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HARTFORD FINANCIAL SERVICES GROUP, INC. – 10-K –
Edgar Glimpses
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 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, and dispositions, see Note 1 - Basis of
Presentation and Significant Accounting Policies, and Note 21 - 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 2021 Form 10-K Annual Report.
Index
Description Page
Key Performance Measures and Ratios 36
The Hartford's Operations 41
Financial Highlights 44
Consolidated Results of Operations 45
Investment Results 48
Critical Accounting Estimates 50
Commercial Lines 72
Personal Lines 77
Property & Casualty Other Operations 81
Group Benefits 82
Hartford Funds 84
Corporate 86
Enterprise Risk Management 87
Capital Resources and Liquidity 104
Impact of New Accounting Standards 112
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 exchange-traded fund
("ETF") assets. AUM is a measure used by the Company's Hartford Funds segment
because a significant portion of the segment'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 - Generally 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 excluding the deferred gain on retroactive reinsurance and related amortization of the deferred gain from 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. 37
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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
2022 2021 2020
Net income $ 1,815 $ 2,365 $ 1,737
Preferred stock dividends 21 21 21
Net income available to common stockholders 1,794 2,344 1,716
Adjustments to reconcile net income available to common stockholders to
core earnings:
Net realized losses (gains) excluded from core earnings, before tax 626 (505) 18
Restructuring and other costs, before tax 13 1 104
Loss on extinguishment of debt, before tax
9 - -
Integration and other non-recurring M&A costs, before tax
21 58 51
Change in deferred gain on retroactive reinsurance, before tax 229 246 312 Income tax expense (benefit) [1] (200) 34 (115) Core earnings$ 2,492 $ 2,178 $ 2,086
[1]Primarily represents the federal income tax expense (benefit) related to
before tax items not included in core earnings.
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 major losses.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 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
other expenses, including certain centralized services costs and bad debt
expense. DAC includes 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, this fee income
increases or decreases with the rise or fall in AUM whether caused by changes in
the market or through net flows.
Gross New Business Premium- Represents the amount of premiums charged, before
ceded reinsurance, for policies issued to customers who were not insured with
the Company in the previous policy term. Gross new business premium plus gross
renewal written premium less ceded reinsurance equals total written premium.
Loss and Loss Adjustment Expense Ratio- A measure of the cost of claims incurred
in the calendar year divided by earned premium and includes losses and loss
adjustment expenses incurred for both the current and prior accident years.
Among other factors, the loss and loss adjustment expense ratio needed for the
Company to achieve its targeted return on equity ("ROE") fluctuates from year to
year based on changes in the expected investment yield over the claim settlement
period, the timing of expected claim settlements and the targeted returns set by
management based on the competitive environment.
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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.
Current Accident Year Loss and Loss Adjustment Expense Ratio Before
Catastrophes- 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 Fund Assets- Are owned by the shareowners 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 ETF 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.
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) 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 ("P&C") 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, and individual risk pricing decisions per unit
of exposure on policies that renewed and includes amount of insurance. For
Personal Lines, renewal written price increases represent the total change in
premium per policy since the prior year on those policies that renewed and
includes the combined effect of rate changes, amount of insurance and other
changes in exposure. For Personal Lines, other changes in exposure include, but
are not limited to, the effect of changes in number of drivers, vehicles and
incidents, as well as changes in customer policy elections, such as deductibles
and limits. The rate component represents the change in rate impacting renewal
policies as previously filed with and approved by state regulators during the
period. 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
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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
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 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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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
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Reconciliation of Net Income to Underwriting Gain (Loss)
For the years ended
2022 2021 2020
Commercial Lines
Net income $ 1,624 $ 1,757 $ 856
Adjustments to reconcile net income to underwriting gain (loss):
Net investment income (1,415) (1,502) (1,160)
Net realized losses (gains) 385 (260) 60
Other expense 12 5 31
Income tax expense 426 402 176
Underwriting gain (loss) $ 1,032 $ 402 $ (37)
Personal Lines
Net income $ 91 $ 385 $ 718
Adjustments to reconcile net income to underwriting gain (loss):
Net investment income (140) (157) (157)
Net realized losses (gains)
35 (29) 5
Net servicing and other expense (income) (17) (19) (13) Income tax expense 22 95 184 Underwriting gain (loss) $
(9)
P&C Other Ops
Net loss $
(190)
Adjustments to reconcile net loss to underwriting loss:
Net investment income
(63) (75) (55) Net realized losses (gains) 16 (13) 1 Other expense (income) - 1 (1) Income tax benefit (52) (28) (46) Underwriting loss$ (289) $ (210) $ (269) 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 certain of Talcott's 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 41 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 ETF 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, making reliable estimates of actual mortality and morbidity, 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 an average of 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 ("LTD"), 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 ETF businesses depend largely on the amount of assets under management and the level of fees charged based, in part, on asset share class and fund 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 ETF shareowners. Financial results are highly correlated to the growth in assets under management since these funds 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 ("AFS") 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 ("CLO"). The Company also invests in commercial mortgage loans as well as limited partnerships and alternative investments, which are private investments that are less liquid, but have the potential to generate higher returns. 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. 42
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and Results of Operations
Impact ofUkraine conflict on our results of operations From theUkraine conflict, the Company incurred$27 of catastrophe losses, net of reinsurance, in 2022, all in the first quarter, that included exposures under political violence and terrorism ("PV&T") policies, including aviation war, as well as under credit and political risk insurance ("CPRI") policies. Also in the first quarter of 2022, the Company recognized provisions for reinstatement premium of$11 as a result of estimated ceded incurred losses related to the conflict.
As of
For a discussion of the risks associated with a deterioration in global economic conditions and/or geopolitical conditions, including due to military action, please see Part 1, Item 1A - Risk Factors, including one entitled "Unfavorable economic, political and global market conditions may adversely impact our business and results of operations" and another entitled "We are vulnerable to losses from catastrophes, both natural and man-made".
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, Information Technology ("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$625 in 2023. To achieve those expected savings, we expect to incur approximately$387 over the course of the program, with$288 expensed cumulatively throughDecember 31, 2022 , and expected expenses of$38 in 2023, and$61 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$387 , we expect to incur restructuring costs of approximately$125 , including$41 of employee severance, and approximately$84 of other costs, including consulting expenses, lease termination expenses and the cost to retire certain IT applications. Restructuring costs are reported as a charge to net income but not in core earnings. The following table presents Hartford Next program costs incurred, including restructuring costs, and expense savings relative to 2019 realized in 2020, 2021 and 2022 and expected annual costs and expense savings relative to 2019 for the full year in 2023: Hartford Next Costs and Expense Savings Estimate for 2020 2021 2022 2023 Employee severance$ 73 $ (25) $ (7) $ - IT costs to retire applications 2 9 8 5 Professional fees and other expenses 29 17 12 2 Estimated restructuring costs 104 1 13 7 Non-capitalized IT costs 30 46 43 15 Other costs 19 17 11 6 Amortization of capitalized IT development costs [1] - - 3 9 Amortization of capitalized real estate [2] - - 1 1 Estimated costs within core earnings 49 63 58 31 Total Hartford Next program costs 153 64 71 38 Cumulative savings relative to 2019 beginning July 1, (106) (423) (561) (625) 2020 Net expense (savings) before tax$ 47 $
(359)
Net expense (savings) before tax: To be accounted for within core earnings$ (57) $ (360) $ (503) $ (594) Restructuring costs recognized outside of core earnings 104 1 13 7 Net expense (savings) before tax$ 47 $
(359)
[1]Does not include approximately
[2]Does not include approximately
43 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
2022 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-20221231_g16.jpg]] [[Image Removed: hig-20221231_g17.jpg]]
[[Image Removed: hig-20221231_g18.jpg]]
Þ Decreased
Decreased
- A change to net realized - Decrease in net income - Decrease in common stockholders'
losses available to common
equity largely due to a decrease in
stockholders
AOCI, primarily driven by a change
from net unrealized gains to net
- Lower net investment income
unrealized losses on available for
driven by lower income from
sale securities
limited partnerships
+ Reduction in
- Higher current accident outstanding shares due
year loss ratio before to share repurchases
catastrophes in Personal -
Dilutive effect of share repurchases
Lines
- Greater P&C underwriting
expenses and Group Benefits
insurance operating costs +
Net income in excess of common
and other expenses
stockholder dividends
- Higher group life loss
ratio, excluding the impact
of excess mortality
+ In Group Benefits, lower
excess mortality claims and
the effect of higher
premiums
+ In Commercial Lines, the
effect of higher earned
premiums
+ Lower unfavorable P&C prior
accident year reserve
development
Property & Casualty Group
Benefits Net Income
Investment Yield, After Tax Combined Ratio
Margin
[[Image Removed: hig-20221231_g19.jpg]][[Image Removed: hig-20221231_g20.jpg]][[Image Removed: hig-20221231_g21.jpg]]
Þ Decreased 30 bps Þ Improved 1.7 points
Ý Increased 1.1 points
- Lower returns on limited - Lower level of unfavorable prior
+ Lower excess mortality in
partnerships and other accident year reserve development group life
alternative investments + Higher fully insured
ongoing premiums
- Lower return on equity fund - Lower catastrophe losses
- A change to net realized
investments
losses
+ A higher yield on fixed - A lower expense ratio driven, in
- Lower net investment
maturity securities due to an part, by higher earned premium
income driven by lower
increased yield on
income from limited
variable-rate securities and
partnerships
reinvesting at higher rates + Higher personal automobile and
- A higher group life loss
homeowners loss costs ratio excluding the impact
of excess mortality
+ In Commercial Lines, higher - Higher insurance operating
non-catastrophe property losses, costs and other expenses
partially offset by margin
improvement in global specialty
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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)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Earned premiums $ 19,390 $ 17,999 $ 17,288 8 % 4 %
Fee income 1,349 1,488 1,277 (9 %) 17 %
Net investment income 2,177 2,313 1,846 (6 %) 25 %
Net realized gains (losses) (627) 509 (14) NM NM
Other revenues 73 81 126 (10 %) (36 %)
Total revenues 22,362 22,390 20,523 - % 9 %
Benefits, losses and loss adjustment expenses 13,142 12,729 11,805
3 % 8 % Amortization of deferred policy acquisition costs 1,835 1,680 1,706 9 % (2 %)
Insurance operating costs and other expenses 4,830 4,779 4,480
1 % 7 % Interest expense 213 234 236 (9 %) (1 %) Amortization of other intangible assets 71 71 72 - % (1 %) Restructuring and other costs 13 1 104 NM (99 %) Total benefits, losses and expenses 20,104 19,494 18,403 3 % 6 % Income before income taxes 2,258 2,896 2,120 (22 %) 37 % Income tax expense 443 531 383 (17 %) 39 % Net income 1,815 2,365 1,737 (23 %) 36 % Preferred stock dividends 21 21 21 - % - %
Net income available to common stockholders
(23 %) 37 %
Year ended
Net income available to common stockholders decreased by
by:
•A$1.1 billion , before tax, change to net realized losses in the 2022 period from net realized gains in the 2021 period, primarily driven by depreciation in value of equity securities in the 2022 period compared to appreciation in the 2021 period, as well as a net loss on sales of fixed maturity securities and equities in 2022 compared to a net gain on sales in 2021; •Lower net investment income, driven by lower returns on limited partnerships and other alternative investments and equity fund investments, partially offset by the impact of higher interest rates on fixed income investments, and
•Lower earnings from Hartford Funds.
This decrease was partially offset by:
•An increase in P&C underwriting results of
effect of Commercial Lines earned premium
growth, a lower level of unfavorable prior accident year reserve development and
a decrease in COVID-19 losses in Commercial Lines in 2021, partially offset by a
higher current accident year loss and loss adjustment expense ("LAE") ratio
before catastrophes in Personal Lines and higher underwriting expenses;
•In Group Benefits, lower losses from excess mortality claims of $423 , before
tax, and the effect of higher fully insured ongoing premiums was partially
offset by a higher loss ratio on accidental death business and an increase in
expense reserves, as well as an increase in insurance operating costs and other
expenses;
•Legal and consulting costs in the 2021 period associated with the unsolicited
proposals from Chubb Limited to acquire the Company; and
•A lower level of interest expense on corporate debt.
For a discussion of the Company's operating results by segment, see MD&A -
Segment Operating Summaries.
45 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Revenue
Earned Premiums
[[Image Removed: hig-20221231_g22.jpg]]
[1]For the year ended 2020, the total includes
revenue.
Earned premiums increased primarily due to:
•An increase in P&C driven by an 11% increase in Commercial Lines while Personal
Lines was relatively flat.
-Contributing to the increase in Commercial Lines was higher policy count retention, earned pricing increases, an increase in small commercial new business, and the effect of higher audit and endorsement premiums as a result of higher insured exposures, principally in workers' compensation, partially offset by lower new business in global specialty.
-For Personal Lines, earned premium was relatively flat as non-renewals offset
an increase in new business and the effect of earned pricing increases.
•An increase in Group Benefits earned premium of 7% due to an increase in group
disability and supplemental health product premiums.
Fee income decreased, driven by lower daily average assets under management
within Hartford Funds due to a decline in equity and fixed income market levels
and, to a lesser extent, net outflows over the preceding twelve months.
Net Investment Income
[[Image Removed: hig-20221231_g23.jpg]]
Net investment income decreased primarily due to:
•Lower income from limited partnerships and other alternative investments driven by lower returns on private equity funds, partially offset by higher real estate joint venture and fund income;
•A decline in valuation of equity fund investments in the 2022 period due to the
decline in equity market levels and fewer distributions;
•Partially offset by the impact of a higher yield on variable-rate securities
and reinvesting at higher rates.
Net realized gains (losses) changed to a net realized loss in the 2022 period
from a net realized gain in the 2021 period, primarily driven by:
•Losses on equity securities in the 2022 period driven by depreciation in value
and sales compared to gains on equity securities in the 2021 period due to
appreciation in value and sales; and
•Net realized losses on sales of fixed maturity securities in 2022, driven by an
increase in interest rates and credit spread widening.
For further discussion of investment results, see MD&A - Investment Results, Net
Realized Gains and MD&A - Investment Results, Net Investment Income.
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Benefits, Losses and Expenses
P&C Losses and LAE Incurred
[[Image Removed: hig-20221231_g24.jpg]]
Benefits, losses and loss adjustment expenses increased due to:
•An increase in incurred losses for Property & Casualty of
by:
-An increase in P&C current accident year ("CAY") loss and loss adjustment
expenses before catastrophes of $681 , before tax, 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 lower current accident year loss ratios in global specialty and lower
COVID-19 incurred losses.
-Partially offsetting this was a favorable change of $163 , before tax, in P&C
net prior accident year reserve development, with development in the 2022 period
of a net unfavorable $36 , before tax, and in the 2021 period of a net
unfavorable $199 before tax. Among other reserve changes, prior year reserve
development included adverse development ceded to NICO under adverse development
covers ("ADC") of $229 , before tax, in 2022 related to A&E and $246 , before tax,
in 2021 of which $155 related to A&E and $91 related to Navigators reserves for
accident years 2018 and prior. For reserve development ceded to NICO in each
year, the Company recognized a deferred gain under retroactive reinsurance
accounting. Apart from adverse development ceded to the ADCs, there was an
increase in net favorable reserve development as the 2021 period included
reserve increases for sexual molestation and sexual abuse claims, primarily to
reflect claims made against the Boy Scouts of America ("BSA"). Compared to 2021,
prior accident year reserve
Group Benefits Losses and LAE Incurred
[[Image Removed: hig-20221231_g25.jpg]]
development in 2022 included less favorable reserve development for
catastrophes, personal automobile liability and package business. For further
discussion, see Note 11 - Reserve for Unpaid Losses and Loss Adjustment Expenses
of Notes to Consolidated Financial Statements.
