Item 1. Financial Statements
Item 1.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of September 30, 2021, the related condensed consolidated statements of operations, comprehensive income (loss), and changes in stockholders' equity for the three-month and nine-month periods ended September 30, 2021 and 2020, and of cash flows for the nine-month periods ended September 30, 2021 and 2020, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 19, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
October 28, 2021
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except for per share data) 2021 2020 2021 2020
(Unaudited)
Revenues
Earned premiums $ 4,565 $ 4,347 $ 13,368 $ 12,972
Fee income 377 323 1,107 941
Net investment income 650 492 1,740 1,290
Net realized gains (losses) 70 6 297 ( 116 )
Other revenues 24 3 62 108
Total revenues 5,686 5,171 16,574 15,195
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses 3,420 2,962 9,556 8,725
Amortization of deferred policy acquisition costs ("DAC") 419 421 1,252 1,287
Insurance operating costs and other expenses 1,200 1,093 3,546 3,394
Interest expense 58 58 172 179
Amortization of other intangible assets 18 18 53 55
Restructuring and other costs ( 12 ) 87 ( 1 ) 87
Total benefits, losses and expenses 5,103 4,639 14,578 13,727
Income before income taxes 583 532 1,996 1,468
Income tax expense 101 73 360 268
Net income 482 459 1,636 1,200
Preferred stock dividends 6 6 16 16
Net income available to common stockholders $ 476 $ 453 $ 1,620 $ 1,184
Net income available to common stockholders per common share
Basic $ 1.38 $ 1.26 $ 4.60 $ 3.30
Diluted $ 1.36 $ 1.26 $ 4.54 $ 3.29
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended September 30, Nine Months Ended September 30,
(in millions) 2021 2020 2021 2020
(Unaudited)
Net income $ 482 $ 459 $ 1,636 $ 1,200
Other comprehensive income (loss) ("OCI"):
Change in net unrealized gain on fixed maturities ( 274 ) 376 ( 904 ) 747
Change in unrealized losses on fixed maturities for which an allowance for credit losses ("ACL") has been recorded — — — 1
Change in net gain on cash flow hedging instruments 1 ( 17 ) 1 22
Change in foreign currency translation adjustments ( 4 ) 6 ( 1 ) ( 1 )
Changes in pension and other postretirement plan adjustments 14 12 41 35
Other comprehensive income (loss), net of tax ( 263 ) 377 ( 863 ) 804
Comprehensive income $ 219 $ 836 $ 773 $ 2,004
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
(in millions, except for share and per share data) September 30,
2021 December 31, 2020
(Unaudited)
Assets
Investments:
Fixed maturities, available-for-sale ("AFS"), at fair value (amortized cost of $ 41,485 and $ 41,561 , and ACL of $ 4 and $ 23 )
$ 43,942 $ 45,035
Equity securities, at fair value 1,616 1,438
Mortgage loans (net of ACL of $ 26 and $ 38 )
5,106 4,493
Limited partnerships and other alternative investments 2,961 2,082
Other investments 337 201
Short-term investments 3,612 3,283
Total investments 57,574 56,532
Cash 232 151
Restricted cash 165 88
Premiums receivable and agents' balances (net of ACL of $ 124 and $ 152 )
4,598 4,268
Reinsurance recoverables (net of allowance for uncollectible reinsurance of $ 99 and $ 108 )
6,247 6,011
Deferred policy acquisition costs 883 789
Deferred income taxes, net 209 46
Goodwill 1,911 1,911
Property and equipment, net 1,047 1,122
Other intangible assets, net 881 950
Other assets 2,376 2,066
Assets held for sale 167 177
Total assets $ 76,290 $ 74,111
Liabilities
Unpaid losses and loss adjustment expenses $ 39,378 $ 37,855
Reserve for future policy benefits 602 638
Other policyholder funds and benefits payable 685 701
Unearned premiums 7,268 6,629
Long-term debt 4,943 4,352
Other liabilities 5,401 5,222
Liabilities held for sale 151 158
Total liabilities 58,428 55,555
Commitments and Contingencies (Note 13)
Stockholders’ Equity
Preferred stock, $ 0.01 par value — 50,000,000 shares authorized, 13,800 shares issued at September 30, 2021 and December 31, 2020, aggregate liquidation preference of $ 345
334 334
Common stock, $ 0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at September 30, 2021 and December 31, 2020
4 4
Additional paid-in capital 4,339 4,322
Retained earnings 15,169 13,918
Treasury stock, at cost 43,138,408 and 26,434,682 shares
( 2,291 ) ( 1,192 )
Accumulated other comprehensive income, net of tax 307 1,170
Total stockholders’ equity 17,862 18,556
Total liabilities and stockholders’ equity $ 76,290 $ 74,111
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended September 30, Nine Months Ended September 30,
(in millions, except for share and per share data) 2021 2020 2021 2020
(Unaudited)
Preferred Stock $ 334 $ 334 $ 334 $ 334
Common Stock 4 4 4 4
Additional Paid-in Capital
Additional Paid-in Capital, beginning of period 4,330 4,299 4,322 4,312
Issuance of shares under incentive and stock compensation plans ( 9 ) ( 5 ) ( 80 ) ( 89 )
Stock-based compensation plans expense 18 16 97 87
Additional Paid-in Capital, end of period 4,339 4,310 4,339 4,310
Retained Earnings
Retained Earnings, beginning of period 14,813 13,167 13,918 12,685
Cumulative effect of accounting changes, net of tax — — — ( 18 )
Adjusted balance, beginning of period 14,813 13,167 13,918 12,667
Net income 482 459 1,636 1,200
Dividends declared on preferred stock ( 6 ) ( 6 ) ( 16 ) ( 16 )
Dividends declared on common stock ( 120 ) ( 117 ) ( 369 ) ( 348 )
Retained Earnings, end of period 15,169 13,503 15,169 13,503
Treasury Stock, at cost
Treasury Stock, at cost, beginning of period ( 1,807 ) ( 1,211 ) ( 1,192 ) ( 1,117 )
Treasury stock acquired ( 511 ) — ( 1,202 ) ( 150 )
Issuance of shares under incentive and stock compensation plans 28 7 130 98
Net shares acquired related to employee incentive and stock compensation plans ( 1 ) ( 1 ) ( 27 ) ( 36 )
Treasury Stock, at cost, end of period ( 2,291 ) ( 1,205 ) ( 2,291 ) ( 1,205 )
Accumulated Other Comprehensive Income (Loss), net of tax
Accumulated Other Comprehensive Income, net of tax, beginning of period 570 479 1,170 52
Total other comprehensive income (loss) ( 263 ) 377 ( 863 ) 804
Accumulated Other Comprehensive Income (Loss), net of tax, end of period 307 856 307 856
Total Stockholders’ Equity $ 17,862 $ 17,802 $ 17,862 $ 17,802
Preferred Shares Outstanding
Preferred Shares Outstanding, beginning of period 13,800 13,800 13,800 13,800
Issuance of preferred shares — — — —
Preferred Shares Outstanding, end of period 13,800 13,800 13,800 13,800
Common Shares Outstanding
Common Shares Outstanding, beginning of period (in thousands) 348,998 358,099 358,489 359,570
Treasury stock acquired ( 7,729 ) — ( 18,765 ) ( 2,661 )
Issuance of shares under incentive and stock compensation plans 532 151 2,589 2,011
Return of shares under incentive and stock compensation plans to treasury stock ( 16 ) ( 16 ) ( 528 ) ( 686 )
Common Shares Outstanding, at end of period 341,785 358,234 341,785 358,234
Cash dividends declared per common share $ 0.350 $ 0.325 $ 1.050 $ 0.975
Cash dividends declared per preferred share $ 375.00 $ 375.00 $ 1,125.00 $ 1,125.00
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30,
(in millions) 2021 2020
Operating Activities (Unaudited)
Net income $ 1,636 $ 1,200
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized losses (gains) ( 317 ) 65
Amortization of deferred policy acquisition costs 1,252 1,287
Additions to deferred policy acquisition costs ( 1,330 ) ( 1,268 )
Depreciation and amortization 515 411
Loss on sale of business 20 51
Other operating activities, net ( 178 ) 129
Change in assets and liabilities:
Increase in reinsurance recoverables ( 257 ) ( 186 )
Net change in accrued and deferred income taxes ( 114 ) 437
Increase in insurance liabilities 2,104 1,019
Net change in other assets and other liabilities ( 442 ) ( 490 )
Net cash provided by operating activities 2,889 2,655
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, available-for-sale 16,141 14,734
Equity securities, at fair value 517 1,420
Mortgage loans 1,092 710
Partnerships 451 84
Payments for the purchase of:
Fixed maturities, available-for-sale ( 15,898 ) ( 15,544 )
Equity securities, at fair value ( 1,060 ) ( 758 )
Mortgage loans ( 1,692 ) ( 995 )
Partnerships ( 830 ) ( 235 )
Net proceeds from derivatives 3 131
Net additions of property and equipment ( 92 ) ( 78 )
Net payments for short-term investments ( 329 ) ( 475 )
Other investing activities, net ( 51 ) ( 1 )
Net cash used for investing activities ( 1,748 ) ( 1,007 )
Financing Activities
Deposits and other additions to investment and universal life-type contracts 66 44
Withdrawals and other deductions from investment and universal life-type contracts ( 57 ) ( 78 )
Net decrease in securities loaned or sold under agreements to repurchase
— ( 511 )
Repayment of debt — ( 500 )
Proceeds from the issuance of debt 588 —
Net issuance (return) of shares under incentive and stock compensation plans 23 ( 27 )
Treasury stock acquired ( 1,202 ) ( 150 )
Dividends paid on preferred stock ( 16 ) ( 16 )
Dividends paid on common stock ( 365 ) ( 341 )
Net cash used for financing activities ( 963 ) ( 1,579 )
Foreign exchange rate effect on cash ( 5 ) ( 3 )
Net increase in cash and restricted cash, including cash classified within assets held for sale 173 66
Less: Net increase in cash classified within assets held for sale 15 58
Net increase in cash and restricted cash 158 8
Cash and restricted cash – beginning of period 239 262
Cash and restricted cash– end of period $ 397 $ 270
Supplemental Disclosure of Cash Flow Information
Income tax paid (received) $ 439 $ ( 161 )
Interest paid $ 165 $ 183
See Notes to Condensed Consolidated Financial Statements.
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Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide property and casualty insurance, group life and disability products and mutual funds and exchange-traded products to individual and business customers in the United States as well as in the United Kingdom, continental Europe and other international locations (collectively, “The Hartford”, the “Company”, “we” or “our”).
On September 30, 2020, the Company entered into a definitive agreement to sell all of the issued and outstanding equity of Navigators Holdings (Europe) N.V., a Belgium holding company, and its subsidiaries, Bracht, Deckers & Mackelbert N.V. (“BDM”) and Assurances Contintales Contintale Verzekeringen N.V. (“ASCO”), (collectively referred to as "Continental Europe Operations"). For further discussion of this transaction see Note 17 - Business Disposition .
The Condens ed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, which differ materially from the accounting practices prescribed by various insurance regulatory authorities. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2020 Form 10-K Annual Report. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.
The accompanying Condensed Consolidated Financial Statements and Notes are unaudited. These financial statements reflect all adjustments (generally consisting only of normal accruals) which are, in the opinion of management, necessary for the fair statement of the financial position, results of operations and cash flows for the interim periods. The
Company's significant accounting policies are summarized in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2020 Form 10-K Annual Report.
CONSOLIDATION
The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., and entities in which the Company directly or indirectly has a controlling financial interest. Entities in which the Company has significant influence over the operating and financing decisions but does not control are reported using the equity method. Intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated.
USE OF ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining property and casualty and group long-term disability insurance product reserves, net of reinsurance; evaluation of goodwill for impairment; valuation of investments and derivative instruments; and contingencies relating to corporate litigation and regulatory matters.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year financial information to conform to the current year presentation.
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Note 2 - Earnings Per Common Share
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS PER COMMON SHARE
Computation of Basic and Diluted Earnings per Common Share
Three Months Ended September 30, Nine Months Ended September 30,
(In millions, except for per share data) 2021 2020 2021 2020
Earnings
Net income $ 482 $ 459 $ 1,636 $ 1,200
Less: Preferred stock dividends 6 6 16 16
Net income available to common stockholders $ 476 $ 453 $ 1,620 $ 1,184
Shares
Weighted average common shares outstanding, basic 345.6 358.3 352.5 358.3
Dilutive effect of stock-based awards under compensation plans 5.1 2.2 4.7 2.0
Weighted average common shares outstanding and dilutive potential common shares 350.7 360.5 357.2 360.3
Net income available to common stockholders per common share
Basic $ 1.38 $ 1.26 $ 4.60 $ 3.30
Diluted $ 1.36 $ 1.26 $ 4.54 $ 3.29
3. SEGMENT INFORMATION
The Company currently 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.
Net Income (Loss)
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Commercial Lines $ 357 $ 323 $ 1,055 $ 378
Personal Lines 51 79 304 548
Property & Casualty Other Operations 22 2 26 12
Group Benefits 28 119 207 324
Hartford Funds 56 44 155 119
Corporate ( 32 ) ( 108 ) ( 111 ) ( 181 )
Net income 482 459 1,636 1,200
Preferred stock dividends 6 6 16 16
Net income available to common stockholders $ 476 $ 453 $ 1,620 $ 1,184
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Note 3 - Segment Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenues
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Earned premiums and fee income:
Commercial Lines
Workers’ compensation $ 821 $ 776 $ 2,327 $ 2,312
Liability 419 355 1,196 1,035
Marine 57 59 172 191
Package business 425 390 1,227 1,150
Property 212 200 617 590
Professional liability 163 150 476 442
Bond 72 68 212 206
Assumed reinsurance 88 68 240 206
Automobile 200 193 586 562
Total Commercial Lines 2,457 2,259 7,053 6,694
Personal Lines
Automobile 517 547 1,545 1,552
Homeowners 235 240 695 721
Total Personal Lines [1] 752 787 2,240 2,273
Group Benefits
Group disability 745 697 2,228 2,142
Group life 591 594 1,797 1,833
Other 79 70 235 200
Total Group Benefits 1,415 1,361 4,260 4,175
Hartford Funds
Mutual fund and Exchange-Traded Products ("ETP") 282 228 813 660
Talcott Resolution life and annuity separate accounts [2] 24 22 71 64
Total Hartford Funds 306 250 884 724
Corporate
12 13 38 47
Total earned premiums and fee income 4,942 4,670 14,475 13,913
Net investment income 650 492 1,740 1,290
Net realized gains (losses) 70 6 297 ( 116 )
Other revenues 24 3 62 108
Total revenues
$ 5,686 $ 5,171 $ 16,574 $ 15,195
[1] For the three months ended September 30, 2021 and 2020, AARP members accounted for earned premiums of $ 687 and $ 713 , respectively. For the nine months ended September 30, 2021 and 2020, AARP members accounted for earned premiums of $ 2.0 billion and $ 2.1 billion, respectively.
[2] Represents revenues earned for investment advisory services on the life and annuity separate account AUM sold in May 2018 that is still managed by the Company's Hartford Funds segment.
