Item 2. Management’s Discussion and Analysis
Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in millions except for per share data, unless otherwise stated)
The Hartford provides projections and other forward-looking information in the following discussions, which contain many forward-looking statements, particularly relating to the Company’s future financial performance. These forward-looking statements are estimates based on information currently available to the Company, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to the cautionary statements set forth on pages 4 and 5 of this Form 10-Q. Actual results are likely to differ, and in the past have differed, materially from those forecast by the Company, depending on the outcome of various factors, including, but not limited to, those set forth in the following discussion; Part I, Item 1A, Risk Factors in The Hartford’s 2021 Form 10-K Annual Report; and our other filings with the Securities and Exchange Commission. The Hartford undertakes no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise.
On December 29, 2021, the Company completed the sale of Navigators Holdings (Europe) N.V., a Belgium holding company, and its subsidiaries, Bracht, Deckers & Mackelbert N.V. and Assurances Contintales Contintale Verzekeringen N.V., collectively referred to as "Continental Europe Operations."
Certain reclassifications have been made to historical financial information presented in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") to conform to the current period presentation.
The Hartford defines increases or decreases greater than or equal to 200% as “NM” or not meaningful.
INDEX
Description Page
Key Performance Measures and Ratios
49
The Hartford's Operations
55
Financial Highlights
57
Consolidated Results of Operations
58
Investment Results
61
Critical Accounting Estimates
63
Commercial Lines
69
Personal Lines
74
Property & Casualty Other Operations
78
Group Benefits
79
Hartford Funds
81
Corporate
83
Enterprise Risk Management
84
Capital Resources and Liquidity
94
Impact of New Accounting Standards
101
Throughout the MD&A, we use certain terms and abbreviations, the more commonly used are summarized in the Acronyms section.
KEY PERFORMANCE MEASURES AND RATIOS
The Company considers the measures and ratios in the following discussion to be key performance indicators for its businesses. Management believes that these ratios and measures are useful in understanding the underlying trends in The Hartford’s businesses. However, these key performance indicators should only be used in conjunction with, and not in lieu of, the results presented in the segment discussions that follow in this MD&A. These ratios and measures may not be comparable to other performance measures used by the Company’s competitors.
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Definitions of Non-GAAP and Other Measures and Ratios
Assets Under Management ("AUM")- Include mutual fund and exchange-traded funds ("ETF") assets. AUM is a measure used by the Company's Hartford Funds segment because a significant portion of the segments’s revenues and expenses are based upon asset values. These revenues and expenses increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows.
Book Value per Diluted Share excluding accumulated other comprehensive income ("AOCI")- This is a non-GAAP per share measure that i s calculated by dividing (a) common stockholders' equity, excluding AOCI, after tax, by (b) common shares outstanding and dilutive potential common shares. The Company provides this measure to enable investors to analyze the amount of the Company's net worth that is primarily attributable to the Company's business operations. The Company believes that excluding AOCI from the numerator is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in interest rates. Book value per diluted share is the most directly comparable U.S. GAAP measure.
Combined Ratio- The sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses.
Core Earnings- The Hartford uses the non-GAAP measure core earnings as an important measure of the Company’s operating performance. The Hartford believes that core earnings provides investors with a valuable measure of the performance of the Company’s ongoing businesses because it reveals trends in our insurance and financial services businesses that may be obscured by including the net effect of certain items. Therefore, the following items are excluded from core earnings:
• Certain realized gains and losses - Some realized gains and losses are primarily driven by investment decisions and external economic developments, the nature and timing of which are unrelated to the insurance and underwriting aspects of our business. Accordingly, core earnings excludes the effect of all realized gains and losses that tend to be highly variable from period to period based on capital market conditions. The Hartford believes, however, that some realized gains and losses are integrally related to our insurance operations, so core earnings includes net realized gains and losses such as net periodic settlements on credit derivatives. These net realized gains and losses are directly related to an offsetting item included in the income statement such as net investment income.
• Restructuring and other costs - Costs incurred as part of a restructuring plan are not a recurring operating expense of the business.
• Loss on extinguishment of debt - Largely consisting of make-whole payments or tender premiums upon paying debt off before maturity, these losses are not a recurring operating expense of the business.
• Gains and losses on reinsurance transactions - Gains or losses on reinsurance, such as those entered into upon sale of a business or to reinsure loss reserves, are not a recurring operating expense of the business.
• Integration and other non-recurring M&A costs - These costs, including transaction costs incurred in connection with an acquired business, are incurred over a short period of time and do not represent an ongoing operating expense of the business.
• Change in loss reserves upon acquisition of a business - These changes in loss reserves are excluded from core earnings because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition.
• Deferred gain resulting from retroactive reinsurance and subsequent changes in the deferred gain - Retroactive reinsurance agreements economically transfer risk to the reinsurers and including the full benefit from retroactive reinsurance in core earnings provides greater insight into the economics of the business.
• Change in valuation allowance on deferred taxes related to non-core components of before tax income - These changes in valuation allowances are excluded from core earnings because they relate to non-core components of before tax income, such as tax attributes like capital loss carryforwards.