-Also partially offsetting was a decrease in current accident year catastrophe
losses of $15 , before tax. Catastrophe losses in the 2022 period included losses
from Hurricane Ian, as well as tornado, wind and hail events in the Northern
Plains, Midwest, South, Mountain West, and Great Plains, losses from winter
storms, including Winter Storm Elliott, and $27 of losses, net of reinsurance,
related to the Ukraine conflict. Catastrophe losses in the 2021 period were
principally from Hurricane Ida and February winter storms, as well as from
tornado, wind and hail events in Texas , the Midwest and Southeast.
•Partially offsetting the P&C increase was a decline in Group Benefits of $92 ,
before tax, primarily driven by a $423 , before tax, decrease in excess mortality
claims, partially offset by the effect of an increase in earned premiums, and a
higher loss ratio excluding excess mortality for group life.
Amortization of deferred policy acquisition costs increased from the prior year
period driven by Commercial Lines reflecting an increase in earned premiums
across all commercial lines of business.
Insurance operating costs and other expenses increased due to:
•Technology investments made to improve customer and broker experience and to
data analytics to enhance underwriting and pricing capabilities;
47 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations •An increase in performance-based commissions in Commercial Lines;
•Higher staffing costs in Commercial Lines and Group Benefits partly in response
to higher business volume; and
•Lower doubtful accounts expense in the 2021 period.
These increases were partially offset by:
•Lower variable expenses in Hartford Funds;
•Incremental savings from the Company's Hartford Next operational transformation
and cost reduction plan; and
•Lower direct marketing costs in Personal Lines.
Restructuring and other costs increased as the prior year period included
reductions in estimated 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 22 - Restructuring and Other Costs of Notes to
Consolidated Financial Statements.
Interest Expense decreased primarily due to the Company redeeming$600 aggregate principal amount of junior subordinated debentures onApril 15, 2022 , partially offset by the issuance of$600 in 2.9% senior notes inSeptember 2021 . For further discussion of the debt redemption, see Note 13 - Debt of Notes to Consolidated Financial Statements. Income tax expense decreased primarily due to a decline in income before tax. For further discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements. INVESTMENT RESULTS Composition of Invested Assets December 31, 2022 December 31, 2021 Amount Percent Amount Percent
Fixed maturities, available-for-sale ("AFS"), at fair value
68.9 %$ 42,847 74.2 %
Fixed maturities, at fair value using the fair value option ("FVO") 333
0.6 % 160 0.3 % Equity securities, at fair value 1,801 3.4 % 2,094 3.6 %
Mortgage loans (net of allowance for credit losses ("ACL") of
and
6,000 11.4 % 5,383 9.3 % Limited partnerships and other alternative investments 4,177 8.0 % 3,353 5.8 % Other investments [1] 159 0.3 % 215 0.4 % Short-term investments 3,859 7.4 % 3,697 6.4 % Total investments$ 52,560 100.0 %$ 57,749 100.0 %
[1]Primarily consists of equity fund investments, overseas deposits,
consolidated investment funds, and derivative instruments which are carried at
fair value.
December 31, 2022 compared toDecember 31, 2021 Total investments decreased primarily due to a decline in fixed maturities, AFS, partially offset by increase in limited partnerships and other alternative investments and in mortgage loans. Fixed maturities, AFS decreased primarily due to a decline in valuations due to higher interest rates and wider credit spreads. The decline was also due to the reinvestment of sales and maturities into other asset classes.
Limited partnerships and other alternative investments increased primarily
driven by additional investments and higher valuations.
Mortgage loans increased largely due to funding of multifamily and industrial
commercial whole loans.
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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
2022 2021 2020
(Before tax) Amount Yield [1] Amount Yield [1] Amount Yield [1]
Fixed maturities [2] $ 1,469 3.4 % $ 1,349 3.1 % $ 1,442 3.4 %
Equity securities 57 3.0 % 73 4.9 % 39 3.7 %
Mortgage loans 211 3.6 % 181 3.7 % 172 3.9 %
Limited partnerships and other alternative
investments 515 14.4 % 732 31.8 % 222 12.3 %
Other [3] 5 58 42
Investment expense (80) (80) (71)
Total net investment income $ 2,177 3.9 % $ 2,313 4.3 % $ 1,846 3.6 %
Total net investment income excluding limited
partnerships and other alternative investments $ 1,662 3.2 % $ 1,581 3.1 % $ 1,624 3.3 %
[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 declined due to:
•Lower income from limited partnerships and other alternative investments driven by lower returns on private equity funds, partially offset by greater income from sales of underlying real estate properties and higher real estate fund valuations;
•A decline in valuation of equity fund investments in the 2022 period due to the
decline in equity market levels and fewer distributions;
•Partially offset by a higher yield on variable-rate securities and the impact
of reinvesting at higher rates.
Annualized net investment income yield, excluding limited partnerships and other alternative investments, was up primarily due to a higher yield on variable-rate securities and higher reinvestment rates, partially offset by lower returns on equity fund investments in the 2022 period. Average reinvestment rate, on fixed maturities and mortgage loans, excluding certainU.S. Treasury securities, for the year-endedDecember 31, 2022 was 4.4% which was above the average yield of sales and maturities of 3.6% for the same period. 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 2023 calendar year, we expect the annualized net investment income yield, excluding limited partnerships and other alternative investments, to be above the portfolio yield earned in 2022 due to the higher rate environment. 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. 49 -------------------------------------------------------------------------------- | 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) 2022 2021 2020 Gross gains on sales of fixed maturities $ 57$ 319 $ 255 Gross losses on sales of fixed maturities (315) (89) (50) Equity securities [1] (349) 227 (214) Net credit losses on fixed maturities, AFS [2] (18) 4 (28) Change in ACL on mortgage loans [3] (7) 9 (19) Intent-to-sell impairments [2] (6) - (5) Other, net [4] 11 39 47 Net realized gains (losses)$ (627) $ 509 $ (14) [1]The change in net unrealized gains (losses) on equity securities still held as of the end of the period and included in net realized gains (losses) were$(108) ,$155 , and$53 for the years endedDecember 31, 2022 , 2021, and 2020, respectively. [2]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]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 2022, 2021, and 2020 of$46 ,$12 , and$104 , respectively, and gains (losses) from transactional foreign currency revaluation of$28 ,$(1) and$(1) , respectively. Also includes a loss of$21 and$48 , respectively, on the sale of Continental Europe Operations for the years endedDecember 31, 2021 and 2020, as well as a gain of$46 for the year endedDecember 31, 2021 on the sale of the Company's previously owned interest in Talcott Resolution. Year endedDecember 31, 2022 Gross gains and losses on sales were primarily due to sales ofU.S. treasuries, which were used to manage duration and liquidity, and to fund purchases of spread product, mortgage loans, and alternative investments. Also included were sales of corporate securities and tax-exempt municipals and tender activity.
Equity securities net losses were primarily driven by depreciation in value due
to the decline in the equity market.
Other, net gains include gains of
revaluation and
interest rates. These gains were partially offset by losses of
securities due to credit spread widening.
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.
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.
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.
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and Results of Operations
|PROPERTY & CASUALTY INSURANCE PRODUCT RESERVES, NET OF REINSURANCE
Loss and LAE Reserves, Net of Reinsurance as of December 31, 2022
Property & Total Property
Casualty &
Other Casualty
Commercial Lines Personal Lines Operations Insurance % Total Reserves-net
Workers' compensation $ 11,729 $ - $ - $ 11,729 44.1%
General liability 5,414 - - 5,414 20.3%
Marine 312 - - 312 1.2%
Package business [1] 2,129 - - 2,129 8.0%
Commercial property 585 - - 585 2.2%
Automobile liability 1,249 1,394 - 2,643 9.9%
Automobile physical damage 17 48 - 65 0.2%
Professional liability 1,316 - - 1,316 4.9%
Bond 452 - - 452 1.7%
Homeowners - 374 - 374 1.4%
Asbestos and environmental 96 9 390 495 1.9%
Assumed reinsurance 414 - 89 503 1.9%
All other 166 4 431 601 2.3%
Total reserves-net 23,879 1,829 910 26,618 100.0%
Reinsurance and other recoverables 4,574 28 1,863 6,465
Total reserves-gross $ 28,453 $ 1,857 $ 2,773 $ 33,083
[1]Commercial Lines policy packages that include property and general liability
coverages are generally referred to as the package line of business.
P&C Loss and Loss Adjustment Expense Reserves, Net of Reinsurance, by Segment as
of December 31, 2022
[[Image Removed: hig-20221231_g26.jpg]]
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 to date ("reported
losses"). Reported
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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. Higher than expected
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 fewer 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. Additionally, social inflationary pressures, such as
increased litigation funding and aggressive tactics by plaintiff attorneys, can
introduce the risk of potentially increasing jury awards and an increase in the
percentage of litigated claims impacting both general liability and automobile
claim frequency and severity.
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 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 reinsurance recoverables 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$102 as ofDecember 31, 2022 , comprised of$45 related to Commercial Lines,$1 related to Personal Lines and$56 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. 52 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 property and automobile physical damage. The longest tail lines of business include workers' compensation, general liability, professional liability and assumed reinsurance. For short-tail lines of business, emergence of paid 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. Some reserves are reviewed fully each quarter, including loss and loss adjustment expense reserves for homeowners, personal automobile, and workers' compensation. Other reserves, including commercial automobile, commercial property, marine, package business, and 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 warranted, performs a reserve review to determine whether the reserve estimate should change. An expected loss ratio "ELR" is used in initially recording the reserves for both short-tail and long-tail lines of business. This ELR 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 ELR 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 for the current accident year
is initially recorded as the product of the ELR 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 ELR method. These primarily include paid and reported loss development methods, frequency/severity techniques and the Bornhuetter-Ferguson method (a combination of the ELR method with the paid development or reported development method). Within any one line of business, the methods that are given more weight vary based primarily on the maturity of the accident year, the mix of business and the particular internal and external influences impacting the claims experience or the methods. The output of the reserve reviews are reserve estimates 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 ofDecember 31, 2022 and 2021,U.S. property and casualty insurance product reserves for losses and loss adjustment expenses, net of reinsurance recoverables, reported underU.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 ofDecember 31, 2018 , up to a$300 limit. Under both agreements, the Company cedes to NICO, a subsidiary of Berkshire Hathaway Inc. ("Berkshire"). Reserving Methods by Line of Business- Apart from Run-off A&E which is discussed in the following section on Property & Casualty Other Operations, below is a general discussion of which reserving methods are preferred by line of business. Because the actuarial estimates are generated at a much finer level of detail than line of business (e.g., by distribution channel, coverage, accident period), other methods than those described for the line of business may also be employed for a coverage and accident year within a line of business. Also, as circumstances change, the methods that are given more weight will change. 53 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
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Preferred Reserving Methods by Line of Business Commercial property, These short-tailed lines are relatively fast-developing and paid and reported homeowners and development techniques are used. These methods use historical data to generate automobile physical paid and reported loss development patterns, which are then applied to damage cumulative paid and reported losses by accident
period to estimate ultimate
losses. In addition to paid and reported
development methods, for the most
immature accident months, the Company uses
frequency/severity techniques and
methods that incorporate the initial expected loss
ratio ("ELR"). The advantage
of frequency/severity techniques is that frequency
estimates are generally more
stable and external information can be used to
supplement internal data in
estimating average severity. In personal lines
automobile physical damage, the
Company also considers gross loss, salvage and
subrogation estimates to project
net ultimate losses for recent accident periods.
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 the initial ELR.
The Company generally uses
the reported development method for older accident
years and a combination of
reported development, frequency/severity and the
initial ELR 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, where there is more
uncertainty and a higher
percentage of open and unreported claims, putting
some reliance on
frequency/severity and initial expectations is
prudent. The Company supplements
these standard actuarial methods with a
comprehensive review of claims
diagnostics such as attorney representation,
litigation, settlement rates, large
loss impacts, and case reserve adequacy. Through
reviewing the standard
actuarial methods and claims diagnostics, a loss
estimate can be calculated that
considers these results and the age of the accident
year that is being
estimated.
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 ELR, 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
ELR 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 ELR
and large deductible and paid and reported development techniques. The Company generally weights
workers' compensation these techniques together, relying more heavily on the ELR method at early ages
of development and shifting more weight onto paid
and reported development
methods as an accident year matures. 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
ELR methods for recent
accident years and then, as an accident year
matures, 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 ELR,
Bornhuetter-Ferguson, and reported development
techniques. The Company generally
weights these techniques together, relying more
heavily on the ELR method at
early ages of development and then shifts towards
Bornhuetter-Ferguson and then
more towards the reported development method as an
accident year matures. For
marine property segments, the Company relies on
Bornhuetter-Ferguson methods for
early development ages then shifts to reported development techniques.
Assumed reinsurance and Standard methods, such as ELR, Bornhuetter-Ferguson and reported development
all other techniques are applied. These methods are informed
by underlying treaty analyses
supporting the ELRs, 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 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 applied to estimated unpaid
losses. For some lines, a
simplified paid-to-paid approach is used.
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.
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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 for 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 2022, see Note 11 -
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 reserves).
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 arise from 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 ("BSA"), 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 11 -
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. The Company also monitors the effects of social inflation, and the
impact of increased litigation funding and aggressive trial tactics by plaintiff
attorneys, that can introduce the risk of potentially increasing jury awards and
an increase in the percentage of litigated claims. Additionally, uncertainty in
estimated claim severity causes reserve variability, including the effect of
changes in internal claim handling and case reserving practices.
Workers' compensation- Included in both small commercial and 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 could reduce the
ability of an injured worker to return to work and thus 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.
We have incurred COVID-19 workers' compensation claims partly 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. For these claims, 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.
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, including but
not limited to the impacts of social inflation mentioned in the general
liability section above.
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. Severity
trends can also be impacted by social inflation whereby increased litigation
funding and aggressive trial tactics by plaintiff attorneys can introduce the
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risk of potentially increasing jury awards and an increase in the percentage of
litigated claims. Changes in claim practices increase the uncertainty in the
interpretation of case reserve data, which increases the uncertainty in recorded
reserve levels. Severity trends have increased in recent accident years, in part
driven by more expensive parts associated with new automobile technology,
causing additional uncertainty about the reliability of past patterns. In
addition, the introduction of new products and class plans has led to a
different mix of business by type of insured than the Company experienced in the
past. Such changes in mix increase the uncertainty of the reserve projections
since historical data and reporting patterns may not be applicable to the new
business. More recently, the Company has experienced slower reporting patterns
due to lengthened repair times and industry-wide delays, and higher replacement
costs due to used vehicle prices and changes in driving behavior that led to a
different mix of claims.
Assumed reinsurance- While 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, international business may have additional uncertainty due to
geopolitical, foreign currency, and trade dispute risks.
Catastrophes- Within Commercial Lines and Personal Lines, the Company is exposed to 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 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 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.