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Note 3 - Segment Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenue from Non-Insurance Contracts with Customers
Three Months Ended September 30, Nine Months Ended September 30,
Revenue Line Item 2021 2020 2021 2020
Commercial Lines
Installment billing fees Fee income $ 8 $ 8 $ 25 $ 21
Personal Lines
Installment billing fees Fee income 8 8 24 26
Insurance servicing revenues Other revenues 22 23 62 63
Group Benefits
Administrative services Fee income 43 44 136 132
Hartford Funds
Advisor, distribution and other management fees Fee income 280 228 807 659
Other fees Fee income 26 22 77 65
Corporate
Investment management and other fees Fee income 12 13 38 38
Transition service revenues Other revenues — — 1 2
Total non-insurance revenues with customers $ 399 $ 346 $ 1,170 $ 1,006
4. FAIR VALUE MEASUREMENTS
The Company carries certain financial assets and liabilities at estimated fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. Our fair value framework includes a hierarchy that gives the highest priority to the use of quoted prices in active markets, followed by the use of market observable inputs, followed by the use of unobservable inputs. The fair value hierarchy levels are as follows:
Level 1 Fair values based primarily on unadjusted quoted prices for identical assets or liabilities, in active markets that the Company has the ability to access at the measurement date.
Level 2 Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
Level 3 Fair values derived when one or more of the significant inputs are unobservable (including assumptions about risk). With little or no observable market, the determination of fair values uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. Also included are securities that are traded within illiquid markets and/or priced by independent brokers.
The Company will classify the financial asset or liability by level based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable inputs (e.g., changes in interest rates) and unobservable inputs (e.g., changes in risk assumptions) are used to determine fair values that the Company has classified within Level 3.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of September 30, 2021
Total Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
Asset backed securities ("ABS") $ 1,207 $ — $ 1,184 $ 23
Collateralized loan obligations ("CLOs") 3,011 — 2,657 354
Commercial mortgage-backed securities ("CMBS") 4,191 — 4,090 101
Corporate 18,861 — 17,607 1,254
Foreign government/government agencies 953 — 948 5
Municipal 8,878 — 8,878 —
Residential mortgage-backed securities ("RMBS") 3,286 — 3,018 268
U.S. Treasuries 3,555 618 2,937 —
Total fixed maturities 43,942 618 41,319 2,005
Equity securities, at fair value 1,616 991 554 71
Derivative assets
Credit derivatives 1 — 1 —
Foreign exchange derivatives 1 — 1 —
Total derivative assets [1] 2 — 2 —
Fixed maturities, at fair value using the fair value option ("FVO") [2] 75 — — 75
Short-term investments 3,612 1,941 1,648 23
Total assets accounted for at fair value on a recurring basis $ 49,247 $ 3,550 $ 43,523 $ 2,174
Liabilities accounted for at fair value on a recurring basis
Derivative liabilities
Credit derivatives $ 5 $ — $ 5 $ —
Foreign exchange derivatives 2 — 2 —
Interest rate derivatives ( 45 ) — ( 45 ) —
Total derivative liabilities [3] ( 38 ) — ( 38 ) —
Total liabilities accounted for at fair value on a recurring basis $ ( 38 ) $ — $ ( 38 ) $ —
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2020
Total Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS $ 1,564 $ — $ 1,564 $ —
CLOs 2,780 — 2,420 360
CMBS 4,484 — 4,407 77
Corporate 20,273 — 19,392 881
Foreign government/government agencies 919 — 913 6
Municipal 9,503 — 9,503 —
RMBS 4,107 — 3,726 381
U.S. Treasuries 1,405 529 876 —
Total fixed maturities 45,035 529 42,801 1,705
Equity securities, at fair value 1,438 872 496 70
Derivative assets
Credit derivatives 21 — 21 —
Foreign exchange derivatives 1 — 1 —
Interest rate derivatives 1 — 1 —
Total derivative assets [1] 23 — 23 —
Short-term investments 3,283 2,663 590 30
Total assets accounted for at fair value on a recurring basis $ 49,779 $ 4,064 $ 43,910 $ 1,805
Liabilities accounted for at fair value on a recurring basis
Derivative liabilities
Foreign exchange derivatives $ ( 14 ) $ — $ ( 14 ) $ —
Interest rate derivatives ( 70 ) — ( 70 ) —
Total derivative liabilities [3] ( 84 ) — ( 84 ) —
Total liabilities accounted for at fair value on a recurring basis $ ( 84 ) $ — $ ( 84 ) $ —
[1] Includes derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law. See footnote 3 to this table for derivative liabilities.
[2] Included within other investments on the Condensed Consolidated Balance Sheets.
[3] Includes derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law.
The Company has overseas deposits in Other Investments of $ 62 and $ 54 as of September 30, 2021 and December 31, 2020, respectively, which are measured at fair value using the net asset value as a practical expedient.
FIXED MATURITIES, EQUITY SECURITIES, SHORT-TERM INVESTMENTS, AND DERIVATIVES
Valuation Techniques
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach
comprised of the following pricing sources and techniques, which are listed in priority order:
• Quoted prices, unadjusted, for identical assets or liabilities in active markets, which are classified as Level 1.
• Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs available through the reporting date. If there are no recently reported trades, they may use a discounted cash flow technique to develop a price using expected cash flows based upon the anticipated future performance of the underlying collateral discounted at an estimated market rate. Both techniques develop prices that consider the time value of future cash flows and provide a margin for risk, including liquidity and credit risk. Most prices provided by third-party pricing services are classified as Level 2 because the inputs used in pricing the securities are observable. However, some securities that are less liquid or trade less actively are classified as Level 3. Additionally, certain long-dated securities, such as municipal securities
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
and bank loans, include benchmark interest rate or credit spread assumptions that are not observable in the marketplace and are thus classified as Level 3.
• Internal matrix pricing is a valuation process internally developed for private placement securities for which the Company is unable to obtain a price from a third-party pricing service. Internal pricing matrices determine credit spreads that, when combined with risk-free rates, are applied to contractual cash flows to develop a price. The Company develops credit spreads using market-based data for public securities adjusted for credit spread differentials between public and private securities, which are obtained from a survey of multiple private placement brokers. The market-based reference credit spread considers the issuer’s sector, financial strength, and term to maturity, using an independent public security index, while the credit spread differential considers the non-public nature of the security. Securities priced using internal matrix pricing are classified as Level 2 because the significant inputs are observable or can be corroborated with observable data.
• Independent broker quotes, which are typically non-binding, use inputs that can be difficult to corroborate with observable market-based data. Brokers may use present value techniques using assumptions specific to the security types, or they may use recent transactions of similar securities. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on independent broker quotes are classified as Level 3.
The fair value of derivative instruments is determined primarily using a discounted cash flow model or option model technique and incorporates counterparty credit risk. In some cases, quoted market prices for exchange-traded and over-the-counter ("OTC") cleared derivatives may be used and in other cases independent broker quotes may be used. The pricing valuation models primarily use inputs that are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may include significant inputs that are unobservable, such as volatility levels, and reflect the Company’s view of what other market participants would use when pricing such instruments.
Valuation Controls
The process for determining the fair value of investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company. The purpose of the Valuation Committee is to provide oversight of the pricing policy, procedures, and controls, including approval of valuation methodologies and pricing sources. The Valuation Committee reviews market data trends, pricing statistics and trading statistics to ensure that prices are reasonable and consistent with our fair value framework. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews. Controls include, but are not limited to, reviewing daily and monthly price changes, stale prices, and missing prices and comparing new trade prices to third-party pricing services, weekly price changes to published bond index prices, and daily OTC derivative market valuations to counterparty valuations. The Company has a dedicated pricing group that works with trading and investment professionals to challenge prices received by a third-party pricing source if the Company believes that the valuation received does not accurately reflect the fair value. New valuation models and changes to current models require approval by the Valuation Committee. In addition, the Company’s enterprise-wide Operational Risk Management function provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and consist of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, certain short-term investments, and exchange traded futures and option contracts.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
Level 2
Primary Observable Inputs
Level 3
Primary Unobservable Inputs
Fixed Maturity Investments
Structured securities (includes ABS, CLOs, CMBS and RMBS)
• Benchmark yields and spreads
• Monthly payment information
• Collateral performance, which varies by vintage year and includes delinquency rates, loss severity rates and refinancing assumptions
• Credit default swap indices
Other inputs for ABS, CLOs and RMBS:
• Estimate of future principal prepayments, derived from the characteristics of the underlying structure
• Prepayment speeds previously experienced at the interest rate levels projected for the collateral • Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for less liquid securities or those that trade less actively, including subprime RMBS:
• Estimated cash flows
• Credit spreads, which include illiquidity premium
• Constant prepayment rates
• Constant default rates
• Loss severity
Corporates
• Benchmark yields and spreads
• Reported trades, bids, offers of the same or similar securities
• Issuer spreads and credit default swap curves
Other inputs for investment grade privately placed securities that utilize internal matrix pricing:
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for below investment grade privately placed securities and private bank loans:
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
U.S. Treasuries, Municipals, and Foreign government/government agencies
• Benchmark yields and spreads
• Issuer credit default swap curves
• Political events in emerging market economies
• Municipal Securities Rulemaking Board reported trades and material event notices
• Issuer financial statements • Credit spreads beyond observable curve
• Interest rates beyond observable curve
Equity Securities
• Quoted prices in markets that are not active • For privately traded equity securities, internal discounted cash flow models utilizing earnings multiples or other cash flow assumptions that are not observable
Short-term Investments
• Benchmark yields and spreads
• Reported trades, bids, offers
• Issuer spreads and credit default swap curves
• Material event notices and new issue money market rates
• Independent broker quotes
Derivatives
Credit derivatives
• Swap yield curve
• Credit default swap curves
Not applicable
Foreign exchange derivatives
• Swap yield curve
• Currency spot and forward rates
• Cross currency basis curves
Not applicable
Interest rate derivatives
• Swap yield curve Not applicable
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Significant Unobservable Inputs for Level 3 - Securities
Assets accounted for at fair value on a recurring basis Fair
Value
Predominant
Valuation
Technique
Significant
Unobservable Input
Minimum Maximum
Weighted Average [1] Impact of
Increase in
Input on Fair Value [2]
As of September 30, 2021
CLOs [3] $ 290 Discounted cash flows Spread 227 bps 251 bps 248 bps Decrease
CMBS [3] $ 96 Discounted cash flows Spread (encompasses prepayment, default risk and loss severity) 192 bps 483 bps 289 bps Decrease
Corporate [4] $ 1,178 Discounted cash flows Spread 94 bps 978 bps 272 bps Decrease
RMBS [3] $ 251 Discounted cash flows Spread [6] 43 bps 233 bps 84 bps Decrease
Constant prepayment rate [6] 2 % 14 % 7 % Decrease [5]
Constant default rate [6] 1 % 6 % 3 % Decrease
Loss severity [6] — % 100 % 65 % Decrease
As of December 31, 2020
CLOs [3] $ 340 Discounted cash flows Spread 304 bps 305 bps 304 bps Decrease
CMBS [3] $ 20 Discounted cash flows Spread (encompasses prepayment, default risk and loss severity) 255 bps 975 bps 688 bps Decrease
Corporate [4] $ 749 Discounted cash flows Spread 110 bps 692 bps 293 bps Decrease
RMBS [3] $ 364 Discounted cash flows Spread [6] 7 bps 937 bps 119 bps Decrease
Constant prepayment rate [6] — % 10 % 5 % Decrease [5]
Constant default rate [6] 2 % 6 % 3 % Decrease
Loss severity [6] — % 100 % 84 % Decrease
[1] The weighted average is determined based on the fair value of the securities.
[2] Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[3] Excludes securities for which the Company bases fair value on broker quotations.
[4] Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
[5] Decrease for above market rate coupons and increase for below market rate coupons.
[6] Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads .
As of September 30, 2021 and December 31, 2020, the fair values of the Company's level 3 derivatives were less than $ 1 for both periods.
The table above excludes certain securities for which fair values are predominately based on independent broker quotes. While the Company does not have access to the significant unobservable inputs that independent brokers may use in their pricing process, the Company believes brokers likely use inputs similar to those used by the Company and third-party pricing services to price similar instruments. As such, in their pricing models, brokers likely use estimated loss severity rates, prepayment rates, constant default rates and credit spreads. Therefore, similar to non-broker priced securities, increases in these inputs would generally cause fair values to decrease. As of September 30, 2021, no significant adjustments were made by the Company to broker prices received.
LEVEL 3 ASSETS AND LIABILITIES MEASURED AT FAIR VALUE ON A RECURRING BASIS USING SIGNIFICANT UNOBSERVABLE INPUTS
The Company uses derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified within the same fair value hierarchy level as the associated asset or liability. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 rollforward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Three Months Ended September 30, 2021
Total realized/unrealized gains (losses)
Fair value as of June 30, 2021 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of September 30, 2021
Assets
Fixed maturities, AFS
ABS $ 14 $ — $ — $ 23 $ — $ — $ — $ ( 14 ) $ 23
CLOs 375 — — 132 ( 34 ) — — ( 119 ) 354
CMBS 86 — — 29 — — — ( 14 ) 101
Corporate 1,141 — ( 7 ) 156 ( 29 ) ( 1 ) — ( 6 ) 1,254
Foreign Govt./Govt. Agencies — — — 5 — — — — 5
RMBS 302 — ( 1 ) 41 ( 45 ) — — ( 29 ) 268
Total fixed maturities, AFS 1,918 — ( 8 ) 386 ( 108 ) ( 1 ) — ( 182 ) 2,005
Equity securities, at fair value 74 4 — 2 ( 9 ) — — — 71
Fixed maturities, FVO [4] — — — 75 — — — — 75
Short-term investments 18 — — 8 ( 3 ) — — — 23
Total Assets $ 2,010 $ 4 $ ( 8 ) $ 471 $ ( 120 ) $ ( 1 ) $ — $ ( 182 ) $ 2,174
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Nine Months Ended September 30, 2021
Total realized/unrealized gains (losses)
Fair value as of January 1, 2021 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of September 30, 2021
Assets
Fixed Maturities, AFS
ABS $ — $ — $ — $ 42 $ — $ — $ — $ ( 19 ) $ 23
CLOs 360 — — 391 ( 79 ) — — ( 318 ) 354
CMBS 77 — 2 68 ( 3 ) — 5 ( 48 ) 101
Corporate 881 6 ( 18 ) 405 ( 105 ) ( 45 ) 172 ( 42 ) 1,254
Foreign Govt./Govt. Agencies 6 — — 5 — ( 6 ) — — 5
RMBS 381 — ( 3 ) 221 ( 148 ) ( 14 ) — ( 169 ) 268
Total Fixed Maturities, AFS 1,705 6 ( 19 ) 1,132 ( 335 ) ( 65 ) 177 ( 596 ) 2,005
Equity Securities, at fair value 70 6 — 5 ( 10 ) — — — 71
Fixed maturities, FVO [4] — — — 75 — — — — 75
Short-term investments 30 — — 10 ( 17 ) — — — 23
Total Assets $ 1,805 $ 12 $ ( 19 ) $ 1,222 $ ( 362 ) $ ( 65 ) $ 177 $ ( 596 ) $ 2,174
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Three Months Ended September 30, 2020
Total realized/unrealized gains (losses)
Fair value as of June 30, 2020 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of September 30, 2020
Assets
Fixed Maturities, AFS
ABS $ 23 $ — $ — $ — $ — $ — $ — $ ( 23 ) $ —
CLOs 99 — 1 63 ( 3 ) — — ( 19 ) 141
CMBS 20 — 2 66 ( 1 ) — 5 — 92
Corporate 1,109 1 19 45 ( 62 ) — 22 ( 138 ) 996
Municipal — ( 3 ) 2 — — — 7 — 6
RMBS 479 — 2 40 ( 48 ) — — ( 22 ) 451
Total Fixed Maturities, AFS 1,730 ( 2 ) 26 214 ( 114 ) — 34 ( 202 ) 1,686
Equity Securities, at fair value 66 — — 3 — — — — 69
Short-term investments 14 — — — — — — — 14
Total Assets $ 1,810 $ ( 2 ) $ 26 $ 217 $ ( 114 ) $ — $ 34 $ ( 202 ) $ 1,769
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Nine Months Ended September 30, 2020
Total realized/unrealized gains (losses)
Fair value as of January 1, 2020 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of September 30, 2020
Assets
Fixed Maturities, AFS
ABS $ 15 $ — $ ( 1 ) $ 43 $ — $ — $ — $ ( 57 ) $ —
CLOs 95 — ( 1 ) 82 ( 16 ) — — ( 19 ) 141
CMBS 9 — 2 79 ( 3 ) — 5 — 92
Corporate 732 ( 31 ) — 161 ( 126 ) ( 27 ) 481 ( 194 ) 996
Foreign Govt./Govt. Agencies 3 — — — — — — ( 3 ) —
Municipal — ( 3 ) 2 — — — 7 — 6
RMBS 560 — ( 10 ) 66 ( 136 ) ( 7 ) — ( 22 ) 451
Total Fixed Maturities, AFS 1,414 ( 34 ) ( 8 ) 431 ( 281 ) ( 34 ) 493 ( 295 ) 1,686
Equity Securities, at fair value 73 ( 10 ) — 6 — — — — 69
Short-term investments 15 — — — ( 1 ) — — — 14
Total Assets $ 1,502 $ ( 44 ) $ ( 8 ) $ 437 $ ( 282 ) $ ( 34 ) $ 493 $ ( 295 ) $ 1,769
Liabilities
Contingent Consideration $ ( 22 ) $ 12 $ — $ — $ 10 $ — $ — $ — $ —
Derivatives, net [5]
Equity ( 15 ) 36 — — ( 21 ) — — — —
Total Derivatives, net [5] ( 15 ) 36 — — ( 21 ) — — — —
Total Liabilities $ ( 37 ) $ 48 $ — $ — $ ( 11 ) $ — $ — $ — $ —
[1] Amounts in these columns are generally reported in net realized gains (losses). All amounts are before income taxes.
