 31, 2021 compared to approximately 71% as ofDecember 31, 2020 . Major Asbestos Defendants have been defined as the "Top 70" accounts in Tillinghast's published Tiers 1 and 2 andWellington 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 ofDecember 31, 2021 compared to approximately 29% as ofDecember 31, 2020 . Review of "All Other" Reserves in Property & Casualty Other Operations Prior year development on all other reserves resulted in increases of$47 ,$50 and$21 , respectively for calendar years 2021, 2020 and 2019. Included in the 2021 adverse reserve development was the portion of the increase in reserve for sexual molestation and sexual abuse claims recognized in P&C Other Operations, principally on assumed reinsurance. Also included in 2021 adverse development was an increase in reserves for ULAE, primarily due to an increase in expected aggregate claim handling costs associated with asbestos and environmental claims. For more information on the increase in reserves for sexual molestation and sexual abuse claims, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses, of the Notes to Consolidated Financial Statements. 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, 70 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and recent developments in commutation activity between reinsurers and cedants. As of 2021, 2020, and 2019 the allowance for uncollectible reinsurance for Property & Casualty Other Operations totaled$53 ,$60 and$71 , 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 & 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 range of prior accident year development shown in the table below is net of losses ceded, including losses ceded under two adverse development cover reinsurance agreements with NICO that are accounted for as a deferred gain on retroactive reinsurance. The amount of prior accident year development (as shown in the reserve rollforward) for a given calendar year is expressed as a percent of the beginning calendar year reserves, net of reinsurance. The ranges presented are significantly influenced by the facts and circumstances of each particular year and by the fact that only the last ten years are included in the range. Accordingly, these percentages are not intended to be a prediction of the range of possible future variability. For further discussion of the potential for variability in recorded loss reserves, see Preferred Reserving Methods by Line of Business and Impact of Key Assumptions on Reserves sections. Range of PriorAccident Year Unfavorable (Favorable) Development for the Ten Years Ended December 31, 2021 Personal Property & Casualty Total Property & Commercial Lines Lines Other Operations Casualty [1] Annual range of prior accident year unfavorable (favorable) development for the ten years ended December 31, 2021 (1.3%) - 0.6% (20.5%) - 8.3% 0.9% - 9.8% (1.9%) - 2.4%
[1]Excluding the reserve increases for asbestos and environmental reserves, over
the past ten years, reserve re-estimates for total property and casualty
insurance ranged from (1.9%) to 1.0%.
The potential variability of the Company's property and casualty insurance product reserves would normally be expected to vary by segment and the types of loss exposures insured by those segments. Illustrative factors influencing the potential reserve variability for each of the segments are discussed under Critical Accounting Estimates for Property & Casualty Insurance Product Reserves and Asbestos and Environmental Reserves. See the section entitled Property & Casualty Other Operations, Annual Reserve Reviews about the impact that the A&E ADC retroactive reinsurance agreement with NICO has on net reserve changes of asbestos and environmental reserves. The following table summarizes the effect of reserve re-estimates, net of reinsurance, on calendar year operations for the ten-year period endedDecember 31, 2021 . The total of each column details the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. The amounts in the total column on the far right represent the cumulative reserve re-estimates during the ten year period endedDecember 31, 2021 for the indicated accident year in each row. This table does not includeNavigators Group reserve re-estimates for periods prior to the acquisition of the business onMay 23, 2019 . 71 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Effect of Net Reserve Re-estimates on Calendar Year Operations
Calendar Year
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total
By Accident Year
2011 & Prior $ (4) $ 173 $ 326 $ 362 $ 310 $ 93 $ (26) $ 19 $ 277 $ 569 $ 2,099
2012 19 - (55) (35) (12) (15) (15) (25) (14) (152)
2013 (98) (43) (29) (33) (2) (26) (15) (35) (281)
2014 (14) 20 (19) (54) (29) (28) (59) (183)
2015 191 (41) (93) 19 (16) (70) (10)
2016 (29) 14 (11) (38) (83) (147)
2017 9 (116) (204) (111) (422)
2018 78 (307) (96) (325)
2019 (92) (47) (139)
2020 (101) (101)
Increase (decrease) in net reserves
[1] (4) 192 228 250 457 (41) (167) (81) (448) (47) 339
Change in deferred gain on
retroactive reinsurance included in
other liabilities 16 312 246
Total unfavorable (favorable) prior
accident year development $ (65) $ (136) $ 199
[1]Increase (decrease) in net reserves by accident year in the above table is
net of losses ceded, including losses ceded under two adverse development cover
reinsurance agreements with NICO accounted for as a deferred gain on retroactive
reinsurance. One agreement covers substantially all A&E reserve development for
2016 and prior accident years (the "A&E ADC") up to an aggregate limit of $1.5
billion and the other covered substantially all reserve development of
Navigators Insurance Company and certain of its affiliates for 2018 and prior
accident years ("Navigators ADC") up to an aggregate limit of $300 . For calendar
years before 2017, the 2011 and prior accident year development includes adverse
development for A&E reserves. 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.
The commentary below explains, by accident year, the total prior accident year
development recognized over the past 10 years.
Accident year 2011 and Prior The net increases in estimates of ultimate losses for accident years 2011 and prior were 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. Also contributing was an increase in workers' compensation and commercial automobile liability, offset by favorable development in personal automobile liability. 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, was 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 favorable frequency and medical severity trends for workers' compensation, partially offset by unfavorable frequency and severity trends for personal and commercial automobile liability and increased severity of liability claims on package business. Accident year 2016 Estimates of ultimate losses were decreased for the 2016 accident year largely due to reserve decreases on workers' compensation and personal automobile liability due to lower
estimated severity, partially 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
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, partially offset by increases in estimates of ultimate losses in general liability and bond. Partially offsetting was an increase to general liability reserves that was related to high hazard exposures which experienced increased frequency and severity trends. In addition, unfavorable bond reserve re-estimates were driven by large claims. Accident year 2018 Ultimate loss estimates were decreased for the 2018 accident year mainly due to reduction in estimated catastrophe reserves forCalifornia 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 partially offset by increases in commercial automobile liability and general liability. Commercial automobile liability reserve increases were related to higher estimated severity on middle & large commercial claims. Increases in general liability reserves for middle market and complex liability claims were also largely due to higher than previously expected severity. 72 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Accident year 2019 Ultimate loss estimates were decreased for the 2019 accident year mainly due to favorable emergence of property lines of business, primarily related to catastrophes. In addition, reduced reserve estimates for personal automobile liability were largely offset by higher reserve estimates for commercial automobile liability. Accident year 2020 Ultimate loss estimates were decreased for the 2020 accident year mainly due to favorable emergence of property lines of business, inclusive of catastrophes. Reserve estimates were also reduced, to a lesser extent, for personal automobile liability due to lower estimated severity and for general liability. |GROUP BENEFIT RESERVES, NET OF REINSURANCEThe 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$6,437 and$6,494 of LTD unpaid losses and loss adjustment expenses, net of reinsurance, as ofDecember 31, 2021 and 2020, respectively.
Reserving Methodology
How Reserves are Set - A Disabled Life Reserve ("DLR") is calculated for each
LTD claim. The DLR for each claim is the expected present value of all future
benefit payments starting with the known monthly gross benefit which is reduced
for estimates of the expected claim recovery due to return to work or claimant
death, offsets from other income including offsets from Social Security
benefits, and discounting where the discount rate is tied to expected investment
yield at the time the claim is incurred. Estimated future benefit payments
represent the monthly income benefit that is paid until recovery, death or
expiration of benefits. Claim recoveries are estimated based on claim
characteristics such as age and diagnosis and represent an estimate of benefits
that will terminate, generally as a result of the claimant returning to work or
being deemed able to return to work. For claims recently closed due to recovery,
a portion of the DLR is retained for the possibility that the claim reopens upon
further evidence of disability. In addition, a reserve for estimated unpaid
claim expenses is included in the DLR.
The DLR also includes a liability for potential payments to pending claimants
beyond the elimination period who have not yet been approved for LTD. In these
cases, the present value of future benefits is reduced for the likelihood of
claim denial based on Company experience.
Estimates for 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 long-term disability, which is the largest reserve
within Group Benefits, include:
Discount Rate - The discount rate is the interest rate at which expected future claim cash flows are discounted to determine the present value. A higher selected discount rate results in a lower reserve. If the discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to cover the discount accretion on our claim reserves which would negatively affect our profits. For each incurral year, the discount rates are estimated based on investment yields expected to be earned net of investment expenses. The incurral year is the year in which the claim is incurred and the estimated settlement pattern is determined. Once established, discount rates for each incurral year are unchanged except that LTD reserves assumed from the acquisition ofAetna 'sU.S. group life and disability business are all discounted using rates as of theNovember 1, 2017 acquisition date. The weighted average discount rate on LTD reserves was 3.3% and 3.4% in 2021 and 2020, respectively. Had the discount rate for each incurral year been 10 basis points lower at the time they were established, our LTD unpaid loss and loss adjustment expense reserves would be higher by$28 , before tax, as ofDecember 31, 2021 . Claim Termination Rates (inclusive of mortality, recoveries, and expiration of benefits) - Claim termination rates are an estimate of the rate at which claimants will cease receiving benefits during a given calendar year. Terminations result from a number of factors, including death, recoveries and expiration of benefits. The probability that benefits will terminate in each future month for each claim is estimated using a predictive model that uses past Company experience, contract provisions, job characteristics and other claimant-specific characteristics such as diagnosis, time since disability began, and age. Actual claim termination experience will vary from period to period. Over the past 10 years, claim termination rates for a single incurral year have generally increased and have ranged from 5% below to 8% above current assumptions over that time period. For a single recent incurral year (such as 2021), a one percent decrease in our assumption for LTD claim termination rates would increase our reserves by$10 . For all incurral years combined, as ofDecember 31, 2021 , a one percent decrease in our assumption for our LTD claim 73 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations termination rates would increase our Group Benefits unpaid losses and loss adjustment expense reserves by$23 .
Impact of COVID-19 on 2021 Results of Operations
Within Group Benefits, the Company experienced excess mortality in its group life business of$583 in 2021, primarily caused by direct and indirect impacts of COVID-19. Within the group disability business, in 2021 the Company recognized$31 of COVID-19 related losses from short-term disability claims.
Current Trends Contributing to Reserve Uncertainty
While we have not seen a significant change in claim recovery patterns to date
due to COVID-19, we have observed delays in
the
potential pandemic-related risks, such as delays in medical care or
return-to-work and the emerging risk of long-COVID symptoms are being monitored.
Also, due to the effects on the economy, we could experience an increase in
claim incidence on long-term disability claims.
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 2021 incurral year is down slightly from that of the 2020 incurral year. |EVALUATION OF GOODWILL FOR IMPAIRMENTGoodwill balances are reviewed for impairment at least annually, or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. The recognition and measurement of goodwill impairment is 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 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
comprised of
Benefits, and
The annual goodwill assessment for the reporting units was completed as ofOctober 31, 2021 , and resulted in no write-downs of goodwill for the year endedDecember 31, 2021 . All reporting units passed the annual impairment test with a significant margin. For information regarding the 2021 and 2020 impairment tests see Note 11 -Goodwill & Other Intangible Assets of Notes to Consolidated Financial Statements. |VALUATION OF INVESTMENTS AND DERIVATIVE INSTRUMENTS Fixed Maturities,Equity Securities , Short-term Investments, and DerivativesThe Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources which are listed in priority order: quoted prices, prices from third-party pricing services, internal matrix pricing, and independent broker quotes. The fair value of derivative instruments is determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded 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,
Short-term Investments and Derivatives section in Note 5 - Fair Value
Measurements of Notes to Consolidated Financial Statements.
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
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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.
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SEGMENT OPERATING SUMMARIES
|COMMERCIAL LINES - RESULTS OF OPERATIONS
Underwriting Summary
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Written premiums $ 10,041 $ 8,969 $ 8,452 12 % 6 %
Change in unearned premium reserve 500 59 162 NM (64 %)
Earned premiums 9,541 8,910 8,290 7 % 7 %
Fee income 34 30 35 13 % (14 %)
Losses and loss adjustment expenses
Current accident year before catastrophes 5,407 5,488 4,913 (1 %) 12 %
Current accident year catastrophes [1] 496 397 323 25 % 23 %
Prior accident year development [1] 141 44 (44) NM NM
Total losses and loss adjustment expenses 6,044 5,929 5,192 2 % 14 %
Amortization of DAC 1,398 1,397 1,296 - % 8 %
Underwriting expenses 1,678 1,594 1,600 5 % - %
Amortization of other intangible assets 29 28 18 4 % 56 %
Dividends to policyholders 24 29 30 (17 %) (3 %)
Underwriting gain (loss) 402 (37) 189 NM (120 %)
Net servicing income 13 4 2 NM 100 %
Net investment income [2] 1,502 1,160 1,129 29 % 3 %
Net realized gains (losses) [2] 260 (60) 271 NM (122 %)
Loss on reinsurance transaction - - (91) - % 100 %
Other (expenses) (18) (35) (38) 49 % 8 %
Income before income taxes 2,159 1,032 1,462 109 % (29 %)
Income tax expense [3] 402 176 270 128 % (35 %)
Net income $ 1,757 $ 856 $ 1,192 105 % (28 %)
[1]For additional information on 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.