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Possible Change in Key Reserves, Net of
Indicator December 31, 2022 Reserve Development
Personal Automobile +/- 2.5 points to the $1.4 billion +/- $70
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 $11.7 billion +/- $400
development patterns
General Liability 8% change in reported loss $5.4 billion +/- $550
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 14 - Commitments and
Contingencies of Notes to Consolidated Financial Statements. The Company
believes that its current asbestos and environmental reserves are appropriate.
Future developments could continue to cause the Company to change its estimates
of its gross asbestos and environmental reserves. Losses ceded under the adverse
development cover ("A&E ADC") with NICO in excess of the ceded premium paid of
$650 have resulted in a deferred gain resulting in a timing difference between
when gross reserves are increased and when reinsurance recoveries are
recognized. This timing difference results in a charge to net income until such
periods when the recoveries are recognized. Consistent with past practice, the
Company will continue to monitor its reserves in Property & Casualty Other
Operations regularly, including its annual reviews of asbestos liabilities,
reinsurance recoverables, the allowance for uncollectible reinsurance, and
environmental liabilities. Where future developments indicate, we will make
appropriate adjustments to the reserves at that time.
Total P&C Insurance Product Reserves Development
In the opinion of management, based upon the known facts and current law, the
reserves recorded for the Company's property and casualty insurance products at
December 31, 2022
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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 or liquidity.
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid
Losses and LAE for the Year Ended December 31, 2022
Property & Total Property &
Personal Casualty Other Casualty
Commercial Lines Lines Operations Insurance
Beginning liabilities for unpaid losses and loss
adjustment expenses, gross $ 26,906 $ 1,844 $ 2,699 $ 31,449
Reinsurance and other recoverables 4,480 37 1,564 6,081
Beginning liabilities for unpaid losses and loss
adjustment expenses, net 22,426 1,807 1,135 25,368
Provision for unpaid losses and loss adjustment
expenses
Current accident year before catastrophes 5,959 1,969 - 7,928
Current accident year ("CAY") catastrophes 441 208 - 649
Prior accident year development ("PYD") (231) (13) 280 36
Total provision for unpaid losses and loss adjustment
expenses
6,169 2,164 280 8,613
Change in deferred gain on retroactive reinsurance
included in the provision for the period but reflected
in other liabilities
- - (229) (229) Payments (4,684) (2,142) (276) (7,102) Foreign currency adjustment (32) - - (32) Ending liabilities for unpaid losses and loss adjustment expenses, net 23,879 1,829 910 26,618 Reinsurance and other recoverables 4,574 28 1,863 6,465 Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 28,453$ 1,857 $ 2,773$ 33,083 Earned premiums and fee income $ 10,610$ 2,979 Loss and loss expense paid ratio [1] 44.1
71.9
Loss and loss expense incurred ratio 58.4
73.4
Prior accident year development (pts) [2] (2.2)
(0.4)
[1]The "loss and loss expense paid ratio" represents the ratio of paid losses
and loss adjustment expenses to earned premiums and fee income.
[2]"Prior accident year development (pts)" represents the ratio of prior
accident year development to earned premiums.
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Current Accident Year Catastrophe Losses for the Year EndedDecember 31, 2022 , Net of Reinsurance Commercial Personal Lines Lines Total Wind and hail $ 107 $ 104$ 211 Winter storms [1] 163 21 184 Hurricanes and Tropical Storms [2] 74 80 154 Wildfires - 3 3 Ukraine conflict [3] 23 - 23 Other international 1 - 1 Catastrophes before assumed reinsurance 368 208 576 Global assumed reinsurance business [1] [2] [3] 73 - 73 Total catastrophe losses $ 441 $ 208$ 649 [1]Includes losses from Winter Storm Elliott of$167 , including$3 in the global assumed reinsurance business. Gross losses from Winter Storm Elliott of$202 were partially offset by a$35 reinsurance recoverable since, under a per occurrence property catastrophe treaty layer covering losses from earthquakes and named storms other than hurricanes and tropical storms, the Company is able to cede 70% of up to$250 in excess of a$100 attachment point subject to a$50 annual aggregate deductible. [2]Includes losses from Hurricane Ian of$186 , net of reinsurance, including$35 of hurricane losses in the global assumed reinsurance business. [3]Total catastrophe losses resulting from theUkraine conflict were$27 , net of reinsurance, including$4 within global assumed reinsurance, all in the first quarter. Unfavorable (Favorable) Prior Accident Year Development for the
Year Ended
Property &
Personal Casualty Other Total Property &
Commercial Lines Lines Operations Casualty Insurance
Workers' compensation $ (204) $ - $ - $ (204)
Workers' compensation discount accretion 36 - - 36
General liability 25 - 31 56
Marine 2 - - 2
Package business (39) - - (39)
Commercial property (11) - - (11)
Professional liability (11) - - (11)
Bond (32) - - (32)
Assumed reinsurance 19 - - 19
Automobile liability 38 (14) - 24
Homeowners - (1) - (1)
Net asbestos and environmental reserves [1] - - - -
Catastrophes (60) (2) - (62)
Uncollectible reinsurance (1) (2) 6 3
Other reserve re-estimates, net 7 6 14 27
Prior accident year development before change
in deferred gain (231) (13) 51 (193)
Change in deferred gain on retroactive
reinsurance included in other liabilities [1] - - 229 229
Total prior accident year development $ (231) $ (13) $ 280 $ 36
[1]The year ended December 31, 2022 included $229 of adverse development on net
asbestos and environmental reserves that was ceded to NICO but for which the
Company recorded a deferred gain on retroactive reinsurance.
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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 catastrophes 496 168 - 664
Prior accident year development [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 11 - 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, 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. 60
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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 $ (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
61
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid
Losses and LAE for the Year Ended December 31, 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 11 - 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 Corporation and Pacific Gas and Electric Company ("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 62 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations the Company's insurance subsidiaries. In the second quarter of 2020, the Company recorded an estimated$289 subrogation benefit though the ultimate amount it collects will depend on how the Company's ultimate paid claims subject to subrogation
compare to other insurers' ultimate paid claims subject to subrogation. In 2020,
the Company received distributions, net of attorney costs, of
Unfavorable (Favorable) Prior Accident 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
Total prior accident year development (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)
For discussion of the factors contributing to unfavorable (favorable) for the prior accident year reserve development 2022, 2021, and 2020 periods, refer to Note 11 - 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 and is 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, respectively.
63
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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
Run-off A&E Summary as of December 31, 2022
Asbestos Environmental Total Run-off A&E
Gross
Direct $ 1,316 $ 373 $ 1,689
Assumed Reinsurance 458 64 522
Total 1,774 437 2,211
Ceded- other than NICO (476) (63) (539)
Total net reserves, before ceded losses to NICO $ 1,298 $ 374 1,672
Ceded - NICO A&E ADC "Run-off" [1] (1,282)
Net $ 390
[1]Including $1,282 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 $1,244 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
2022
Beginning net reserves before reinsurance
recoverable from NICO $ 1,263 $ 394 $ 1,657
Losses and loss adjustment expenses incurred before
ceding to NICO A&E ADC
161 68 229 Losses and loss adjustment expenses paid (128) (89) (217) Reclassification of allowance for uncollectible reinsurance [1] 2 1 3
Ending net reserves before reinsurance recoverable
from NICO
$ 1,298 $ 374 1,672 Reinsurance recoverable from NICO A&E ADC (1,282) Ending net reserves $ 390
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 liability - net $ 789
[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 64
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations limit. Cumulative ceded losses up to the$650 reinsurance premium paid have been recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the$650 reinsurance premium paid have resulted in a deferred gain. As ofDecember 31, 2022 , the Company has incurred a cumulative$1,244 in adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, including$1,282 for Run-off A&E reserves, partially offset by a$38 reduction for A&E reserves in Commercial Lines and Personal Lines. As such,$256 of coverage is available for future adverse net reserve development, if any. As a result, the Company has recorded a$594 deferred gain within other liabilities, representing the difference between the reinsurance recoverable of$1,244 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$1.7 billion which was based on the carrying value of net reserves as ofDecember 31, 2016 . Accordingly, the payment of losses without any current collection of recoveries from NICO has reduced the Company's net loss reserves which decreases the net survival ratios such that, unadjusted, the net survival ratios would not be representative of the true number of years of average loss payments covered by the reserves. Therefore, the net survival ratios presented in the table below are calculated before considering the effect of the A&E ADC reinsurance agreement but net of other reinsurance in place. Net and Gross Survival Ratios Asbestos Environmental One year net survival ratio 10.1 4.1 Three year net survival ratio 9.3 5.7 One year gross survival ratio 11.0 4.0 Three year gross survival ratio 9.3 5.2 Run-off A&E Paid and Incurred Losses and LAE Development Asbestos Environmental Total A&E Paid Losses & Incurred Losses
Incurred Losses Paid Losses & Incurred Losses
LAE & LAE Paid Losses & LAE & LAE LAE & LAE 2022 Gross$ 160 $ 227 $ 106 $ 80$ 266 $ 307 Ceded- other than NICO (32) (66) (17) (12) (49) (78) Net - Gross of ADC$ 128 $ 161 $ 89 $ 68 217 229 Ceded - NICO A&E ADC - (229) Net$ 217 $ - 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) 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 2022, the Company reviewed all of its open direct domestic insurance accounts exposed to asbestos and environmental liability, as well as assumed reinsurance accounts. 65 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 2022 comprehensive annual reviews As a result of the 2022 fourth quarter review, the Company increased estimated asbestos reserves before NICO reinsurance by$162 , including$161 in P&C Other Operations, primarily driven by an increase in the Company's share of liability due to insolvencies and cost sharing agreements, an increase in claim settlement rates, and higher claim settlement values and defense costs. The increase in asbestos reserves was offset by a$162 reinsurance recoverable under the NICO treaty. As a result of the 2022 fourth quarter review, the Company increased estimated environmental reserves before NICO reinsurance by$67 , including$68 in P&C Other Operations, primarily due to increased estimates of liability for PFAS exposure, the resolution of one large mining account, higher environmental site cleanup and monitoring costs, and higher legal expenses. The increase in environmental reserves was offset by a$67 reinsurance recoverable under the NICO treaty. The total$229 increase in asbestos and environmental reserves in P&C Other Operations was offset by a$229 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$229 increase in deferred gain on retroactive reinsurance, resulting in the Company recording a charge to earnings of$229 in 2022. 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. For information regarding the 2020 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 2021 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 72% of the Company's total Direct gross asbestos reserves as ofDecember 31, 2022 compared to approximately 71% as ofDecember 31, 2021 . 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 28% of the Company's Direct gross asbestos reserves as ofDecember 31, 2022 compared to approximately 29% as ofDecember 31, 2021 . Review of "All Other" Reserves in Property & Casualty Other Operations Prior year development on all other reserves resulted in increases of$51 ,$47 and$50 , respectively for calendar years 2022, 2021 and 2020. Included in the 2022 adverse reserve development was an increase in ULAE reserves and an increase in reserves from reallocating a portion of general liability reserves from Commercial Lines to P&C Other Operations related to sexual molestation and sexual abuse claims. The reallocated reserves relate to excess liability policies written by a legal entity in P&C Other Operations for amounts owed to claimants under the agreement in principle reached with the BSA on sexual molestation and sexual abuse claims in third quarter 2021. In total for the Company, there was no change in the liability for settlement amounts owed on the BSA claims in the 2022 period. The increase in reserves for ULAE was primarily due to an increase in expected aggregate claim handling costs associated with asbestos and environmental claims. The Company provides an allowance for uncollectible reinsurance, reflecting management's best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers' unwillingness or inability to pay. In performing its assessment, the Company evaluates the collectibility of the reinsurance recoverables and the adequacy of the allowance for uncollectible reinsurance associated with older, long-term casualty liabilities reported in Property & Casualty Other Operations. In conducting these evaluations, the Company used its most recent detailed evaluations of ceded liabilities reported in the segment. The Company analyzed the overall credit quality of the Company's reinsurers, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers, and recent developments in commutation activity between reinsurers and cedants. As of 2022, 2021, and 2020 the allowance for uncollectible reinsurance for Property & Casualty Other Operations totaled$56 ,$53 and$60 , 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. 66 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations |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, 2022 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, 2022 (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, 2022 . 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, 2022 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 . 67 -------------------------------------------------------------------------------- | 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
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Total
By Accident Year
2012 & Prior $ 192 $ 326 $ 307 $ 275 $ 81 $ (41) $ 4 $ 252 $ 555 $ 36 $ 1,987
2013 (98) (43) (29) (33) (2) (26) (15) (35) (10) (291)
2014 (14) 20 (19) (54) (29) (28) (59) (23) (206)
2015 191 (41) (93) 19 (16) (70) (23) (33)
2016 (29) 14 (11) (38) (83) (41) (188)
2017 9 (116) (204) (111) (101) (523)
2018 78 (307) (96) 22 (303)
2019 (92) (47) 39 (100)
2020 (101) (101) (202)
2021 9 9
Increase (decrease) in net reserves
[1] 192 228 250 457 (41) (167) (81) (448) (47) (193) 150
Change in deferred gain on
retroactive reinsurance included in
other liabilities 312 246 229
Total unfavorable (favorable) prior
accident year development $ (136) $ 199 $ 36
[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 2012 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 11 - 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 2012 and Prior The net increases in estimates of ultimate losses for accident years 2012 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 commercial automobile liability, offset by favorable development in personal automobile liability. Accident year 2013 Estimates of ultimate losses were decreased for the 2013 accident year 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, bond 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
construction, premises liability, products liability and excess casualty.
Accident year 2017 Ultimate loss estimates were decreased for the 2017 accident year mainly due to release of reserves related to catastrophes, lower reserve estimates in personal automobile liability due to emergence of lower estimated severity and lower reserve estimates for workers' compensation related to lower than previously estimated claim severity, 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. 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 and workers' compensation 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. 68 -------------------------------------------------------------------------------- | 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 professional liability. Accident year 2021 There were no significant changes in ultimate loss estimates. |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$6,535 and$6,437 of LTD unpaid losses and loss adjustment expenses, net of reinsurance, as ofDecember 31, 2022 and 2021, 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 3.2% and 3.3% in 2022 and 2021, 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, 2022 . 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 69 -------------------------------------------------------------------------------- | 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 for a single incurral year have generally increased and have ranged from 7% below to 6% above current assumptions over that time period. For a single recent incurral year (such as 2022), a one percent decrease in our assumption for LTD claim termination rates would increase our reserves by$11 . For all incurral years combined, as ofDecember 31, 2022 , a one percent decrease in our assumption for our LTD claim termination rates would increase our Group Benefits unpaid losses and loss adjustment expense reserves by$25 .
Impact of COVID-19 on 2022 Results of Operations
Within Group Benefits, the Company experienced excess mortality in its group life business of$160 in 2022, primarily caused by direct and indirect impacts of COVID-19. Within the group disability business, in 2022 the Company recognized$12 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 theSocial Security Administration's processing of disability claims. Other 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, if we have a downturn in the economy, we could experience an increase in claim incidence on long-term disability claims. By investing in fixed income securities of similar duration to our liabilities, we hedge our interest rate exposure over a three year period at the time we price and sell long-term disability policies given average three year rate guarantees. Our weighted average discount rate assumption for the 2022 incurral year is down from that of the 2021 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 annual goodwill assessment for the reporting units was completed as ofOctober 31, 2022 , and resulted in no write-downs of goodwill for the year endedDecember 31, 2022 . All reporting units passed the annual impairment test with a significant margin. For information on goodwill see Note 10 -Goodwill & Other Intangible Assets of Notes to Consolidated Financial Statements. |VALUATION OF INVESTMENTS AND DERIVATIVE INSTRUMENTS Fixed Maturities,Equity Securities , Short-term Investments, and 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 values of derivative instruments are determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded transactions and transactions cleared through central clearing houses ("OTC-cleared") may be used and in other cases independent broker quotes may be used. For further discussion, see the
Fixed Maturities,
section in Note 4 - 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 sections within the
Investment Portfolio Risks and Risk Management section of the MD&A.