[2] All amounts are before income taxes.
[3] Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.
[4] Included within other investments on the Condensed Consolidated Balance Sheets.
[5] Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Condensed Consolidated Balance Sheets in other investments and other liabilities.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as
Level 3 Still Held at End of Period
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Changes in Unrealized Gain/(Loss) included in Net Income [1] [2] Changes in Unrealized Gain/(Loss) included in OCI [3] Changes in Unrealized Gain/(Loss) included in Net Income [1] [2] Changes in Unrealized Gain/(Loss) included in OCI [3]
Assets
Fixed Maturities, AFS
CLOs $ — $ — $ — $ 1 $ — $ — $ — $ ( 1 )
CMBS — — — 2 — — 2 2
Corporate — ( 1 ) ( 7 ) 17 — ( 21 ) ( 16 ) 1
Municipal — ( 3 ) — 2 — ( 3 ) — 2
RMBS — — ( 1 ) 2 — — ( 3 ) ( 9 )
Total Fixed Maturities, AFS — ( 4 ) ( 8 ) 24 — ( 24 ) ( 17 ) ( 5 )
Equity Securities, at fair value 1 — — — 4 ( 9 ) — —
Total Assets $ 1 $ ( 4 ) $ ( 8 ) $ 24 $ 4 $ ( 33 ) $ ( 17 ) $ ( 5 )
Liabilities
Contingent Consideration $ — $ — $ — $ — $ — $ 12 $ — $ —
Total Liabilities $ — $ — $ — $ — $ — $ 12 $ — $ —
[1] All amounts in these rows are reported in net gains (losses). All amounts are before income taxes.
[2] Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
[3] Changes in unrealized gain (loss) on fixed maturities, AFS are reported in changes in net unrealized gain on securities in the Condensed Consolidated Statements of Comprehensive Income.
Fair Value Option
The Company has elected the fair value option for certain investments in residual interests of securitizations in order to reflect changes in fair value in earnings. These instruments are included within other investments on the Condensed Consolidated Balance Sheets and changes in the fair value of these securities are reported in net realized gains and losses.
As of September 30, 2021 and December 31, 2020, the fair value of assets using the fair value option was $ 75 and $ 0 , respectively.
For the three and nine months ended September 30, 2021 realized gains (losses) related to the change in fair value of assets using the fair value option were less than $( 1 ). For the three and nine months ended September 30, 2020 there were no realized gains (losses) related to the change in fair value of assets using the fair value option.
FINANCIAL INSTRUMENTS NOT CARRIED AT FAIR VALUE
Financial Assets and Liabilities Not Carried at Fair Value
September 30, 2021 December 31, 2020
Fair Value Hierarchy Level Carrying Amount [1] Fair Value Fair Value Hierarchy Level Carrying Amount [1] Fair Value
Assets
Mortgage loans Level 3 $ 5,106 $ 5,332 Level 3 $ 4,493 $ 4,792
Liabilities
Other policyholder funds and benefits payable Level 3 $ 685 $ 688 Level 3 $ 701 $ 703
Senior notes [2] Level 2 $ 3,853 $ 4,707 Level 2 $ 3,262 $ 4,363
Junior subordinated debentures [2] Level 2 $ 1,090 $ 1,107 Level 2 $ 1,090 $ 1,107
[1] As of September 30, 2021 and December 31, 2020, carrying amount of mortgage loans is net of ACL of $ 26 and $ 38 , respectively.
[2] Included in long-term debt in the Condensed Consolidated Balance Sheets, except for any current maturities, which are included in short-term debt when applicable.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS
Net Realized Gains (Losses)
Three Months Ended September 30, Nine Months Ended September 30,
(Before tax) 2021 2020 2021 2020
Gross gains on sales $ 63 $ 27 $ 162 $ 201
Gross losses on sales ( 8 ) ( 12 ) ( 54 ) ( 42 )
Equity securities [1] 3 42 134 ( 269 )
Net credit losses on fixed maturities, AFS — ( 1 ) 4 ( 33 )
Change in ACL on mortgage loans ( 2 ) 5 12 ( 19 )
Intent-to-sell impairments — — — ( 5 )
Other, net [2] 14 ( 55 ) 39 51
Net realized gains (losses) $ 70 $ 6 $ 297 $ ( 116 )
[1] The net unrealized gains (losses) on equity securities included in net realized gains (losses) related to equity securities still held as of September 30, 2021, were $( 17 ) and $ 92 for the three and nine months ended September 30, 2021 respectively. The net unrealized gains on equity securities included in net realized gains (losses) related to equity securities still held as of September 30, 2020, were $ 36 and $ 6 for the three and nine months ended September 30, 2020 respectively.
[2] For both the three and nine months ended September 30, 2021 includes gains (losses) from transactional foreign currency revaluation of $ 6 and $( 1 ), respectively, non-qualifying derivatives of $ 10 and $ 16 , respectively, and an additional loss of $( 2 ) and $( 20 ), respectively, on the pending sale of Continental Europe Operations. For the nine months ended September 30, 2021, there was also a gain of $ 46 on the sale of the Company's previously owned equity interest in Talcott Resolution. For the three and nine months ended September 30, 2020, includes gains (losses) from transactional foreign currency revaluation of $( 4 ) and $ 6 , respectively, non-qualifying derivatives of $( 2 ) and $ 97 , respectively, and a loss of $ 51 related to the pending sale of the Continental Europe Operations.
Proceeds from the sales of fixed maturities, AFS totaled $ 2.9 billion and $ 11.1 billion for the three and nine months ended September 30, 2021 respectively, and $ 4.5 billion and $ 11.7 billion for the three and nine months ended September 30, 2020, respectively.
Accrued Interest Receivable on Fixed Maturities, AFS and Mortgage Loans
As of September 30, 2021 and December 31, 2020, the Company reported accrued interest receivable related to fixed maturities, AFS of $ 326 and $ 327 , respectively, and accrued interest receivable related to mortgage loans of $ 15 and $ 14 , respectively. These amounts are recorded in other assets on the Condensed Consolidated Balance Sheets and are not included in the carrying value of the fixed maturities or mortgage loans. The Company does not include the current accrued interest receivable balance when estimating the ACL. The Company has a policy to write-off accrued interest receivable balances that are more than 90 days past due. Write-offs of accrued interest receivable are recorded as a credit loss component of net realized gains and losses.
Interest income on fixed maturities and mortgage loans is accrued unless it is past due over 90 days or management deems the interest uncollectible.
Recognition and Presentation of Intent-to-Sell Impairments and ACL on Fixed Maturities, AFS
The Company will record an "intent-to-sell impairment" as a reduction to the amortized cost of fixed maturities, AFS in an unrealized loss position if the Company intends to sell or it is more likely than not that the Company will be required to sell the fixed maturity before a recovery in value. A corresponding charge is recorded in net realized losses equal to the difference
between the fair value on the impairment date and the amortized cost basis of the fixed maturity before recognizing the impairment.
When fixed maturities are in an unrealized loss position and the Company does not record an intent-to-sell impairment, the Company will record an ACL for the portion of the unrealized loss due to a credit loss. Any remaining unrealized loss on a fixed maturity after recording an ACL is the non-credit amount and is recorded in OCI. The ACL is the excess of the amortized cost over the greater of the Company's best estimate of the present value of expected future cash flows or the security's fair value. Cash flows are discounted at the effective yield that is used to record interest income. The ACL cannot exceed the unrealized loss and, therefore, it may fluctuate with changes in the fair value of the fixed maturity if the fair value is greater than the Company's best estimate of the present value of expected future cash flows. The initial ACL and any subsequent changes are recorded in net realized gains and losses. The ACL is written off against the amortized cost in the period in which all or a portion of the related fixed maturity is determined to be uncollectible .
Developing the Company’s best estimate of expected future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions regarding the future performance. The Company's considerations include, but are not limited to, (a) changes in the financial condition of the issuer and/or the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, instrument-specific developments including changes in credit ratings, industry earnings multiples and the
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
issuer’s ability to restructure, access capital markets, and execute asset sales.
For structured securities, assumptions include, but are not limited to, various performance indicators such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, loan-to-value ratios ("LTVs"),
average cumulative collateral loss rates that vary by vintage year, prepayment speeds, and property value declines. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value.
ACL on Fixed Maturities, AFS by Type
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
(Before tax) Corporate Total Corporate Municipal Total Corporate Total Corporate Municipal Total
Balance as of beginning of period $ 4 $ 4 $ 32 $ — $ 32 $ 23 $ 23 $ — $ — $ —
Credit losses on fixed maturities where an allowance was not previously recorded — — — 3 3 2 2 35 3 38
Reduction due to sales — — ( 1 ) — ( 1 ) ( 15 ) ( 15 ) ( 3 ) — ( 3 )
Net increases (decreases) on fixed maturities where an allowance was previously recorded — — ( 2 ) — ( 2 ) ( 6 ) ( 6 ) ( 3 ) — ( 3 )
Balance as of end of period $ 4 $ 4 $ 29 $ 3 $ 32 $ 4 $ 4 $ 29 $ 3 $ 32
Fixed Maturities, AFS, by Type
September 30, 2021 December 31, 2020
Amortized
Cost
ACL Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Amortized
Cost
ACL Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
ABS $ 1,187 $ — $ 20 $ — $ 1,207 $ 1,525 $ — $ 39 $ — $ 1,564
CLOs 3,002 — 10 ( 1 ) 3,011 2,780 — 7 ( 7 ) 2,780
CMBS 3,969 — 231 ( 9 ) 4,191 4,219 — 286 ( 21 ) 4,484
Corporate 17,597 ( 4 ) 1,310 ( 42 ) 18,861 18,401 ( 23 ) 1,926 ( 31 ) 20,273
Foreign govt./govt. agencies 916 — 40 ( 3 ) 953 842 — 77 — 919
Municipal 8,113 — 776 ( 11 ) 8,878 8,564 — 940 ( 1 ) 9,503
RMBS 3,212 — 85 ( 11 ) 3,286 3,966 — 144 ( 3 ) 4,107
U.S. Treasuries 3,489 — 83 ( 17 ) 3,555 1,264 — 141 — 1,405
Total fixed maturities, AFS
$ 41,485 $ ( 4 ) $ 2,555 $ ( 94 ) $ 43,942 $ 41,561 $ ( 23 ) $ 3,560 $ ( 63 ) $ 45,035
Fixed Maturities, AFS, by Contractual Maturity Year
September 30, 2021 December 31, 2020
Amortized Cost Fair Value Amortized Cost Fair Value
One year or less $ 1,319 $ 1,340 $ 1,411 $ 1,432
Over one year through five years 8,214 8,577 7,832 8,286
Over five years through ten years 9,088 9,520 7,622 8,354
Over ten years 11,494 12,810 12,206 14,028
Subtotal 30,115 32,247 29,071 32,100
Mortgage-backed and asset-backed securities 11,370 11,695 12,490 12,935
Total fixed maturities, AFS $ 41,485 $ 43,942 $ 41,561 $ 45,035
Estimated maturities may differ from contractual maturities due to call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio including issuer, sector and geographic stratification, where
applicable, and has established certain exposure limits, diversification standards and review procedures to mitigate credit risk. The Company had no investment exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity as of September 30, 2021 or December 31, 2020 other than U.S. government securities and certain U.S. government agencies.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unrealized Losses on Fixed Maturities, AFS
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of September 30, 2021
Less Than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
ABS $ 204 $ — $ — $ — $ 204 $ —
CLOs 842 ( 1 ) 159 — 1,001 ( 1 )
CMBS 298 ( 3 ) 87 ( 6 ) 385 ( 9 )
Corporate 2,229 ( 34 ) 208 ( 8 ) 2,437 ( 42 )
Foreign govt./govt. agencies 265 ( 3 ) — — 265 ( 3 )
Municipal 695 ( 11 ) 12 — 707 ( 11 )
RMBS 880 ( 8 ) 100 ( 3 ) 980 ( 11 )
U.S. Treasuries 2,707 ( 17 ) 3 — 2,710 ( 17 )
Total fixed maturities, AFS in an unrealized loss position $ 8,120 $ ( 77 ) $ 569 $ ( 17 ) $ 8,689 $ ( 94 )
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of December 31, 2020
Less Than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
ABS $ 44 $ — $ — $ — $ 44 $ —
CLOs 758 ( 2 ) 715 ( 5 ) 1,473 ( 7 )
CMBS 410 ( 17 ) 19 ( 4 ) 429 ( 21 )
Corporate 466 ( 13 ) 212 ( 18 ) 678 ( 31 )
Foreign govt./govt. agencies 24 — — — 24 —
Municipal 34 ( 1 ) — — 34 ( 1 )
RMBS 461 ( 3 ) 21 — 482 ( 3 )
U.S. Treasuries 39 — — — 39 —
Total fixed maturities, AFS in an unrealized loss position $ 2,236 $ ( 36 ) $ 967 $ ( 27 ) $ 3,203 $ ( 63 )
As of September 30, 2021, fixed maturities, AFS in an unrealized loss position consisted of 1,057 instruments, primarily in the corporate sectors, most notably financial services, technology and communications, capital goods, and utilities, as well as U.S. Treasuries which were depressed largely due to higher interest rates and/or wider credit spreads since the purchase date. As of September 30, 2021, 98 % of these fixed maturities were depressed less than 20% of cost or amortized cost. The increase in unrealized losses during the nine months ended September 30, 2021, was primarily attributable to higher interest rates, partially offset by tighter credit spreads.