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Premium Measures
2021 2020 2019
Small Commercial:
Net new business premium $ 673 $ 557 $ 646
Policy count retention [1] 84 % 83 % 82 %
Policy count retention, net of cancellations [1] 87 % 84 % 83 %
Renewal written price increases 3.0 % 2.0 % 1.7 %
Renewal earned price increases 2.6 % 2.1 % 1.9 %
Policies in-force as of end of period (in thousands) 1,366 1,283 1,291
Middle Market [2]:
Net new business premium $ 532 $ 479 $ 584
Policy count retention [1] 82 % 78 % 81 %
Policy count retention, net of cancellations [1] 83 % 78 % 81 %
Renewal written price increases 6.0 % 7.7 % 3.9 %
Renewal earned price increases 7.3
% 6.5 % 2.8 %
Global Specialty: Global specialty gross new business premium [3]$ 912 $ 752 U.S. global specialty renewal written price increases 11.5 % 17.3 % U.S. global specialty renewal earned price increases 16.6
% 13.0 %
International global specialty renewal written price
increases [4]
19.6
% 41.8 %
International global specialty renewal earned price
increases [4]
42.8
% 41.3 %
[1]Policy count retention represents the ratio of the number of renewal policies
issued during the current year period divided by the number of policies issued
in the previous calendar year period before considering policies cancelled
subsequent to renewal. Policy count retention, net of cancellations, represents
the ratio of the number of renewal policies issued net of cancellations during
the current year period divided by the number of policies issued net of
cancellations in the previous calendar year period.
[2]Except for net new business premium, metrics for middle market exclude loss
sensitive and programs businesses.
[3]Excludes Global Re and Continental Europe Operations and is before ceded
reinsurance.
[4]Excludes offshore energy policies, political violence and terrorism policies,
and any business under which the managing agent of our Lloyd's Syndicate
delegates underwriting authority to coverholders and other third parties.
Underwriting Ratios
Increase (Decrease) Increase (Decrease)
2021 2020
2019 From 2020 to 2021 From 2019 to 2020
Loss and loss adjustment expense ratio
Current accident year before catastrophes
56.7 61.6 59.3 (4.9) 2.3 Current accident year catastrophes 5.2 4.5 3.9 0.7 0.6 Prior accident year development 1.5 0.5 (0.5) 1.0 1.0 Total loss and loss adjustment expense ratio 63.3 66.5 62.6 (3.2) 3.9 Expense ratio 32.2 33.5 34.7 (1.3) (1.2) Policyholder dividend ratio 0.3 0.3 0.4 - (0.1) Combined ratio 95.8 100.4 97.7 (4.6) 2.7 Impact of current accident year catastrophes and prior year development (6.7) (5.0) (3.4) (1.7) (1.6) Impact of current accident year change in loss reserves upon acquisition of a business [1] - - (0.3) - 0.3 Underlying combined ratio 89.1 95.5 94.0 (6.4) 1.5 [1]Upon acquisition ofNavigators Group and a review of Navigators Insurers reserves, the year endedDecember 31, 2019 included$68 of prior accident year reserve increases and$29 of current accident year reserve increases which were excluded for the purposes of the underlying combined ratio calculation. 77 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Net Income
[[Image Removed: hig-20211231_g27.jpg]]
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net income increased primarily due to a change from an underwriting loss to an
underwriting gain, higher net investment income and a change from net realized
losses to net realized gains. For further discussion of investment results, see
MD&A - Investment Results.
Underwriting Gain (Loss)
[[Image Removed: hig-20211231_g28.jpg]]
Year ended
Underwriting gain in 2021 compared with an underwriting loss in 2020 with the improvement primarily due to lower current accident year losses before catastrophes, partially offset by higher net unfavorable prior accident year development and higher current accident year catastrophes. The decrease in current accident year losses before catastrophes was primarily driven by$278 before tax of COVID-19 incurred losses in 2020 compared with$31 before tax of COVID-19 incurred losses in 2021, partially offset by the impact of higher earned premium on incurred losses. Underwriting expenses increased due to higher contingent and supplemental commissions, incentive compensation, technology costs and marketing expenses, partially offset by a decrease in the allowance for credit losses on premiums receivable in the 2021 period compared to an increase in the 2020 period and savings from Hartford Next initiatives. Earned Premiums [[Image Removed: hig-20211231_g29.jpg]] [1]Other of$42 ,$43 and$43 for 2019, 2020 and 2021, respectively, is included in the total. Written Premiums [[Image Removed: hig-20211231_g30.jpg]]
[1]Other written premiums of
2019
78 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 Earned premiums increased in 2021 due to written premium increases over the prior 12 months as well as due to higher premiums from audits and endorsements, principally in workers' compensation due to an increasing exposure base from higher payrolls as the economy recovers from the pandemic.
Written premiums increased in 2021 driven by growth in small commercial, middle
& large commercial and global specialty across most lines of business.
The Company recognized renewal written pricing increases in all lines in 2021, with moderating price increases across most lines in middle market and global specialty. In global specialty, ourU.S. wholesale book achieved an approximate 16% renewal written price increase, led by excess casualty. Global specialty international lines achieved a nearly 20% price increase, led by D&O. In small commercial, renewal written price increases were higher in 2021 than 2020, with workers' compensation pricing slightly positive in 2021 due to rising wages, along with mid-single digit increases in most other lines. In middle market, the Company recognized high single-digit to low double-digit rate increases in most middle market lines other than workers' compensation, which experienced low single-digit written pricing increases.
Written premium increased across all three lines of business.
•Small commercial written premium increased in 2021 driven by exposure growth from higher audit and endorsement premium, higher policy count retention, renewal written pricing increases in all lines as well as new business growth. Written premium grew in all lines of business, with the most significant growth in package business and workers' compensation. •Middle & large commercial written premium increased in 2021 driven by exposure growth from higher audit and endorsement premium, improved retention, renewal written pricing increases in all lines as well as new business growth. Written premium grew in most lines of business, including general industries, national accounts, complex liability solutions and specialized industries. •Global specialty written premium increased in 2021 driven by continued strong written pricing increases, higher retention and growth in gross new written premium. Written premium grew in all lines except international, with the most significant growth inU.S. wholesale, financial lines and global reinsurance. Current Accident Year Loss and LAE Ratio before Catastrophes [[Image Removed: hig-20211231_g31.jpg]]
Year ended
Current Accident Year Loss and LAE ratio before catastrophes decreased in 2021 primarily due to lower COVID-19 incurred losses in 2021 as well as due to lower loss ratios in global specialty and workers' compensation. The lower loss ratios in global specialty were largely the result of rate and underwriting actions to improve profitability in those lines and was driven byU.S. financial lines, global reinsurance,U.S. wholesale and international. 2021 included COVID-19 incurred losses of$31 before tax, including losses of$20 in workers' compensation and$11 in financial and other lines. 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 as well as a reserve of$40 for legal defense costs. Workers' compensation COVID-19 incurred losses include 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 include exposures in D&O, E&O and employment practices liability and the recessionary impacts on the surety book of business. 79 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
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and Results of Operations
Catastrophes and Unfavorable (Favorable) Prior
[[Image Removed: hig-20211231_g32.jpg]]
Year ended
Current accident year catastrophe losses for 2021 included losses from tornado, wind and hail events, mostly concentrated in the Midwest,Texas and Southeast as well as hurricane Ida, and February winter storms primarily in the South.
Current accident year catastrophe losses for 2020 were primarily from civil
unrest, a number of hurricanes and tropical storms,
Northeast windstorms as well as tornado, wind and hail events in the South,
Midwest and Central Plains.
Prior accident year development was net unfavorable for 2021. Reserve development in 2021 included an increase in general liability that included a reserve increase related to the settlement withBoy Scouts of America on sexual molestation and sexual abuse claims, largely offset by reserve decreases for workers' compensation, package business, catastrophes, commercial property and bond.
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. Partially offsetting was
favorable development on prior year catastrophe reserves in 2020 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 both 2021 and 2020 included reserve increases
related to
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.
2022 Outlook The Company expects Commercial Lines written premiums in 2022 to be 4% to 5% higher than 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. In middle & large commercial, we expect written premium growth in our general industries book of business driven by improved retention and new business growth, as well as an increase in new business in specialized industries. In global specialty, premium growth in 2022 is expected primarily in wholesale and financial lines in theU.S. , as well as in global reinsurance and international. In 2022, management expects positive renewal written pricing in most lines, though workers' compensation pricing is expected to be flat to slightly negative. Across the rest of Commercial Lines, mid single-digit rate increases are expected to continue in most lines with written pricing increases in the high single-digits in wholesale and ocean marine. Written pricing increases in 2022 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 90.0 to 92.0 in 2022, compared to 95.8 in 2021, primarily due to lower current accident year catastrophe losses expected in 2022, and the effect of a prior accident year reserve increase and COVID-19 incurred claims in 2021. Apart from lower expected COVID-19 claims, we expect earned pricing increases in excess of loss costs in most lines except workers' compensation, while the expense ratio is expected to improve driven, in part, by additional savings from Hartford Next initiatives. The underlying combined ratio is expected to be 86.5 to 88.5 in 2022 compared to 89.1 in 2021. 80
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| PERSONAL LINES - RESULTS OF OPERATIONS
Underwriting Summary
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Written premiums $ 2,908 $ 2,936 $ 3,131 (1 %) (6 %)
Change in unearned premium reserve (46) (72) (67) 36 % (7 %)
Earned premiums 2,954 3,008 3,198 (2 %) (6 %)
Fee income 32 34 37 (6 %) (8 %)
Losses and loss adjustment expenses
Current accident year before catastrophes 1,840 1,695 2,087
9 % (19 %) Current accident year catastrophes [1] 168 209 140 (20 %) 49 % Prior accident year development [1] (144) (438) (42) 67 % NM Total losses and loss adjustment expenses 1,864 1,466 2,185 27 % (33 %) Amortization of DAC 230 244 259 (6 %) (6 %) Underwriting expenses 615 591 625 4 % (5 %) Amortization of other intangible assets 2 4 6 (50 %) (33 %) Underwriting gain 275 737 160 (63 %) NM Net servicing income [2] 19 14 13 36 % 8 % Net investment income [3] 157 157 179 - % (12 %) Net realized gains (losses) [3] 29 (5) 43 NM (112 %) Other income (expenses) - (1) (1) 100 % - % Income before income taxes 480 902 394 (47 %) 129 % Income tax expense [4] 95 184 76 (48 %) 142 % Net income$ 385 $ 718 $ 318 (46 %) 126 % [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 and Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses. [2]Includes servicing revenues of$80 ,$81 , and$83 for 2021, 2020, and 2019, respectively and includes servicing expenses of$61 ,$67 , and$70 for 2021, 2020, and 2019, respectively. [3]For discussion of consolidated investment results, see MD&A - Investment Results. [4]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements. Written and Earned Premiums Increase (Decrease) Increase (Decrease) Written Premiums 2021 2020 2019 From 2020 to 2021 From 2019 to 2020 Product Line Automobile$ 1,997 $ 2,003 $ 2,176 - % (8 %) Homeowners 911 933 955 (2 %) (2 %) Total$ 2,908 $ 2,936 $ 3,131 (1 %) (6 %) Earned Premiums Product Line Automobile$ 2,035 $ 2,058 $ 2,221 (1 %) (7 %) Homeowners 919 950 977 (3 %) (3 %) Total$ 2,954 $ 3,008 $ 3,198 (2 %) (6 %) 81
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Premium Measures
2021 2020 2019
Policies in-force end of period (in thousands)
Automobile 1,317 1,369 1,422
Homeowners 773 826 877
New business written premium
Automobile $ 219 $ 223 $ 220
Homeowners $ 60 $ 63 $ 73
Policy count retention [1]
Automobile 84 % 84 % 83 %
Homeowners 85 % 84 % 83 %
Policy count retention, net of cancellations [1]
Automobile 84 % 86 % 85 %
Homeowners 84 % 86 % 85 %
Renewal written price increase
Automobile 2.2 % 2.4 % 4.6 %
Homeowners 8.5 % 6.4 % 6.5 %
Renewal earned price increase
Automobile 2.1 % 3.4 % 5.5 %
Homeowners 8.1 % 5.7 % 8.4 %
[1]Policy count retention represents the ratio of the number of renewal policies
issued during the current year period divided by the number of policies issued
in the previous calendar period before considering policies cancelled subsequent
to renewal. Policy count retention, net of cancellations, represents the ratio
of the number of renewal policies issued net of cancellations during the current
year period divided by the number of policies issued net of cancellations in the
previous calendar period.
Underwriting Ratios
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Loss and loss adjustment expense ratio
Current accident year before
catastrophes 62.3 56.3 65.3 6.0 (9.0)
Current accident year catastrophes 5.7 6.9 4.4 (1.2) 2.5
Prior accident year development (4.9) (14.6) (1.3) 9.7 (13.3)
Total loss and loss adjustment expense
ratio 63.1 48.7 68.3 14.4 (19.6)
Expense ratio 27.6 26.8 26.7 0.8 0.1
Combined ratio 90.7 75.5 95.0 15.2 (19.5)
Impact of current accident year
catastrophes and prior year development (0.8) 7.7 (3.1) (8.5) 10.8
Underlying combined ratio 89.9 83.1 91.9 6.8 (8.8)
Product Combined Ratios
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Automobile
Combined ratio 92.9 85.5 96.6 7.4 (11.1)
Underlying combined ratio 95.9 88.0 97.9 7.9 (9.9)
Homeowners
Combined ratio 86.8 54.2 91.7 32.6 (37.5)
Underlying combined ratio 76.5 72.5 78.3 4.0 (5.8)
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Net Income
[[Image Removed: hig-20211231_g33.jpg]]
Year ended
Net income decreased in 2021, largely driven by a decrease in underwriting gain,
partially offset by a change from net realized losses to net realized gains and
an increase in net servicing income.