• Results of discontinued operations - These results are excluded from core earnings for businesses sold or held for sale because such results could obscure the ability to compare period over period results for our ongoing businesses.
In addition to the above components of net income available to common stockholders that are excluded from core earnings, preferred stock dividends declared, which are excluded from net income available to common stockholders, are included in the determination of core earnings. Preferred stock dividends are a cost of financing more akin to interest expense on debt and are expected to be a recurring expense as long as the preferred stock is outstanding.
Net income (loss) and net income (loss) available to common stockholders are the most directly comparable U.S. GAAP measures to core earnings. Core earnings should not be considered as a substitute for net income (loss) or net income (loss) available to common stockholders and does not reflect the overall profitability of the Company’s business. Therefore, The Hartford believes that it is useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, and core earnings when reviewing the Company’s performance.
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Reconciliation of Net Income to Core Earnings
Three Months Ended March 31,
2022 2021
Net income $ 445 $ 249
Preferred stock dividends 5 5
Net income available to common stockholders 440 244
Adjustments to reconcile net income available to common stockholders to core earnings:
Net realized losses (gains) excluded from core earnings, before tax 146 (77)
Restructuring and other costs, before tax 5 11
Integration and other non-recurring M&A costs, before tax 5 9
Change in deferred gain on retroactive reinsurance, before tax — 6
Income tax expense (benefit) [1] (35) 10
Core earnings $ 561 $ 203
[1] Primarily represents the federal income tax expense (benefit) related to before tax items not included in core earnings and includes the effect of changes in net deferred taxes due to changes in enacted tax rates.
Core Earnings Margin- The Hartford uses the non-GAAP measure core earnings margin to evaluate, and believes it is an important measure of, the Group Benefits segment's operating performance. Core earnings margin is calculated by dividing core earnings by revenues, excluding buyouts and realized gains (losses). Net income margin, calculated by dividing net income by revenues, is the most directly comparable U.S. GAAP measure. The Company believes that core earnings margin provides investors with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the effect of buyouts and realized gains (losses) as well as other items excluded in the calculation of core earnings. Core earnings margin should not be considered as a substitute for net income margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important for investors to evaluate both core earnings margin and net income margin when reviewing performance. A reconciliation of net income margin to core earnings margin is set forth in the Results of Operations section within MD&A - Group Benefits.
Current Accident Year Catastrophe Ratio- A component of the loss and loss adjustment expense ratio, represents the ratio of catastrophe losses incurred in the current accident year (net of reinsurance) to earned premiums. For U.S. events, a catastrophe is an event that causes $25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers, as defined by the Property Claim Services office of Verisk. For international events, the Company's approach is similar, informed, in part, by how Lloyd's of London defines major losses. Lloyd's of London is an insurance market-place operating worldwide ("Lloyd's"). Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The current accident year catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums.
Expense Ratio- For the underwriting segments of Commercial Lines and Personal Lines is the ratio of underwriting expenses less fee income, to earned premiums. Underwriting expenses include the amortization of deferred policy acquisition costs ("DAC") and insurance operating costs and expenses, including certain centralized services costs and
bad debt expense. DAC include commissions, taxes, licenses and fees and other incremental direct underwriting expenses and are amortized over the policy term.
The expense ratio for Group Benefits is expressed as the ratio of insurance operating costs and other expenses including amortization of intangibles and amortization of DAC, to premiums and other considerations, excluding buyout premiums.
The expense ratio for Commercial Lines, Personal Lines and Group Benefits does not include integration and other transaction costs associated with an acquired business.
Fee Income- Is largely driven from amounts earned as a result of contractually defined percentages of assets under management in our Hartford Funds business. These fees are generally earned on a daily basis. Therefore, the growth in assets under management either through net inflows or favorable market performance will have a favorable impact on fee income. Conversely, either net outflows or unfavorable market performance will reduce fee income.
Gross New Business Premium- Represents the amount of premiums charged, before ceded reinsurance, for policies issued to customers who were not insured with the Company in the previous policy term. Gross new business premium plus gross renewal written premium less ceded reinsurance equals total written premium.
Loss and Loss Adjustment Expense Ratio- A measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses and loss adjustment expenses incurred for both the current and prior accident years. Among other factors, the loss and loss adjustment expense ratio needed for the Company to achieve its targeted return on equity ("ROE") fluctuates from year to year based on changes in the expected investment yield over the claim settlement period, the timing of expected claim settlements and the targeted returns set by management based on the competitive environment.
The loss and loss adjustment expense ratio is affected by claim frequency and claim severity, particularly for shorter-tail property lines of business, where the emergence of claim frequency and severity is credible and likely indicative of ultimate losses. Claim
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frequency represents the percentage change in the average number of reported claims per unit of exposure in the current accident year compared to that of the previous accident year. Claim severity represents the percentage change in the estimated average cost per claim in the current accident year compared to that of the previous accident year. As one of the factors used to determine pricing, the Company’s practice is to first make an overall assumption about claim frequency and severity for a given line of business and then, as part of the rate-making process, adjust the assumption as appropriate for the particular state, product or coverage.