Most of the fixed maturities depressed for twelve months or more relate to the corporate and CMBS sectors which were primarily depressed because current market spreads are wider than at the respective purchase dates. Additionally, certain corporate fixed maturities were also depressed because of their variable-rate coupons and long-dated maturities. The Company neither has an intention to sell nor does it expect to be required to sell the fixed maturities outlined in the preceding discussion. The decision to record credit losses on fixed maturities, AFS in the form of an ACL requires us to make qualitative and quantitative estimates of expected future cash flows. Given the uncertainty about the ultimate impact of the COVID-19 pandemic on issuers of these securities, actual cash flows could ultimately deviate significantly from our expectations resulting in realized losses in future periods.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MORTGAGE LOANS
ACL on Mortgage Loans
The Company reviews mortgage loans on a quarterly basis to estimate the ACL with changes in the ACL recorded in net realized gains and losses. Apart from an ACL recorded on individual mortgage loans where the borrower is experiencing financial difficulties, the Company records an ACL on the pool of mortgage loans based on lifetime expected credit losses. The Company utilizes a third-party forecasting model to estimate lifetime expected credit losses at a loan level under multiple economic scenarios. The scenarios use macroeconomic data provided by an internationally recognized economics firm that generates forecasts of varying economic factors such as GDP growth, unemployment and interest rates. The economic scenarios are projected over 10 years. The first two to four years of the 10-year period assume a specific modeled economic scenario (including moderate upside, moderate recession and severe recession scenarios) and then revert to historical long-term assumptions over the remaining period. Using these economic scenarios, the forecasting model projects property-specific operating income and capitalization rates used to estimate the value of a future operating income stream. The operating income and the property valuations derived from capitalization rates are compared to loan payment and principal amounts to create debt service coverage ratios ("DSCRs") and loan-to-value ratios ("LTVs") over the forecast period. The model overlays historical data about mortgage loan performance based on DSCRs and LTVs and projects the probability of default, amount of loss given a default and resulting expected loss through maturity for each loan under each economic scenario. Economic scenarios are probability-weighted based on a statistical analysis of the forecasted economic factors and qualitative analysis. The Company records the change in the ACL on mortgage loans based on the weighted-average expected credit losses across the selected economic scenarios.
When a borrower is experiencing financial difficulty, including when foreclosure is probable, the Company measures an ACL on individual mortgage loans. The ACL is established for any shortfall between the amortized cost of the loan and the fair value of the collateral less costs to sell. Estimates of collectibility from an individual borrower require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, cash flow projections may change based upon new information about the borrower's ability to pay and/or the value of underlying collateral such as changes in projected property value estimates. As of September 30, 2021, the Company did no t have any mortgage loans for which an ACL was established on an individual basis.
There were no mortgage loans held-for-sale as of September 30, 2021 or December 31, 2020. For the three and nine months ended September 30, 2021 and 2020, respectively, the Company had no mortgage loans that have had extensions
or restructurings other than what is allowable under the original terms of the contract.
ACL on Mortgage Loans
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
ACL as of beginning of period $ 24 $ 43 $ 38 $ —
Cumulative effect of accounting changes [1] 19
Adjusted beginning ACL 24 43 38 19
Current period provision (release) 2 ( 5 ) ( 12 ) 19
ACL as of September 30, $ 26 $ 38 $ 26 $ 38
[1] Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information, see the Financial Instruments - Credit Losses section within Note 1 - Basis of Presentation and Significant Accounting Policies, included in The Hartford's 2020 Form 10-K Annual Report.
The increase in the allowance for the three months ended September 30, 2021, is driven by net additions of new loans. The decrease in the allowance for the nine months ended September 30, 2021, is the result of improved economic scenarios, including improved GDP growth and unemployment, and higher property valuations as compared to the prior periods, partially offset by an increase driven by net additions of new loans. We continue to monitor the impact on our mortgage loan portfolio from borrower behavior in response to the economic stress. Borrowers with lower LTVs have an incentive to continue to make payments of principal and/or interest in order to preserve the equity they have in the underlying commercial real estate properties. During the first nine months of 2020, the Company increased the estimate of the ACL in response to significant economic stress experienced as a result of the COVID-19 pandemic.
The weighted-average LTV ratio of the Company’s mortgage loan portfolio was 52 % as of September 30, 2021, while the weighted-average LTV ratio at origination of these loans was 60 %. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan with property values based on appraisals updated no less than annually. Factors considered in estimating property values include, among other things, actual and expected property cash flows, geographic market data and the ratio of the property's net operating income to its value. DSCR compares a property’s net operating income to the borrower’s principal and interest payments and are updated no less than annually through reviews of underlying properties.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Loans LTV & DSCR by Origination Year as of September 30, 2021
2021 2020 2019 2018 2017 2016 & Prior Total
Loan-to-value Amortized Cost Avg. DSCR
Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost [1]
Avg. DSCR
65% - 80% $ 3 2.25 x $ 51 2.63 x $ 91 1.37 x $ 111 1.04 x $ 45 1.75 x $ 125 1.52 x $ 426 1.52 x
Less than 65% 1,020 2.86 x 654 2.76 x 772 2.71 x 485 2.21 x 419 1.88 x 1,356 2.46 x 4,706 2.55 x
Total mortgage loans
$ 1,023 2.86 x $ 705 2.75 x $ 863 2.57 x $ 596 1.99 x $ 464 1.87 x $ 1,481 2.38 x $ 5,132 2.47 x
[1]Amortized cost of mortgage loans excludes ACL of $ 26 .
Mortgage Loans LTV & DSCR by Origination Year as of December 31, 2020
2020 2019 2018 2017 2016 2015 & Prior Total
Loan-to-value Amortized Cost
Avg. DSCR
Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost [1]
Avg. DSCR
65% - 80% $ 28 1.62 x $ 243 1.58 x $ 212 1.33 x $ 45 2.02 x $ 51 1.92 x $ 115 1.74 x $ 694 1.59 x
Less than 65% 659 2.56 x 676 2.85 x 410 2.25 x 446 1.89 x 235 2.99 x 1,411 3.01 x 3,837 2.69 x
Total mortgage loans
$ 687 2.52 x $ 919 2.51 x $ 622 1.94 x $ 491 1.90 x $ 286 2.80 x $ 1,526 2.92 x $ 4,531 2.52 x
[1]Amortized cost of mortgage loans excludes ACL of $ 38 .
Mortgage Loans by Region
September 30, 2021 December 31, 2020
Amortized Cost Percent of Total Amortized Cost Percent of Total
East North Central $ 294 5.7 % $ 290 6.4 %
Middle Atlantic 304 5.9 % 291 6.4 %
Mountain 418 8.1 % 254 5.6 %
New England 394 7.7 % 397 8.8 %
Pacific 1,216 23.7 % 1,001 22.1 %
South Atlantic 1,407 27.4 % 1,038 22.9 %
West North Central 44 0.9 % 44 1.0 %
West South Central 388 7.6 % 433 9.5 %
Other [1] 667 13.0 % 783 17.3 %
Total mortgage loans 5,132 100.0 % 4,531 100.0 %
ACL ( 26 ) ( 38 )
Total mortgage loans, net of ACL $ 5,106 $ 4,493
[1] Primarily represents loans collateralized by multiple properties in various regions.
Mortgage Loans by Property Type
September 30, 2021 December 31, 2020
Amortized Cost Percent of Total Amortized Cost Percent of Total
Commercial
Industrial $ 1,804 35.2 % $ 1,339 29.5 %
Multifamily 1,695 33.0 % 1,498 33.1 %
Office 650 12.7 % 774 17.1 %
Retail [1] 916 17.8 % 788 17.4 %
Single Family 27 0.5 % 92 2.0 %
Other 40 0.8 % 40 0.9 %
Total mortgage loans 5,132 100.0 % 4,531 100.0 %
ACL ( 26 ) ( 38 )
Total mortgage loans, net of ACL $ 5,106 $ 4,493
[1] Primarily comprised of grocery-anchored retail centers, with no exposure to regional shopping malls.
Past-Due Mortgage Loans
Mortgage loans are considered past due if a payment of principal or interest is not received according to the contractual terms of the loan agreement, which typically includes a grace period. As of September 30, 2021 and December 31, 2020, the Company held no mortgage loans considered past due.
Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fee income over the period that services are performed. As of September 30, 2021, under this program, the Company serviced mortgage loans with a total outstanding
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
principal of $ 7.9 billion, of which $ 3.9 billion was serviced on behalf of third parties and $ 4.0 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. As of December 31, 2020, the Company serviced mortgage loans with a total outstanding principal balance of $ 6.9 billion, of which $ 3.7 billion was serviced on behalf of third parties and $ 3.2 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or fair value and were $ 0 as of September 30, 2021 and December 31, 2020, because servicing fees were market-level fees at origination and remain adequate to compensate the Company for servicing the loans.
VARIABLE INTEREST ENTITIES
The Company is engaged with various special purpose entities and other entities that are deemed to be VIEs primarily as an investor through normal investment activities but also as an investment manager.
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.
Consolidated VIEs
As of September 30, 2021 and December 31, 2020, the Company did no t hold any securities for which it is the primary beneficiary.
Non-Consolidated VIEs
The Company, through normal investment activities, makes passive investments in limited partnerships and other alternative investments. For these non-consolidated VIEs, the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. The Company’s maximum exposure to loss as of September 30, 2021 and December 31, 2020 was limited to the total carrying value of $ 1.7 billion and $ 1.3 billion, respectively, which are included in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of September 30, 2021 and December 31, 2020, the Company has outstanding commitments totaling $ 1.2 billion and $ 768 million, respectively, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. These investments are generally of a passive nature in that the Company does not take an active role in management. For further discussion of these investments, see Equity Method Investments within Note 6 - Investments of
Notes to Consolidated Financial Statements included in the Company’s 2020 Form 10-K Annual Report.
In addition, the Company makes passive investments in structured securities issued by VIEs for which the Company is not the manager. These investments are included in ABS, CLOs, CMBS, and RMBS and are reported in fixed maturities, AFS, and other investments. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs, and, where applicable, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
SECURITIES LENDING, REVERSE REPURCHASE AGREEMENTS, OTHER COLLATERAL TRANSACTIONS AND RESTRICTED INVESTMENTS
Securities Lending
Under a securities lending program, the Company lends certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities to qualifying third-party borrowers in return for collateral in the form of cash or securities. For domestic and non-domestic loaned securities, respectively, borrowers provide collateral of 102 % and 105 % of the fair value of the securities lent at the time of the loan. Borrowers will return the securities to the Company for cash or securities collateral at maturity dates generally of 90 days or less. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, except in the event of default by the counterparty, and is not reflected on the Company’s Condensed Consolidated Balance Sheets. Additional collateral is obtained if the fair value of the collateral falls below 100 % of the fair value of the loaned securities. The agreements are continuous and do not have stated maturity dates and provide the counterparty the right to sell or re-pledge the securities loaned. If cash, rather than securities, is received as collateral, the cash is typically invested in short-term investments or fixed maturities and is reported as an asset on the Company's Condensed Consolidated Balance Sheets. Income associated with securities lending transactions is reported as a component of net investment income in the Company’s Condensed Consolidated Statements of Operations. While the Company had securities on loan as part of a securities lending program during 2020, as of September 30, 2021 and December 31,
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2020, the Company did no t have any securities on loan as part of a securities lending program.
Reverse Repurchase Agreements
From time to time, the Company enters into reverse repurchase agreements where the Company purchases securities and simultaneously agrees to resell the same or substantially the same securities. The maturity of these transactions is generally within one year. The agreements require additional collateral to be transferred to the Company under specified conditions and the Company has the right to sell or re-pledge the securities received. The Company accounts for reverse repurchase agreements as collateralized financing. As of September 30, 2021 and December 31, 2020, the Company reported $ 23 and $ 30 , respectively, within short-term investments on the Condensed Consolidated Balance Sheets representing a receivable for the amount of cash transferred to purchase the securities.
Other Collateral Transactions
As of September 30, 2021 and December 31, 2020, the Company pledged collateral of $ 9 and $ 34 , respectively, of U.S. government securities or cash primarily related to certain bank loan participations committed through a limited partnership agreement. Amounts also include collateral related to letters of credit.
For disclosure of collateral in support of derivative transactions, refer to the Derivative Collateral Arrangements section in Note 6 - Derivatives of Notes to Condensed Consolidated Financial Statements.
Other Restricted Investments
The Company is required by law to deposit securities with
government agencies in certain states in which it conducts business. As of September 30, 2021 and December 31, 2020, the fair value of securities on deposit was $ 2.5 billion and $ 2.6 billion, respectively.
In addition, as of September 30, 2021, the Company held fixed maturities of $ 682 and short-term investments of $ 2 in trust for the benefit of syndicate policyholders, held fixed maturities of $ 170 in a Lloyd's of London ("Lloyd's") trust account to provide a portion of the required capital, and maintained other investments of $ 62 primarily consisting of overseas deposits in various countries with Lloyd's to support underwriting activities in those countries. As of December 31, 2020, the Company held fixed maturities of $ 661 and short-term investments of $ 26 in trust for the benefit of syndicate policyholders, held fixed maturities of $ 175 in a Lloyd's trust account to provide a portion of the required capital, and maintained other investments of $ 54 primarily consisting of overseas deposits in various countries with Lloyd's to support underwriting activities in those countries. Lloyd's is an insurance market-place operating worldwide. Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate").
Equity Method Investments
On June 30, 2021, Hopmeadow Holdings LP, the legal entity that acquired Talcott Resolution in May 2018 (collectively referred to as "Talcott Resolution"), was sold and, as a result, the Company sold its retained 9.7% interest. The Company received a total $ 217 in connection with the sale of its 9.7% ownership interest, resulting in a realized gain on sale of $ 46 before tax for the nine months ended September 30, 2021.
6. DERIVATIVES
The Company utilizes a variety of OTC, OTC-cleared and exchange traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions or income generation covered call transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies.
STRATEGIES THAT QUALIFY FOR HEDGE ACCOUNTING
Some of the Company's derivatives satisfy hedge accounting requirements as outlined in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements, included in The Hartford’s 2020 Form 10-K Annual Report. Typically, these hedging instruments include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities or debt instruments issued.
Cash Flow Hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives primarily convert interest receipts on variable-rate fixed maturity securities to fixed rates. The Company has also entered into interest rate swaps to convert the variable interest payments on 3 month LIBOR + 2.125% junior subordinated debt to fixed interest payments. For further information, see the Junior Subordinated Debentures section within Note 14 - Debt of Notes to the Consolidated Financial Statements, included in The Hartford's 2020 Form 10-K Annual Report.