Underwriting Gain
[[Image Removed: hig-20211231_g34.jpg]]
Year ended
Underwriting gain decreased in 2021, primarily due to a decrease in favorable prior accident year catastrophe reserve development and higher current accident year personal automobile loss costs. Also contributing was an increase in underwriting expenses and higher current accident year non-catastrophe property losses, partially offset by lower current accident year catastrophe losses. Contributing to the increase in underwriting expenses in 2021 was higher costs forAARP direct marketing, incentive compensation, and technology, partially offset by cost savings from the Hartford Next initiative. Earned Premiums [[Image Removed: hig-20211231_g35.jpg]] Year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 Earned premiums decreased in 2021 due to the effect of a decline in written premium over the prior twelve months in both Agency channels and in AARP Direct due to non-renewals exceeding new business. The decrease was partially offset by 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 reduced miles driven in 2020. Written Premiums [[Image Removed: hig-20211231_g36.jpg]] Written premiums decreased in automobile for 2021 due to the effect of non-renewed premium exceeding new business, partially offset by the effect of the premium credits given in the 2020 period. Written premium declined in homeowners due to the effect of non-renewed premium exceeding new business. For automobile and homeowners new business decreased in 2021 compared to the prior year.
Renewal written pricing increases were down modestly in automobile for 2021
while renewal written pricing increases for homeowners were higher in 2021 in
response to recent loss cost trends.
Policy count retention was flat for automobile and was up slightly for
homeowners.
Policies in-force decreased in the 2021 period in both automobile and homeowners
driven by not generating enough new business to offset the loss of non-renewed
policies.
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Current Accident Year Loss and Loss Adjustment Expense Ratio before Catastrophes
[[Image Removed: hig-20211231_g37.jpg]]
Year ended
Current accident year loss and LAE ratio before catastrophes increased in 2021 by 7.1 points in automobile and 3.1 points in homeowners. The increase in automobile was due to higher claim frequency, due to an increase in miles driven, and an increase in average claim severity. For 2021, the homeowners current accident year loss and LAE ratio before catastrophes increased due to an increase in weather and non-weather severity, partially offset by the effect of earned pricing increases. Contributing to the increase in homeowners severity was the effect of higher rebuilding costs and a greater number of large losses.
Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident
Year Development [[Image Removed: hig-20211231_g38.jpg]]
Year ended
Current accident year catastrophe losses decreased in 2021 compared to the prior year. Current accident year catastrophe losses for 2021 included losses from hurricane Ida, tropical storms,California wildfires, and February winter storms as well as losses largely from tornado, wind and hail events, mostly concentrated inTexas , the Southeast, Midwest and Mountain West. Current accident year catastrophe losses for 2020 were primarily fromPacific Coast wildfires, tropical storm Isaias, hurricane Laura, and various tornado, wind and hail events in the South, Midwest and Central Plains. Prior accident year development was less favorable in 2021, with the decrease largely due to lower reserve reductions for prior year catastrophes. Prior accident year development was favorable in 2021, with a reduction in personal automobile liability and a decrease in catastrophe reserves, driven by reductions in estimates for prior year hurricanes, tornado & hail and wildfires, including the benefit of higher expected subrogation recoveries related to the 2017 and 2018 California wildfires. Prior accident year development was favorable in 2020 with reserve reductions in catastrophes and, to a lesser extent, personal automobile liability. The reduction in catastrophe reserves for 2020 was 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 2018 and 2019 wind and hail events. 84 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
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and Results of Operations
2022 Outlook Written premium is expected to decrease in 2022 compared with 2021 as non-renewal of premium more than offsets new business. While new business conversions are expected to increase with the continued rollout of the Prevail automobile and home product in additional states, new business premium is expected to be lower despite expected higher conversion rates as the Company transitions from 12-month automobile policies to 6-month automobile policies forAARP members. In 2022, the Company expects written pricing increases in automobile to be in the low to mid-single digits throughout the year as the effect of recent claim frequency and severity trends are reflected in rate filings. Written pricing increases in homeowners are expected to be in the mid-to-high single digits.
The Company expects the combined ratio for Personal Lines will be 97.0 to 99.0
in 2022 compared to 90.7 in 2021 as 2021
benefited from claim frequency that was still below pre-pandemic levels as well as from lower current accident year catastrophe losses and favorable prior accident year development. The underlying combined ratio for Personal Lines is expected to be 90.0 to 92.0 in 2022 compared to 89.9 in 2021 due to an increase in the current accident year loss and loss adjustment expense ratio before catastrophes in both automobile and homeowners with supply chain disruptions causing an increase in severity through 2022. For automobile, we expect the underlying combined ratio to increase driven by an increase in both claim frequency and severity. The underlying combined ratio for homeowners is also expected to increase in 2022, 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.
| PROPERTY & CASUALTY OTHER OPERATIONS - RESULTS OF OPERATIONS
Underwriting Summary
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Change in unearned premium reserve $ - $ -
- % 100 %
Earned premiums - - 2 - % (100 %)
Losses and loss adjustment expenses
Prior accident year development [1] 202 258 21 (22 %) NM
Total losses and loss adjustment
expenses 202 258 21 (22 %) NM
Underwriting expenses 8 11 12 (27 %) (8 %)
Underwriting loss (210) (269) (31) 22 % NM
Net investment income [2] 75 55 84 36 % (35 %)
Net realized gains (losses) [2] 13 (1) 20 NM (105 %)
Other income (expenses) (1) 1 - NM NM
Income (loss) before income taxes (123) (214) 73 43 % NM
Income tax expense (benefit) [3] (28) (46) 12 39 % NM
Net income (loss) $ (95) $ (168) $ 61 43 % NM
[1]For discussion of prior accident year development, see MD&A - Critical
Accounting Estimates, Property and Casualty Insurance Product Reserves, 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.
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Net Income (Loss)
[[Image Removed: hig-20211231_g39.jpg]]
Year ended
Net loss in 2021 decreased compared to 2020, primarily due to lower unfavorable
prior accident year reserve development, higher net investment income and a
change from net realized losses to net realized gains.
Underwriting loss in 2021 decreased from 2020 primarily due to a lower increase
in A&E reserves. Unfavorable prior
accident year development in 2021 included a$155 increase in A&E reserves, an increase in reserves for sexual molestation and sexual abuse claims, primarily on assumed reinsurance, and a$14 increase in ULAE reserves, partially offset by a reduction in the allowance for uncollectible reinsurance. Unfavorable prior accident year development in 2020 primarily included a $208 increase in A&E reserves, and a $35 increase in ULAE reserves. In both periods, the increase in ULAE reserves was primarily driven by the higher estimate for A&E claims. Before NICO reinsurance in 2021, A&E reserves were increased by $155 in P&C Other Operations, including $104 for asbestos and $51 for environmental. Cumulative adverse A&E reserve development on both ongoing operations and P&C Other Operations totaled $1,015 through December 31, 2021 and since this amount exceeds ceded premium paid for the A&E ADC of $650, the Company has recognized a $365 deferred gain on retroactive reinsurance as of December 31, 2021, within other liabilities, including a $155 increase in deferred gain in 2021 recognized within P&C Other Operations. Asbestos reserves prior accident year development in 2021 before NICO reinsurance of $104 was primarily due to an increase in claim settlement rates, claim settlement values, and defense costs, which more than offset the impact of a decline in claim filing frequency. Also contributing was an increase in the Company's estimated share of liability under pending or potential cost sharing agreements and settlements.
Environmental reserves prior accident year development in 2021 before NICO
reinsurance of $51 was primarily due to the settlement of a large coal ash
remediation claim, an increase in legal defense costs and higher site
remediation costs.
|GROUP BENEFITS - RESULTS OF OPERATIONS
Operating Summary
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Premiums and other considerations $ 5,687 $ 5,536 $ 5,603 3 % (1 %)
Net investment income [1] 550 448 486 23 % (8 %)
Net realized gains [1] 130 22 34 NM (35 %)
Total revenues 6,367 6,006 6,123 6 % (2 %)
Benefits, losses and loss adjustment expenses 4,612 4,137
4,055 11 % 2 %
Amortization of DAC 40 50 54 (20 %) (7 %)
Insurance operating costs and other expenses 1,373 1,308 1,311 5 % - %
Amortization of other intangible assets 40 40 41 - % (2 %)
Total benefits, losses and expenses 6,065 5,535 5,461 10 % 1 %
Income before income taxes 302 471 662 (36 %) (29 %)
Income tax expense [2] 53 88 126 (40 %) (30 %)
Net income $ 249 $ 383 $ 536 (35 %) (29 %)
[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.
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Premiums and Other Considerations
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Fully insured - ongoing premiums $ 5,502 $ 5,305 $ 5,416 4 % (2 %)
Buyout premiums 2 56 7 (96 %) NM
Fee income 183 175 180 5 % (3 %)
Total premiums and other considerations $ 5,687 $ 5,536 $ 5,603 3 % (1 %)
Fully insured ongoing sales, excluding buyouts $ 760 $ 717 $
647 6 % 11 %
Ratios, Excluding Buyouts
Increase Increase
(Decrease) From (Decrease) From
2021 2020 2019 2020 to 2021 2019 to 2020
Group disability loss ratio 68.2 % 66.1 % 67.3 % 2.1 (1.2)
Group life loss ratio 101.9 % 87.5 % 79.5 % 14.4 8.0
Total loss ratio 81.1 % 74.5 % 72.3 % 6.6 2.2
Expense ratio [1] 25.5 % 25.2 % 24.5 % 0.3 0.7
[1]Integration and transaction costs related to the acquisition of
group life and disability business are not included in the expense ratio.
Margin
Increase Increase
(Decrease) From (Decrease) From
2021 2020 2019 2020 to 2021 2019 to 2020
Net income margin 3.9 % 6.4 % 8.8 % (2.5) (2.4)
Adjustments to reconcile net income margin to
core earnings margin:
Net realized losses (gains) excluded from core
earnings, before tax (2.0 %) (0.4 %) (0.5 %) (1.6) 0.1
Integration and other non-recurring M&A costs,
before tax 0.1 % 0.3 % 0.6 % (0.2) (0.3)
Income tax benefit 0.5 % - % - % 0.5 0.0
Impact of excluding buyouts from denominator of
core earnings margin - % 0.1 % - % (0.1) 0.1
Core earnings margin 2.5 % 6.4 % 8.9 % (3.9) (2.5)
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Net Income
[[Image Removed: hig-20211231_g40.jpg]]
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net income decreased largely driven by higher excess mortality and short-term disability losses and higher operating expenses, partially offset by an increase in net realized gains, an increase in net investment income and increased earned premiums. Insurance operating costs and other expenses were higher year over year as an increase in incentive compensation, technology costs and claim costs to handle elevated claim levels resulting from the pandemic was partially offset by lower staffing and other costs due to the Hartford Next operational transformation and cost reduction program and a decrease in integration costs.
In addition, 2021 included a decrease in the allowance for credit losses on
premiums receivable compared to an increase in the allowance in the prior year.
Fully Insured Ongoing Premiums
[[Image Removed: hig-20211231_g41.jpg]]
Year ended December 31, 2021 compared to the year ended December 31, 2020
Fully insured ongoing premiums increased primarily due to an increase in
exposure on existing accounts as our customers emerge from the pandemic, as well
as strong persistency and sales.
Fully insured ongoing sales, excluding buyouts increased with increases in group
disability and other partially offset by a decrease in group life.
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and Results of Operations
Ratios
[[Image Removed: hig-20211231_g42.jpg]]
Year ended December 31, 2021 compared to the year ended December 31, 2020
Total loss ratio increased 6.6 points for 2021 reflecting a higher group life
loss ratio and higher group disability loss ratio. The group life loss ratio
increased 14.4 points driven by a 14.5 point increase in excess mortality claims
compared to the twelve month period ended December 31, 2020. For the twelve
month periods ended December 31, 2021 and 2020, excess mortality losses were
$583 and $239, respectively. The group disability loss ratio increased 2.1
points over the twelve-month period ended December 31, 2020. Both the short-term
and long-term disability loss ratios reflect increased claim incidence
especially compared to the favorable incidence levels experienced during the
early stages of the pandemic. The increased claim incidence was partially offset
by a higher favorable New York Paid Family Leave adjustment recognized in the
2021 period.
Expense ratio increased 0.3 points in 2021 driven by an increase in incentive
compensation, technology costs and claim costs to handle elevated claim levels
resulting from the pandemic, partially offset by lower staffing and other costs
as a result of the Hartford Next operational transformation and cost reduction
program, and higher earned premiums. Also included was a decrease in the
allowance for credit losses on premiums receivable compared to an increase in
the allowance in the prior year period.
2022 Outlook
The Company expects Group Benefits fully insured ongoing premiums to increase
approximately 2% in 2022 due to higher book persistency and continued strong
sales. We expect net income in 2022 to benefit from lower excess mortality and
pandemic related short-term disability losses, partially offset by the effects
of downward pressure on pricing due to recent historical favorable long-term
disability claim incidence, an expectation of higher claim incidence and less
favorable recoveries on long-term disability claims in 2022 and lower expected
investment yields. For 2022, we have assumed excess mortality losses of $100 to
$200 before tax and COVID-19 short-term disability losses of approximately $25
before tax. The level of excess mortality losses is subject to significant
uncertainty as it is dependent on a number of factors difficult to predict
including, among others, the ultimate vaccination rate of the population, the
continued effectiveness of the vaccines, the potential spread of new COVID-19
variants, the percentage of those infected who are of working age and the strain
on the health care system preventing timely treatment of chronic illnesses.
Compared to the net income margin of 3.9% in 2021, the net income margin in 2022
will largely depend on the level of excess mortality claims and other COVID-19
impacts. Based on the assumed range of excess mortality and COVID-19 short-term
disability losses, the core earnings margin is expected to be 3.1% to 5.4% in
2022 compared to the 2.5% core earnings margin reported in 2021.