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|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)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Written premiums $ 11,158 $ 10,041 $ 8,969 11 % 12 %
Change in unearned premium reserve 587 500 59 17 % NM
Earned premiums 10,571 9,541 8,910 11 % 7 %
Fee income 39 34 30 15 % 13 %
Losses and loss adjustment expenses
Current accident year before catastrophes 5,959 5,407 5,488 10 % (1 %)
Current accident year catastrophes [1] 441 496 397 (11 %) 25 %
Prior accident year development [1] (231) 141 44 NM NM
Total losses and loss adjustment expenses 6,169 6,044 5,929 2 % 2 %
Amortization of DAC 1,563 1,398 1,397 12 % - %
Underwriting expenses 1,788 1,678 1,594 7 % 5 %
Amortization of other intangible assets 29 29 28 - % 4 %
Dividends to policyholders 29 24 29 21 % (17 %)
Underwriting gain (loss) 1,032 402 (37) 157 % NM
Net investment income [2] 1,415 1,502 1,160 (6 %) 29 %
Net realized gains (losses) [2] (385) 260 (60) NM NM
Other income (expense) (12) (5) (31) (140 %) 84 %
Income before income taxes 2,050 2,159 1,032 (5 %) 109 %
Income tax expense [3] 426 402 176 6 % 128 %
Net income $ 1,624 $ 1,757 $ 856 (8 %) 105 %
[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
11 - 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 16 - Income Taxes of Notes to
Consolidated Financial Statements.
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Premium Measures
2022 2021 2020
Small Commercial:
Net new business premium $ 768 $ 673 $ 557
Policy count retention [1] 86 %
84 % 83 %
Renewal written price increases 3.8 %
3.2 % 2.0 %
Renewal earned price increases 3.4 %
2.6 % 2.1 %
Policies in-force as of end of period (in thousands) 1,421 1,366 1,283
Middle Market [2]:
Net new business premium$ 531 $
532
Policy count retention [1] 84 %
82 % 78 %
Renewal written price increases 5.9 %
5.9 % 7.6 %
Renewal earned price increases 5.8 %
7.2 % 6.4 %
Global Specialty:
Global specialty gross new business premium [3]$ 825 $
912
Renewal written price increases [4] 5.9 %
13.6 % 21.6 %
Renewal earned price increases [4] 10.0 %
21.5 % 18.0 %
[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.
[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 Global Re, offshore energy policies, credit and political risk
insurance 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)
2022 2021
2020 From 2021 to 2022 From 2020 to 2021
Loss and loss adjustment expense ratio
Current accident year before catastrophes
56.4 56.7 61.6 (0.3) (4.9)
Current accident year catastrophes 4.2 5.2 4.5 (1.0) 0.7
Prior accident year development (2.2) 1.5 0.5 (3.7) 1.0
Total loss and loss adjustment expense ratio 58.4 63.3 66.5 (4.9) (3.2)
Expense ratio 31.6 32.2 33.5 (0.6) (1.3)
Policyholder dividend ratio 0.3 0.3 0.3 - -
Combined ratio 90.2 95.8 100.4 (5.6) (4.6)
Impact of current accident year catastrophes and
prior year development (2.0) (6.7) (5.0) 4.7 (1.7)
Underlying combined ratio 88.3 89.1 95.5 (0.8) (6.4)
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Net Income
[[Image Removed: hig-20221231_g27.jpg]]
Year ended
Net income decreased due to a change from net realized gains to net realized
losses and lower net investment income, partially offset by a higher
underwriting gain. For further discussion of investment results, see MD&A -
Investment Results.
Underwriting (Loss) Gain
[[Image Removed: hig-20221231_g28.jpg]]
Year ended
Underwriting gain increased with the improvement primarily due to the effect of earned premium growth, a change from unfavorable prior accident year development in 2021 to favorable prior accident year development in 2022, and lower current accident year catastrophes, partially offset by an increase in underwriting expenses. Underwriting expenses increased in 2022 due to higher staffing and performance-based commissions, investments in technology, and a decrease in the allowance for credit losses on premiums receivable in the 2021 period, partially offset by incremental savings from Hartford Next initiatives.
Expense ratio decreased in 2022 driven by the impact of
higher earned premium and incremental savings from the Hartford Next program,
partially offset by investments in technology, higher staffing costs and
performance-based commissions and the impact of a decrease in the allowance for
credit losses on premiums receivable recognized in 2021.
Earned Premiums
[[Image Removed: hig-20221231_g29.jpg]]
[1]Other of $43 , $43 and $46 for 2020, 2021 and 2022, respectively, is included
in the total.
Written Premiums
[[Image Removed: hig-20221231_g30.jpg]]
[1]Other written premiums of
2020
74 -------------------------------------------------------------------------------- | 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, 2022 compared to the year endedDecember 31, 2021
Earned premiums increased in 2022 due to written premium increases over the
prior 12 months including higher premiums from audits and endorsements,
principally in workers' compensation due to an increasing exposure base from
higher payrolls.
Written premiums increased in 2022 driven by growth across small commercial,
middle & large commercial and global specialty.
•Small commercial written premium increased in 2022 driven by exposure growth from higher audit and endorsement premium, double-digit new business growth, higher policy count retention, and renewal written price increases in all lines. 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 2022 driven by renewal written price increases in all lines, higher audit and endorsement premium and higher policy count retention. Written premium grew across general industries, industry verticals and specialty markets. •Global specialty written premium increased in 2022 driven by written price increases and higher retention, partially offset by a decline in new business. Written premium grew in all lines except international, with the most significant growth in global reinsurance, wholesale and financial lines.
Renewal written price increases were recognized in nearly all lines in 2022,
with moderating price increases across most lines in global specialty.
•In small commercial, renewal written price increases were modestly higher in 2022, with mid-single digit price increases in package business and automobile. Workers' compensation pricing was slightly positive in 2022 due to the effect of rising wages largely offset by lower rates. •In middle market, the Company recognized mid-to-high single-digit price increases in most lines other than workers' compensation, which experienced low single-digit written price increases as the effect of higher wages more than offset lower rates.
•In global specialty, we achieved low-to-mid single-digit renewal written price
increases, with the highest increases in property, marine and professional
liability.
Current Accident Year Loss and LAE Ratio before Catastrophes
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Year ended
Current Accident Year Loss and LAE ratio before catastrophes decreased slightly primarily due to lower loss ratios in global specialty lines and lower COVID-19 incurred losses, largely offset by higher non-catastrophe property losses in both small commercial and middle market. There were no current accident year COVID-19 incurred losses in the year endedDecember 31, 2022 compared to$31 of COVID-19 incurred losses in 2021, including$20 in workers' compensation and$11 in financial and other lines. 75 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Catastrophes and Unfavorable (Favorable) Prior
[[Image Removed: hig-20221231_g32.jpg]]
Year ended
Current accident year catastrophe losses for 2022 included losses for Hurricane Ian, tornado, wind and hail events primarily in the Midwest, South, Mountain West and Great Plains, losses from winter storms, including Winter Storm Elliott, and$27 of losses, net of reinsurance, related to theUkraine conflict. 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. Prior accident year development was net favorable for 2022 and included reserve decreases for workers' compensation, catastrophes, package business and bond, partially offset by reserve increases for automobile liability, general liability and assumed reinsurance. In 2022, an increase in reserves for general liability related to excess casualty and primary construction was largely offset by a reallocation of a portion of reserves for sexual molestation and sexual abuse claims from Commercial Lines to P&C Other Operations. The reallocated reserves relate to excess liability policies written by a legal entity in P&C Other Operations for amounts owed to claimants under the agreement in principle reached with the BSA on sexual molestation and sexual abuse claims in third quarter 2021. In total for the Company, there was no change in 2022 in the liability for settlement amounts owed on the BSA claims. Net unfavorable 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. Prior accident year development in 2021 included reserve increases related toNavigators Group on 2018 and prior accident years that was economically ceded to NICO but for which the benefit was not recognized in earnings as it has been recorded as a deferred gain on retroactive reinsurance.
2023 Outlook
The Company expects Commercial Lines written premiums in 2023 to be higher than
written premiums in 2022, with growth across the segment.
In 2023, management expects mid-single digit renewal written pricing in lines
other than workers' compensation and financial lines with workers' compensation
pricing expected to be flat to slightly negative. Written pricing increases in
2023 are driven by a number of factors affecting loss costs including the
effects of social inflation, higher reinsurance costs, and the cost of materials
and labor for repairs.
The Company expects the Commercial Lines combined ratio will be 90.5 to 92.5 in
2023, compared to 90.2 in 2022, primarily due to the effect of prior accident
year reserve decreases in 2022, partially offset by lower current accident year
catastrophe losses assumed for 2023 and a lower expense ratio. We expect overall
earned pricing to keep pace with loss trends, while the expense ratio is
expected to improve slightly driven by higher earned premium. The underlying
combined ratio is expected to be 87.0 to 89.0 in 2023 compared to 88.3 in 2022.
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| PERSONAL LINES - RESULTS OF OPERATIONS
Underwriting Summary
Increase (Decrease) Increase (Decrease)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Written premiums $ 2,961 $ 2,908 $ 2,936 2 % (1 %)
Change in unearned premium reserve 12 (46) (72) 126 % 36 %
Earned premiums 2,949 2,954 3,008 - % (2 %)
Fee income 30 32 34 (6 %) (6 %)
Losses and loss adjustment expenses
Current accident year before catastrophes 1,969 1,840 1,695
7 % 9 % Current accident year catastrophes [1] 208 168 209 24 % (20 %) Prior accident year development [1] (13) (144) (438) 91 % 67 % Total losses and loss adjustment expenses 2,164 1,864 1,466 16 % 27 % Amortization of DAC 228 230 244 (1 %) (6 %) Underwriting expenses 594 615 591 (3 %) 4 % Amortization of other intangible assets 2 2 4 - % (50 %) Underwriting gain (loss) (9) 275 737 (103 %) (63 %) Net investment income [2] 140 157 157 (11 %) - % Net realized gains (losses) [2] (35) 29 (5) NM NM
Net servicing and other income (expense) [3] 17 19 13
(11 %) 46 % Income before income taxes 113 480 902 (76 %) (47 %) Income tax expense [4] 22 95 184 (77 %) (48 %) Net income$ 91 $ 385 $ 718 (76 %) (46 %) [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 11 - 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]Includes servicing revenues of$73 ,$80 , and$81 for 2022, 2021, and 2020, respectively and includes servicing expenses of$55 ,$61 , and$67 for 2022, 2021, and 2020, respectively. [4]For discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements. Written and Earned Premiums Increase (Decrease) Increase (Decrease) Written Premiums 2022 2021 2020 From 2021 to 2022 From 2020 to 2021 Product Line Automobile$ 2,020 $ 1,997 $ 2,003 1 % - % Homeowners 941 911 933 3 % (2 %) Total$ 2,961 $ 2,908 $ 2,936 2 % (1 %) Earned Premiums Product Line Automobile$ 2,025 $ 2,035 $ 2,058 - % (1 %) Homeowners 924 919 950 1 % (3 %) Total$ 2,949 $ 2,954 $ 3,008 - % (2 %) 77
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Premium Measures
2022 2021 2020
Policies in-force end of period (in thousands)
Automobile 1,323 1,317 1,369
Homeowners 740 773 826
New business written premium
Automobile $ 227 $ 219 $ 223
Homeowners $ 74 $ 60 $ 63
Policy count retention [1]
Automobile 84 % 84 % 84 %
Homeowners 84 % 85 % 84 %
Renewal written price increase
Automobile 4.5 % 2.2 % 2.4 %
Homeowners 10.7 % 8.5 % 6.4 %
Renewal earned price increase
Automobile 3.2 % 2.1 % 3.4 %
Homeowners 8.9 % 8.1 % 5.7 %
[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.
Underwriting Ratios
Increase (Decrease) Increase (Decrease)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Loss and loss adjustment expense ratio
Current accident year before
catastrophes 66.8 62.3 56.3 4.5 6.0
Current accident year catastrophes 7.1 5.7 6.9 1.4 (1.2)
Prior accident year development (0.4) (4.9) (14.6) 4.5 9.7
Total loss and loss adjustment expense
ratio 73.4 63.1 48.7 10.3 14.4
Expense ratio 26.9 27.6 26.8 (0.7) 0.8
Combined ratio 100.3 90.7 75.5 9.6 15.2
Impact of current accident year
catastrophes and prior year development (6.7) (0.8) 7.7 (5.9) (8.5)
Underlying combined ratio 93.7 89.9 83.1 3.8 6.8
Product Combined Ratios
Increase (Decrease) Increase (Decrease)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Automobile
Combined ratio 104.1 92.9 85.5 11.2 7.4
Underlying combined ratio 101.3 95.9 88.0 5.4 7.9
Homeowners
Combined ratio 92.2 86.8 54.2 5.4 32.6
Underlying combined ratio 77.0 76.5 72.5 0.5 4.0
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Net Income
[[Image Removed: hig-20221231_g33.jpg]]
Year ended
Net income decreased in 2022, largely driven by a change from underwriting gain
to an underwriting loss, a change from net realized gains to net realized
losses, and a decrease in net investment income.
Underwriting Gain (Loss)
[[Image Removed: hig-20221231_g34.jpg]]
Year ended
Underwriting gain (loss) changed from a gain to a loss in 2022, primarily due to
higher current accident year loss costs before catastrophes in automobile, a
decrease in net favorable prior accident year reserve development and, to a
lesser extent, an increase in current accident year catastrophe losses and
higher current accident year loss costs before catastrophes in homeowners.
Underwriting expenses and the expense ratio decreased in 2022 as lower direct
marketing costs and incremental cost savings from the Hartford Next initiative
were partially offset by higher technology and operations staffing costs.
Earned Premiums
[[Image Removed: hig-20221231_g35.jpg]]
Year ended December 31, 2022 compared to the year ended December 31, 2021
Earned premiums were down slightly in 2022 due to the effect of a decline in
written premium over the prior twelve months across both Agency channels due to
non-renewals exceeding new business, primarily in automobile, largely offset by
an increase in AARP direct.
Written Premiums
[[Image Removed: hig-20221231_g36.jpg]]
Written premiums increased in automobile in 2022 due to an increase in new
business and the effect of written pricing increases. Written premiums increased
in homeowners in 2022 primarily due to an increase in new business and the
effect of written pricing increases, partially offset by slightly lower policy
count retention.
Renewal written pricing increases were higher for both automobile and homeowners
in 2022 primarily in response to recent higher loss cost trends as well as
higher insured values in homeowners.
Policy count retention for automobile was flat in 2022 while, for homeowners, policy count retention was down partly due to policyholder response to pricing increases.