Foreign currency swaps are used to convert foreign currency denominated cash flows related to certain investment receipts to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
The Company also previously entered into forward starting swap agreements to hedge the interest rate exposure related to the future purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain group benefits liabilities.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NON-QUALIFYING STRATEGIES
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include hedges of interest rate, foreign currency and equity risk of certain fixed maturities and equities. In addition, hedging and replication strategies that utilize credit default swaps do not qualify for hedge accounting. The non-qualifying strategies include:
Credit Contracts
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in the value of fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty or the Company should the referenced security issuers experience a credit event, as defined in the contract. The Company also enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Interest Rate Swaps, Swaptions and Futures
The Company uses interest rate swaps, swaptions and futures to manage interest rate duration between assets and liabilities. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap going forward. As of September 30, 2021 and December 31, 2020, the notional amount of interest rate swaps in offsetting relationships was $ 7.2 billion and $ 7.6 billion, respectively.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Equity Index Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. The Company also enters into covered call options on equity securities to generate additional return.
DERIVATIVE BALANCE SHEET CLASSIFICATION
For reporting purposes, the Company has elected to offset within assets or liabilities, based upon the net of the fair value amounts, income accruals and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The following fair value amounts do not include income accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Derivative Balance Sheet Presentation
Net Derivatives Asset
Derivatives
Liability Derivatives
Notional Amount Fair Value Fair Value Fair Value
Hedge Designation/ Derivative Type Sep 30, 2021 Dec. 31, 2020 Sep 30, 2021 Dec. 31, 2020 Sep 30, 2021 Dec. 31, 2020 Sep 30, 2021 Dec. 31, 2020
Cash flow hedges
Interest rate swaps $ 2,340 $ 2,340 $ — $ — $ — $ — $ — $ —
Foreign currency swaps 326 286 2 ( 13 ) 7 3 ( 5 ) ( 16 )
Total cash flow hedges 2,666 2,626 2 ( 13 ) 7 3 ( 5 ) ( 16 )
Non-qualifying strategies
Interest rate contracts
Interest rate swaps and futures 7,991 8,335 ( 45 ) ( 69 ) 3 4 ( 48 ) ( 73 )
Foreign exchange contracts
Foreign currency swaps and forwards 465 269 1 — 1 — — —
Credit contracts
Credit derivatives that purchase credit protection 16 6 ( 1 ) — — — ( 1 ) —
Credit derivatives that assume credit risk [1] 75 675 7 21 7 21 — —
Credit derivatives in offsetting positions 212 218 — — 3 5 ( 3 ) ( 5 )
Total non-qualifying strategies 8,759 9,503 ( 38 ) ( 48 ) 14 30 ( 52 ) ( 78 )
Total cash flow hedges and non-qualifying strategies $ 11,425 $ 12,129 $ ( 36 ) $ ( 61 ) $ 21 $ 33 $ ( 57 ) $ ( 94 )
Balance Sheet Location
Fixed maturities, available-for-sale $ 318 $ 269 $ — $ — $ — $ — $ — $ —
Other investments 1,367 9,585 2 23 5 25 ( 3 ) ( 2 )
Other liabilities 9,740 2,275 ( 38 ) ( 84 ) 16 8 ( 54 ) ( 92 )
Total derivatives $ 11,425 $ 12,129 $ ( 36 ) $ ( 61 ) $ 21 $ 33 $ ( 57 ) $ ( 94 )
[1] The derivative instruments related to this strategy are held for other investment purposes.
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Condensed Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and
payables associated with derivative instruments that are traded under a common master netting agreement, as described in the preceding discussion. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Offsetting Derivative Assets and Liabilities
(i) (ii) (iii) = (i) - (ii) (iv) (v) = (iii) - (iv)
Net Amounts Presented in the Statement of Financial Position Collateral Disallowed for Offset in the Statement of Financial Position
Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Statement of Financial Position Derivative Assets [1] (Liabilities) [2] Accrued Interest and Cash Collateral (Received) [3] Pledged [2] Financial Collateral (Received) Pledged [4] Net Amount
As of September 30, 2021
Other investments $ 21 $ 18 $ 2 $ 1 $ 3 $ —
Other liabilities $ ( 57 ) $ ( 7 ) $ ( 38 ) $ ( 12 ) $ ( 48 ) $ ( 2 )
As of December 31, 2020
Other investments $ 33 $ 31 $ 23 $ ( 21 ) $ 1 $ 1
Other liabilities $ ( 94 ) $ ( 6 ) $ ( 84 ) $ ( 4 ) $ ( 83 ) $ ( 5 )
[1] Included in other investments in the Company's Condensed Consolidated Balance Sheets.
[2] Included in other liabilities in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty.
[3] Included in other investments in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty.
[4] Excludes collateral associated with exchange-traded derivative instruments.
CASH FLOW HEDGES
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Gain (Loss) Recognized in OCI
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Interest rate swaps $ 2 $ — $ 8 $ 36
Foreign currency swaps 8 ( 12 ) 19 12
Total $ 10 $ ( 12 ) $ 27 $ 48
Gain (Loss) Reclassified from AOCI into Income for the Three Months Ended
September 30, 2021 September 30, 2020
Net Realized Gain/(Loss) Net Investment Income Interest Expense Net Realized Gain/(Loss) Net Investment Income Interest Expense
Interest rate swaps $ — $ 11 $ ( 3 ) $ — $ 9 $ ( 2 )
Foreign currency swaps — 1 — 1 1 —
Total $ — $ 12 $ ( 3 ) $ 1 $ 10 $ ( 2 )
Total amounts presented on the Condensed Consolidated Statement of Operations $ 70 $ 650 $ 58 $ 6 $ 492 $ 58
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Gain (Loss) Reclassified from AOCI into Income for the Nine Months Ended
September 30, 2021 September 30, 2020
Net Realized Gain/(Loss) Net Investment Income Interest Expense Net Realized Gain/(Loss) Net Investment Income Interest Expense
Interest rate swaps $ — $ 31 $ ( 8 ) $ — $ 19 $ ( 4 )
Foreign currency swaps — 3 — 1 3 —
Total $ — $ 34 $ ( 8 ) $ 1 $ 22 $ ( 4 )
Total amounts presented on the Condensed Consolidated Statement of Operations $ 297 $ 1,740 $ 172 $ ( 116 ) $ 1,290 $ 179
As of September 30, 2021, the before tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $ 31 . This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities and long-term debt that will occur over the next twelve months. At that time, the Company will recognize the deferred net gains (losses) as an adjustment to net investment income and interest expense over the term of the investment cash flows.
During the three and nine months ended September 30, 2021 and 2020, the Company had no net reclassifications from AOCI
to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
NON-QUALIFYING STRATEGIES
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized gains (losses).
Non-Qualifying Strategies Recognized within Net Realized Gains (Losses)
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Foreign exchange contracts
Foreign currency swaps and forwards $ 1 $ — $ 1 $ 3
Interest rate contracts
Interest rate swaps, swaptions, and futures 9 — 9 21
Credit contracts
Credit derivatives that purchase credit protection — ( 1 ) — 3
Credit derivatives that assume credit risk — ( 1 ) 6 ( 5 )
Equity contracts
Equity index swaps and options — — — 75
Total $ 10 $ ( 2 ) $ 16 $ 97
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that are permissible under the Company's investment policies. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the
occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard diversified portfolios of corporate and CMBS issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
Credit Risk Assumed Derivatives by Type
Underlying Referenced Credit
Obligation(s) [1]
Notional
Amount
[2]
Fair
Value
Weighted
Average
Years to
Maturity
Type Average
Credit
Rating
Offsetting
Notional
Amount [3]
Offsetting
Fair
Value [3]
As of September 30, 2021
Basket credit default swaps [4]
Below investment grade risk exposure $ 75 $ 7 5 years Corporate Credit B+ $ — $ —
Investment grade risk exposure 100 1 7 years CMBS Credit AAA 100 ( 1 )
Below investment grade risk exposure 6 ( 3 ) Less than 1 year CMBS Credit CCC+ 6 3
Total $ 181 $ 5 $ 106 $ 2
As of December 31, 2020
Single name credit default swaps
Investment grade risk exposure $ 175 $ 9 5 years Corporate Credit A- $ — $ —
Basket credit default swaps [4]
Investment grade risk exposure 500 12 5 years Corporate Credit BBB+ — —
Investment grade risk exposure 100 1 8 years CMBS Credit AAA 100 ( 1 )
Below investment grade risk exposure 9 ( 4 ) Less than 1 year CMBS Credit CCC+ 9 4
Total $ 784 $ 18 $ 109 $ 3
[1] The average credit ratings are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.
[2] Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and applicable law, which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
[3] The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.
[4] Comprised of swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
.
DERIVATIVE COLLATERAL ARRANGEMENTS
The Company enters into various collateral arrangements in connection with its derivative instruments, which require both the pledging and accepting of collateral. As of September 30, 2021 and December 31, 2020, the Company ha s pl edged cash collateral associated with derivative instruments of $ 2 and $ 0 , respectively . In general, collateral receivable is recorded in other assets or other liabilities on the Company's Condensed Consolidated Balance Sheets as determined by the Company's election to offset on the balance sheet. As of September 30,
2021 and December 31, 2020, the Company pledged securities collateral associated with derivative instruments with a fair value of $ 54 and $ 90 , respectively, which have been included in fixed maturities on the Company's Condensed Consolidated Balance Sheets. The counterparties generally have the right to sell or re-pledge these securities.
In addition, as of September 30, 2021 and December 31, 2020, the Company has pledged initial margin of securities related to OTC-cleared and exchange traded derivatives with a fair value of $ 119 and $ 83 , respectively, which are included within fixed maturities on the Company's Condensed Consolidated Balance Sheets.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2021 and December 31, 2020, the Company accepted cash collateral associated with derivative instruments of $ 12 and $ 24 , respectively, which was invested and recorded in the Company's Condensed Consolidated Balance Sheets in fixed maturities and short-term investments with corresponding amounts recorded in other investments or other liabilities as determined by the Company's election to offset on the balance sheet. The Company also accepted
securities collateral as of September 30, 2021 and December 31, 2020, with a fair value of $ 3 and $ 1 , respectively, which the Company has the right to sell or repledge. As of September 30, 2021 and December 31, 2020, the Company had no repledged securities and no securities held as collateral have been sold. Non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Condensed Consolidated Balance Sheets .
7. PREMIUMS RECEIVABLE AND AGENTS' BALANCES
Premiums Receivable and Agents' Balances
As of September 30, 2021 As of December 31, 2020
Premiums receivable, excluding receivables for losses within a deductible and retrospectively-rated policy premiums ("loss sensitive business") $ 4,200 $ 3,851
Receivables for loss sensitive business, by credit quality:
AAA — —
AA 137 142
A 57 62
BBB 161 185
BB 103 115
Below BB 64 65
Total receivables for loss sensitive business 522 569
Total Premiums Receivable and Agents' Balances, Gross
4,722 4,420
ACL ( 124 ) ( 152 )
Total Premiums Receivable and Agents' Balances, Net of ACL
$ 4,598 $ 4,268
ACL on Premiums Receivable and Agents' Balances
Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods. The Company had an immaterial amount of receivables with a due date of more than one year that are past-due.
Premiums receivable and agents' balances, excluding receivables for loss sensitive business, are primarily comprised of premiums due from policyholders, which are typically collectible within one year or less. For these balances, the ACL is estimated based on an aging of receivables and recent historical credit loss and collection experience, adjusted for current economic conditions and reasonable and supportable forecasts, when appropriate.
A portion of the Company's Commercial Lines business is written with large deductibles or under retrospectively-rated plans (referred to as "loss sensitive business"). 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 oversight.
The ACL for receivables for loss sensitive business is estimated as the amount of the receivable exposed to loss multiplied by estimated factors for probability of default and the amount of loss given a default. The probability of default is assigned based on each policyholder's credit rating, or a rating is estimated if no external rating is available. Credit ratings are reviewed and updated at least annually. The exposure amount is estimated net of collateral and other credit enhancement, considering the nature of the collateral, potential future changes in collateral values, and historical loss information for the type of collateral obtained. The probability of default factors are historical corporate defaults for receivables with similar durations estimated through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors through multiple economic cycles. The Company's evaluation of the required ACL for receivables for loss sensitive business considers the current economic environment as well as the probability-weighted macroeconomic scenarios similar to the approach used for estimating the ACL for mortgage loans. See Note 5 - Investments.
During the three and nine months ended September 30, 2021, the ACL on premiums receivable decreased as the provision required on premiums written in the quarter was more than offset by write-offs and a reduction in the provision reflecting lessening expected impacts of COVID-19 relative to prior assumptions in certain lines of business. The three months ended September 30, 2020 reflected a decrease in the ACL primarily due to modest economic scenario improvement related to COVID-19, and for the nine months ended September 30, 2020, an increase in the ACL due to the increasing impacts of COVID-19.
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Note 7 - Premiums Receivable and Agents' Balances
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Rollforward of ACL on Premiums Receivable and Agents' Balances for the Three Months Ended
September 30, 2021 September 30, 2020
Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total
Beginning ACL $ 97 $ 37 $ 134 $ 139 $ 44 $ 183
Current period provision (release) 1 — 1 2 — 2
Current period write-offs ( 13 ) — ( 13 ) ( 12 ) — ( 12 )
Current period recoveries 2 — 2 1 — 1
Ending ACL $ 87 $ 37 $ 124 $ 130 $ 44 $ 174
Rollforward of ACL on Premiums Receivable and Agents' Balances for the Nine Months Ended
September 30, 2021 September 30, 2020
Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total
Beginning ACL
$ 117 $ 35 $ 152 $ 85 $ 60 $ 145
Cumulative effect of accounting change [1] ( 2 ) ( 21 ) ( 23 )
Adjusted beginning ACL 117 35 152 83 39 122
Current period provision (release) 6 2 8 78 5 83
Current period write-offs ( 43 ) — ( 43 ) ( 35 ) — ( 35 )
Current period recoveries 7 — 7 4 — 4
Ending ACL
$ 87 $ 37 $ 124 $ 130 $ 44 $ 174
[1] Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. The adjusted beginning ACL was based on the Company's historical loss information adjusted for current conditions and the forecasted economic environment at the time the guidance was adopted. For further information, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2020 Form 10-K Annual Report.
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Note 8 - Reinsurance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
8. REINSURANCE
The Company cedes insurance risk to reinsurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company's procedures include carefully selecting its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers.
REINSURANCE RECOVERABLES
Reinsurance recoverables include balances due from reinsurance companies and are presented net of an allowance for uncollectible reinsurance. Reinsurance recoverables include an estimate of the amount of gross losses and loss adjustment
expense reserves that may be ceded under the terms of the reinsurance agreements, including incurred but not reported ("IBNR") unpaid losses. The Company’s estimate of losses and loss adjustment expense reserves ceded to reinsurers is based on assumptions that are consistent with those used in establishing the gross reserves for amounts the Company owes to its claimants. The Company estimates its ceded reinsurance recoverables based on the terms of any applicable facultative and treaty reinsurance, including an estimate of how incurred but not reported losses will ultimately be ceded under reinsurance agreements. Accordingly, the Company’s estimate of reinsurance recoverables is subject to similar risks and uncertainties as the estimate of the gross reserve for unpaid losses and loss adjustment expenses.