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|HARTFORD FUNDS - RESULTS OF OPERATIONS
Operating Summary
Increase (Decrease) Increase (Decrease)
2021 2020
2019 From 2020 to 2021 From 2019 to 2020
Fee income and other revenue
$ 1,189 $ 989 $ 999 20 % (1 %) Net investment income 5 4 7 25 % (43 %) Net realized gains 4 8 5 (50 %) 60 % Total revenues 1,198 1,001 1,011 20 % (1 %) Amortization of DAC 12 14 12 (14 %) 17 % Operating costs and other expenses 913 773 813 18 % (5 %) Total benefits, losses and expenses 925 787 825 18 % (5 %) Income before income taxes 273 214 186 28 % 15 % Income tax expense [1] 56 44 37 27 % 19 % Net income $ 217 $ 170 $ 149 28 % 14 %
Daily average total Hartford Funds segment AUM $ 151,347 $ 120,908 $ 117,914
25 % 3 %
Return on Assets ("ROA") [2] 14.3 14.1 12.5 0.2 1.6
Adjustments to reconcile ROA to ROA, core
earnings:
Effect of net realized gains, excluded from core
earnings, before tax (0.3) (0.7) (0.3) 0.4 (0.4)
Effect of income tax expense 0.1 0.1 - 0.0 0.1
Return on Assets ("ROA"), core earnings [2] 14.1 13.5 12.2 0.6 1.3
[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
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Mutual Fund and ETP AUM - beginning of period $ 124,627 $ 112,533 $ 91,557 11 % 23 %
Sales - mutual fund 32,399 28,604 22,479 13 % 27 %
Redemptions - mutual fund (28,653) (31,412) (23,624) 9 % (33 %)
Net flows - ETP 121 (276) 1,332 144 % (121 %)
Net Flows - mutual fund and ETP 3,867 (3,084) 187 NM NM
Change in market value and other 14,138 15,178 20,789 (7 %) (27 %)
Mutual Fund and ETP AUM - end of period 142,632 124,627 112,533 14 % 11 %
Talcott Resolution life and annuity separate
account AUM [1] 15,263 14,809 14,425 3 % 3 %
Hartford Funds AUM - end of period $ 157,895 $ 139,436 $ 126,958 13 % 10 %
[1]Represents AUM of the life and annuity business sold in May 2018 that is
still managed by the Company's Hartford Funds segment.
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Mutual Fund AUM by Asset Class
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Equity $ 95,703 $ 82,123 $ 71,629 17 % 15 %
Fixed Income 20,113 17,034 16,130 18 % 6 %
Multi-Strategy Investments [1] 23,610 22,645 21,332 4 % 6 %
Exchange-traded products 3,206 2,825 3,442 13 % (18 %)
Mutual Fund and ETP AUM $ 142,632 $ 124,627 $ 112,533 14 % 11 %
[1]Includes balanced, allocation, and alternative investment products.
Net Income
[[Image Removed: hig-20211231_g43.jpg]]
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net income increased primarily due to higher fee income as a result of an
increase in daily average assets under management, partially offset by higher
variable costs and the effect of a $12 reduction in contingent consideration
payable associated with the acquisition of Lattice that was recognized in first
quarter 2020.
Hartford Funds AUM
[[Image Removed: hig-20211231_g44.jpg]]
December 31, 2021 compared to December 31, 2020
Hartford Funds AUM increased primarily due to net inflows and an increase in
market values over the previous twelve months. Net inflows on mutual fund and
ETP of $3.9 billion in 2021 compared to net outflows of $3.1 billion for the
year ended December 31, 2020.
2022 Outlook
Assuming net inflows and continued growth in equity markets in 2022, the Company
expects net income for Hartford Funds to increase from 2021.
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|CORPORATE - RESULTS OF OPERATIONS
Operating Summary
Increase (Decrease) Increase (Decrease)
2021 2020 2019 From 2020 to 2021 From 2019 to 2020
Fee income [1] $ 50 $ 49 $ 50 2 % (2 %)
Net investment income 24 22 66 9 % (67 %)
Net realized gains 73 22 22 NM - %
Other revenue (10) 53 96 (119 %) (45 %)
Total revenues 137 146 234 (6 %) (38 %)
Benefits, losses and loss adjustment expenses
[2] 7 15 19 (53 %) (21 %)
Insurance operating costs and other expenses
[1] 90 76 83 18 % (8 %)
Loss on extinguishment of debt [3] - - 90 - % (100 %)
Interest expense [3] 234 236 259 (1 %) (9 %)
Restructuring and other costs 1 104 - (99 %) NM
Total benefits, losses and expenses 332 431 451 (23 %) (4 %)
Loss before income taxes (195) (285) (217) 32 % (31 %)
Income tax benefit [4] (47) (63) (46) 25 % (37 %)
Net loss (148) (222) (171) 33 % (30 %)
Preferred stock dividends 21 21 21 - % - %
Net loss available to common stockholders $ (169) $ (243) $ (192)
30 % (27 %)
[1]Includes investment management fees and expenses related to managing third
party business, including management of a portion of the invested assets of
Talcott Resolution.
[2]Includes benefits expense on life and annuity business previously
underwritten by the Company.
[3]For discussion of debt, see Note 14 - Debt of Notes to Consolidated Financial
Statements.
[4]For discussion of income taxes, see Note 17 - Income Taxes of Notes to
Consolidated Financial Statements.
Net Loss
[[Image Removed: hig-20211231_g45.jpg]]
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net loss available to common stockholders decreased from 2020 primarily due to a
decrease in restructuring and other costs and greater net realized gains,
partially offset by a change from income to loss from the Company's previously
owned equity interest in Talcott Resolution and higher insurance operating costs
and other expenses.
Income (loss) from the Company's previously owned equity interest in Talcott
Resolution was $(11) and $42, respectively, for 2021 and 2020. The increase in
operating costs and other expenses for 2021 was primarily driven by legal and
consulting costs associated with the unsolicited proposals from Chubb Limited to
acquire the Company, partially offset by lower consulting fees. Net realized
gains for 2021 included a $46 gain on sale of the Company's 9.7% retained equity
interest in Talcott Resolution.
Interest Expense
[[Image Removed: hig-20211231_g46.jpg]]
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Interest expense in 2021 was relatively consistent with 2020 due to the
repayment of our 5.5% senior notes in March
2020 offset by the issuance of the 2.9% senior notes in September 2021.
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 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
ERCC
Asset Liability Committee Underwriting Risk Committee Emerging Risk Steering Operational Risk Committee Economic Capital Executive Committee Model
Oversight Committee
Committee
The Company's enterprise risk management ("ERM") function supports the ERCC and
functional committees, and is tasked with, among other things:
•risk identification and assessment;
•the development of risk appetites, tolerances, and limits;
•risk monitoring; and
•internal and external risk reporting.
The Company categorizes its main risks as insurance risk, operational risk and
financial risk, each of which is described in more detail below.
|INSURANCE RISK Insurance risk is the risk of losses of both a catastrophic and non-catastrophic nature on the P&C and Group Benefits products the Company has sold. Catastrophe insurance risk is the exposure arising from both natural (e.g., weather, earthquakes, wildfires, pandemics) and man-made catastrophes (e.g., terrorism, cyber-attacks) that create a concentration or
aggregation of loss across the Company's insurance or asset portfolios.
Sources of Insurance Risk Non-catastrophe insurance risks exist within each of
the Company's 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.
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-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations •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 theU.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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Risk Definition
Details and Company Limits
Natural catastrophe Exposure arising from The Company generally limits its estimated before tax loss as a result
natural phenomena (e.g., of natural catastrophes
for property & casualty exposures from a single
earthquakes, wildfires, 250-year event to less
than 30% of the reported capital and surplus of
etc.) that create a the property and
casualty insurance subsidiaries prior to reinsurance
concentration or and to less than 15% of
the reported capital and surplus of the
aggregation of loss across property and casualty
insurance subsidiaries after reinsurance. The
the Company's insurance or Company generally
limits its estimated before tax loss from an
asset portfolios and the aggregation of multiple
natural catastrophe events for an all-peril
inherent volatility of annual aggregate
100-year event to less than 18% reported capital and
weather or climate pattern surplus of the property
and casualty insurance subsidiaries after
changes. reinsurance. From time
to time the estimated loss from natural
catastrophes may
fluctuate above or below these limits due to changes
in modeled loss
estimates, exposures or statutory surplus. [1]
The table below
represents the estimated before tax catastrophe loss
exceedance
probabilities, from an aggregate of all catastrophe events
occurring in a one-year
timeframe before and after reinsurance and from
a single hurricane or
earthquake occurrence.
Modeled
Loss Gross and Net of Reinsurance [2]
Probability of Loss Exceedance [3] Gross of Net of
Reinsurance Reinsurance
Aggregate annual all-peril (1-in-100) $ 2,062 $ 1,160
(1.0%)
Aggregate annual all-peril (1-in-250) $ 2,893 $ 1,726
(0.4%)
Hurricane single occurrence $ 1,106 $ 459
(1-in-100) (1.0%)
Hurricane single occurrence $ 1,854 $ 904
(1-in-250) (0.4%)
Earthquake single occurrence $ 783 $ 414
(1-in-100) (1.0%)
Earthquake single occurrence $ 1,482 $ 661
(1-in-250) (0.4%)
Terrorism The risk of losses from Enterprise limits for
terrorism apply to aggregations of risk across
terrorist attacks, property & casualty,
group benefits and specific asset portfolios and
including losses caused by are defined based on a
deterministic, single-site conventional
single-site and multi-site terrorism attack
scenario. The Company manages its potential estimated
conventional attacks, as loss from a
conventional terrorism loss scenario, up to $2.0 billion
well as the potential for net of reinsurance and
$2.5 billion gross of reinsurance, before
attacks using nuclear, coverage under TRIPRA.
In addition, the Company monitors exposures
biological, chemical or monthly and employs
both internally developed and vendor-licensed loss
radiological weapons modeling tools as part
of its risk management discipline. Our modeled
("NBCR"). exposures to
conventional terrorist attacks around landmark locations
may fluctuate above and below our stated limits.
Pandemic The exposure to loss The Company generally
limits its estimated before tax loss from a
arising from widespread single 250 year
pandemic event to less than 18% of the aggregate
influenza or other reported capital and
surplus of the property and casualty and group
pathogens or bacterial benefits insurance
subsidiaries. In evaluating these scenarios, the
infections that create an Company assesses the
impact on group life, short-term disability,
aggregation of loss across long-term disability
and property & casualty claims. While ERM has a
the Company's insurance or process to track and
manage these limits, from time to time, the
asset portfolios. 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. [1]
[1]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.
[2]The loss estimates represent total property modeled losses for hurricane
single occurrence events, property and workers' compensation modeled losses for
earthquake single occurrence events, and modeled aggregate annual losses for
natural catastrophes from all perils (hurricane, flood, earthquake, hail,
tornado, wildfire and winter storms). 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.
[3]The modeled probability of loss exceedance represents the likelihood of a
loss from single peril occurrence or from an aggregate of catastrophe events
from all perils to exceed the indicated amount in a one-year time frame.
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"), TRIPRA and other reinsurance programs relating to particular
risks or specific lines of business.
Reinsurance for Catastrophes- The Company utilizes various reinsurance programs
to mitigate catastrophe losses including excess of loss occurrence-based
treaties covering property and workers' compensation, and an aggregate property
catastrophe treaty as well as individual risk agreements (including facultative
reinsurance) that reinsure losses from specific classes or lines
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of business. 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 earthquakes and named
hurricanes and tropical
storms (subject to a $50 annual aggregate deductible). Beginning with the
January 1, 2021 renewal, our per occurrence property catastrophe treaty and
workers' compensation catastrophe treaty incepting January 1, 2021 do not cover
pandemic losses, as most industry reinsurance programs exclude communicable
disease. The Company has reinsurance in place to cover individual group life
losses in excess of $1 per person.
Primary Catastrophe Treaty Reinsurance Coverages as of January 1, 2022 [1]
Portion of losses Portion of losses retained
reinsured by The Hartford
Per Occurrence Property Catastrophe Treaty from 1/1/2022
to 12/31/2022 [1] [2]
Losses of $0 to $100
None 100% retained
Losses of $100 to $350 for earthquakes and named
hurricanes and tropical storms [3] None 100% retained
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")) 70% of $250 in excess
[3] of $100 30% co-participation
75% of $150 in excess
Losses of $350 to $500 from one event (all perils) of $350
25% co-participation
Losses of $500 to $1.1 billion from one event [4] (all 90% of $600 in excess
perils)
$500 10% co-participation Aggregate Property Catastrophe Treaty for 1/1/2022 to 12/31/2022 [5] $0 to $700 of aggregate losses None 100% retained $700 to $900 of aggregate losses 100% None
Workers' Compensation Catastrophe Treaty for 1/1/2022 to
12/31/2022
Losses of $0 to $100 from one event
None 100% retained
80% of $350 in
excess
Losses of $100 to $450 from one event [6] of $100
20% co-participation
[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, forFlorida wind events, The Hartford has purchased the mandatory FHCF reinsurance for the annual period starting at June 1, 2021. Retention and coverage varies by writing company. The writing company with the largest coverage under FHCF isHartford Insurance Company of the Midwest, with coverage estimated at approximately 90% of $52 in per event losses in excess of a $21 retention (estimates are based on best available information at this time and are periodically updated as information is made available byFlorida ). [3]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 theUS National Weather Service ). [4]Portions of this layer of coverage extend beyond a traditional one year term. [5]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 ofVerisk 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, except assumed reinsurance business losses, apply toward satisfying the $700 attachment point under the aggregate treaty. [6]In addition to the limits shown, the workers' compensation reinsurance includes a non-catastrophe, industrial accident layer, providing coverage for 80% of $30 in per event losses in excess of a $20 retention. In addition to the property catastrophe reinsurance coverage described in the above table, the Company has other reinsurance agreements that cover property catastrophe losses. The Per Occurrence Property Catastrophe Treaty, and Workers' Compensation Catastrophe Treaty include a provision to reinstate one limit in the event that a catastrophe loss exhausts limits on one or more layers under the treaties. Reinsurance for Terrorism- For the risk of terrorism, private sector catastrophe reinsurance capacity is generally limited and largely unavailable for terrorism losses caused by nuclear, biological, chemical or radiological attacks. As such, the Company's principal reinsurance protection against large-scale terrorist attacks is the coverage currently provided through TRIPRA to the end of 2027.
