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Part I – Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
(Dollar amounts in millions except for per share data, unless otherwise stated)
TheHartford provides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company's future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the cautionary statements set forth on pages 4 and 5 of this Form 10-Q. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in the following discussion; Part I, Item 1A, Risk Factors in TheHartford's 2022 Form 10-K Annual Report; and our other filings with theSecurities and Exchange Commission . TheHartford undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. OnJanuary 1, 2023 , the Company adopted theFinancial Accounting Standards Board's ("FASB") updated guidance on accounting for long duration insurance contracts, which was applied on a modified retrospective basis as ofJanuary 1, 2021 . For additional information refer to Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements. Certain reclassifications have been made to historical financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to conform to the current period presentation.
The
"NM" or not meaningful.
INDEX Description Page Key Performance Measures and Ratios 51 TheHartford's Operations 57 Financial Highlights 59 Consolidated Results of Operations 60 Investment Results 63 Critical Accounting Estimates 65 Commercial Lines 69 Personal Lines 74 Property & Casualty Other Operations 78 Group Benefits 79 Hartford Funds 81 Corporate 82 Enterprise Risk Management 83 Capital Resources and Liquidity 94 Impact of New Accounting Standards 99
Throughout the MD&A, we use certain terms and abbreviations, the more commonly
used are summarized in the Acronyms section.
KEY PERFORMANCE MEASURES AND RATIOS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these ratios and measures are useful in understanding the underlying trends in TheHartford's businesses. However, these key performance indicators should only be used in conjunction with, and not in lieu of, the results presented in the segment discussions that follow in this MD&A. These ratios and measures may not be comparable to other performance measures used by the Company's competitors. 51
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
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 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, 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, TheHartford 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. 52
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Part I - Item 2. Management's Discussion and Analysis of Financial Condition and
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Reconciliation of Net Income to Core Earnings
Three Months
Ended March
31,
2023 2022
Net income $ 535 $ 443
Preferred stock dividends 5 5
Net income available to common stockholders 530 438
Adjustments to reconcile net income available to common stockholders
to core earnings:
Net realized losses excluded from core earnings, before tax
7 146 Restructuring and other costs, before tax - 5 Integration and other non-recurring M&A costs, before tax 2 5 Income tax benefit [1] (3) (35) Core earnings$ 536 $ 559
[1]Primarily represents the federal income tax expense (benefit) related to
before tax items not included in core earnings.
Core Earnings Margin- TheHartford 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.
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
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-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Condensed 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.
Premium Retention - For middle and large commercial, represents the ratio of prior period premiums that were successfully renewed divided by premiums associated with policies available for renewal in the current period. Premium retention excludes premium amounts from annual audits, renewal written price increases and changes in exposure, including amount of insurance. Premium retention statistics are subject to change from period to period based on a number of factors, including the effect of subsequent cancellations and non-renewals.
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
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when competition among insurance carriers increases. Renewal written price
statistics are subject to change from period to period, based on a number of
factors, including changes in actuarial estimates and the effect of subsequent
cancellations and non-renewals, and modifications made to better reflect
ultimate pricing achieved.
Return on Assets ("ROA"), Core Earnings-The Company uses this non-GAAP financial
measure to evaluate, and believes is an important measure of, the Hartford Funds
segment's operating performance. ROA, core earnings is calculated by dividing
annualized core earnings by a daily average AUM. ROA is the most directly
comparable U.S. GAAP measure. The Company believes that ROA, core earnings,
provides investors with a valuable measure of the performance of the Hartford
Funds segment because it reveals trends in our business that may be obscured by
the effect of items excluded in the calculation of core earnings. ROA, core
earnings, should not be considered as a substitute for ROA and does not reflect
the overall profitability of our Hartford Funds business. Therefore, the Company
believes it is important for investors to evaluate both ROA, and ROA, core
earnings when reviewing the Hartford Funds segment performance. A reconciliation
of ROA to ROA, core earnings is set forth in the Results of Operations section
within MD&A - Hartford Funds.