Reinsurance Recoverables by Credit Quality Indicator
As of September 30, 2021 As of December 31, 2020
Property and Casualty
Group Benefits
Corporate Total Property and Casualty
Group Benefits
Corporate Total
A.M. Best Financial Strength Rating
A++ $ 1,728 $ — $ — $ 1,728 $ 1,598 $ — $ — $ 1,598
A+ 1,876 236 279 2,391 1,788 230 305 2,323
A 696 — — 696 638 — — 638
A- 29 9 — 38 37 9 — 46
B++ 644 — 3 647 666 — 3 669
Below B++ 21 1 — 22 21 1 — 22
Total Rated by A.M. Best
4,994 246 282 5,522 4,748 240 308 5,296
Mandatory (Assigned) and Voluntary Risk Pools 251 — — 251 259 — — 259
Captives 311 — — 311 305 — — 305
Other not rated companies 255 7 — 262 254 5 — 259
Gross Reinsurance Recoverables
5,811 253 282 6,346 5,566 245 308 6,119
Allowance for uncollectible reinsurance
( 96 ) ( 1 ) ( 2 ) ( 99 ) ( 105 ) ( 1 ) ( 2 ) ( 108 )
Net Reinsurance Recoverables
$ 5,715 $ 252 $ 280 $ 6,247 $ 5,461 $ 244 $ 306 $ 6,011
Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods, generally 30, 60 or 90 days. To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational quality of each potential reinsurer. In placing reinsurance, the Company considers the nature of the risk reinsured, including the expected liability payout duration, and establishes limits tiered by reinsurer credit rating.
Where its contracts permit, the Company secures future claim obligations with various forms of collateral or other credit enhancement, including irrevocable letters of credit, secured trusts, funds held accounts and group wide offsets. As part of its reinsurance recoverable review, the Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers and the overall credit quality of the Company’s reinsurers.
Due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables become due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarter or annual period.
The allowance for uncollectible reinsurance comprises an ACL and an allowance for disputed balances. The ACL is estimated as the amount of reinsurance recoverables exposed to loss multiplied by estimated factors for the probability of default and the amount of loss given a default. The probability of default is assigned based on each reinsurer's credit rating, or a rating is estimated if no external rating is available. Credit ratings are reviewed on a quarterly basis and any significant changes are reflected in an updated estimate. The probability of default factors are historical insurer and reinsurer defaults for liabilities with similar durations to the reinsured liabilities as estimated
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Note 8 - Reinsurance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors of corporations through multiple economic cycles or, in the case of purchased annuities funding structured settlements accounted for as reinsurance, historical recovery rates for annuity contract holders.
As shown in the table above, a portion of the total gross reinsurance recoverable balance relates to the Company’s participation in various mandatory (assigned) and voluntary risk pools. Reinsurance recoverables due from pools are backed by the financial position of all insurance companies participating in the pools and the credit backing the reinsurance recoverable is not limited to the financial strength of each pool. The mandatory pools generally are funded through policy assessments or surcharges and if any participant in the pool defaults, remaining liabilities are apportioned among the other members.
The Company's evaluation of the required ACL for reinsurance recoverables considers the current economic environment as well as macroeconomic scenarios similar to the approach used to estimate the ACL for mortgage loans. See Note 5 - Investments. Insurance companies, including reinsurers, are regulated and hold risk-based capital ("RBC") to mitigate the risk of loss due to economic factors and other risks. Non-U.S. reinsurers are either subject to a capital regime substantively equivalent to domestic insurers or we hold collateral to support collection of reinsurance recoverables. As a result, there is limited history of losses from insurer defaults. The decrease in the ACL for the nine months ended September 30, 2021 was primarily due to higher than expected recovery from one reinsurer on which the Company had recognized an ACL. In the three and nine months ended September 30, 2021, there were no write-offs of reinsurance recoverables that would impact ACL.
Allowance for Uncollectible Reinsurance for the Three Months Ended
September 30, 2021 September 30, 2020
Property and Casualty Group Benefits Corporate Total Property and Casualty Group Benefits Corporate Total
Beginning allowance for uncollectible reinsurance
$ 96 $ 1 $ 2 $ 99 $ 108 $ 1 $ 2 $ 111
Beginning allowance for disputed amounts 56 — — 56 57 — — $ 57
Beginning ACL
40 1 2 43 51 1 2 54
Current period provision (release) 1 — — 1 1 — — 1
Ending ACL
41 1 2 44 52 1 2 55
Ending allowance for disputed amounts 55 — — 55 54 — — 54
Ending allowance for uncollectible reinsurance
$ 96 $ 1 $ 2 $ 99 $ 106 $ 1 $ 2 $ 109
Allowance for Uncollectible Reinsurance for the Nine Months Ended
September 30, 2021 September 30, 2020
Property and Casualty Group Benefits Corporate Total Property and Casualty Group Benefits Corporate Total
Beginning allowance for uncollectible reinsurance
$ 105 $ 1 $ 2 $ 108 $ 114 $ — $ — $ 114
Beginning allowance for disputed amounts 53 — — 53 66 — — $ 66
Beginning ACL
52 1 2 55 48 — — 48
Cumulative effect of accounting change [1] — 1 1 2
Adjusted beginning ACL 52 1 2 55 48 1 1 50
Current period provision (release) ( 11 ) — — ( 11 ) 3 — 1 4
Current period gross recoveries — — — — 1 — — 1
Ending ACL
41 1 2 44 52 1 2 55
Ending allowance for disputed amounts 55 — — 55 54 — — 54
Ending allowance for uncollectible reinsurance
$ 96 $ 1 $ 2 $ 99 $ 106 $ 1 $ 2 $ 109
[1] Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2020 Form 10-K Annual Report.
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Note 9 - Reserves for Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
9. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
| PROPERTY & CASUALTY INSURANCE PRODUCT RESERVES, NET OF REINSURANCE
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the nine months ended September 30,
2021 2020
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$ 29,622 $ 28,261
Reinsurance and other recoverables 5,725 5,275
Beginning liabilities for unpaid losses and loss adjustment expenses, net
23,897 22,986
Provision for unpaid losses and loss adjustment expenses
Current accident year 5,968 5,992
Prior accident year development [1] 170 ( 320 )
Total provision for unpaid losses and loss adjustment expenses
6,138 5,672
Change in deferred gain on retroactive reinsurance included in other liabilities [1] ( 73 ) ( 97 )
Payments
Current accident year ( 1,549 ) ( 1,447 )
Prior accident years ( 3,155 ) ( 3,338 )
Total payments
( 4,704 ) ( 4,785 )
Net change in reserves transferred to liabilities held for sale — ( 43 )
Foreign currency adjustment 1 ( 3 )
Ending liabilities for unpaid losses and loss adjustment expenses, net
25,259 23,730
Reinsurance and other recoverables 5,931 5,421
Ending liabilities for unpaid losses and loss adjustment expenses, gross
$ 31,190 $ 29,151
[1]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and A&E ADC which, under retroactive reinsurance accounting, is deferred and is recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the two adverse development cover reinsurance agreements, refer to Adverse Development Covers discussion below.
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Note 9 - Reserves for Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unfavorable (Favorable) Prior Accident Year Development
For the nine months ended September 30,
2021 2020
Workers’ compensation $ ( 113 ) $ ( 72 )
Workers’ compensation discount accretion 26 27
General liability 451 112
Marine — 1
Package business ( 66 ) ( 24 )
Commercial property ( 24 ) ( 6 )
Professional liability ( 7 ) ( 16 )
Bond ( 26 ) ( 10 )
Assumed reinsurance — ( 7 )
Automobile liability - Commercial Lines 9 27
Automobile liability - Personal Lines ( 73 ) ( 53 )
Homeowners 2 3
Catastrophes ( 98 ) ( 413 )
Uncollectible reinsurance ( 10 ) ( 8 )
Other reserve re-estimates, net 26 22
Prior accident year development before change in deferred gain 97 ( 417 )
Change in deferred gain on retroactive reinsurance included in other liabilities [1] 73 97
Total prior accident year development $ 170 $ ( 320 )
[1]The change in deferred gain for the nine months ended September 30, 2021 and 2020 included $ 73 and $ 97 , respectively, of adverse development on Navigators 2018 and prior accident year reserves, primarily driven by professional liability and wholesale construction within general liability in the 2021 period and marine, professional liability, general liability, assumed reinsurance and prior accident year catastrophes in the 2020 period.
Re-estimates of prior accident year reserves for the nine months ended September 30, 2021
Workers’ compensation reserves were decreased within small commercial and middle & large commercial for the 2013 through 2018 accident years driven by lower than previously estimated claim severity.
General liability reserves were increased including an increase for sexual molestation and sexual abuse claims above the amount of reserves previously recorded for this exposure, primarily to reflect an increase in reserves for claims made against the Boy Scouts of America ("BSA") as discussed further below, partially offset by reserve decreases for other mass torts and extra contractual liability claims. In addition, the Company recognized reserve increases on Navigators’ wholesale construction business for 2018 and prior accident years included in the change in deferred gain on retroactive reinsurance in the above table.
Package business reserves decreased largely due to lower estimated loss adjustment expenses for accident years
2014 to 2018 and a reduction in estimated reserves for extra contractual liability claims.
Commercial property reserves were decreased primarily due to favorable development for the 2020 accident year in both middle & large commercial and global specialty.
Professional liability reserves were decreased due to lower estimated severity in both large and middle market directors’ and officers’ (“D&O”) insurance for older accident years. More than offsetting this favorable reserve development were reserve increases on legacy Navigators public company directors’ and officers’ insurance for 2018 and prior accident years which is reflected within the change in deferred gain on retroactive reinsurance in the above table.
Bond reserves were reduced mostly due to favorable emergence on contract surety claims driven by higher than previously anticipated recoveries, largely for the 2016 to 2017 accident years.
Automobile liability reserves were decreased in Personal Lines principally due to lower estimated severity on AARP Direct and Agency claims, primarily within accident years 2017 to 2020, and a reduction in estimated reserves for extra contractual liability claims.
Catastrophes reserves were decreased in both Commercial and Personal Lines primarily driven by a reduction in reserves for 2019 and 2020 wind and hail events, lower estimated losses from 2017 and 2018 hurricanes and a reduction in estimated losses from the 2017 and 2018 California wildfires, including an expected recovery of subrogation from a utility related to the 2018 Woolsey wildfire in California.
Uncollectible reinsurance reserves were decreased due to a higher than expected recovery from one reinsurer on which the Company had recognized an allowance for credit losses.
Other reserve re-estimates, net, were increased primarily due to an increase in reserves for sexual molestation and sexual abuse claims within P&C Other Operations, principally on assumed reinsurance.
Re-estimates of prior accident year reserves for the nine months ended September 30, 2020
Workers’ compensation reserves were reduced on national account business within middle & large commercial, driven by lower than previously estimated claim severity for the 2014 and prior accident years and were reduced in small commercial due to lower than expected claim severity for the 2013 to 2018 accident years.
General liability reserves were increased in part due to guaranteed cost construction business for accident years 2014 to 2019 as incurred losses are developing higher than previously expected for premises and operations claims and product liability claims, partly due to a change in industry mix and a heavier concentration of losses in California than initially assumed, as well as increased reserves for middle market and complex liability claims for accident year 2018 largely due to higher than expected severity. Also contributing were increases
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Note 9 - Reserves for Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
in reserves on primary layer construction account business within global specialty, mainly related to accident years 2015-2017, which is included as a component of the change in deferred gain under retroactive reinsurance in the above table.
In addition, the Company recorded an increase in reserves for sexual molestation and abuse claims related to cases brought against religious and other institutions that were insureds of the Company which was partly offset by reserve decreases for other mass torts and extra contractual liability claims.
The Company increased reserves for sexual molestation claims by $ 129 considering the impact of recent bankruptcy filings and an expected increase in claim incidence largely driven by legislation passed in a number of states that provides an opportunity for claimants to file claims for a period of time despite the fact that the original statute of limitations had expired.
Marine reserves were increased principally due to an increase in domestic marine liability, mostly in accident years 2017 and 2018 due to a higher number of large losses. The increase in marine reserves is included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Package business reserves decreased for accident years 2014 to 2017 largely due to lower estimates of allocated loss adjustment expenses.
Commercial property reserves were decreased for accident year 2019 due to favorable developments on marine and middle market property claims.
Professional liability reserves were decreased primarily due to lower estimated severity on non-security class action D&O claims and fewer than expected E&O claims with financial institutions for the 2011 to 2018 accident years, partially offset by an increase in D&O reserves for the 2019 accident year driven by higher frequency of class action lawsuits and an increase in large Syndicate D&O losses for the 2016 and 2017 accident years. These Syndicate reserve increases within Global Specialty are included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Assumed reinsurance reserves were increased for accident year 2018 mostly due to higher accident and health reserve estimates for medical professionals on assumed casualty business. These reserve increases are included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Automobile liability reserves were decreased in Personal Lines principally due to lower than previously expected AARP Direct automobile liability claim severity for the 2017 and 2018 accident years. Automobile liability reserves were increased in Commercial Lines primarily due to higher than expected large losses on national accounts in the first quarter of 2020 related to accident years 2015 to 2017 and due to large losses within middle & large commercial, primarily within the 2018 and 2019 accident years.
Catastrophes reserves were reduced, primarily due to a reduction in estimated reserves for 2017 and 2018 California wildfires and a reduction in estimated catastrophes for wind and hail events in the 2018 and 2019 accident years, partially offset
by an increase in reserves for 2019 typhoons Hagibis and Faxai in Asia. The reduction in reserves for the 2017 and 2018 wildfires was largely due to recognizing a $ 289 subrogation benefit in the second quarter of 2020 from PG&E Corporation and Pacific Gas and Electric Company (together, “PG&E”).
Settlement Agreement with Boy Scouts of America
On September 14, 2021, the Company announced that it entered into a new agreement-in-principle with the BSA, related to sexual molestation and sexual abuse claims associated with liability policies issued by various Hartford writing companies in the 1970s and early 1980s, superseding its prior agreement of April 16, 2021, which now includes the BSA, its local councils and the representatives of a majority of the sexual abuse claimants. As part of the agreement-in-principle, The Hartford will pay $ 787 , before tax, for claims associated with policies mostly issued in the 1970s. In exchange for The Hartford’s payment, the BSA and its local councils will fully release The Hartford from any obligation under policies The Hartford issued to the BSA and its local councils. In addition, the representatives for the claimants joining this agreement-in-principle will support a plan of reorganization which incorporates the settlement. The prior agreement of April 16, 2021 to settle these claims for $ 650 did not include the local councils or representatives of a majority of the claimants.
The agreement-in-principle was reached in connection with BSA’s Chapter 11 bankruptcy and will become a final settlement upon the occurrence of certain conditions, including execution of a definitive settlement agreement, confirmation of the BSA’s global resolution plan, receipt of executed releases from the local councils, and approval from the bankruptcy court as part of BSA’s overall plan of reorganization. The parties to the agreement-in-principle expect to receive court approval of the settlement in early 2022. No assurance can be given that all the conditions precedent to the settlement will be satisfied or that bankruptcy court approval, if obtained, will not be delayed for various procedural reasons.
If the bankruptcy court ultimately does not approve BSA’s plan of reorganization including terms of the agreement-in-principle, it is possible that adverse outcomes, if any, could have a material adverse effect on the Company’s consolidated operating results.