TRIPRA provides a backstop for insurance-related losses resulting from any "act
of terrorism", which is certified by the
Secretary of theTreasury , in consultation with the Secretary ofHomeland 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 $1.7 billion for 2022. 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. 96 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A 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 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") up to an aggregate limit of $1.5 billion and the other covered substantially all reserve development ofNavigators Insurance Company and certain of its affiliates for 2018 and prior accident years ("Navigators ADC") up to an aggregate limit of $300. As the Company has ceded all of the $300 available limit under the Navigators ADC, there is no remaining limit available as of December 31, 2021. Any net adverse loss development above the $300 limit is reflected in the Company's results from operations. 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. 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 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 reporting segment and the allowance for uncollectible
reinsurance reported in the Commercial Lines and Group Benefits reporting
segments as well as the Corporate category. For a discussion regarding the
results of the evaluation of older, long-term casualty liabilities reported in
the Property & Casualty Other Operations reporting segment, see MD&A - Critical
Accounting Estimates, Property and Casualty Insurance Product Reserves, Net of
Reinsurance. For a discussion of the allowance for uncollectible reinsurance,
see Note 9 - Reinsurance of Notes to Consolidated Financial Statements.
Reinsurance Recoverables as of December 31,
Property and Casualty Group Benefits Corporate Total
2021 2020 2021 2020 2021 2020 2021 2020
Paid loss and loss adjustment
expenses $ 319 $ 269 $ 5 $ 6 $ - $ - $ 324 $ 275
Unpaid loss and loss adjustment
expenses 5,774 5,297 246 239 278 308 6,298 5,844
Gross reinsurance recoverables 6,093 5,566 251 245 278 308 6,622 6,119
Allowance for uncollectible
reinsurance (96) (105) (1) (1) (2) (2) (99) (108)
Net reinsurance recoverables $ 5,997 $ 5,461 $ 250 $ 244 $ 276 $ 306 $ 6,523 $ 6,011
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
97 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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:
•Establishing policies and monitoring risk tolerances and exceptions;
•Conducting business risk assessments and implementing action plans where
necessary;
•Validating existing crisis management protocols;
•Identifying and monitoring emerging risks; and
•Purchasing insurance coverage.
In response to COVID-19 the Company continues to assess evolving risks related to COVID-19 while monitoring guidance and regulations to maintain certain practices in the interest of the health and welfare of our employees and to reduce operational risk. Among others, current practices include enabling work from home and hybrid work arrangements, mandating protocols that employees must follow when they are in the office and established contact tracing processes for in-office and customer facing individuals who have had exposure to COVID-19. We also continue to work with vendors to ensure they have business continuity plans in place. 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 theNational Institute of Standards and Technology ("NIST") Cyber Security Framework and provides preventative, detective and responsive measures that collectively protects the Company. The Hartford continually assesses cyber capabilities and threat detection. Various cyber assurance methods, including security metrics, third party security assessments, external penetration testing, red team exercises, and cyber incident response exercises are used to test the effectiveness of the overall cybersecurity control environment. Additionally, The Company collaborates with industry associations, government authorities, peers and external advisors to monitor the threat environment and to inform our security practices. 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 trading the Company's securities during the investigation and assessment of such cybersecurity incidents. From a governance perspective, senior members of our Enterprise Risk Management, Information Protection and Internal Audit functions provide detailed, regular reports on cybersecurity matters to the Board, including the Finance, Investment, and Risk Management Committee ("FIRMCo"), a committee 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 aU.S. GAAP, statutory, and economic basis. Exposures are actively monitored and managed, with risks mitigated where appropriate. The Company uses various risk management strategies, including limiting aggregation of risk, portfolio re-balancing and hedging with over-the-counter ("OTC") and exchange-traded derivatives with counterparties meeting the appropriate regulatory and due diligence requirements. Derivatives are utilized to achieve the following Company-approved objectives: (1) hedging risk arising from interest rate, equity market, commodity market, credit spread and issuer default, price or currency exchange rate risk or volatility; (2) managing liquidity; (3) controlling transaction costs; and (4) 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.
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Impact Inadequate capital resources and liquidity could negatively affect the
Company's overall financial strength and its ability to generate cash flows from
its businesses, borrow funds at competitive rates, and raise new capital to meet
operating and growth needs.
Management The Company has defined ongoing monitoring and reporting requirements
to assess liquidity across the enterprise under both current and stressed market
conditions. The Company measures and manages liquidity risk exposures and
funding needs within prescribed limits across legal entities, taking into
account legal, regulatory and operational limitations to the transferability of
liquid assets 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 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 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 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 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, 2021, the Company had no investment exposure to any credit concentration risk of a single issuer or counterparty greater than 10% of the Company's stockholders' equity, other than theU.S. government and certainU.S. government agencies. For further discussion of concentration of credit risk in the investment portfolio, see the Concentration of Credit Risk section in Note 6 - Investments of Notes to Consolidated Financial Statements. 99 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
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Assets and Liabilities Subject to Credit Risk
Investments Essentially all of the Company's invested assets are subject to
credit risk. In 2021, there were net credit recoveries on fixed maturities, AFS
and a decrease in the ACL on mortgage loans of $4 and $9 respectively, primarily
due to an improved economic environment. In 2020, there were net credit losses
on fixed maturities, AFS and an increase in the ACL on mortgage loans of $28 and
$19 respectively, due primarily to the negative economic impacts resulting from
the pandemic. Refer to 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 $6,523 and $6,011 as of December 31, 2021 and
2020 respectively. Refer to 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 $4,445 and $4,268, as of December 31, 2021 and
2020, 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
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, 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, 2021 and 2020, the notional amount related to
credit derivatives that purchase credit protection was $112 and $6,
respectively, while the fair value was $(2) and less than $(1), respectively.
These amounts do not include positions that are in offsetting relationships.
Credit Risk Assumed Through Credit Derivatives
The Company also enters into credit default swaps that assume credit risk as
part of replication transactions. Replication transactions are used as an
economical means to synthetically replicate the characteristics and performance
of assets that are permissible investments under the Company's investment
policies. These swaps primarily reference investment grade single corporate
issuers and indexes. As of December 31, 2021, the Company did not hold credit
default swaps that assume credit risk. As of December 31, 2020, the notional
amount related to credit derivatives that assume credit risk was $675 and the
fair value was $21. 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
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is made. Retrospectively-rated policies are utilized primarily for 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 investments in fixed maturities and commercial mortgage loans,
issuances by the Company of debt securities, preferred stock and similar
securities, discount rate assumptions associated with the Company's claim
reserves and pension and other postretirement benefit obligations, and assets
that support the Company's pension and other postretirement benefit plans.
Impact Changes in interest rates from current levels can have both favorable and
unfavorable effects for the Company.
Change in Interest Rates Favorable Effects
Unfavorable Effects
•Additional net investment income due to
•Decrease in the fair value of the fixed income
reinvesting at higher yields and higher
investment portfolio
Ý yields on variable rate securities
•Higher interest expense on variable rate debt
obligations
•Increase in the fair value of the fixed
•Lower net investment income due to reinvesting
income investment portfolio at
lower yields and lower yields on variable
Þ
rate securities
•Lower interest expense on variable rate
•Acceleration in paydowns and prepayments or
debt obligations
calls of certain mortgage-backed and municipal
securities
Management The Company manages its exposure to interest rate risk by
constructing investment portfolios that seek
to protect the Company 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 primarily utilizes interest rate swaps and, to a lesser extent, futures to mitigate interest rate risk associated with its investment portfolio or liabilities and 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. As of December 31, 2021 and 2020, notional amounts pertaining to derivatives utilized to manage interest rate risk, including offsetting positions, totaled $9.9 billion and $10.7 billion, respectively, and primarily relate to hedging invested assets. The fair value of these derivatives was $(46) and $(69) as of December 31, 2021 and 2020, 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 $51.9 billion and $52.8 billion at December 31, 2021 and 2020, respectively.
The weighted average duration of the portfolio, including derivative
instruments, was approximately 4.3 years and 4.9 years as of December 31, 2021
and 2020, respectively. Changes in the fair value of fixed maturities due to
changes in interest rates are reflected as a component of AOCI.
Long-term debt obligations The Company's variable rate debt obligations will
generally result in increased interest expense as a result of higher interest
rates; the inverse is true during a declining interest rate environment. Changes
in the value of long-term debt as a result of changes in interest rates will
impact the fair value of these instruments but not the carrying value in the
Company's Consolidated Balance Sheets.
Group life and disability product liabilities The cash outflows associated with
contracts issued by the Company's Group Benefits segment, primarily group life
and short and long-term disability policy liabilities, are not interest rate
sensitive but vary based on timing. Though the aggregate cash flow payment
streams are relatively predictable, these products rely upon actuarial pricing
assumptions (including mortality and morbidity) and have an element of cash flow
uncertainty. As of December 31, 2021 and 2020, the Company had $8,609 and
$8,653, respectively of reserves for group life and disability contracts.
Changes in the value of the liabilities as a result of changes in interest rates
will impact the fair value of these instruments but not the carrying value in
the Company's Consolidated Balance Sheets.
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Pension and other postretirement benefit obligations The Company's pension and other postretirement 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.) Interest Rate Sensitivity Group Life and Disability Reserves and Invested Assets Supporting Them Included in the following table is the before tax change in the net economic value of contracts issued by the Company's Group Benefits segment, primarily group life and disability, for which fixed valuation discount rate assumptions are established based upon investment returns assumed in pricing, along with the corresponding invested assets. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge its exposure to interest rate risk in the investment portfolios supporting these contracts. This analysis does not include the assets and corresponding liabilities of other insurance products such as automobile, property, workers' compensation and general liability insurance. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis as the interest rate sensitivity of these investments is generally lower and less predictable than fixed income investments. The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and downward parallel shift in the yield curve. The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated below due to the nature of the estimates and assumptions used in the analysis. The Company's sensitivity analysis calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the current relationship between short-term and long-term interest rates will remain constant over time. As a result, these calculations may not fully capture the impact of portfolio re-allocations, significant product sales or non-parallel changes in interest rates.
Interest Rate Sensitivity of Group Benefits Short and Long-term Disability
Reserves and Invested Assets Supporting Them
Change in Net Economic Value as of December 31,
2021 2020
Basis point shift -100 +100 -100 +100
Increase (decrease) in economic value,
before tax $ 101 $ (94)
$ 137 $ (133)
The carrying value of assets related to the businesses included in the table
above was $11.3 billion and $12.1 billion, as of December 31, 2021 and 2020,
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, 2021 and 2020. 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,
2021 2020
Basis point shift -100 +100 -100 +100
Increase (decrease) in fair value,
before tax $ 1,841 $ (1,730) $
2,054 $ (1,906)
The carrying value of fixed maturities, commercial mortgage loans and short-term
investments related to the businesses included in the table above was $40.6
billion and $40.7 billion as of December 31, 2021 and 2020, respectively.
Long-term Debt
A 100 basis point parallel decrease in the yield curve would result in an
increase in the fair value of long-term debt by $732 and $670 as of December 31,
2021 and 2020, 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 $600 and
$551 as of December 31, 2021 and 2020, 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 Postretirement Plan Obligations
A 100 basis point parallel decrease in the yield curve would
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impact both the value of the underlying pension assets and the value of the
liabilities, resulting in an increase in the unfunded liabilities (or decrease
in asset) for pension and other postretirement plan obligations of $36 and $196
as of December 31, 2021 and 2020, 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 (or increase in assets) for pension and
other postretirement plan obligations of $17 and $148 as of December 31, 2021
and 2020, respectively. Gains or losses due to changes in interest rates on the
pension and postretirement 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 intended to stop persuading or
compelling banks to report information used to set LIBOR. On March 5, 2021, the
FCA announced that publication of certain LIBOR settings in currencies other
than U.S. dollars would cease immediately after December 31, 2021, and that
publication of U.S. dollar LIBOR on a representative basis would cease for the
one-week and two-month settings immediately after December 31, 2021 and for the
remaining U.S. dollar settings immediately after June 30, 2023. Although the
most widely used settings of U.S. dollar LIBOR continue to be published and used
in existing transactions, regulatory pressures and other factors have resulted
in a general decline in new U.S. dollar LIBOR-based transactions. The Company
continues to monitor the potential impacts of the discontinuation of LIBOR,
which is used as a benchmark or reference rate for certain investments and
derivatives the Company owns and floating rate debt the Company has issued.
The Company has identified three principal types of outstanding contracts that
may be affected by the discontinuance 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 one class of junior subordinated debentures that mature
after June 30, 2023.
•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, 2021 and that the Company expects to be
outstanding after June 2023 is $4 billion. The Company has performed a review of
the LIBOR replacement language on these assets and believes that greater than
90% 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, 2021 with a
floating rate component that references LIBOR that the Company expects to be
outstanding after June 30, 2023, considering maturities, is $8.1 billion, with
$7.9 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.
•The Company has issued $1.1 billion of junior subordinated debentures that
mature after June 30, 2023 with LIBOR referenced floating interest rates. The
Company expects to call its $600 of 7.875% junior subordinated debentures at par
in April of 2022 and, for the $500 of 3 month LIBOR + 2.125% notes, is assessing
options to manage the risk associated with the transition away from LIBOR.