Underlying Combined Ratio- This non-GAAP financial measure of underwriting
results represents the combined ratio before catastrophes, prior accident year
development and current accident year change in loss reserves upon acquisition
of a business. Combined ratio is the most directly comparable GAAP measure. The
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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Reconciliation of Net Income to Underwriting Gain (Loss)
Three Months
Ended March
31,
2023 2022
Commercial Lines
Net income $ 421 $ 383
Adjustments to reconcile net income to underwriting gain:
Net investment income (338) (333) Net realized gains 19 91 Other expense - 6 Income tax expense 100 95 Underwriting gain$ 202 $ 242 Personal Lines Net income (loss)$ (1) $ 77
Adjustments to reconcile net income to underwriting gain (loss):
Net investment income (38) (33) Net realized gains 1 9 Net servicing and other expense (income) (6) (4) Income tax expense (benefit) (1) 20 Underwriting gain (loss)$ (45) $ 69 P&C Other Operations Net income$ 6 $ 8 Adjustments to reconcile net income to underwriting loss: Net investment income (16) (16) Net realized gains 3 4 Income tax expense 1 1 Underwriting loss$ (6) $ (3) Written and Earned Premiums- Written premium represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Premiums are considered earned and are included in the financial results on a pro rata basis over the policy period. Management believes that written premium is a performance measure that is useful to investors as it reflects current trends in the Company's sale of property and casualty insurance products. Written and earned premium are recorded net of ceded reinsurance premium. Traditional life and disability insurance type products, such as those sold by Group Benefits, collect premiums from policyholders in exchange for financial protection for the policyholder from a specified insurable loss, such as death or disability. These premiums together with net investment income earned are used to pay the contractual obligations under these insurance contracts. Two major factors, new sales and persistency, impact premium growth. Sales can increase or decrease in a given year based on a number of factors, including but not limited to, customer demand for the Company's product offerings, pricing competition, distribution channels and the Company's reputation and ratings. Persistency refers to the percentage of premium remaining in-force from year-to-year. 56
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations THEHARTFORD'S OPERATIONS TheHartford 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. 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 57
-------------------------------------------------------------------------------- | Table of Contents Index to MD&A Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations based on a variety of factors including business needs, regulatory requirements and tax considerations. 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
the course of the program, with
expensed cumulatively throughMarch 31, 2023 , and expected expenses of$27 over the last nine months of 2023 and$62 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$386 , we expect to incur restructuring costs of approximately$121 , including$38 of employee severance,$23 to retire certain IT applications, and$60 for consulting and lease termination expenses. 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 the three months endedMarch 31, 2023 and expected annual costs and expense savings relative to 2019 for the full year in 2023: Hartford Next Costs and Expense Savings Three Months Ended March 31, 2023 Estimate for 2023 Employee severance $ (3) $ (3) IT costs to retire applications 1 4 Professional fees and other expenses 2 2 Estimated restructuring costs - 3 Non-capitalized IT costs 5 17 Other costs 2 7 Amortization of capitalized IT development costs [1] 2 8 Amortization of capitalized real estate [2] - 1 Estimated costs within core earnings 9 33 Total Hartford Next program costs 9 36 Cumulative savings for the period relative to 2019 (155) (625) Net expense (savings) before tax $ (146) $ (589) Net expense (savings) before tax: Accounted for within core earnings $ (146) $ (593) Restructuring costs recognized outside of core earnings - 4 Net expense (savings) before tax $ (146) $ (589)
[1]Does not include approximately
[2]Does not include approximately
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Results of Operations
FIRST QUARTER FINANCIAL HIGHLIGHTS
Net Income Available to Net Income Available to Common Book Value per
Common Stockholders Stockholders per Diluted Share Diluted Share
[[Image Removed: 43]] [[Image Removed: 47]] [[Image Removed: 50]] Ý Increased$92 or 21% Ý Increased$0.36 or 28% Ý Increased$2.60 or 6%
+ Lower net realized losses + Increase in net income + An increase in common stockholders'
available to common
equity largely due to a increase in
stockholders
AOCI, primarily driven by lower net
+ In Group Benefits, lower
unrealized losses on available for
mortality claims and the
sale securities
effect of higher premiums
+ Reduction in
outstanding shares due
+ Lower interest expense on to share repurchases + Net income in excess of common
corporate debt
stockholder dividends
+ In Commercial Lines and
Personal Lines, the effect
of higher earned premiums -
Dilutive effect of share repurchases
- Higher P&C current accident
year catastrophe losses
- A higher current accident
year loss ratio before
catastrophes in Personal
Lines
- Favorable P&C prior
accident year reserve
development in the prior
year period
Investment Yield, After Tax Property & Casualty Group Benefits Net Income
Combined Ratio Margin
[[Image Removed: 58]] [[Image Removed: 62]] [[Image Removed: 65]]
Ý Increased 10 bps Ý Increased 5.3 points Ý Increased 5.8 points
+ A higher yield on fixed maturity + Higher current accident + Lower mortality claims in
securities due to an increased yield year catastrophe losses group life
on variable-rate securities and + A lower group disability
reinvesting at higher rates loss ratio due to
favorable long-term
+ Higher personal automobile disability claim incidence
loss costs, driven by
- Lower returns on limited severity
partnerships and other alternative
investments + Favorable prior accident + Higher fully insured
year reserve development in ongoing premiums
the prior year period + A change to net realized
gains
+ Higher current accident - Higher insurance operating
year loss ratio in workers' costs and other expenses
compensation
- Lower current accident year - Lower net investment
losses in international income driven by lower
income from limited
partnerships
- A lower expense ratio
driven, in part, by higher
earned premium
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Part I - Item 2. 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 Condensed Consolidated Financial Statements and the related Notes as well as with the segment operating results sections of MD&A.
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