Policies in-force increased slightly in 2022 for automobile compared to the end
of 2021 due to an increase in new
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business, and decreased for homeowners reflecting the level of new business in
relation to non-renewed policies.
Current Accident Year Loss and Loss Adjustment Expense Ratio before Catastrophes
[[Image Removed: hig-20221231_g37.jpg]]
Year ended
Current accident year loss and LAE ratio before catastrophes increased in both automobile and homeowners in 2022. The increase in automobile was due to an increase in automobile liability claim frequency and severity and higher physical damage claim severity due to inflationary effects on parts and repairs, partially offset by earned pricing increases. For homeowners, the increase in the current accident year loss and LAE ratio before catastrophes was due to an increase in homeowners' severity that was partially offset by earned pricing increases and lower frequency of both weather and non-weather claims. Contributing to the increase in homeowners severity was the effect of higher rebuilding costs due to inflation and a greater proportion of non-weather claims, which have higher average severity.
Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident
Year Development [[Image Removed: hig-20221231_g38.jpg]]
Year ended
Current accident year catastrophe losses increased in 2022 compared to the prior year. Current accident year catastrophe losses for 2022 included losses for Hurricane Ian as well as wind and hail events primarily in the Northern Plains, Midwest, South and Mountain West, and losses from winter storms. 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. Prior accident year development was less favorable in 2022, with lower reserve reductions for automobile liability and catastrophes. Net favorable prior accident year development in the 2022 period was primarily driven by automobile liability. Prior accident year development was favorable for 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. 80
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 2023 Outlook Written premium is expected to increase in 2023 compared with 2022 largely driven by written pricing increases.
In 2023, the Company expects double-digit written pricing increases in both
automobile and home as the effect of recent automobile claim frequency and
severity trends are reflected in automobile rate filings, and rate increases in
homeowners reflect increasing property loss cost trends.
The Company expects the combined ratio for Personal Lines will be 100.5 to 102.5
in 2023 compared to 100.3 in 2022 due to a continuation of elevated auto and
homeowners' loss cost severity and, to a lesser extent, increased auto
frequency, as well as the effect of prior accident year reserve decreases in
2022, partly offset by the effect of earned pricing increases. The underlying
combined ratio for Personal Lines is expected to be 93.0 to 95.0 in 2023
compared to 93.7 in 2022.
| PROPERTY & CASUALTY OTHER OPERATIONS - RESULTS OF OPERATIONS
Underwriting Summary
Increase (Decrease) Increase (Decrease)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Losses and loss adjustment expenses
Prior accident year development [1]
39 % (22 %) Total losses and loss adjustment expenses 280 202 258 39 % (22 %) Underwriting expenses 9 8 11 13 % (27 %) Underwriting loss (289) (210) (269) (38 %) 22 % Net investment income [2] 63 75 55 (16 %) 36 % Net realized gains (losses) [2] (16) 13 (1) NM NM Other income (expenses) - (1) 1 100 % NM Loss before income taxes (242) (123) (214) (97 %) 43 % Income tax benefit [3] (52) (28) (46) (86 %) 39 % Net loss$ (190) $ (95) $ (168) (100 %) 43 % [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 11 - 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 16 - Income Taxes of Notes to Consolidated Financial Statements. Net Loss [[Image Removed: hig-20221231_g39.jpg]]
Year ended
Net loss increased primarily due to a higher underwriting loss, a change from net realized gains in the 2021 period to net realized losses in the 2022 period and a decrease in net investment income. Underwriting loss increased primarily due to higher unfavorable prior accident year reserve development. Unfavorable prior accident year reserve development for the year endedDecember 31, 2022 was primarily due to a$229 increase in A&E reserves, and reallocating a portion of general liability reserves from Commercial Lines to P&C Other Operations related to sexual molestation and sexual abuse claims. The reallocated reserves relate to excess liability policies written by a legal entity in P&C Other Operations for amounts owed to claimants under the agreement in principle reached with the BSA on sexual molestation and sexual abuse claims in third quarter 2021. In total for the Company, there was no change in the liability for settlement amounts owed on the BSA claims in the 2022 period. 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 81
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ULAE reserves, partially offset by a reduction in the allowance for uncollectible reinsurance. Before NICO reinsurance in 2022, A&E reserves were increased by$229 in P&C Other Operations, including$161 for asbestos and$68 for environmental. Cumulative adverse A&E reserve development ceded to NICO for both ongoing operations and P&C Other Operations totaled$1,244 throughDecember 31, 2022 and since this amount exceeds ceded premium paid for the A&E ADC of$650 , the Company has recognized a$594 deferred gain on retroactive reinsurance as ofDecember 31, 2022 , within other liabilities, including a$229 increase in deferred gain in 2022 recognized within P&C Other Operations. Asbestos reserves prior accident year development in 2022 before NICO reinsurance of$161 was primarily due to an increase in the Company's share of liability due to insolvencies and cost sharing agreements, an increase in claim settlement rates, and higher claim settlement values and defense costs. Environmental reserves prior accident year development in 2022 before NICO reinsurance of$68 was primarily due to increased estimates of liability for PFAS exposure, the resolution of one large mining account, higher environmental site cleanup and monitoring costs, and higher legal expenses.
|GROUP BENEFITS - RESULTS OF OPERATIONS
Operating Summary
Increase (Decrease) Increase (Decrease)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Premiums and other considerations $ 6,057 $ 5,687 $ 5,536 7 % 3 %
Net investment income [1] 524 550 448 (5 %) 23 %
Net realized gains (losses) [1] (122) 130 22 (194 %) NM
Total revenues 6,459 6,367 6,006 1 % 6 %
Benefits, losses and loss adjustment expenses 4,520 4,612 4,137
(2 %) 11 % Amortization of DAC 33 40 50 (18 %) (20 %)
Insurance operating costs and other expenses 1,467 1,373 1,308
7 % 5 % Amortization of other intangible assets 40 40 40 - % - % Total benefits, losses and expenses 6,060 6,065 5,535 - % 10 % Income before income taxes 399 302 471 32 % (36 %) Income tax expense [2] 75 53 88 42 % (40 %) Net income$ 324 $ 249 $ 383 30 % (35 %) [1]For discussion of consolidated investment results, see MD&A - Investment Results. [2]For discussion of income taxes, see Note 16 - Income Taxes of Notes to the Consolidated Financial Statements. Premiums and Other Considerations Increase (Decrease) Increase (Decrease) 2022 2021 2020 From 2021 to 2022 From 2020 to 2021 Fully insured - ongoing premiums$ 5,858 $ 5,502 $ 5,305 6 % 4 % Buyout premiums 12 2 56 NM (96 %) Fee income 187 183 175 2 % 5 % Total premiums and other considerations$ 6,057 $ 5,687 $ 5,536 7 % 3 %
Fully insured ongoing sales, excluding buyouts
717 5 % 6 %
82
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and Results of Operations
Ratios, Excluding Buyouts
Increase Increase
(Decrease) From (Decrease) From
2022 2021 2020 2021 to 2022 2020 to 2021
Group disability loss ratio 68.3 % 68.2 % 66.1 % 0.1 2.1
Group life loss ratio 87.5 % 101.9 % 87.5 % (14.4) 14.4
Total loss ratio 74.6 % 81.1 % 74.5 % (6.5) 6.6
Expense ratio [1] 25.3 % 25.5 % 25.2 % (0.2) 0.3
[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
2022 2021 2020 2021 to 2022 2020 to 2021
Net income margin 5.0 % 3.9 % 6.4 % 1.1 (2.5)
Adjustments to reconcile net income margin to
core earnings margin:
Net realized losses (gains), before tax 1.8 % (2.0 %) (0.4 %) 3.8 (1.6)
Integration and other non-recurring M&A costs,
before tax 0.1 % 0.1 % 0.3 % 0.0 (0.2)
Income tax expense (benefit) (0.4 %) 0.5 % - % (0.9) 0.5
Impact of excluding buyouts from denominator of
core earnings margin - % - % 0.1 % 0.0 (0.1)
Core earnings margin 6.5 % 2.5 % 6.4 % 4.0 (3.9)
Net Income
[[Image Removed: hig-20221231_g40.jpg]]
Year ended December 31, 2022 compared to the year ended December 31, 2021
Net income increased primarily due to a lower loss ratio and additional earnings
generated by growth in fully insured ongoing premium, partially offset by a
change from net realized gains in the 2021 period to net realized losses in the
2022 period, a decrease in net investment income, and higher insurance operating
expenses.
Insurance operating costs and other expenses were higher as higher claim costs
to handle pandemic related claims, and an increase in technology costs were
partially offset by incremental expense savings from the Hartford Next
operational transformation and cost reduction program.
Fully Insured Ongoing Premiums
[[Image Removed: hig-20221231_g41.jpg]]
Year ended
Fully insured ongoing premiums increased primarily in group disability driven by
an increase in exposure on existing accounts resulting from increased
enrollment, low unemployment, and wage increases, as well as strong persistency.
83
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Fully insured ongoing sales, excluding buyouts increased due to growth from
existing customers, including from increased enrollment and customer expansion.
Ratios
[[Image Removed: hig-20221231_g42.jpg]]
Year ended December 31, 2022 compared to the year ended December 31, 2021
Total loss ratio decreased 6.5 points for 2022 due to a lower group life loss
ratio. The group life loss ratio decreased 14.4 points driven by a 17.7 point
decrease in excess mortality claims partially offset by a higher loss ratio on
accidental death business and an increase in expense reserves. For the twelve
month period ended December 31, 2022 and 2021, excess
mortality losses were $160 and $583 , respectively. The group disability loss
ratio was consistent with prior year as favorable development related to
estimates of long-term disability claim incidence and lower COVID-19 related
short-term disability losses were offset by less favorable long-term disability
claim recoveries and a lower New York Paid Family Leave risk adjustment benefit.
Expense ratio decreased slightly in 2022 driven by higher earned premiums and
incremental expense savings from the Hartford Next operational transformation
and cost reduction program, partially offset by higher claim costs to handle
pandemic related claims and an increase in technology costs.
2023 Outlook
The Company expects Group Benefits fully insured ongoing premiums to increase in
2023 due to higher book persistency and continued strong sales.
With COVID shifting from pandemic to endemic state, excess mortality losses are
expected to improve in 2023 compared to 2022, though we expect mortality trends
will settle above pre-pandemic levels and we are pricing the business
accordingly. As a result, group life loss ratios are expected to improve versus
2022. In group disability, we expect some modest moderation of favorable
incidence and recovery trends in 2023.
Compared to the net income margin of 5.0% in 2022, the net income margin for
2023 is expected to be between 6.0% and 7.0% as the Company does not assume in
its plan that realized losses in 2022 will recur in 2023. Compared to a core
earnings margin of 6.5% in 2022, the core earnings margin in 2023 is expected to
be between 6.0% and 7.0%, subject to uncertainty on mortality and long-term
disability loss cost trends.
|HARTFORD FUNDS - RESULTS OF OPERATIONS
Operating Summary
Increase (Decrease) Increase (Decrease)
2022 2021
2020 From 2021 to 2022 From 2020 to 2021
Fee income and other revenue
$ 1,044 $ 1,189 $ 989 (12 %) 20 % Net investment income 9 5 4 80 % 25 % Net realized gains (losses) (24) 4 8 NM (50 %) Total revenues 1,029 1,198 1,001 (14 %) 20 % Amortization of contingent deferred commissions [1] 11 12 14 (8 %) (14 %) Operating costs and other expenses 815 913 773 (11 %) 18 % Total benefits, losses and expenses 826 925 787 (11 %) 18 % Income before income taxes 203 273 214 (26 %) 28 % Income tax expense [2] 41 56 44 (27 %) 27 % Net income$ 162 $ 217 $ 170 (25 %) 28 % Daily average Hartford Funds AUM$ 135,124 $ 151,347 $ 120,908 (11 %) 25 % Return on Assets ("ROA") [3] 12.0 14.3 14.1 (2.3) 0.2 Adjustments to reconcile ROA to ROA, core earnings: Effect of net realized losses (gains), excluded from core earnings, before tax 1.7 (0.3) (0.7) 2.0 0.4 Effect of income tax expense (benefit) (0.4) 0.1 0.1 (0.5) 0.0 Return on Assets ("ROA"), core earnings [3] 13.3 14.1 13.5 (0.8) 0.6 [1]Reported in amortization of DAC in the Consolidated Statements of Operations. [2]For discussion of income taxes, see Note 16 - Income Taxes of Notes to Consolidated Financial Statements. [3]Represents annualized earnings divided by a daily average of assets under management, as measured in basis points. 84 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Hartford Funds Segment AUM
Increase (Decrease) Increase (Decrease)
2022 2021
2020 From 2021 to 2022 From 2020 to 2021
14 % 11 % Sales - Mutual Fund 29,833 32,399 28,604 (8 %) 13 % Redemptions - Mutual Fund (37,981) (28,653) (31,412) (33 %) 9 % Net flows - ETF 197 121 (276) 63 % 144 % Net Flows - Mutual Fund and ETF (7,951) 3,867 (3,084) NM NM Change in market value and other (22,209) 14,138 15,178 NM (7 %) Mutual Fund and ETF AUM - end of period 112,472 142,632 124,627 (21 %) 14 % Talcott Resolution life and annuity separate account AUM [1] 11,635 15,263 14,809 (24 %) 3 % Hartford Funds AUM - end of period$ 124,107 $ 157,895 $ 139,436 (21 %) 13 %
[1]Represents AUM of the life and annuity business sold in May 2018 that is
still managed by the Company's Hartford Funds segment.
Mutual Fund and ETF AUM by Asset Class
Increase (Decrease) Increase (Decrease)
2022 2021
2020 From 2021 to 2022 From 2020 to 2021
Equity - Mutual Funds
$ 73,782 $ 95,703 $ 82,123 (23 %) 17 % Fixed Income - Mutual Funds 15,861 20,113 17,034 (21 %) 18 %
Multi-Strategy Investments - Mutual Funds [1] 19,975 23,610
22,645 (15 %) 4 % Equity - ETF 1,805 2,230 2,207 (19 %) 1 % Fixed Income - ETF 1,049 976 618 7 % 58 % Mutual Fund and ETF AUM $ 112,472 $ 142,632 $ 124,627 (21 %) 14 %
[1]Includes balanced, allocation, and alternative investment products.
Net Income
[[Image Removed: hig-20221231_g43.jpg]]
Year ended December 31, 2022 compared to the year ended December 31, 2021
Net income decreased for the year ended December 31, 2022, primarily due to
lower fee income net of variable expenses as a result of a decrease in daily
average assets under management. Additionally, net income decreased from net
realized losses in 2022 related to investments in funds seeded by the Company.
Hartford Funds AUM
[[Image Removed: hig-20221231_g44.jpg]]
December 31, 2022 compared to December 31, 2021
Hartford Funds AUM decreased primarily due to a decrease in market values over
the previous twelve months and, to a lesser extent, due to net outflows. Net
outflows were $8.0 billion for the year ended December 31, 2022 compared to net
inflows of $3.9 billion for the year ended December 31, 2021.