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 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
the reference rate. The FASB is deliberating revised guidance which would extend
the accounting relief for contract modifications made and hedge relationships
entered into or evaluated through December 31, 2024, 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. For a discussion of risks related to
the discontinuance of LIBOR, see Part I, Item 1A, - Risk Factors for the risk
factor "The discontinuance of LIBOR may adversely affect the value of certain
investments we hold and floating rate securities we have issued, and another
other assets or liabilities whose value may be tied to LIBOR."
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 postretirement benefit plans, and fee
income derived from Hartford Funds assets under management.
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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 postretirement
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.
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 postretirement 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 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 postretirement 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 postretirement 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 postretirement benefit plans with sensitivity to equity risk. The calculation of the hypothetical change in economic value below assumes a 20% upward and downward shock to theStandard & Poor's 500 Composite Price Index ("S&P 500"). For limited partnerships and other alternative investments, the movement in economic value is calculated using a beta analysis largely derived from historical experience relative to the S&P 500. The selection of the 20% shock to the S&P 500 was made only as an illustration 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 As of December 31, 2021 As of December 31, 2020 [1] Shock to S&P 500 Shock to S&P 500 (Before tax) Fair Value +20% -20% Fair Value +20% -20% Investment Portfolio $ 5,447 $ 641
$ (641) $ 3,520 $ 397 $ (397)
Assets supporting pension and other
postretirement benefit plans
$ 1,245 $ 167
$ (167) $ 1,573 $ 240 $ (240)
[1]Table excludes the Company's investment in Hopmeadow Holdings LP which was reported in other assets on the Company's Consolidated Balance Sheets prior to being sold on June 30, 2021. Hartford Funds assets under management Hartford Funds earnings are significantly influenced by theU.S. and other equity markets. If equity markets were to hypothetically decline 20% and remain depressed for one year, the estimated before tax impact on reported earnings for that one year period is approximately $65 as of December 31, 2021. 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. 104 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Foreign Currency Exchange Risk Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies. Sources of Currency Risk The Company has foreign currency exchange risk in non-U.S. dollar denominated cash, fixed maturities, equities, and derivative instruments. In addition, the Company has non-U.S. subsidiaries, some with functional currencies other thanU.S. dollar, and which transact business in multiple currencies resulting in assets and liabilities denominated in foreign currencies. Impact Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains and losses on changes in the 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 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 gains and losses. These assets or liabilities include, but are not limited to, cash and cash equivalents, premiums receivable, reinsurance recoverables, and unpaid losses and loss adjustment expenses. Additionally, the Company translates the assets, liabilities, and income of non-U.S. dollar functional currency legal entities intoU.S. dollar. This translation amount is reported as a component of other comprehensive income. Management The Company manages its foreign currency exchange risk primarily through asset-liability matching and through the use of derivative instruments. However, legal entity capital is invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations. The foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using foreign currency swaps and forwards. Assets and Liabilities Subject to Foreign Currency Exchange Risk Investment portfolio The Company is exposed to foreign exchange risk affecting non-U.S. dollar denominated cash, fixed maturities, equities and derivative instruments. Changes in relative values between currencies can positively or negatively impact net realized 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, 2021 and 2020, the Company had pension plan assets of $97 and $95, 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 and reinsurance contracts and associated premiums receivable, reinsurance recoverables and unpaid losses and loss adjustment expenses, that are exposed to foreign exchange risk. For contracts that are withinU.S , dollar functional currency legal entities, changes in foreign currency exchange rates can positively or negatively impact net realized gains and losses. For contracts within non-U.S. dollar functional currency legal entities, changes in foreign currency exchange rates can positively or negatively impact other comprehensive income. Foreign Currency Sensitivity For the Company's primary currencies that create foreign exchange risk, the following table provides the estimated impact of a hypothetical 10% unfavorable change in exchange rates. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis. The amounts presented are inU.S. dollars and before tax. Foreign Currency Sensitivity [1]
GBP CAD 10% Unfavorable Change December 31, 2021 Net assets (liabilities) $ 287 $ 132 $ (38) December 31, 2020 Net assets (liabilities) $ 296 $ 189 $ (44)
[1]Amount excludes currencies where the value of net assets in
equivalent is less than 1% of total net assets of the Company.
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Financial Risk on
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, an increase in interest rates, or a decline in equity market levels, may result in a decrease in statutory surplus and RBC ratios;
•A decline in investment yields 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; and
•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 ourU.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, 2021 December 31, 2020 Amortized Percent of Total Amortized Percent of Total Cost Fair Value Fair Value Cost Fair Value Fair Value United States Government/Government agencies $ 5,706 $ 5,881 13.7 % $ 4,872 $ 5,214 11.6 % AAA 5,917 6,133 14.3 % 6,482 6,848 15.2 % AA 7,279 7,718 18.0 % 7,840 8,453 18.8 % A 10,277 10,962 25.6 % 10,500 11,595 25.7 % BBB 9,196 9,708 22.7 % 9,831 10,856 24.1 % BB & below 2,413 2,445 5.7 % 2,036 2,069 4.6 % Total fixed maturities, AFS $ 40,788 $ 42,847 100.0 % $ 41,561 $ 45,035 100.0 %
The fair value of fixed maturities, AFS decreased as compared to December 31,
2020, primarily due a decrease in valuations due to higher interest rates,
partially offset by tighter credit spreads. The decline was also due to the
reinvestment into other asset classes.
Fixed maturities, FVO, included within other investments on the Consolidated
Balance Sheets, are not included in the preceding table. For further discussion
on FVO securities, see Note 5 - Fair Value Measurements of Notes to Consolidated
Financial Statements.
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Fixed Maturities, AFS by Type
December 31, 2021 December 31, 2020
Gross Unrealized Gross Unrealized Percent of Total Gross Unrealized Gross Unrealized Percent
of Total
Amortized Cost ACL Gains Losses Fair Value Fair Value Amortized Cost ACL Gains Losses Fair Value Fair Value
Asset-backed securities ("ABS")
Consumer loans $ 959 $ - $ 11 $ (2) $ 968 2.3 % $ 1,396 $ - $ 35 $ - $ 1,431 3.2 %
Other 166 - 2 (1) 167 0.4 % 129 - 4 - 133 0.3 %
Collateralized loan obligations
("CLOs") 3,019 - 8 (2) 3,025 7.1 % 2,780 - 7 (7) 2,780 6.2 %
Commercial Mortgage-Backed
Securities ("CMBS")
Agency [1] 1,390 - 75 (5) 1,460 3.4 % 1,779 - 117 (6) 1,890 4.2 %
Bonds 2,327 - 92 (9) 2,410 5.6 % 2,160 - 159 (13) 2,306 5.1 %
Interest only 238 - 12 (1) 249 0.6 % 280 - 10 (2) 288 0.6 %
Corporate
Basic industry 761 - 34 (5) 790 1.8 % 727 - 69 (1) 795 1.8 %
Capital goods 1,442 - 84 (9) 1,517 3.5 % 1,488 - 148 (11) 1,625 3.6 %
Consumer cyclical 1,161 (1) 50 (5) 1,205 2.8 % 1,434 (1) 108 (1) 1,540 3.4 %
Consumer non-cyclical 2,473 - 134 (8) 2,599 6.1 % 2,878 - 314 (4) 3,188 7.1 %
Energy 1,405 - 99 (2) 1,502 3.5 % 1,474 (1) 147 (4) 1,616 3.6 %
Financial services 4,648 - 214 (20) 4,842 11.3 % 4,523 (21) 398 (4) 4,896 10.9 %
Tech./comm. 2,658 - 216 (11) 2,863 6.7 % 2,651 - 370 (3) 3,018 6.7 %
Transportation 744 - 43 (3) 784 1.8 % 747 - 85 (3) 829 1.8 %
Utilities 1,917 - 141 (8) 2,050 4.8 % 1,999 - 250 - 2,249 5.0 %
Other 535 - 23 (3) 555 1.3 % 480 - 37 - 517 1.1 %
Foreign govt./govt. agencies 883 - 33 (6) 910 2.1 % 842 - 77 - 919 2.0 %
Municipal bonds
Taxable 1,079 - 83 (2) 1,160 2.7 % 1,084 - 109 (1) 1,192 2.6 %
Tax-exempt 6,394 - 704 (1) 7,097 16.6 % 7,480 - 831 - 8,311 18.5 %
Residential Mortgage-Backed
Securities ("RMBS")
Agency 1,337 - 44 (11) 1,370 3.2 % 1,829 - 92 (2) 1,919 4.3 %
Non-agency 2,101 - 11 (16) 2,096 4.9 % 1,755 - 41 (1) 1,795 4.0 %
Alt-A 12 - 1 - 13 - % 27 - 2 - 29 0.1 %
Sub-prime 160 - 4 - 164 0.4 % 355 - 9 - 364 0.8 %
U.S. Treasuries 2,979 - 86 (14) 3,051 7.1 % 1,264 - 141 - 1,405 3.1 %
Total fixed maturities, AFS $ 40,788 $ (1) $ 2,204 $ (144) $ 42,847 100.0 % $ 41,561 $ (23) $ 3,560 $ (63) $ 45,035 100.0 %
Fixed maturities, FVO [2] $ 160 $ -
[1]Includes securities with pools of loans issued by the Small Business
Administration which are backed by the full faith and credit of the
government..
[2]Included within other investments on the Consolidated Balance Sheets.
The fair value of fixed maturities, AFS decreased as compared with December 31,
2020, primarily due to a decrease in valuations due to higher interest rates,
partially offset by tighter
credit spreads. The decline was also due to the reinvestment into other asset
classes.The Company primarily decreased holdings of tax-exempt municipal bonds,
agency and sub-prime
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-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations RMBS, consumer cyclical and non-cyclical corporate bonds, consumer loans, and agency CMBS, while primarily increasing holdings inU.S. treasuries, non-agency RMBS, CLOs, and CMBS bonds. Commercial &Residential Real Estate The following table presents the Company's exposure to CMBS and RMBS by credit quality included in the preceding Fixed Maturities, AFS by Type table. Exposure to CMBS and RMBS as of December 31, 2021AAA 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] $ 1,380 $ 1,450 $ 10 $ 10 $ - $ - $ - $ - $ - $ - $ 1,390 $ 1,460 Bonds 950 995 571 593 439 453 182 186 185 183 2,327 2,410 Interest Only 134 141 92 96 1 1 10 10 1 1 238 249 Total CMBS 2,464 2,586 673 699 440 454 192 196 186 184 3,955 4,119 RMBS Agency 1,315 1,347 22 23 - - - - - - 1,337 1,370 Non-Agency 840 845 554 552 477 473 199 196 31 30 2,101 2,096 Alt-A - - - - - - - - 12 13 12 13 Sub-Prime 6 7 34 35 47 48 24 24 49 50 160 164 Total RMBS 2,161 2,199 610 610 524 521 223 220 92 93 3,610 3,643 Total CMBS & RMBS $ 4,625 $ 4,785 $ 1,283 $ 1,309 $ 964 $ 975 $ 415 $ 416 $ 278 $ 277 $ 7,565 $ 7,762 Exposure to CMBS and RMBS as of December 31, 2020AAA 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 1,101 541 582 423 430 170 179 17 14 2,160 2,306 Interest Only 177 183 90 93 8 7 4 4 1 1 280 288 Total CMBS 2,957 3,166 639 683 431 437 174 183 18 15 4,219 4,484 RMBS Agency 1,807 1,894 22 25 - - - - - - 1,829 1,919 Non-Agency 1,034 1,063 371 380 313 315 36 36 1 1 1,755 1,795 Alt-A - - 3 3 2 2 2 2 20 22 27 29 Sub-Prime 1 1 25 26 114 116 102 105 113 116 355 364 Total RMBS 2,842 2,958 421 434 429 433 140 143 134 139 3,966 4,107
Total CMBS & RMBS $ 5,799 $ 6,124 $ 1,060 $ 1,117 $
860 $ 870 $ 314 $
326 $ 152 $ 154 $ 8,185 $ 8,591
[1]Includes securities with pools of loans issued by the Small Business
Administration which are backed by the full faith and credit of the
government.
The Company also has exposure to commercial mortgage loans. These loans are collateralized by real estate properties that are diversified both geographically throughoutthe United States and by property type. These commercial loans are originated by the Company as high quality whole loans, and the Company may sell participation interests in one or more loans to third parties. A loan participation interest represents a pro-rata share in interest and principal payments generated by the participated loan, and the relationship between the Company as loan originator, lead participant and servicer and the third party
as a participant are governed by a participation agreement.
As of December 31, 2021, mortgage loans had an amortized cost of $5.4 billion
and carrying value of $5.4 billion, with an ACL of $29. 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. The decrease in the allowance is primarily
attributable to improved economic scenarios, partially offset by an increase
driven by net additions of new loans.
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The Company funded $1.3 billion of commercial mortgage loans with a weighted
average loan-to-value ("LTV") ratio of 57% and a weighted average yield of 2.9%
during the twelve months ended December 31, 2021. The Company continues to
originate commercial mortgage loans in high growth markets across the country
focusing primarily on institutional-quality industrial, multi-family, and retail
properties with strong LTV ratios. There were no mortgage loans held for sale as
of December 31, 2021 or December 31, 2020.
Municipal Bonds
The following table presents the Company's exposure to municipal bonds by type
and weighted average credit quality included in the preceding Securities by Type
table.