Adverse Development Covers
The Company has an adverse development cover reinsurance agreement with NICO, a subsidiary of Berkshire Hathaway Inc., to reinsure loss development after 2016 on substantially all of the Company’s asbestos and environmental reserves (the “A&E ADC”). Under the A&E ADC, the Company paid a reinsurance premium of $ 650 for NICO to assume adverse net loss reserve development up to $ 1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $ 1.7 billion including reserves for A&E exposure for accident years prior to 1986 that are reported in Property & Casualty Other Operations ("Run-off A&E") and reserves for A&E exposure for accident years 1986 and subsequent from policies underwritten prior to 2016 that are reported in ongoing Commercial Lines and Personal Lines. The $ 650 reinsurance premium was placed into a collateral trust account as security for NICO’s claim payment obligations to the Company. The Company has retained the risk of collection on amounts due from other third-party reinsurers and continues to be responsible
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Note 9 - Reserves for Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
for claims handling and other administrative services, subject to certain conditions. The A&E ADC covers substantially all the Company’s A&E reserve development up to the reinsurance limit.
Under retroactive reinsurance accounting, net adverse A&E reserve development after December 31, 2016 will result in an offsetting reinsurance recoverable up to the $ 1.5 billion limit. Cumulative ceded losses up to the $ 650 reinsurance premium paid have been recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the $ 650 reinsurance premium paid result in a deferred gain. As of September 30, 2021, the Company has incurred $ 860 in cumulative adverse development on asbestos and environmental reserves that have been ceded under the A&E ADC treaty with NICO with $ 640 of available limit remaining under the A&E ADC. As a result, the Company has recorded a $ 210 deferred gain within other liabilities, representing the difference between the reinsurance recoverable of $ 860 and ceded premium paid of $ 650 . The deferred gain is recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and environmental claims will result in charges against earnings which may be significant.
Immediately after closing on the acquisition of Navigators Group, effective May 23, 2019, the Company purchased the Navigators ADC, an aggregate excess of loss reinsurance agreement covering adverse reserve development, from NICO, on behalf of Navigators Insurers. Under the Navigators ADC, the Navigators Insurers paid NICO a reinsurance premium of $ 91 in exchange for reinsurance coverage of $ 300 of adverse net loss reserve development that attaches $ 100 above the Navigators Insurers' existing net loss and allocated loss adjustment reserves as of December 31, 2018 subject to the treaty of $ 1.816 billion for accidents and losses prior to December 31, 2018.
As of September 30, 2021, the Company has recorded a reinsurance recoverable under the Navigators ADC of $ 282 , as estimated cumulative loss development on the 2018 and prior accident year reserves of $ 382 exceed the $ 100 deductible. While the reinsurance recoverable is $ 282 , the Company has also recorded a $ 191 cumulative deferred gain within other liabilities since, under retroactive reinsurance accounting, ceded losses in excess of the $ 91 of ceded premium paid must be recognized as a deferred gain. Of the $ 191 of cumulative ceded losses in exces s of ceded premium paid, $ 73 was recognized as a deferred gain in 2021 and $ 97 was recognized as a deferred gain in 2020. As the Company has ceded $ 282 of the $ 300 available limit, there is $ 18 of remaining limit available as of September 30, 2021.
| GROUP LIFE, DISABILITY AND ACCIDENT PRODUCTS
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the nine months ended September 30,
2021 2020
Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 8,233 $ 8,256
Reinsurance recoverables [1] 237 246
Beginning liabilities for unpaid losses and loss adjustment expenses, net 7,996 8,010
Provision for unpaid losses and loss adjustment expenses
Current incurral year 3,753 3,339
Prior year's discount accretion 155 160
Prior incurral year development [2] ( 382 ) ( 362 )
Total provision for unpaid losses and loss adjustment expenses [3] 3,526 3,137
Payments
Current incurral year ( 1,776 ) ( 1,553 )
Prior incurral years ( 1,804 ) ( 1,681 )
Total payments ( 3,580 ) ( 3,234 )
Ending liabilities for unpaid losses and loss adjustment expenses, net 7,942 7,913
Reinsurance recoverables 246 242
Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 8,188 $ 8,155
[1] Includes a cumulative effect adjustment of $( 1 ) representing an adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to 2020 10-K, Note 1 - Basis of Presentation and Significant Accounting Policies.
[2] Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
[3] Includes unallocated loss adjustment expenses ("ULAE") of $ 131 and $ 133 for the nine months ended September 30, 2021 and 2020, respectively, that are recorded in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations .
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Note 9 - Reserves for Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Re-estimates of prior incurral years reserves for the nine months ended September 30, 2021
Group disabilit y- Prior period reserve estimates decreased by approximately $ 320 largely driven by group long-term disability claim incidence lower than prior assumptions together with strong recoveries on prior incurral year claims, and a New York Paid Family Leave refund.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $ 50 largely driven by lower-than-previously expected claim incidence in both Group Life Premium Waiver and Group Accidental Death & Dismemberment.
Supplemental Accident & Health- Prior period reserve estimates decreased by approximately $ 10 driven by lower-than-previously expected claim incidence during the pandemic.
Re-estimates of prior incurral years reserves for the nine months ended September 30, 2020
Group disability- Prior period reserve estimates decreased by approximately $ 293 largely driven by group long-term
disability lower claim incidence and higher recoveries on prior incurral year claims, and a refund on the New York Paid Family Leave program.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $ 50 largely driven by lower-than-previously expected claim incidence in group life premium waiver.
Supplemental Accident & Health- Prior period reserve estimates decreased by approximately $ 19 driven by lower-than-expected emergence of prior year claims, especially for voluntary critical Illness and voluntary accident products.
10. RESERVE FOR FUTURE POLICY BENEFITS
Changes in Reserves for Future Policy Benefits[1]
For the nine months ended September 30,
2021 2020
Beginning liability balance $ 638 $ 635
Incurred 45 74
Paid ( 74 ) ( 67 )
Change in unrealized investment gains and losses ( 7 ) 8
Ending liability balance $ 602 $ 650
Ending reinsurance recoverable asset $ 22 $ 29
[1]Reserves for future policy benefits includes paid-up life insurance and whole-life policies resulting from conversion from group life policies included within the Group Benefits segment and reserves for run-off structured settlement and terminal funding agreement liabilities which are in the Corporate category.
11. DEBT
Senior Notes
On September 21, 2021, The Hartford issued $ 600 of 2.9 % senior notes (“2.9% Notes”) due September 15, 2051 for net proceeds of approximately $ 588 , after deducting underwriting discounts and expenses from the offering. Interest is payable semi-annually in arrears on March 15 and September 15, commencing March 15, 2022. The Hartford, at its option, can redeem the 2.9% Notes at any time, in whole or part, at a redemption price equal to the greater of 100 % of the principal amount being redeemed or a make-whole amount based on a comparable maturity US Treasury plus 20 basis points, plus any accrued and unpaid interest, except the 2.9% Notes may be redeemed at par within six months of maturity.
Revolving Credit Facility
In 2018, The Hartford entered into a $ 750 senior unsecured five-year revolving credit facility (the "Credit Facility"). As of September 30, 2021, no borrowings were outstanding, no letters of credit were issued under the Credit Facility and The Hartford was in compliance with all financial covenants.
On October 27, 2021, The Hartford amended and restated the Credit Facility (as amended, the “2021 Credit Facility”) which, among other changes, extends the term of the facility through October 27, 2026, includes provisions for determining LIBOR successor rates, and resets the level of The Hartford’s minimum consolidated net worth financial covenant to $11.25 billion, excluding AOCI. The 2021 Credit Facility provides up to $ 750 of
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Note 11 - Debt
T HE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
unsecured credit, including $ 100 available to support letters of credit. Under the 2021 Credit Facility:
• Revolving loans may be in multiple currencies.
• U.S. dollar loans will bear interest at a floating rate equivalent to an indexed rate that varies depending on the type of borrowing plus a basis point spread based on The Hartford's credit rating and will mature no later than October 27, 2026.
• Letters of credit bear a fee based on The Hartford's credit rating and expire no later than October 27, 2027.
The 2021 Credit Facility limits the ratio of senior debt to capitalization, excluding AOCI, at 35% and includes other customary covenants. The 2021 Credit Facility is for general corporate purposes.
For further information regarding the Credit Facility, see Note 14 - Debt of Notes to Consolidated Financial Statements included in the Company’s 2020 Form 10-K Annual Report.
12. INCOME TAXES
INCOME TAX EXPENSE
Income Tax Rate Reconciliation
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Tax provision at U.S. federal statutory rate $ 122 $ 111 $ 419 $ 308
Tax-exempt interest ( 10 ) ( 12 ) ( 31 ) ( 36 )
Increase in deferred tax valuation allowance ( 1 ) 6 6 19
Sale of business — ( 8 ) ( 5 ) ( 8 )
Earnings on corporate owned life insurance ( 5 ) ( 6 ) ( 16 ) ( 3 )
Carryback benefit — ( 5 ) — ( 5 )
Tax credits ( 8 ) ( 4 ) ( 9 ) ( 4 )
Tax law change 1 ( 6 ) ( 6 ) ( 6 )
Other 2 ( 3 ) 2 3
Provision for income taxes $ 101 $ 73 $ 360 $ 268
UNCERTAIN TAX POSITIONS
Rollforward of Unrecognized Tax Benefits
Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020
Balance, beginning of period $ 15 $ 14 $ 15 $ 14
Gross increases - tax positions in prior period — — — —
Gross decreases - tax positions in prior period — — — —
Gross increases - tax positions in current period 5 1 5 1
Lapse of statute of limitations ( 5 ) — ( 5 ) —
Balance, end of period $ 15 $ 15 $ 15 $ 15
The entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate in the period of the release. The Company recognized $ 5 of its previously unrecognized tax benefits associated with dividends from segregated asset accounts of the life and annuity business sold in 2018. This liability was subject to a tax indemnification agreement and a corresponding receivable included in other assets has been taken down upon lapse of the statute of limitations.
OTHER TAX MATTERS
On June 10, 2021, the United Kingdom enacted Finance Bill 2021, which included an increase in the corporate tax rate from 19% to 25%, effective April 1, 2023. In the nine months ended September 30, 2021, the Company recorded a tax benefit of $ 6 , which reflects the estimated benefit of the change in tax rate on the net deferred tax assets of its U.K. subsidiaries.
On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act established new tax provisions including, but not limited to: (1) five-year carryback of net operating losses ("NOLs") generated in 2018, 2019 and 2020; (2) accelerated refund of alternative minimum tax ("AMT") credit carryforwards; and (3) retroactive changes to allow accelerated depreciation for certain depreciable property.
For the period ending September 30, 2020 the Company recorded a tax benefit of $ 11 related to the carryback of losses from the Navigators Group 2019 pre-acquisition tax return to recover taxes paid in prior years at the previous statutory tax rate of 35%, of which $ 5 related to the existing insurance company carryback provision and $ 6 was due to the non-insurance carryback provision of the CARES Act.
For the nine months ended September 30, 2021 and 2020, the Company recorded a tax benefit of $ 5 and $ 8 related to the excess tax basis over GAAP basis on the sale of the Continental Europe Operations. For discussion of this transaction, refer to Note 17 - Business Disposition.
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Note 12 - Income Taxes
T HE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
As of September 30, 2021, the Company has foreign net operating losses of $ 23 for which a valuation allowance of $ 4 has been established. While the foreign net operating losses ("NOLs") do not expire, this assessment reflects uncertainty in the Company's ability to generate sufficient taxable income in the near term in those specific jurisdictions.
Management has assessed the need for a valuation allowance against its deferred tax assets based on tax character and jurisdiction. In making the assessment, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryovers, taxable income in open carry back years and other
tax planning strategies which management views as prudent and feasible.
The federal income tax audits for the Company have been completed through 2013, and the Company is not currently under federal income tax examination for any open years. The statute of limitations is closed through the 2017 tax year with the exception of NOL carryforwards utilized in open tax years. Management believes that adequate provision has been made in the Company's Condensed Consolidated Financial Statements for any potential adjustments that may result from tax examinations and other tax-related matters for all open tax years.
13. COMMITMENTS AND CONTINGENCIES
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes liabilities for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated liability at the low end of the range of losses.
LITIGATION
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties related to sexual molestation and sexual abuse claims discussed in Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of this Form 10-Q and in Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses, of the Company's Annual Report on Form 10-K for the year ended December 31, 2020, and in the following discussion under the caption “COVID-19 Pandemic Business Income Insurance Coverage Litigation” and under the caption “Run-off Asbestos and Environmental Claims,” management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. In addition to the matter described below, these actions include putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper sales or underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the
ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
COVID-19 Pandemic Business Income Insurance Coverage Litigation
Like many others in the property and casualty insurance industry, beginning in April 2020, various direct and indirect subsidiaries of the Company (collectively the "Hartford Writing Companies”), and in some instances the Company itself, have been served as defendants in lawsuits seeking insurance coverage under commercial insurance policies issued by the Hartford Writing Companies for alleged losses resulting from the shutdown or suspension of their businesses due to the spread of COVID-19. More than 260 such lawsuits have been filed, of which more than 60 purport to be filed on behalf of broad nationwide or statewide classes of policyholders. These lawsuits have been filed in state and federal courts in roughly 34 states. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts, interest, and attorneys' fees. Many of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages.
The Company and its subsidiaries deny the allegations and continue to vigorously defend these suits. The Hartford Writing Companies maintain that they have no coverage obligations with respect to these suits for business income allegedly lost by the plaintiffs due to the COVID-19 pandemic based on the clear terms of the applicable insurance policies. Although the policy terms vary depending, among other things, upon the size, nature, and location of the policyholder’s business, in general, the claims at issue in these lawsuits were denied because the claimant identified no direct physical damage or loss to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage in the
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Note 13 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. In addition, the vast majority of the policies at issue expressly exclude from coverage any loss caused directly or indirectly by the presence, growth, proliferation, spread or activity of a virus, subject to a narrow set of exceptions not applicable in connection with this pandemic, and contain a pollution and contamination exclusion that, among other things, expressly excludes from coverage any loss caused by material that threatens human health or welfare.
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present numerous uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any state or nationwide classes will be certified, and the size and scope of any such classes. The legal theories advocated by plaintiffs vary significantly by case as do the state laws that govern the policy interpretation. These lawsuits are at various stages of litigation; some are in the earliest stages of litigation, many complaints are in the process of being amended, some have been dismissed voluntarily and may be refiled, while others have been dismissed through rulings in favor of the Hartford Writing Companies. Discovery is underway in certain single plaintiff cases and class actions. More than 40 policyholders have appealed dismissals in favor of the Hartford Writing Companies. While these appeals are at various stages of the process, no decisions have been issued at this time. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, almost none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the large number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate, could have a material adverse effect on the Company’s consolidated operating results.
Run-off Asbestos and Environmental Claims
The Company continues to receive A&E claims. Asbestos claims relate primarily to bodily injuries asserted by people who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs.
The vast majority of the Company's exposure to A&E relates to Run-off A&E, reported within the P&C Other Operations segment. In addition, since 1986, the Company has written asbestos and environmental exposures under general liability policies and pollution liability under homeowners policies, which are reported in the Commercial Lines and Personal Lines segments.
Prior to 1986, the Company wrote several different categories of insurance contracts that may cover A&E claims. First, the Company wrote primary policies providing the first layer of coverage in an insured’s liability program. Second, the
Company wrote excess and umbrella policies providing higher layers of coverage for losses that exhaust the limits of underlying coverage. Third, the Company acted as a reinsurer assuming a portion of those risks assumed by other insurers writing primary, excess, umbrella and reinsurance coverages.
Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid gross losses and expenses related to environmental and particularly asbestos claims. The degree of variability of gross reserve estimates for these exposures is significantly greater than for other more traditional exposures.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation, and inconsistent emerging legal doctrines. Furthermore, over time, insurers, including the Company, have experienced significant changes in the rate at which asbestos claims are brought, the claims experience of particular insureds, and the value of claims, making predictions of future exposure from past experience uncertain. Plaintiffs and insureds also have sought to use bankruptcy proceedings, including “pre-packaged” bankruptcies, to accelerate and increase loss payments by insurers. In addition, some policyholders have asserted new classes of claims for coverages to which an aggregate limit of liability may not apply. Further uncertainties include insolvencies of other carriers and unanticipated developments pertaining to the Company’s ability to recover reinsurance for A&E claims. Management believes these issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include expanding theories of liability and damages, the risks inherent in major litigation, inconsistent decisions concerning the existence and scope of coverage for environmental claims, and uncertainty as to the monetary amount being sought by the claimant from the insured.
The reporting pattern for assumed reinsurance claims, including those related to A&E claims, is much longer than for direct claims. In many instances, it takes months or years to determine that the policyholder’s own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves.
It is also not possible to predict changes in the legal and legislative environment and their effect on the future development of A&E claims.
Given the factors described above, the Company believes the actuarial tools and other techniques it employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure are less precise in estimating reserves for A&E exposures. For this reason, the Company principally relies on exposure-based analysis to estimate the ultimate costs of these claims, both gross and net of reinsurance, and regularly evaluates new account information in assessing its potential A&E exposures. The Company supplements this exposure-based analysis with evaluations of the Company’s historical direct net loss and expense paid and reported experience, and net loss and expense paid and reported experience by calendar and/or report year, to assess any emerging trends, fluctuations
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Note 13 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
or characteristics suggested by the aggregate paid and reported activity.
While the Company believes that its current A&E reserves are appropriate, significant uncertainties limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not estimable now, could be material to The Hartford’s consolidated operating results and liquidity.
For its Run-off A&E, as of September 30, 2021, the Company reported $ 621 of net asbestos reserves and $ 25 of net environmental reserves. While the Company believes that its current Run-off A&E reserves are appropriate, significant uncertainties limit our ability to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not reasonably estimable now, could be material to The Hartford's consolidated operating results and liquidity.
The Company’s A&E ADC reinsurance agreement with NICO reinsures substantially all A&E reserve development for 2016 and prior accident years, including Run-off A&E and A&E reserves included in Commercial Lines and Personal Lines. The A&E ADC has a coverage limit of $ 1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $ 1.7 billion. As of September 30, 2021 , the Company has incurred $ 860 in cumulative adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, leaving $ 640 of coverage available for future adverse net reserve development, if any. The Company has recorded a $ 210 deferred gain within other liabilities for losses economically ceded to NICO but for which the benefit is not recognized in earnings until later periods. Cumulative adverse development of A&E claims for accident years 2016 and prior could ultimately exceed the $ 1.5 billion treaty limit in which case any adverse development in excess of the treaty limit would be absorbed as a charge to earnings by the Company. In these scenarios, the effect of these charges could be material to the Company’s consolidated operating results and liquidity. For more information on the A&E ADC, refer to Note 12, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements included in the Company's 2020 Form 10-K Annual Report.
DERIVATIVE COMMITMENTS
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical agencies, of the individual legal entity that entered into the derivative agreement. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could, in certain instances, terminate the agreements and demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative
instruments with credit-risk-related contingent features that are in a net liability position as of September 30, 2021 was $ 52 for which the legal entities have posted collateral of $ 55 in the normal course of business. Based on derivative market values as of September 30, 2021, a downgrade of the current financial strength ratings by either Moody's or S&P would no t require additional assets to be posted as collateral. This requirement could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the additional collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
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Note 14 - Equity
T HE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. EQUITY
EQUITY REPURCHASE PROGRAM
During the nine months ended September 30, 2021, the Company repurchased $ 1.2 billion ( 19 million shares) of common stock under the share repurchase program that is effective January 1, 2021 until December 31, 2022 as authorized by the Board of Directors in December 2020. The share repurchase program was initially authorized at $ 1.5 billion and, in April 2021, was increased to $ 2.5 billion. In October 2021, the Company announced an additional increase in the
share repurchase authorization to $ 3.0 billion, which remains effective until December 31, 2022. During the period October 1, 2021 through October 27, 2021, the Company repurchased $ 108 ( 1.5 million shares) under this repurchase program. The timing of future repurchases will be 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.
During the nine months ended September 30, 2020, The Company repurchased $ 150 ( 2.7 million shares) of common stock under the previous share repurchase program that expired December 31, 2020.
15. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in AOCI, Net of Tax for the Three Months Ended September 30, 2021
Changes in
Net Unrealized Gain on Fixed Maturities Unrealized Loss on Fixed Maturities with ACL Net Gain on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ 2,204 $ ( 2 ) $ 12 $ 46 $ ( 1,690 ) $ 570
OCI before reclassifications ( 231 ) — 8 ( 4 ) 1 ( 226 )
Amounts reclassified from AOCI ( 43 ) — ( 7 ) — 13 ( 37 )
OCI, net of tax ( 274 ) — 1 ( 4 ) 14 ( 263 )
Ending balance $ 1,930 $ ( 2 ) $ 13 $ 42 $ ( 1,676 ) $ 307
Changes in AOCI, Net of Tax for the Nine Months Ended September 30, 2021
Changes in
Net Unrealized Gain on Fixed Maturities Unrealized Loss on Fixed Maturities with ACL Net Gain on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ 2,834 $ ( 2 ) $ 12 $ 43 $ ( 1,717 ) $ 1,170
OCI before reclassifications ( 816 ) — 22 ( 1 ) ( 1 ) ( 796 )
Amounts reclassified from AOCI ( 88 ) — ( 21 ) — 42 ( 67 )
OCI, net of tax ( 904 ) — 1 ( 1 ) 41 ( 863 )
Ending balance $ 1,930 $ ( 2 ) $ 13 $ 42 $ ( 1,676 ) $ 307
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Note 15 - Accumulated Other Comprehensive Income (Loss), Net of Tax
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications from AOCI
Three Months Ended September 30, 2021 Nine Months Ended September 30, 2021 Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Gain on Fixed Maturities
Available-for-sale fixed maturities $ 55 $ 112 Net realized gains (losses)
55 112 Total before tax
12 24 Income tax expense
$ 43 $ 88 Net income
Net Gains on Cash Flow Hedging Instruments
Interest rate swaps $ 11 $ 31 Net investment income
Interest rate swaps ( 3 ) ( 8 ) Interest expense
Foreign currency swaps 1 3 Net investment income
9 26 Total before tax
2 5 Income tax expense
$ 7 $ 21 Net income
Pension and Other Postretirement Plan Adjustments
Amortization of prior service credit $ 2 $ 5 Insurance operating costs and other expenses
Amortization of actuarial loss ( 19 ) ( 58 ) Insurance operating costs and other expenses
( 17 ) ( 53 ) Total before tax
( 4 ) ( 11 ) Income tax expense
$ ( 13 ) $ ( 42 ) Net income
Total amounts reclassified from AOCI $ 37 $ 67 Net income
Changes in AOCI, Net of Tax for the Three Months Ended September 30, 2020
Changes in
Net Unrealized Gain on Fixed Maturities Net Unrealized Loss on Fixed Maturities with ACL Net Gain on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ 2,055 $ ( 2 ) $ 48 $ 27 $ ( 1,649 ) $ 479
OCI before reclassifications 388 — ( 10 ) 6 — 384
Amounts reclassified from AOCI ( 12 ) — ( 7 ) — 12 ( 7 )
OCI, net of tax 376 — ( 17 ) 6 12 377
Ending balance $ 2,431 $ ( 2 ) $ 31 $ 33 $ ( 1,637 ) $ 856
Changes in AOCI, Net of Tax for the Nine Months Ended September 30, 2020
Changes in
Net Unrealized Gain on Fixed Maturities Net Unrealized Loss on Fixed Maturities with ACL Net Gain on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ 1,684 $ ( 3 ) $ 9 $ 34 $ ( 1,672 ) $ 52
OCI before reclassifications 842 1 37 ( 1 ) ( 1 ) 878
Amounts reclassified from AOCI ( 95 ) — ( 15 ) — 36 ( 74 )
OCI, net of tax 747 1 22 ( 1 ) 35 804
Ending balance $ 2,431 $ ( 2 ) $ 31 $ 33 $ ( 1,637 ) $ 856
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Note 15 - Accumulated Other Comprehensive Income (Loss), Net of Tax
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reclassifications from AOCI
Three Months Ended September 30, 2020 Nine Months Ended September 30, 2020 Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Gain on Fixed Maturities
Available-for-sale fixed maturities $ 15 $ 120 Net realized gains (losses)
15 120 Total before tax
3 25 Income tax expense
$ 12 $ 95 Net income
Net Gains on Cash Flow Hedging Instruments
Interest rate swaps $ 9 $ 19 Net investment income
Interest rate swaps ( 2 ) ( 4 ) Interest expense
Foreign currency swaps 1 3 Net investment income
Foreign currency swaps 1 1 Net realized gains (losses)
9 19 Total before tax
2 4 Income tax expense
$ 7 $ 15 Net income
Pension and Other Postretirement Plan Adjustments
Amortization of prior service credit $ 2 $ 5 Insurance operating costs and other expenses
Amortization of actuarial loss ( 17 ) ( 50 ) Insurance operating costs and other expenses
( 15 ) ( 45 ) Total before tax
( 3 ) ( 9 ) Income tax expense
$ ( 12 ) $ ( 36 ) Net income
Total amounts reclassified from AOCI $ 7 $ 74 Net income
16. EMPLOYEE BENEFIT PLANS
The Company’s employee benefit plans are described in Note 19 - Employee Benefit Plans of Notes to Consolidated Financial Statements included in The Hartford’s 2020 Annual Report on Form 10-K. Net periodic cost (benefit) is recognized in insurance operating costs and other expenses in the condensed consolidated statement of operations.
Based on the funded status of the U.S. qualified defined benefit
pension plan, the Company does not anticipate making a contribution to the plan in 2021 .
Net Periodic Cost (Benefit)
Pension Benefits Other Postretirement Benefits
Three Months Ended September 30, Nine Months Ended September 30, Three Months Ended September 30, Nine Months Ended September 30,
2021 2020 2021 2020 2021 2020 2021 2020
Service cost $ 1 $ 1 $ 3 $ 3 $ — $ — $ — $ —
Interest cost 24 31 71 95 — 1 2 4
Expected return on plan assets ( 51 ) ( 53 ) ( 153 ) ( 161 ) — — ( 2 ) ( 2 )
Amortization of prior service credit — — — — ( 2 ) ( 2 ) ( 5 ) ( 5 )
Amortization of actuarial loss 17 15 52 45 2 2 6 5
Net periodic cost (benefit) $ ( 9 ) $ ( 6 ) $ ( 27 ) $ ( 18 ) $ — $ 1 $ 1 $ 2
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Note 16 - Business Disposition
T HE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17. BUSINESS DISPOSITION
Sale of Continental Europe Operations
On September 30, 2020, the Company entered into a definitive agreement to sell its Continental Europe Operations consisting of multiple arrangements designed as a single transaction. The Continental Europe Operations are included in the Commercial Lines reporting segment. Revenues and earnings are not material to the Company's consolidated results of operations for the three and nine months ended September 30, 2021 and 2020. The pending sale resulted in an estimated loss on the
sale of approximately $ 68 , before tax, including $ 20 , before tax, in the nine months ended September 30, 2021, which was recorded within net realized gains (losses). The accrual for the estimated before tax loss is included as a reduction of the carrying value of assets held for sale in the Company's Condensed Consolidated Balance Sheets as of September 30, 2021. The transaction is expected to close in the fourth quarter of 2021, subject to customary closing conditions, including regulatory approvals.
Carrying Value of Assets and Liabilities to be Transferred in Connection With the Sale [1]
As of September 30, 2021 As of December 31, 2020
Assets
Investments and cash $ 153 $ 142
Reinsurance recoverables and other 14 35
Total assets held for sale 167 177
Liabilities
Unpaid losses and loss adjustment expenses 82 84
Unearned premiums 19 31
Other liabilities 50 43
Total liabilities held for sale $ 151 $ 158
[1]As of September 30, 2021 and December 31, 2020, the estimated fair value of the disposal group was $ 12 and $ 14 , respectively, based on the estimated consideration to be received less cost to sell. Within the disposal group, as of September 30, 2021 and December 31, 2020, investments in fixed maturities and short-term investments, which are measured at fair value on a recurring basis, had a fair value of $ 79 and $ 84 , respectively, of which $ 2 and $ 1 , respectively, was based on quoted prices in active markets for identical assets and $ 77 and $ 83 , respectively, was based on significant observable inputs.The remaining fair value less costs to sell for the disposal group as of September 30, 2021 and December 31, 2020 was ($ 67 ) and ($ 70 ), respectively, which is measured on a nonrecurring basis using significant unobservable inputs. See Note 4—Fair Value Measurements for more information .
18. RESTRUCTURING AND OTHER COSTS
In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, on July 30, 2020 the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next. Hartford Next is intended to reduce annual insurance operating costs and other expenses through reduction of the Company's headcount, investment in information technology ("IT") to further enhance our capabilities, and other activities. The activities are expected to be substantially complete by the end of 2022.
Termination benefits related to workforce reductions and professional fees are included within restructuring and other costs in the Condensed Consolidated Statement of Operations and unpaid restructuring costs are included in other liabilities in
the September 30, 2021 Condensed Consolidated Balance Sheet. In the nine months ended September 30, 2021, the severance benefits accrual was reduced $ 24 due to more recent experience of higher than expected voluntary attrition. Subsequent to September 30, 2021, the Company expects to incur additional costs including amortization of right of use assets and other lease exit costs, other IT costs to retire applications, professional fees and other expenses. Total restructuring and other costs are expected to be approximately $ 133 , before tax, and are being recognized in Corporate for segment reporting. The estimated restructuring and other costs for future periods do not include all costs associated with the real estate consolidation plan as those plans are still being finalized.
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Note 18 - Restructuring and Other Costs
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Restructuring and Other Costs, Before Tax
Incurred in the Three Months Ended September 30, Incurred in the Nine Months Ended September 30, Cumulative Incurred Through September 30, 2021 Total Amount Expected to be Incurred
2021 2020 2021 2020
Severance benefits $ ( 15 ) $ 78 $ ( 24 ) $ 78 $ 49 $ 49
IT costs 2 — 6 — 8 24
Professional fees and other expenses 1 9 17 9 46 60
Total restructuring and other costs, before tax $ ( 12 ) $ 87 $ ( 1 ) $ 87 $ 103 $ 133
Accrued Restructuring and Other Costs
Nine Months Ended September 30, 2021
Severance Benefits and Related Costs IT Costs Professional Fees and Other Total Restructuring and Other Costs Liability
Balance, beginning of period $ 54 $ — $ — $ 54
Incurred ( 24 ) 6 17 ( 1 )
Payments ( 10 ) ( 6 ) ( 17 ) ( 33 )
Balance, end of period $ 20 $ — $ — $ 20
Accrued Restructuring and Other Costs
Nine Months Ended September 30, 2020
Severance Benefits and Related Costs IT Costs Professional Fees and Other Total Restructuring and Other Costs Liability
Balance, beginning of period $ — $ — $ — $ —
Incurred 78 — 9 87
Payments ( 3 ) — ( 9 ) ( 12 )
Balance, end of period $ 75 $ — $ — $ 75
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Index to MD&A
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.