85
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2023 Outlook
Given the lower level of assets under management as the result of market
declines in 2022, the Company expects lower net
income in 2023 than in 2022, though subject to uncertainty based on how markets
perform in 2023.
|CORPORATE - RESULTS OF OPERATIONS
Operating Summary
Increase (Decrease) Increase (Decrease)
2022 2021 2020 From 2021 to 2022 From 2020 to 2021
Fee income [1] $ 49 $ 50 $ 49 (2 %) 2 %
Net investment income 26 24 22 8 % 9 %
Net realized gains (losses) (45) 73 22 (162 %) NM
Other revenue (loss) 1 (10) 53 110 % (119 %)
Total revenues 31 137 146 (77 %) (6 %)
Benefits, losses and loss adjustment expenses
[2] 9 7 15 29 % (53 %)
Insurance operating costs and other expenses
[1] 61 90 76 (32 %) 18 %
Interest expense [3] 213 234 236 (9 %) (1 %)
Restructuring and other costs 13 1 104 NM (99 %)
Total benefits, losses and expenses 296 332 431 (11 %) (23 %)
Loss before income taxes (265) (195) (285) (36 %) 32 %
Income tax benefit [4] (69) (47) (63) (47 %) 25 %
Net loss (196) (148) (222) (32 %) 33 %
Preferred stock dividends 21 21 21 - % - %
Net loss available to common stockholders $ (217) $ (169) $ (243)
(28 %) 30 %
[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 13 - Debt of Notes to Consolidated Financial
Statements.
[4]For discussion of income taxes, see Note 16 - Income Taxes of Notes to
Consolidated Financial Statements.
Net loss available to common stockholders
[[Image Removed: hig-20221231_g45.jpg]]
Year ended December 31, 2022 compared to the year ended December 31, 2021
Net loss available to common stockholders for the year ended December 31, 2022
increased primarily due to a change from net realized gains in the 2021 period
to net realized losses in the 2022 period, as well as restructuring charges and
a loss on extinguishment of debt incurred in the 2022 period.
These changes were partially offset by legal and consulting costs incurred in
the 2021 period associated with the unsolicited proposals from Chubb Limited to
acquire the Company, lower interest expense in the 2022 period, and the effect
of a loss of $11 before tax in the 2021 period from the Company's previously
owned equity interest in Talcott Resolution.
Interest Expense
[[Image Removed: hig-20221231_g46.jpg]]
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Year ended December 31, 2022 compared to the year ended December 31, 2021
Interest expense decreased for the year ended December 31, 2022 due to the
redemption of $600 in 7.875% junior
subordinated debentures in April 2022, partially offset by the issuance of $600
in 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)
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 catastrophes (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, losses from
PV&T 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 CPRI
coverages, losses from derivative lawsuits, and other securities actions and
covered perils.
87
-------------------------------------------------------------------------------- | 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 but could also arise from other coverages such as losses under PV&T and CPRI policies. 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. The Hartford closely monitors scientific literature on climate change to help identify climate change risks impacting our business. We use data from the scientific community and other outside experts including partnerships with third-party catastrophe modeling firms to inform our risk management activities and stay abreast of potential implications of climate-related impacts that we incorporate into our risk assessment. We regularly study these climate change implications and incorporate these risks into our catastrophe risk assessment and management strategy through product pricing, underwriting and management of aggregate risk to manage implications of severe weather and climate change in our insurance portfolio. 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.
88
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and Results of Operations
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) $ 2,247 $ 1,320
(1.0%)
Aggregate annual all-peril (1-in-250) $ 3,111 $ 1,888
(0.4%)
Hurricane single occurrence $ 1,269 $ 523
(1-in-100) (1.0%)
Hurricane single occurrence $ 1,965 $ 1,067
(1-in-250) (0.4%)
Earthquake single occurrence $ 860 $ 442
(1-in-100) (1.0%)
Earthquake single occurrence $ 1,463 $ 651
(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 other 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, an aggregate property
catastrophe treaty, and individual risk agreements (including facultative
reinsurance) that reinsure losses from specific classes or lines
89 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of business. The aggregate property catastrophe treaty covers the aggregate losses of catastrophe events designated by the Property Claim Services office ofVerisk 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 $750 retention. The occurrence-based property catastrophe treaty responds in excess of $150 per occurrence for all perils other than earthquakes and named hurricanes and tropical storms. For earthquakes and named tropical storms the occurrence based property treaty responds in excess of $350 per occurrence. The occurrence property catastrophe treaty and workers' compensation catastrophe treaties beginning with the January 1, 2021 renewal 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, 2023 [1] Portion of losses Portion of losses retained reinsured by The Hartford
Per Occurrence Property Catastrophe Treaty from 1/1/2023
to 12/31/2023 [1] [2]
Losses of $0 to $150
None 100% retained Losses of $150 to $350 for earthquakes and named hurricanes and tropical storms [3] None 100% retained
Losses of $150 to $350 from one event other than 60% of $200 in excess
earthquakes and named hurricanes and tropical storms [3] of $150
40% 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) of $500 10% co-participation Aggregate Property Catastrophe Treaty for 1/1/2023 to 12/31/2023 [5] $0 to $750 of aggregate losses None 100% retained $750 to $950 of aggregate losses 100% None
Workers' Compensation Catastrophe Treaty for 1/1/2023 to
12/31/2023
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 homeowners wind events, The Hartford has purchased the mandatory FHCF reinsurance for the annual period starting June 1, 2022. Retention and coverage varies by writing company. The writing company with the largest coverage under FHCF is Hartford Insurance Company of the Midwest, with coverage of $41 in per event losses in excess of a $19 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 $750 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 $25 in per event losses in excess of a $25 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, some of which provide for reinstatement of limits in the event of loss with reinstatement provisions varying depending on the layer of coverage. 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 $1.9 billion for 2023. 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. 90 -------------------------------------------------------------------------------- | 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, 2022. For more information on the A&E ADC and the Navigators ADC, see Note 1, Basis of Presentation and Significant Accounting Policies, and Note 11, 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 8 - 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 8 - Reinsurance of Notes to Consolidated Financial Statements.
Reinsurance Recoverables as of December 31,
Property and Casualty Group Benefits Corporate Total
2022 2021 2022
2021 2022 2021 2022 2021
Paid loss and loss adjustment expenses $ 300 $ 319 $ 6
$ 5 $ - $ - $ 306 $ 324
Unpaid loss and loss adjustment
expenses
6,257 5,774 245
246 263 278 6,765 6,298
Gross reinsurance recoverables
6,557 6,093 251
251 263 278 7,071 6,622
Allowance for uncollectible
reinsurance
(102) (96) (1)
(1) (2) (2) (105) (99)
Net reinsurance recoverables
$ 6,455 $ 5,997 $ 250
$ 250 $ 261 $ 276 $ 6,966 $ 6,523
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 theU.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 regulations, cybersecurity, business disruption, technology failure, inadequate execution or process management, reliance on model and data analytics, internal fraud, external fraud, third party dependency and attraction and retention of talent.
Impact Operational risk can result in financial loss, disruption of our
business, regulatory actions or damage to our reputation.
Management Responsibility for day-to-day management of operational risk lies
within each business unit and functional area. ERM provides an enterprise-wide
view of the Company's operational risk on an aggregate basis. ERM is responsible
for
91
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations establishing, maintaining and communicating the framework, principles and guidelines of the Company's operational risk management program. Operational risk mitigation strategies include the following:
•Establishing policies and monitoring risk tolerances and exceptions;
•Conducting business risk assessments and implementing action plans where
necessary;
•Validating existing crisis management protocols;
•Identifying and monitoring emerging risks; and
•Purchasing insurance coverage.
Cybersecurity Risk The Hartford has implemented an information protection program with established governance routines that promote an adaptive approach for assessing and managing risks. The Hartford 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. The Audit Committee, which oversees controls for the Company's major risk exposures, 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. In 2022, the Audit Committee received five updates on cybersecurity matters. |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 of the investment portfolio. 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 ofThe Hartford Financial Services Group, Inc. ("HFSG Holding Company") have been and will continue to be met by the HFSG Holding Company's 92 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations fixed maturities, short-term investments and cash, and dividends from its subsidiaries, principally from 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 theFederal Home Loan Bank of Boston ("FHLBB") for certain affiliates. The Company's CFO has primary responsibility for liquidity risk. 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. 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, 2022, 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 5 - Investments of Notes to Consolidated Financial Statements. Assets and Liabilities Subject to Credit Risk Investments Essentially all of the Company's invested assets are subject to credit risk. In 2022, there were net credit losses on fixed maturities, AFS and an increase in the ACL on mortgage loans of $18 and $7 respectively. 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. 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 $6,966 and $6,523 as of December 31, 2022 and 2021 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 $4,949 and $4,445, as of December 31, 2022 and 2021, respectively. For a discussion regarding collectibility of these balances, see Note 7 - 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. 93 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 necessarily 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 14 - 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, 2022 and 2021, the notional amount related to credit derivatives that purchase credit
protection was $11 and $112, respectively, while the fair value was $0 and $(2),
respectively. These amounts do not include positions that are in offsetting
relationships.
Credit Risk Assumed Through Credit Derivatives The Company may also enter 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, 2022 and 2021, the Company did not hold credit default swaps that assume credit risk.
For further information on credit derivatives, see Note 6 - Derivatives of Notes
to Consolidated Financial Statements.
Credit Risk of Business Operations A portion of the Company's Commercial Lines business is written with large deductibles or under retrospectively-rated plans. Under some commercial insurance contracts with a large deductible, the Company is obligated to pay the claimant the full amount of the claim and the Company is subsequently reimbursed by the policyholder for the deductible amount. As such, the Company is subject to credit risk until reimbursement is made. Retrospectively-rated policies are utilized primarily for 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 7- Premiums Receivable and Agents' Balances of Notes to 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.
94 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Change in Interest Rates Favorable Effects
Unfavorable Effects
•Additional net investment income due to
•Decrease in the fair value of the fixed income
Ý reinvesting at higher yields and higher investment portfolio
yields on variable rate securities
•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
•Acceleration in paydowns and prepayments or
calls of certain mortgage-backed and municipal
securities
Management The Company manages its exposure to interest rate risk by constructing investment portfolios that seek 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, 2022 and 2021, notional amounts pertaining to derivatives utilized to manage interest rate risk, including offsetting positions, totaled $9.4 billion and $9.9 billion, respectively, and primarily relate to hedging invested assets. The fair value of these derivatives was $(6) and $(46) as of December 31, 2022 and 2021, 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 $46.4 billion and $51.9 billion at December 31, 2022 and 2021, respectively.
The weighted average duration of the portfolio, including derivative
instruments, was approximately 4.0 years and 4.3 years as of December 31, 2022
and 2021, 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.
However, as explained in Note 13 - Debt of Notes to Consolidated Financial
Statements, the Company has entered into an interest-rate swap agreement to
effectively convert variable interest rate payments on its 3 Month London
Inter-Bank Offered Rate ("LIBOR") + 2.125% notes to fixed interest payments.
Changes in the value of fixed rate 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, 2022 and 2021, the Company had $8,540 and
$8,609, respectively of reserves for group life and disability contracts.
Changes in the value of the liabilities as a result of changes in interest rates
will impact the fair value of these instruments but not the carrying value in
the Company's Consolidated Balance Sheets.
Pension and other 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 18 - Employee Benefit Plans of Notes to Consolidated Financial
Statements.)
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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 Reserves and Invested Assets
Supporting Them
Change in Net Economic Value as of December 31,
2022 2021
Basis point shift -100 +100 -100 +100
Increase (decrease) in economic value,
before tax $ 71 $ (71)
$ 101 $ (94)
The carrying value of assets related to supporting Group Benefits, primarily long-term disability reserves, was $9.8 billion and $11.3 billion, as of December 31, 2022 and 2021, 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, 2022 and 2021.
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 (Excluding Those Supporting Group
Benefits Reserves)
Change in Fair Value as of December 31,
2022 2021
Basis point shift -100 +100 -100 +100
Increase (decrease) in fair value,
before tax $ 1,554 $ (1,470) $
1,841 $ (1,730)
The carrying value of fixed maturities, commercial mortgage loans and short-term
investments, excluding those related to supporting Group Benefits short and
long-term disability reserves, was $36.6 billion and $40.6 billion as of
December 31, 2022 and 2021, 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 $426 and $732 as of December 31, 2022 and 2021, 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 $357 and $600 as of December 31, 2022 and 2021, 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 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 $22 and $36 as of December 31, 2022 and 2021, 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 $10 and $17 as of December 31, 2022 and 2021, 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 TheU.K. Financial Conduct Authority ("FCA") announced that publication ofU.S. dollar LIBOR on a representative basis would cease immediately after June 30, 2023. 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. Uncertainties and risks relating to the transition from LIBOR have been reduced by the federal Adjustable Interest Rate (LIBOR) Act, which addresses replacement of LIBOR in certain contracts governed byU.S. law (including the law of anyU.S. state), including investments, derivatives and the outstanding floating rate subordinated 96 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations debentures issued by the Company. As such, the Company expects minimal impact from the transition. There is 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. The Company has adopted the FASB's temporary guidance which allows for contract modifications made solely due to rate reform 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. On December 21, 2022, the FASB extended the effective date for the temporary guidance and which now expires for contract modifications made and hedge relationships entered into or evaluated after December 31, 2024. After that date, there is uncertainty whether certain outstanding derivative contracts will continue to qualify for hedge accounting because the replacement rate of the financial instrument being hedged is not sufficiently matched to the reference rate of the derivative contract. 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. 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 theU.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 18 - 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. 97
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Equity Sensitivity
As of December 31, 2022 As of December 31, 2021
Shock to S&P 500 Shock to S&P 500
(Before tax) Fair Value +20% -20% Fair Value +20% -20%
Investment Portfolio $ 5,978 $ 676
$ (676) $ 5,447 $ 641 $ (641)
Assets supporting pension and other
postretirement benefit plans
$ 820 $ 84
$ (84) $ 1,245 $ 167 $ (167)
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 Hartford Funds earnings for that one year period is approximately $50 as of December 31, 2022. The selection of the 20% shock to the S&P 500 was made only as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis. Foreign Currency Exchange Risk Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies. Sources of Currency Risk The Company has foreign currency exchange risk in non-U.S. dollar denominated cash, fixed maturities, equities, and derivative instruments. In addition, the Company has non-U.S. subsidiaries, some with functional currencies other 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. dollars. 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 As of December 31, 2022, the Company had immaterial exposure to non-U.S. dollar investments within pension plan assets. As of December 31, 2021, the Company had $97 of non-U.S. dollar investments. 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. 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 the functional currency relative to theU.S. dollar 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. 98 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
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and Results of Operations
Foreign Currency Sensitivity [1]
GBP CAD 10% Unfavorable Change December 31, 2022 Net assets (liabilities) $ 174 $ 185 $ (33) December 31, 2021 Net assets (liabilities) $ 287 $ 132 $ (38)
[1]Table excludes currencies where the value of net assets in
equivalent is less than 1% of total net assets of the Company.