Available For Sale Investments in Municipal Bonds
December 31, 2021 December 31, 2020
Weighted Average Weighted Average
Amortized Cost Fair Value Credit Quality Amortized Cost Fair Value Credit Quality
General Obligation $ 910 $ 1,031 AA+ $ 1,082 $ 1,232 AA+
Pre-refunded [1] 487 519 AAA 889 940 AAA
Revenue
Transportation 1,404 1,579 A+ 1,441 1,636 A+
Health Care 1,274 1,397 A+ 1,273 1,407 A+
Leasing [2] 813 874 AA- 905 985 AA-
Education 670 748 AA 732 824 AA
Water & Sewer 504 538 AA 644 694 AA
Sales Tax 370 436 AA 394 464 AA
Power 317 357 A+ 401 450 A+
Housing 98 103 AA 102 109 AA+
Other 626 675 AA- 701 762 A+
Total Revenue 6,076 6,707 AA- 6,593 7,331 AA-
Total Municipal $ 7,473 $ 8,257 AA- $ 8,564 $ 9,503 AA-
[1]Pre-refunded bonds are bonds for which an irrevocable trust containing
sufficient U.S. treasury, agency, or other securities has been established to
fund the remaining payments of principal and interest.
[2]Leasing revenue bonds are generally the obligations of a financing authority
established by the municipality that leases facilities back to a municipality.
The notes are typically secured by lease payments made by the municipality that
is leasing the facilities financed by the issue. Lease payments may be subject
to annual appropriation by the municipality or the municipality may be obligated
to appropriate general tax revenues to make lease payments.
As of December 31, 2021, the largest issuer concentrations were the New York
State Dormitory Authority, the State of California , and the Pennsylvania State
Turnpike Commission, 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, 2020, the largest issuer concentrations were the New York
State 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. In total, municipal bonds make up 14% of the fair value of the
Company's investment portfolio. While COVID-19 has had an impact on many
municipal issuers, credit fundamentals in this sector have broadly stabilized
due to an unprecedented influx of federal relief funds and a strong economic
recovery.
Limited Partnerships and Other Alternative Investments
The following table presents the Company's investments in limited partnerships
and other alternative investments which include hedge funds, real estate funds,
and private equity funds. Real estate funds consist of investments primarily in
real estate joint ventures and, to a lesser extent, equity funds. Private equity
funds primarily consist of investments in funds whose assets typically consist
of a diversified pool of investments in small to mid-sized non-public businesses
with high growth potential and strong owner sponsorship, as well as limited
exposure to public markets.
Income or losses on investments in limited partnerships and other alternative
investments are recognized on a lag as results from private equity investments
and other funds are generally reported on a three-month delay.
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Limited Partnerships and Other Alternative Investments - Net Investment Income
Year Ended December 31,
2021 2020 2019
Amount Yield [1] Amount Yield [1] Amount Yield [1]
Hedge funds $ 33 17.7 % $ 9 7.1 % $ 5 7.2 %
Real estate funds 149 18.4 % 85 20.3 % 70 17.0 %
Private equity funds 456 51.3 % 106 12.4 % 126 16.6 %
Other alternative investments [2] 94 22.6 % 22 5.4 % 31 8.2 %
Total $ 732 31.8 % $ 222 12.3 % $ 232 14.4 %
[1]Yields calculated using annualized net investment income divided by the
monthly average invested assets.
[2]Consists of an insurer-owned life insurance policy which is primarily
invested in fixed income, private equity, and hedge funds.
Investments in Limited Partnerships and Other Alternative Investments
December 31, 2021 December 31, 2020
Amount Percent Amount Percent
Hedge funds $ 274 8.2 % $ 158 7.6 %
Real estate funds 1,315 39.2 % 563 27.0 %
Private equity and other funds 1,256 37.5 % 944 45.4 %
Other alternative investments [1] 508 15.1 % 417 20.0 %
Total $ 3,353 100.0 % $ 2,082 100.0 %
[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 $144 as of December 31, 2021, and have
increased $81 from December 31, 2020, primarily due to higher interest rates,
partially offset by tighter credit spreads. As of December 31, 2021, $141 of the
gross unrealized losses were associated with fixed maturities, AFS depressed
less than 20% of amortized cost. The remaining $3 of gross unrealized losses
were associated with fixed maturities, AFS depressed greater than 20%. The fixed
maturities, AFS depressed more than 20%, primarily related to 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, 2021 December 31, 2020
Amortized
Consecutive Months Items Cost ACL Unrealized Loss Fair Value Items Amortized Cost ACL Unrealized Loss Fair Value
Three months or less 640 $ 6,193 $ - $ (32) $ 6,161 102 $ 625 $ - $ (3) $ 622
Greater than three to six months 404 3,249 - (55) 3,194 46 367 - (5) 362
Greater than six to nine months 101 571 - (5) 566 8 6 - (1) 5
Greater than nine to eleven months 171 1,041 - (29) 1,012 186 1,275 (1) (27) 1,247
Twelve months or more 184 631 - (23) 608 205 994 - (27) 967
Total 1,500 $ 11,685 $ - $ (144) $ 11,541 547 $ 3,267 $ (1) $ (63) $ 3,203
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Unrealized Loss Aging for Fixed Maturities, AFS Continuously Depressed Over 20%
December 31, 2021 December 31, 2020
Consecutive Months Items Amortized Cost Unrealized Loss Fair Value Items Amortized Cost Unrealized Loss Fair Value
Three months or less - $ - $ - $ - 2 $ 2 $
(1) $ 1
Greater than six to nine months - - - - 1 46 (10) 36 Greater than nine to eleven months - - - - 2 5 (1) 4 Twelve months or more 20 5 (3) 2 24 5 (2) 3 Total 20 $ 5 $ (3) $ 2 29 $ 58 $ (14) $ 44
Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments
For the year ended December 31, 2021 The Company recorded a net decrease in the ACL of $4, driven by increases in the fair value of corporate issuers that had an ACL in prior periods, partially offset by credit losses on a media/entertainment company. Unrealized losses on securities with an ACL recognized in other comprehensive income were less than $1. For further information, refer to Note 6 - Investments of Notes to Consolidated Financial Statements.
There were no intent-to-sell impairments.
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 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.
Intent-to-sell impairments of $5 were primarily related to one corporate issuer
in the energy sector and one issuer with exposure to
ACL on Mortgage Loans
For the year ended December 31, 2021 The Company reviews mortgage loans on a quarterly basis to estimate the ACL with changes in the ACL recorded in net realized 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. For
further information, refer to Note 6 - Investments of Notes to Consolidated
Financial Statements.
The Company recorded a decrease in the ACL on mortgage loans of $9. The decrease was primarily the result of improved economic scenarios, partially offset by an increase driven by net additions of new loans. The Company did not record an ACL on any individual mortgage loans. 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. 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.
|SUMMARY OF CAPITAL RESOURCES AND LIQUIDITY
Capital available to the holding company as of December 31, 2021:
•$1.9 billion in fixed maturities, short-term investments, investment sales
receivable and cash at the HFSG Holding Company.
•A senior unsecured revolving credit facility that provides for borrowing
capacity up to $750 of unsecured credit through October 27, 2026. As of
December 31, 2021, 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,
2021, there were no borrowings outstanding.
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2022 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'sU.S. property and casualty insurance subsidiaries have dividend capacity of $2.0 billion for 2022, with $1.3 to $1.4 billion of net dividends expected in 2022.
•Group Benefits - HLA has dividend capacity of $241 in 2022 with $175 to $200 of
dividends expected in 2022.
•Hartford Funds - HFSG Holding Company expects to receive $175 to $200 in
dividends from Hartford Funds in 2022.
Expected liquidity requirements for the next twelve months as of December 31, 2021: •$210 of interest on debt;
•$21 dividends on preferred stock, subject to the discretion of the Board of
Directors;
•$525 of common stockholders' dividends, subject to the discretion of the Board
of Directors and before share repurchases; and
•$600 of 7.875% junior subordinated debentures expected to be called at par in
April of 2022.
Expected liquidity requirements for beyond the next twelve months as of
December 31, 2021:
•Interest on debt and debt repayments, see Note 14 - Debt of Notes to
Consolidated Financial Statements.
•Preferred stock and common stock dividends, subject to the discretion of the
Board of Directors.
Equity repurchase program: Authorization for equity repurchases of up to $3.0 billion effective through December 31, 2022. Under the program, the Company repurchased 25.9 million shares during the period from January 1, 2021 to December 31, 2021 for $1.7 billion with $1.3 billion of authorization remaining as of December 31, 2021.
|LIQUIDITY REQUIREMENTS AND SOURCES OF CAPITAL
The liquidity requirements of the holding company of
Services Group, Inc.
maturities; short-term investments and cash; and dividends from its
subsidiaries, principally its insurance operations.
The Company maintains sufficient liquidity and has a variety of contingent
liquidity resources to manage liquidity across a range of economic scenarios. We
continue to expect to successfully manage our liquidity throughout the pandemic.
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, 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 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.
Debt
On September 21, 2021, The Hartford issued $600 of 2.9% senior notes ("2.9%
Notes") due September 15, 2051 for net proceeds of approximately $588, after
deducting underwriting discounts and expenses from the offering. Interest is
payable semi-annually in arrears on March 15 and September 15, commencing March
15, 2022. The Hartford, at its option, can redeem the 2.9% 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 plus 20 basis points, plus any accrued and unpaid interest,
except the 2.9% Notes may be redeemed at par within six months of maturity. The
Hartford intends to use the net proceeds along with other available resources to
repay The Hartford's $600 7.875% junior subordinated debentures ("7.875%
Notes"), which are redeemable at par on or after April 15, 2022. The Hartford
expects to recognize a loss on extinguishment of debt of $9, before tax, on
redemption.
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.
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|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. The authorization was increased by the Board of Directors to $2.5 billion in April 2021 and then further increased to $3.0 billion in October 2021. During the period from January 1, 2022 through February 17, 2022, the Company repurchased 3.8 million shares for $274 and has $1.0 billion of authorization remaining as of February 17, 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, the Company's blackout periods, and other considerations. Under The Hartford's previous $1.0 billion share repurchase program authorized by its Board of Directors in February 2019 and which expired on 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.
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, 2021:
Common Stock Dividends
Declared Record Payable Amount per share
October 28, 2021 December 1, 2021 January 4, 2022 $ 0.385
February 16, 2022 March 1, 2022 April 4, 2022 $ 0.385
Preferred Stock Dividends
Declared Record Payable Amount per share
December 15, 2021 February 1, 2022 February 15, 2022 $ 375.00
February 16, 2022 May 2, 2022 May 16, 2022 $ 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. The Company's principal insurance subsidiaries are
domiciled in
The payment of dividends byConnecticut -domiciled insurers is limited under the insurance holding company laws ofConnecticut . These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer's statutory policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the preceding year, in each case determined under statutory insurance accounting principles. In addition, if any dividend of aConnecticut -domiciled insurer exceeds the insurer's earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. Property casualty insurers domiciled inNew York , includingNavigators Insurance Company ("NIC") andNavigators Specialty Insurance Company ("NSIC"), generally may not, without notice to and approval by the state insurance commissioner, pay dividends out of earned surplus in any twelvemonth period that exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the most recent financial statement on file, or (ii) 100% of its adjusted net investment income, as defined, for the same twelve month period. 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 FAL capital requirement and subject to restrictions imposed underUK Company Law. The FAL is determined based on the SCR under the Solvency II capital adequacy model, the current regulatory framework governingUK domiciled insurers, plus a Lloyd's specific economic capital assessment. Insurers domiciled in theUnited Kingdom may pay dividends to their parent out of their statutory profits subject to restrictions imposed underU.K. Company law and Solvency II. In 2021, HFSG Holding Company received $295 of dividends from HLA and $165 from Hartford Funds. In addition, HFSG Holding Company received $1.1 billion of net dividends from P&C subsidiaries in 2021 which excludes $150 of P&C dividends that were subsequently contributed to P&C subsidiaries and $50 of P&C dividends related to interest 113 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations payments on an intercompany note owed by Hartford Holdings, Inc. ("HHI") toHartford 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 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 to common
stockholders due to additional interest expense or preferred stock dividends.
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 Facility
In 2018, The Hartford entered into a senior unsecured revolving credit facility
(the "Credit Facility") that provides up to $750 of unsecured credit with an
expiration date of March 29, 2023. On October 27, 2021, The Hartford amended and
restated the Credit Facility and extended it through October 27, 2026. As of
December 31, 2021, no borrowings were outstanding and no letters of credit were
issued under the Credit Facility and The Hartford was in compliance with all
financial covenants. For further information regarding the Credit Facility, see
Note 14- Debt of Notes to Consolidated Financial Statements.
Intercompany Liquidity Agreements
The Company has $2.0 billion available under an intercompany liquidity agreement
that allows for short-term advances of funds among the HFSG Holding Company and
certain affiliates of up to $2.0 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, 2021, 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 Hartford Life and Accident Insurance Company ("HLA"), are members of the
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, 2021, there were
no advances outstanding. The CTDOI permits Hartford Fire and HLA to pledge up to
$1.3 billion and $0.6 billion in qualifying assets, respectively, without prior
approval, to secure FHLBB advances in 2022. 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
The Hartford has entered into a committed credit facility agreement with a
syndicate of lenders (the "Club Facility") as well as a non-committed $25 credit
facility with a lender (the "Bilateral Facility"). The Club Facility has two
tranches with one tranche extending a $104 commitment and the other tranche
extending a £85 million ($115 as of December 31, 2021) commitment. As of
December 31, 2021, letters of credit with an aggregate face amount of $104 and
£68 million, or $92, 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 and Lloyd's, consistent with Lloyd's requirements. As of
December 31, 2021, The Hartford was in compliance with all financial covenants
of both facilities.
For further information regarding the Club Facility and the Bilateral Facility,
see Note 14- Debt of Notes to Consolidated Financial Statements.