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 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 5 - Investments of Notes to Consolidated Financial Statements. Fixed Maturities, AFS by Credit Quality December 31, 2022 December 31, 2021 Percent of Percent of Amortized Total Fair Amortized Total Fair Cost Fair Value Value Cost Fair Value Value United States Government/Government agencies $ 5,573 $ 5,025 13.9 % $ 5,706 $ 5,881 13.7 % AAA 6,171 5,824 16.1 % 5,917 6,133 14.3 % AA 7,136 6,650 18.4 % 7,279 7,718 18.0 % A 9,758 8,968 24.7 % 10,277 10,962 25.6 % BBB 8,918 7,973 22.0 % 9,196 9,708 22.7 % BB & below 1,977 1,791 4.9 % 2,413 2,445 5.7 % Total fixed maturities, AFS $ 39,533 $ 36,231 100.0 % $ 40,788 $ 42,847 100.0 % The fair value of fixed maturities, AFS decreased as compared to December 31, 2021, primarily due to a decline in valuations due to higher interest rates and wider credit spreads. The decline was also due to the reinvestment of sales and maturities into other asset classes. Fixed maturities, FVO are not included in the preceding table. For further discussion on FVO securities see Note 4 - Fair Value Measurements of Notes to Consolidated Financial Statements. 99 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A
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Fixed Maturities, AFS by Type
December 31, 2022 December 31, 2021
Gross
Gross Unrealized 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 $ 1,538 $ - $ - $ (41) $ 1,497 4.1 % $ 959 $ - $ 11 $ (2) $ 968 2.3 %
Other 478 - - (34) 444 1.3 % 166 - 2 (1) 167 0.4 %
CLO 3,040 - 3 (102) 2,941 8.1 % 3,019 - 8 (2) 3,025 7.1 %
Commercial Mortgage-Backed
Securities ("CMBS")
Agency [1] 1,268 (10) 14 (115) 1,157 3.2 % 1,390 - 75 (5) 1,460 3.4 %
Bonds 2,263 - 2 (228) 2,037 5.6 % 2,327 - 92 (9) 2,410 5.6 %
Interest only 184 - 5 (15) 174 0.5 % 238 - 12 (1) 249 0.6 %
Corporate
Basic industry 797 - 1 (64) 734 2.0 % 761 - 34 (5) 790 1.8 %
Capital goods 1,380 - 2 (117) 1,265 3.5 % 1,442 - 84 (9) 1,517 3.5 %
Consumer cyclical 1,100 - - (97) 1,003 2.8 % 1,161 (1) 50 (5) 1,205 2.8 %
Consumer non-cyclical 2,102 - 6 (188) 1,920 5.3 % 2,473 - 134 (8) 2,599 6.1 %
Energy 1,076 - 3 (92) 987 2.7 % 1,405 - 99 (2) 1,502 3.5 %
Financial services 4,923 - 8 (441) 4,490 12.4 % 4,648 - 214 (20) 4,842 11.3 %
Tech./comm. 2,312 (2) 9 (249) 2,070 5.7 % 2,658 - 216 (11) 2,863 6.7 %
Transportation 731 - 1 (81) 651 1.8 % 744 - 43 (3) 784 1.8 %
Utilities 1,871 - 3 (212) 1,662 4.6 % 1,917 - 141 (8) 2,050 4.8 %
Other 502 - - (51) 451 1.2 % 535 - 23 (3) 555 1.3 %
Foreign govt./govt. agencies 596 - - (49) 547 1.5 % 883 - 33 (6) 910 2.1 %
Municipal bonds
Taxable 1,062 - 2 (148) 916 2.5 % 1,079 - 83 (2) 1,160 2.7 %
Tax-exempt 5,656 - 91 (367) 5,380 14.9 % 6,394 - 704 (1) 7,097 16.6 %
Residential Mortgage-Backed
Securities ("RMBS")
Agency 1,865 - 2 (196) 1,671 4.6 % 1,337 - 44 (11) 1,370 3.2 %
Non-agency 2,277 - - (312) 1,965 5.4 % 2,101 - 11 (16) 2,096 4.9 %
Alt-A 7 - - - 7 - % 12 - 1 - 13 - %
Sub-prime 65 - - - 65 0.2 % 160 - 4 - 164 0.4 %
U.S. Treasuries 2,440 - - (243) 2,197 6.1 % 2,979 - 86 (14) 3,051 7.1 %
Total fixed maturities, AFS $ 39,533 $ (12) $ 152 $ (3,442) $ 36,231 100.0 % $ 40,788 $ (1) $ 2,204 $ (144) $ 42,847 100.0 %
Fixed maturities, FVO $ 333 $ 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.
The fair value of fixed maturities, AFS decreased as compared to December 31,
2021, primarily due to a decline in valuations due to higher interest rates and
wider credit spreads. The decline was also due to the reinvestment of sales and
maturities
into other asset classes. The Company primarily decreased holdings of consumer
non-cyclical, technology/communication, and energy corporate bonds, tax-exempt
municipal bonds, and
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U.S. treasuries, while primarily increasing holdings in agency and non-agency
RMBS and consumer loans.
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, 2022
AAA AA A BBB BB and Below Total
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
CMBS
Agency [1] $ 1,264 $ 1,154 $ 4 $ 3 $ - $ - $ - $ - $ - $ - $ 1,268 $ 1,157
Bonds 908 840 568 504 424 370 138 116 225 207 2,263 2,037
Interest Only 101 96 74 70 - - 8 7 1 1 184 174
Total CMBS 2,273 2,090 646 577 424 370 146 123 226 208 3,715 3,368
RMBS
Agency 1,845 1,652 20 19 - - - - - - 1,865 1,671
Non-Agency 1,166 1,036 501 428 353 288 236 198 21 15 2,277 1,965
Alt-A - - - - - - 1 1 6 6 7 7
Sub-Prime 3 3 21 21 10 10 8 8 23 23 65 65
Total RMBS 3,014 2,691 542 468 363 298 245 207 50 44 4,214 3,708
Total CMBS & RMBS $ 5,287 $ 4,781 $ 1,188 $ 1,045 $ 787 $ 668 $ 391 $ 330 $ 276 $ 252 $ 7,929 $ 7,076
Exposure to CMBS and RMBS as of December 31, 2021
AAA AA A BBB BB and Below Total
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
CMBS
Agency [1] $ 1,380 $ 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
[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, 2022, mortgage loans had an amortized cost of $6.0 billion
and carrying value of $6.0 billion, with an ACL of $36. 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. The increase in the allowance was primarily
attributable to the deteriorating economic conditions and the potential impact
on real estate property valuations, and to a lesser extent, net additions of new
loans.
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The Company funded $913 million of commercial mortgage loans with a weighted
average loan-to-value ("LTV") ratio of 56% and a weighted average yield of 3.6%
during the twelve months ended December 31, 2022. The Company continues to
originate commercial mortgage loans in high growth markets across the country
focusing primarily on institutional-quality multi-family and industrial
properties with strong LTV ratios. There were no mortgage loans held for sale as
of December 31, 2022, or December 31, 2021.
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, 2022 December 31, 2021
Weighted Average Weighted Average
Amortized Cost Fair Value Credit Quality Amortized Cost Fair Value Credit Quality
General Obligation $ 863 $ 838 AA $ 910 $ 1,031 AA+
Pre-refunded [1] 235 242 AAA 487 519 AAA
Revenue
Transportation 1,435 1,342 A+ 1,404 1,579 A+
Health Care 1,132 1,012 A+ 1,274 1,397 A+
Leasing [2] 714 659 AA- 813 874 AA-
Education 601 572 AA 670 748 AA
Water & Sewer 411 384 AA 504 538 AA
Sales Tax 304 295 AA 370 436 AA
Power 280 268 A 317 357 A+
Housing 73 62 AA- 98 103 AA
Other 670 622 A+ 626 675 AA-
Total Revenue 5,620 5,216 AA- 6,076 6,707 AA-
Total Municipal $ 6,718 $ 6,296 AA- $ 7,473 $ 8,257 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, 2022, the largest issuer concentrations were the Grand
Parkway Transportation Corporation of Texas , the New York City Transitional
Finance Authority , and the New York City Municipal Water Finance Authority ,
which each comprised less than 3% of the municipal bond portfolio and were
primarily comprised of general obligation and revenue bonds. As of December 31,
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. In total,
municipal bonds make up 12% of the fair value of the Company's investment
portfolio.
Limited Partnerships and Other Alternative Investments
The following table presents the Company's investments in limited partnerships
and other alternative investments which include real estate joint ventures, real
estate funds, private equity funds, other funds, and other alternative
investments. 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,
2022 2021 2020
Amount Yield [1] Amount Yield [1] Amount Yield [1]
Real estate joint ventures and funds $ 316 21.9 % $ 149 18.4 % $ 85 20.3 %
Private equity funds 186 14.2 % 456 51.3 % 106 12.4 %
Other funds 32 10.5 % 33 17.7 % 9 7.1 %
Other alternative investments [2] (19) (3.8 %) 94 22.6 % 22 5.4 %
Total $ 515 14.4 % $ 732 31.8 % $ 222 12.3 %
[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 private equity, fixed income, hedge funds and public equity.
Investments in Limited Partnerships and Other Alternative Investments
December 31, 2022 December 31, 2021
Amount Percent Amount Percent
Real estate joint ventures and funds $ 1,713 41.0 % $ 1,315 39.2 %
Private equity funds 1,565 37.5 % 1,256 37.5 %
Other funds 413 9.9 % 274 8.2 %
Other alternative investments [1] 486 11.6 % 508 15.1 %
Total $ 4,177 100.0 % $ 3,353 100.0 %
[1]Consists of an insurer-owned life insurance policy which is primarily
invested in private equity, fixed income, hedge funds and public equity.
Fixed Maturities, AFS - Unrealized Loss Aging
The total gross unrealized losses were $3.4 billion as of December 31, 2022, and
have increased $3.3 billion from December 31, 2021, primarily due to higher
interest rates and wider credit spreads. As of December 31, 2022, $2,567 of the
gross unrealized losses were associated with fixed maturities, AFS depressed
less than 20% of amortized cost. The remaining $875 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 corporate fixed
maturities, municipal bonds, and RMBS that are mainly depressed because current
interest rates are higher and market spreads are wider than at the respective
purchase dates.
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, 2022 December 31, 2021
Amortized Amortized
Consecutive Months Items Cost ACL Unrealized Loss Fair Value Items Cost ACL Unrealized Loss Fair Value
Three months or less 200 $ 786 $ - $ (15) $ 771 640 $ 6,193 $ - $ (32) $ 6,161
Greater than three to six months 809 6,175 - (234) 5,941 404 3,249 - (55) 3,194
Greater than six to nine months 1,024 7,598 - (561) 7,037 101 571 - (5) 566
Greater than nine to eleven months 1,859 12,994 (6)
(1,510) 11,478 171 1,041 - (29) 1,012
Twelve months or more 1,044 8,218 (6) (1,122) 7,090 184 631 - (23) 608
Total 4,936 $ 35,771 $ (12) $ (3,442) $ 32,317 1,500 $ 11,685 $ - $ (144) $ 11,541
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Unrealized Loss Aging for Fixed Maturities, AFS Continuously Depressed Over 20%
December 31, 2022 December 31, 2021
Consecutive Months Items Amortized Cost ACL Unrealized Loss Fair Value Items Amortized Cost ACL Unrealized Loss Fair Value
Three months or less 98 $ 543 $ - $ (116) $ 427 - $ - $ - $ - $ -
Greater than three to six
months 215 2,021 - (490) 1,531 - - - - -
Greater than six to nine
months 89 791 - (253) 538 - - - - -
Greater than nine to eleven
months 7 34 (2) (14) 18 - - - - -
Twelve months or more 17 5 (1) (2) 2 20 5 - (3) 2
Total 426 $ 3,394 $ (3) $ (875) $ 2,516 20 $ 5 $ - $ (3) $ 2
Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments
For the year ended December 31, 2022
The Company recorded net credit losses of $18, primarily attributable to increases in the allowance for credit losses of $10 on CMBS where projected cash flows are lower than originally expected due to faster prepayments, $3 on issuers with exposure toRussia , $3 related to a private corporate utilities issuer, and $2 related to a public corporate cable satellite issuer. Unrealized losses on securities with an ACL recognized in other comprehensive income were $6. For further information, refer to Note 5 - Investments of Notes to Consolidated Financial Statements.
Intent-to-sell impairments of $6 related to two corporate issuers in the
financial services and utilities sectors, and an issuer with exposure to
that had an ACL prior to disposal.
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, 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 ACL recognized in other comprehensive income were less than $1.
There were no intent-to-sell impairments.
ACL on Mortgage Loans
For the year ended December 31, 2022
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 5 -
Investments of Notes to Consolidated Financial Statements.
The Company recorded an increase in the ACL on mortgage loans of $7. The increase was primarily attributable to the deteriorating economic conditions and the potential impact on real estate property valuations, and to a lesser extent, net additions of new loans. The Company did not record an ACL on any individual mortgage loans.
For the year ended December 31, 2021
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.
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, 2022:
•$1.0 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, 2022, there were no borrowings outstanding.
104 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations •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, 2022, $2.0 billion was available and there were no amounts outstanding at the HFSG Holding Company. As of February 23, 2023, $1.9 billion was available, $100 was outstanding between certain affiliates and there were no amounts outstanding at the HFSG Holding Company.
2023 expected dividends and other sources of capital:
The future payment of dividends from our subsidiaries is dependent on several
factors including business results, capital position and liquidity of our
subsidiaries.
•P&C - The Company's property and casualty insurance subsidiaries have regulatory dividend capacity of $1.8 billion for 2023, and expect available net dividends to the HFSG Holding Company of $1.5 billion after considering state deposit and regulatory capital requirements to support growth in certain entities, dividends that are expected to be subsequently contributed to P&C subsidiaries and dividends related to interest on intercompany notes. The HFSG Holding Company expects to receive approximately $1.5 billion of net dividends from the Company's property and casualty insurance subsidiaries in 2023.
•Group Benefits -
regulatory dividend capacity of $408 in 2023 with approximately $400 of
dividends expected in 2023.
•Hartford Funds - HFSG Holding Company expects to receive approximately $125 in
dividends from Hartford Funds in 2023.
Expected liquidity requirements for the next twelve months as of December 31,
2022:
•$194 of interest on debt, including, for the 3-month LIBOR plus 2.125% Notes
due 2067, interest at a rate of 4.39% given the 10-year interest rate swap
agreement the Company entered into in April 2017;
•$21 dividends on preferred stock, subject to the discretion of the Board of
Directors; and
•$540 of common stockholders' dividends, subject to the discretion of the Board
of Directors and before share repurchases.
Expected liquidity requirements for beyond the next twelve months as of
December 31, 2022:
•Interest on debt and debt repayments, see Note 13 - 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: In 2022, the Company repurchased 22.3 million common shares for $1.6 billion under two share repurchase programs authorized by the Board of Directors. The Company had a $3.0 billion share repurchase authorization which was effective through December 31, 2022. In addition to this authorization, in July 2022, the Board of Directors approved a $3.0 billion share repurchase authorization effective from August 1, 2022 to December 31, 2024. As of December 31, 2022, the Company has $2.75 billion remaining for equity repurchases under the share repurchase program effective through 2024. During the period January 1, 2023 through February 23, 2023, the Company repurchased approximately 2.7 million common shares for $209.
The timing of any repurchases is dependent on 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.
|LIQUIDITY REQUIREMENTS AND SOURCES OF CAPITAL
The
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.
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
105
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 maturityUS 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. After receiving proceeds from the issuance of the 2.9% Notes, in second quarter 2022, The Hartford redeemed at par $600 aggregate principal amount of its 7.875% junior subordinated debentures due 2042 and recognized, in insurance operating costs and other expenses, a loss on extinguishment of debt of $9, before tax, for unamortized debt issuance costs.
For additional information on Debt, see Note 13 - Debt of Notes to Consolidated
Financial Statements.
|DIVIDENDS
The Hartford's Board of Directors declared the following quarterly dividends
since October 1, 2022:
Common Stock Dividends
Declared Record Payable Amount per share
October 27, 2022 December 1, 2022 January 4, 2023 $ 0.425
February 22, 2023 March 6, 2023 April 4, 2023 $ 0.425
Preferred Stock Dividends
Declared Record Payable Amount per share
December 14, 2022 February 1, 2023 February 15, 2023 $ 375.00
February 22, 2023 May 1, 2023 May 15, 2023 $ 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, regulatory capital requirements, liquidity requirements and state deposit requirements of the individual subsidiary. 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 syndicate's solvency capital requirement ("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 under U.K. Company law and Solvency II. In 2022, HFSG Holding Company received $240 of dividends from HLA and $157 from Hartford Funds. In addition, HFSG Holding Company received $1.4 billion of net dividends from P&C subsidiaries in 2022 which excludes $395 of P&C dividends that were subsequently contributed to P&C subsidiaries and $50 of P&C dividends related to interest payments on an intercompany note owed by Hartford Holdings, Inc. ("HHI") toHartford Fire Insurance Company . Refer to "2023 expected dividends and other sources of capital" for expected payments of dividends from our subsidiaries in 2023. 106
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Part II - Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
|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 February 22, 2022 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 13 - Debt of
Notes to Consolidated Financial Statements.
Revolving Credit Facility
The Hartford has a senior unsecured revolving credit facility (the "Credit
Facility") that provides up to $750 of unsecured credit through October 27,
2026. As of December 31, 2022, 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 13 - Debt of Notes to Consolidated Financial Statements.
Intercompany Liquidity Agreements
The Company has $2.0 billion available under an intercompany liquidity agreement
that allows for short-term advances of funds among the HFSG Holding Company and
certain affiliates of up to $2.0 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, 2022, $2.0 billion was available and there were no amounts
outstanding at the HFSG Holding Company.
As of February 23, 2023, $1.9 billion was available, $100 was outstanding
between certain affiliates and there were no amounts outstanding at the HFSG
Holding Company.
Collateralized Advances withFederal Home Loan Bank of Boston The Company's subsidiaries,Hartford Fire Insurance Company ("Hartford Fire") and 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, 2022, 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 2023. For further information regarding the Company's collateralized advances withFederal Home Loan Bank of Boston , see Note 13 - 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"). The Club Facility has two tranches with one tranche extending a $74 commitment and the other tranche extending a £79 million ($95 as of December 31, 2022) commitment. As of December 31, 2022, letters of credit with an aggregate face amount of $74 and £79 million, or $95, were outstanding under the Club Facility. Among other covenants, the Club Facility contains financial covenants regarding The Hartford's consolidated net worth and financial leverage and that limit the amount of letters of credit that can support Funds at Lloyd's, consistent with Lloyd's requirements. As of December 31, 2022, The Hartford was in compliance with all financial covenants of the facility. For further information regarding the Club Facility, see Note 13 - 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., aBelgium 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 theU.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 theU.S. qualified defined benefit pension plan in 2022 and 2021, and made contributions to this pension plan of approximately $70 in 2020. No contributions were made to the other postretirement plans in 2022, 2021 and 2020. The Company's 2022, 2021 and 2020 required minimum funding contributions were immaterial. The Company does not have a 2023 required minimum funding contribution for theU.S. qualified defined benefit pension plan and the funding requirements for all pension plans are expected to be 107 -------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations immaterial. The Company has not determined whether, and to what extent, contributions may be made to theU.S. qualified defined benefit pension plan in 2023. The Company will monitor the funded status of theU.S. qualified defined benefit pension plan during 2023 to make this determination. As of December 31, 2022, theU.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 18 - 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 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements. As of December 31, 2022, 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.
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, 2022
Fixed maturities $ 28,497
Short-term investments 2,475
Cash 193
Less: Derivative collateral 49
Total $ 31,116
Property & Casualty operations invested assets also include $1.2 billion in
equity securities, $4.3 billion in mortgage loans and $3.3 billion in limited
partnerships and other alternative investments.
Group Benefits Operations
As of
December 31, 2022
Fixed maturities $ 7,794
Short-term investments 325
Cash 27
Less: Derivative collateral 15
Total $ 8,131
Group Benefits operations invested assets also include $308 in equity
securities, $1.7 billion in mortgage loans and $866 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, 2022 were $33.1 billion and net of reinsurance were $26.6
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, Net of Reinsurance, and for historical payments by reserve line net of
reinsurance, see Note 11 - 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.
Group Benefits reserves as of December 31, 2022 were $9.0 billion and net of
reinsurance were $8.7 billion. Group life and disability obligations are
estimated using assumptions based on 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 Reserves,
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Net of Reinsurance, for further discussion on future policy benefits, see Note
12 - Reserve for Future Policy Benefits of Notes to Consolidated Financial
Statements and for historical payments by reserve line, net of reinsurance, see
Note 11 - 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 reserves of $420 as of December 31, 2022 related to retained
run-off liabilities of its former life and annuity business. For further
discussion on future policy benefits, see Note 12 - Reserve for Future Policy
Benefits of Notes to Consolidated Financial Statements.
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, 2022,
Hartford Funds cash and short-term investments were $208.
|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 14 - 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 20 - 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, 2022 December 31, 2021 Change
Long-term debt $ 4,357 $ 4,944 (12%)
Total debt 4,357 4,944 (12%)
Common stockholders' equity, excluding AOCI, net of tax 17,173 17,337 (1%)
Preferred stock 334 334 -%
AOCI, net of tax (3,876) 172 NM
Total stockholders' equity $ 13,631 $ 17,843 (24%)
Total capitalization $ 17,988 $ 22,787 (21%)
Debt to stockholders' equity 32 % 28 %
Debt to capitalization 24 % 22 %
Total capitalization decreased $4,799, or 21%, as of December 31, 2022 compared
to December 31, 2021 primarily due to an increase in net unrealized losses on
fixed maturities, AFS, share repurchases, and the Company's redemption of its
7.875% junior subordinated debentures, partially offset by net income in excess
of common stockholder dividends in the period.
For additional information on AOCI, net of tax, including
unrealized gains from securities, see Note 17 - Changes in and Reclassifications From Accumulated Other Comprehensive Income (Loss) and Note 5 - Investments of Notes to Consolidated Financial Statements. For additional information on debt, see Note 13 - Debt of Notes to Consolidated Financial Statements.
|CASH FLOW [1]
2022 2021 2020
Net cash provided by operating activities $ 4,008 $ 4,093 $ 3,871
Net cash used for investing activities $ (1,277) $ (2,466) $ (2,066)
Net cash used for financing activities $ (2,710) $ (1,581) $ (1,778)
Cash and restricted cash- end of year $ 344 $ 337 $ 239
[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 21 - Business Dispositions of Notes
to Consolidated Financial Statements for discussion of this transaction.
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and Results of Operations
Year ended December 31, 2022 compared to the year ended December 31, 2021
Net cash provided by operating activities decreased slightly in 2022 as compared
to the prior year period primarily driven by an increase in P&C loss and loss
adjustment expenses paid, higher operating expenses, including increased
commissions and staffing costs, a decrease in Hartford Funds fee income and
higher taxes paid, mostly offset by an increase in P&C and Group Benefits
premiums received and lower integration and restructuring costs.
Cash used for investing activities decreased in 2022 as compared to the prior
year period primarily driven by a decrease in net payments for equity
securities, a decrease in net payments for mortgage loans, a decrease in net
payments for short term investments and a change from net payments to net
proceeds from derivatives.
Cash used for financing activities increased primarily due to the redemption of
$600 of 7.875% junior subordinated debentures in the second quarter of 2022, as
well as proceeds from the issuance of debt in the third quarter of 2021,
partially offset by a decrease in share repurchases.
Operating cash flows for the year ended December 31, 2022 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 August 15, 2022, S&P upgraded the financial strength rating ofThe Navigators Group, Inc. and its core operating subsidiaries (collectively, "Navigators"), including NIC, to A+ from A with a Stable outlook. The upgrade of Navigators is reflective of its core status to the Company and recognizes its improved underwriting, which is in line with the Company's overall underwriting standard. Insurance Financial Strength Ratings as of February 23, 2023 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 ourU.S. insurance subsidiaries as well as the level 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."
|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,
2022 $ 11,914 $ 2,410 $ 14,324
Statutory income 1,514 378 1,892
Dividends to parent (1,365) (240) (1,605)
Other items 48 23 71
Net change to U.S. statutory capital 197 161 358
U.S. statutory capital at
December 31, 2022 $ 12,111 $ 2,571 $ 14,682
[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.
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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
•Costs incurred by the Company to acquire insurance policies are deferred under
•Temporary differences between the book and tax basis of an asset or liability which are recorded as deferred tax assets are evaluated for recoverability under U.S. GAAP while these amounts are then subject to further admissibility tests under U.S. STAT. •The assumptions used in the determination of Group Benefits reserves (i.e. for Group Benefits contracts) are prescribed under U.S. STAT, while the assumptions used under U.S. GAAP are generally the Company's best estimates. •The difference between the amortized cost and fair value of fixed maturity and other investments, net of tax, is recorded as an increase or decrease to the carrying value of the related asset and to equity under U.S. GAAP, while, under U.S. STAT, most investments are carried at amortized cost with only certain securities carried at fair value, such as equity securities and certain lower rated bonds required by
the NAIC to be recorded at the lower of amortized cost or fair value.
•U.S. STAT for life insurance companies like HLA establishes a formula reserve for realized and unrealized losses due to default and equity risks associated with certain invested assets (the Asset Valuation Reserve), while U.S. GAAP does not. Also, for those realized gains and losses caused by changes in interest rates, U.S. STAT for life insurance companies defers and amortizes the gains and losses, caused by changes in interest rates, into income over the original life to maturity of the asset sold (the Interest Maintenance Reserve) while U.S. GAAP does not. •Goodwill arising from the acquisition of a business is tested for recoverability on an annual basis (or more frequently, as necessary) for U.S. GAAP, while under U.S. STAT goodwill is amortized over a period not to exceed 10 years and the amount of goodwill admitted as an asset is limited. •The deferred gain on retroactive reinsurance for losses ceded to the Navigators and A&E ADC agreements is recognized within a special category of surplus under U.S. STAT but is recognized within other liabilities under U.S. GAAP.
In addition, certain assets, including a portion of premiums receivable and
fixed assets, are non-admitted (recorded at zero value and charged against
surplus) under U.S. STAT. U.S. GAAP generally evaluates assets based on their
recoverability.
|RISK BASED CAPITAL The Company's U.S. insurance companies' states of domicile impose RBC requirements. The requirements provide a means of measuring the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations based on its size and risk profile. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. All of the Company's U.S. operating insurance subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations. Similar to the RBC ratios that are employed by U.S. insurance regulators, regulatory authorities in the international jurisdictions in which the Company operates generally establish minimum solvency requirements for insurance companies. All of the Company's international insurance subsidiaries expect to maintain capital levels in excess of the minimum levels required by the applicable regulatory authorities.
|SENSITIVITY
In any particular period, statutory capital amounts and RBC ratios may increase or decrease depending upon a variety of factors. The amount of change in the statutory capital or RBC ratios can vary based on individual factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. For further discussion on these factors, see 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 The Hartford's legal proceedings, see the information
contained in Note 14 - Commitments and Contingencies of the Notes to
Consolidated Financial Statements and Part I, Item 3 Legal Proceedings, which
are incorporated herein by reference.
111
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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
Legislative and Regulatory Developments
Inflation Reduction Act
On August 16, 2022, the U.S. enacted the Inflation Reduction Act of 2022 ("IRA")
which is generally effective for years beginning after December 31, 2022.
Notably, the bill created a 15% corporate alternative minimum tax ("CAMT") on
corporations with three-year average financial statement income over $1 billion.
The Internal Revenue Service has issued limited preliminary guidance. The
Company has made certain interpretations and assumptions to comply with the
CAMT. While the Company's financial statement income is over $1 billion, it is
not expected the Company would have a CAMT liability. If CAMT is paid in the
future, the amount would be indefinitely available as a credit carryforward that
would reduce tax in future years and would be treated as a temporary item
reflected within deferred taxes. The IRA also creates a 1% non-deductible excise
tax on stock buybacks of publicly traded U.S. corporations. Such excise tax
applies if a company repurchases in excess of $1 worth of its stock in any given
calendar year. The impact of this provision will depend on the extent of share
repurchases made in future periods. In addition, the IRA added
an $80 billion funding increase for the IRS to support tax enforcement and
modernization. Increases to IRS enforcement resources could increase audits on
corporate taxpayers, which may include the Company. Finally, the IRA provides
the U.S. Department of Treasury with authority to promulgate additional
regulations and guidance on implementing the new law.
In addition, Congress may consider a variety of proposals including a possible
increase in the corporate tax rate to offset the cost of any new spending. 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 such Congressional or
regulatory action with respect to any such efforts is unclear.
Guaranty Fund and Other Insurance-related Assessments
For a discussion regarding Guaranty Fund and Other Insurance-related
Assessments, see Note 14 - Commitments and Contingencies of Notes to
Consolidated Financial Statements.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 - Basis of Presentation and
Significant Accounting Policies of Notes to Consolidated Financial Statements.
112 -------------------------------------------------------------------------------- | 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 HLA Hartford Life and Accident Insurance Company ACL Allowance for Credit Losses IBNR Incurred But Not Reported ADC Adverse Development Cover LAE Loss Adjustment Expense AFS Available-For-Sale LCL Liability for Credit Losses ALAE Allocated Loss Adjustment Expenses LIBOR London Inter-Bank Offered Rate AOCI Accumulated Other Comprehensive Income LTD Long-Term Disability AUM Assets Under Management LTV
Loan-to-Value
BSA Boy Scouts of America 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 Obligations NIC
Navigators Insurance Company
CMBS Commercial Mortgage-Backed Securities NICO National Indemnity Company, a subsidiary of
Berkshire Hathaway Inc. ("Berkshire")
CPRI Credit and Political Risk Insurance NM Not
Meaningful
DAC Deferred Policy Acquisition Costs NOLs Net Operating Loss Carryforwards or Carrybacks
DEI Diversity, Equity and Inclusion
NSIC Navigators Specialty Insurance Company DLR Disabled Life Reserve OCI Other Comprehensive Income DSCR Debt Service Coverage Ratio OTC
Over-the-Counter
ERCC Enterprise Risk and Capital Committee P&C Property and Casualty
ESPP The Hartford Employee Stock Purchase Plan PG&E PG&E Corporation and Pacific Gas and Electric
Company
ETF Exchange-Traded Funds PV&T Political Violence and Terrorism FAL Funds at Lloyd's PYD Prior Accident Year Development FASB Financial Accounting Standards Board RBC Risk-Based Capital FHLBB Federal Home Loan Bank of Boston RMBS Residential Mortgage-Backed Securities FVO Fair Value Option ROA Return on Assets GAAP Generally Accepted Accounting Principles ROE Return on Equity HFSG Hartford Financial Services Group, Inc. SCR Solvency Capital Requirement HHI Hartford Holdings, Inc. ULAE
Unallocated Loss Adjustment Expenses
113 -------------------------------------------------------------------------------- |
Table of Contents
KINSALE CAPITAL GROUP, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
RADIAN GROUP INC – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
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