Other Sources and Uses of Capital As part of the sale of the former retained interest in Talcott Resolution, which was completed on June 30, 2021, the Company received $217 of proceeds. In May 2021, the Company contributed €15 million ($18) to Navigators Holdings (Europe) N.V., a Belgium holding company. On December 29, 2021, the Company received approximately $20, before $9 of transaction costs, related to the sale of its Continental Europe Operations.
|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 did not make any contributions to the U. S.
qualified defined benefit pension plan in 2021, and made contributions to this
pension plan of approximately $70 in both 2020 and 2019. No contributions
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were made to the other postretirement plans in 2021, 2020 and 2019. The
Company's 2021, 2020 and 2019 required minimum funding contributions were
immaterial. The Company does not have a 2022 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 2022. The Company will monitor
the funded status of the U.S. qualified defined benefit pension plan during 2022
to make this determination. As of December 31, 2021, the U.S. qualified defined
benefit pension plan is fully funded and in an asset position. For further
discussion of pension and other postretirement benefit obligations, see Note 19
- Employee Benefit Plans of Notes to Consolidated Financial Statements.
|DERIVATIVE COMMITMENTS
Certain of the Company's derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical rating 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 terminate agreements and demand immediate settlement of the outstanding net derivative positions transacted under each agreement. For further information, refer to Note 15 - Commitments and Contingencies of Notes to Consolidated Financial Statements. As of December 31, 2021, 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. 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 on Form 10-K. The principal sources of operating funds are premiums, fees earned from insurance and administrative service agreements, and investment income, while investing cash flows primarily originate from maturities and sales of invested assets. 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 losses.
The following tables represent the fixed maturity holdings, including the
aforementioned cash and short-term investments available to meet liquidity
needs, for each of the Company's insurance operations.
Property & Casualty
As of
December 31, 2021
Fixed maturities $ 33,143
Short-term investments 1,332
Cash 176
Less: Derivative collateral 36
Total $ 34,615
Property & Casualty operations invested assets also include $1.4 billion in
equity securities, $3.9 billion in mortgage loans and $2.7 billion in limited
partnerships and other alternative investments.
Group Benefits Operations
As of
December 31, 2021
Fixed maturities $ 9,487
Short-term investments 352
Cash 15
Less: Derivative collateral 18
Total $ 9,836
Group Benefits operations invested assets also include $338 in equity
securities, $1.5 billion in mortgage loans and $664 in limited partnerships and
other alternative investments.
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.
Property & Casualty reserves for unpaid losses and loss adjustment expenses as
of December 31, 2021 were $31.4 billion. Reserves for Property & Casualty unpaid
losses and loss adjustment expenses include case reserves and IBNR. 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. For a
discussion of The Hartford's judgment in estimating reserves for Property &
Casualty see Part II, Item 7, MD&A - Critical Accounting Estimates, Property &
Casualty Insurance Product Reserves, and for historical payments by reserve line
net of reinsurance, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment
Expenses of Notes to Consolidated Financial Statements. The timing of future
payments for the next twelve months and for beyond twelve months could vary
materially from historical payment patterns 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.
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Group Benefits reserves as of December 31, 2021 were $9.0 billion. Estimated
group life and disability obligations are based on assumptions comparable with
the Company's historical experience, modified for recent observed trends. For a
discussion of The Hartford's judgment in estimating reserves for Group Benefits
see Part II, Item 7, MD&A - Critical Accounting Estimates, Group Benefit LTD
Reserves, Net of Reinsurance, for further discussion on future policy benefits,
see Note 13 Reserve for Future Policy Benefits and for historical payments by
reserve line, net of reinsurance, see Note 12 - Reserve for Unpaid Losses and
Loss Adjustment Expenses of Notes to Consolidated Financial Statements. Due to
the significance of the assumptions used, payments for the next twelve months
and beyond twelve months could materially differ from historical patterns.
Corporate includes retained reserves of $458 as of December 31, 2021 related to
retained run-off liabilities of its former life and annuity business. For
further discussion on future policy benefits, see Note 13 Reserve for Future
Policy Benefits.
Hartford Funds
Hartford Funds principal sources of operating funds are fees earned from basis
points on assets under management with uses primarily for payments to
subadvisors and other general operating expenses. As of December 31, 2021,
Hartford Funds cash and short-term investments were $254.
|PURCHASE AND OTHER OBLIGATIONS
The Hartford's unfunded commitments to purchase investments in limited
partnerships and other alternative investments, private placements, and mortgage
loans are disclosed in Note 15 - Commitments and Contingencies of Notes to
Consolidated Financial Statements. It is anticipated that these unfunded
commitments will be funded through the Company's normal operating and investing
activities.
In the normal course of business, the Company enters into contractual
commitments to purchase various goods and services such as maintenance, human
resources, and information technology. The Company's operating lease commitments
are disclosed in Note 21 - Leases of Notes to Consolidated Financial Statements.
It is anticipated that these purchase commitments and operating lease
obligations will be funded through the Company's normal operating and investing
activities.
|CAPITALIZATION
Capital Structure
December 31, 2021 December 31, 2020 Change
Long-term debt $ 4,944 $ 4,352 14%
Total debt 4,944 4,352 14%
Common stockholders' equity, excluding AOCI, net of tax 17,337 17,052 2%
Preferred stock 334 334 -%
AOCI, net of tax 172 1,170 (85)%
Total stockholders' equity $ 17,843 $ 18,556 (4%)
Total capitalization $ 22,787 $ 22,908 (1%)
Debt to stockholders' equity 28 % 23 %
Debt to capitalization 22 % 19 %
Total capitalization decreased $121, or 1%, as of December 31, 2021 compared to
December 31, 2020 primarily due to share repurchases in the period and a
decrease in AOCI, partially offset by net income in excess of stockholder
dividends and an increase in long-term debt due to the issuance of the 2.9%
Notes.
For additional information on AOCI, net of tax, including unrealized gains from
securities, see Note 18 - Changes in and Reclassifications From Accumulated
Other Comprehensive Income and Note 6 - Investments of Notes to Consolidated
Financial Statements. For additional information on debt, see Note 14 - Debt of
Notes to Consolidated Financial Statements.
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|CASH FLOW[1]
2021 2020 2019
Net cash provided by operating activities $ 4,093 $ 3,871 $ 3,489
Net cash used for investing activities $ (2,466) $ (2,066) $ (2,148)
Net cash used for financing activities $ (1,581) $ (1,778) $ (1,191)
Cash and restricted cash- end of year $ 337 $ 239 $ 262
[1]Cash activities in 2021 and 2020 include cash flows related to Continental
Europe Operations classified as held for sale beginning in the third quarter of
2020 and sold on December 29, 2021. See Note 22 - Business Dispositions of Notes
to Consolidated Financial Statements for discussion of this transaction.
Year ended December 31, 2021 compared to the year ended December 31, 2020
Net cash provided by operating activities increased in 2021 as compared to the prior year period primarily driven by an increase in Commercial Lines and Group Benefits premiums received, greater cash distributions from limited partnerships, lower payroll and employee related expenditures, a decrease in restructuring costs and the impact of Personal Lines premium refunds in the 2020 period. Positive cash flow impacts were partially offset by an increase in income taxes paid and an increase in Group Benefits loss and loss adjustment expenses paid. Cash used for investing activities increased in 2021 as compared to the prior year as a result of a decrease from net proceeds to net payments for equity securities, an increase in net payments for partnerships, an increase in net payments for mortgage loans, an increase in net payments for other investing activities and a decrease from net proceeds to net payments for derivatives, partially offset by an increase from net payments to net proceeds for fixed maturities and consideration received from the sale of the Company's equity interest in Talcott Resolution. Cash used for financing activities decreased primarily due to proceeds from the issuance of debt in 2021, debt repayments in the 2020 period, and a decrease in cash used for securities lending transactions, partially offset by an increase in share repurchases in 2021.
Operating cash flows for the year ended December 31, 2021 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 July 21, 2021, Moody's upgraded the insurance financial strength rating of
HLA to A1 from A2. The upgrade reflects HLA's leading market position in the
group life and disability business, its distribution capabilities and consistent
profitability, as well as implicit support from The Hartford.
Insurance Financial Strength Ratings as of February 17, 2022
A.M. Best Standard & Poor's Moody's
Hartford Fire Insurance Company A+ A+ A1
Hartford Life and Accident Insurance Company A+ A+ A1
Navigators Insurance Company A+ A Not Rated
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 withdrawn at any time at the
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."
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|STATUTORY CAPITAL
U.S. Statutory Capital Rollforward for the Company's Insurance Subsidiaries
Property and Casualty
Insurance Subsidiaries [1] Group Benefits
[2] Insurance Subsidiary Total
U.S. statutory capital at January 1,
2021 $ 10,795 $ 2,601 $ 13,396
Statutory income 1,774 32 1,806
Dividends to parent (1,105) (295) (1,400)
Other items 450 72 522
Net change to U.S. statutory capital 1,119 (191) 928
U.S. statutory capital at December
31, 2021 $ 11,914 $
2,410 $ 14,324
[1]The statutory capital for property and casualty insurance subsidiaries in this table does not include the value of an intercompany note owed by HHI to Hartford Fire Insurance Company. [2]Excludes insurance operations in the U.K. and Continental Europe. . 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
118 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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 lawmakers continue to propose legislation and regulation to address the effects of the COVID-19 pandemic and to promote recovery from the pandemic. 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. As the COVID-19 global pandemic continues, regulators may require us or we may elect to provide additional consumer and/or business financial relief. We may also see this manifest in the review and approval of new rate filings, with regulators applying heightened scrutiny even when rate reductions are proposed. 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.
Proposals have been introduced in Congress to enact a pandemic risk insurance coverage through a risk sharing mechanism between insurers and the federal government for future pandemics. Timing for any Congressional action with respect to these proposals 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.
Biden Administration Build Back Better Agenda
During 2021, the Biden Administration called for Congressional action on the President's Build Back Better Agenda, which outlined funding across traditional infrastructure and human infrastructure in the U.S.
On November 15, 2021, President Biden signed the bipartisan "Infrastructure
Investment and Jobs Act" into law, which provided funding for traditional
infrastructure such as roads, bridges and highways.
The second phase of Build Back Better proposes funding for a national paid
family and medical leave program, clean energy initiatives, affordable childcare
and more in the Build Back Better Act.
Notably, a national paid family and medical leave program could affect existing state-based disability and paid leave programs or other products and services that the Company provides through its Group Benefits business. If enacted, the effect of new proposals from the Build Back Better agenda on the Company's operations, including the ability to attract new business and retain existing customers is unclear. While Congress is considering partisan action on the Build Back Better agenda, the nature and timing of such action 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
reverse, amend or alter the ongoing operation of the Affordable Care Act
("ACA"). If such actions were to occur, they might have an impact on various
aspects of our businesses, including our insurance businesses. 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 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. The potential effect
on The Hartford as an employer would be consistent with other large employers.
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US Tax Reform As Congress debates action on various spending initiatives, it may consider a variety of proposals to fund the cost of new spending with revenue raising measures. Proposals from the Build Back Better agenda, as well as the Biden Administration commitment to the OECD global minimum tax, could be drivers of tax policy changes, including a possible increase in the corporate tax rate, creation of a corporate minimum tax and other changes to taxes owed on income earned outside of the U.S. These and other tax proposals and regulatory initiatives that may be 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.
Post-Brexit UK Regulatory Reforms
The UK Prudential Regulation Authority ("PRA") is reviewing the Solvency II
regime, introduced across the EU during 2016 to
align insurance entities' risk frameworks for managing capital adequacy and risk management practices, as well as increased transparency and enhanced regulatory supervision. The PRA also recognizes that climate change presents a material financial risk to insurers and the financial system and for 2022 the PRA will incorporate the financial risks posed by supervision into its core supervisory approach.
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.
120 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ACRONYMS A&E Asbestos and Environmental HIMCO Hartford Investment Management Company ABS Asset Backed Securities IBNR Incurred But Not
Reported
ACL Allowance for Credit Losses IT Information
Technology
ADC Adverse Development Cover LCL Liability for Credit Losses AFS Available-For-Sale LIBOR London Inter-Bank Offered Rate ALAE Allocated Loss Adjustment Expenses LTD Long-Term
Disability
AOCI Accumulated Other Comprehensive Income LTV Loan-to-Value
AUM Assets Under Management MD&A Management's Discussion and Analysis of
Financial Conditions and Results of Operations
CAY Current Accident Year NAIC National Association of Insurance
Commissioners
CLO Collateralized Loan Obligation NIC Navigators Insurance Company
CMBS Commercial Mortgage-Backed Securities NICO National
Indemnity Company, a subsidiary of
Berkshire Hathaway Inc. ("Berkshire")
DAC Deferred Policy Acquisition Costs NM Not Meaningful
DEI Diversity, Equity and Inclusion NOLs Net Operating Loss Carryforwards or Carrybacks
DLR Disabled Life Reserve NSIC Navigators Specialty Insurance Company
DSCR Debt Service Coverage Ratio OCI Other Comprehensive Income
ERCC Enterprise Risk and Capital Committee OTC Over-the-Counter
ESPP The Hartford Employee Stock Purchase Plan P&C Property and Casualty
ETF Exchange-Traded Funds PG&E PG&E Corporation and Pacific Gas and Electric
Company
ETP Exchange-Traded Products PYD Prior Year Development
FAL Funds at Lloyd's RBC Risk-Based Capital
FASB Financial Accounting Standards Board RMBS Residential Mortgage-Backed Securities
FHLBB Federal Home Loan Bank of Boston ROA Return on Assets
GAAP Generally Accepted Accounting Principles ROE Return on Equity
GB Group Benefits
SCR Solvency Capital
Requirement
HFSG Hartford Financial Services Group, Inc. SOFR Secured Overnight Funding Rate
HHI Hartford Holdings, Inc. ULAE Unallocated Loss Adjustment Expenses
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AON PLC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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