Loss and Loss Adjustment Expense Ratio before Catastrophes and Prior Accident Year Development- A measure of the cost of non-catastrophe loss and loss adjustment expenses incurred in the current accident year divided by earned premiums. Management believes that the current accident year loss and loss adjustment expense ratio before catastrophes is a performance measure that is useful to investors as it removes the impact of volatile and unpredictable catastrophe losses and prior accident year development.
Loss Ratio, excluding Buyouts- Utilized for the Group Benefits segment and is expressed as a ratio of benefits, losses and loss adjustment expenses, excluding those related to buyout premiums, to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the profitability of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts.
Mutual Fund and Exchange-Traded Fund Assets- Are owned by the shareholders of those products and not by the Company and, therefore, are not reflected in the Company’s Condensed Consolidated Financial Statements except in instances where the Company seeds new investment products.
Mutual fund and ETF assets are a measure used by the Company primarily because a significant portion of the Company’s Hartford Funds segment revenues and expenses are based upon asset values. These revenues and expenses increase or decrease with a rise or fall in AUM whether caused by changes in the market or through net flows.
Net New Business Premium- Represents the amount of premiums charged, after ceded reinsurance, for policies issued to customers who were not insured with the Company in the previous policy term. Net new business premium plus renewal written premium equals total written premium.
Policy Count Retention- Represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar period before considering policies cancelled subsequent to renewal. Policy count retention is affected by a number of factors, including the percentage of renewal policy quotes accepted and decisions by the Company to non-renew policies because of specific policy underwriting concerns or because of a decision to reduce premium writings in certain classes of business or states. Policy count retention is also affected by advertising and rate actions taken by competitors.
Policies in Force- Represents the number of policies with coverage in effect as of the end of the period. The number of policies in force is a growth measure used for Personal Lines and standard commercial lines (small commercial and middle market lines within middle & large commercial) within Commercial Lines and is affected by both new business growth and policy count retention.
Policyholder Dividend Ratio- The ratio of policyholder dividends to earned premium.
Prior Accident Year Loss and Loss Adjustment Expense Ratio- Represents the increase (decrease) in the estimated cost of settling catastrophe and non-catastrophe claims incurred in prior accident years as recorded in the current calendar year divided by earned premiums.
Reinstatement Premiums- Represents additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of the Company ceding losses to reinsurers.
Renewal Earned Price Increase (Decrease)- Written premiums are earned over the policy term, which is six months for certain Personal Lines automobile business and twelve months for substantially all of the remainder of the Company’s Property and Casualty ("P&C") business. Since the Company earns premiums over the six to twelve month term of the policies, renewal earned price increases (decreases) lag renewal written price increases (decreases) by six to twelve months.
Renewal Written Price Increase (Decrease)- For Commercial Lines, represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure on commercial lines policies that renewed. For Personal Lines, renewal written price increases represent the total change in premium per policy since the prior year on those policies that renewed and includes the combined effect of rate changes, amount of insurance and other changes in exposure. For Personal Lines, other changes in exposure include, but are not limited to, the effect of changes in number of drivers, vehicles and incidents, as well as changes in customer policy elections, such as deductibles and limits. The rate component represents the change in rate filed with and approved by state regulators during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for automobiles, building replacement costs for property and wage inflation for workers’ compensation. A number of factors affect renewal written price increases (decreases) including expected loss costs as projected by the Company’s pricing actuaries, rate filings approved by state regulators, risk selection decisions made by the Company’s underwriters and marketplace competition. Renewal written price changes reflect the property and casualty insurance market cycle. Prices tend to increase for a particular line of business when insurance carriers have incurred significant losses in that line of business in the recent past or the industry as a whole commits less of its capital to writing exposures in that line of business. Prices tend to decrease when recent loss experience has been favorable or when competition among insurance carriers increases. Renewal written price statistics are subject to change from period to period, based on a number of factors, including changes in
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actuarial estimates and the effect of subsequent cancellations and non-renewals, and modifications made to better reflect ultimate pricing achieved.
Return on Assets (“ROA”), Core Earnings- The Company uses this non-GAAP financial measure to evaluate, and believes is an important measure of, the Hartford Funds segment’s operating performance. ROA, core earnings is calculated by dividing annualized core earnings by a daily average AUM. ROA is the most directly comparable U.S. GAAP measure. The Company believes that ROA, core earnings, provides investors with a valuable measure of the performance of the Hartford Funds segment because it reveals trends in our business that may be obscured by the effect of items excluded in the calculation of core earnings. ROA, core earnings, should not be considered as a substitute for ROA and does not reflect the overall profitability of our Hartford Funds business. Therefore, the Company believes it is important for investors to evaluate both ROA, and ROA, core earnings when reviewing the Hartford Funds segment performance. A reconciliation of ROA to ROA, core earnings is set forth in the Results of Operations section within MD&A - Hartford Funds.
Underlying Combined Ratio- This non-GAAP financial measure of underwriting results represents the combined ratio before catastrophes, prior accident year development and current accident year change in loss reserves upon acquisition of a business. Combined ratio is the most directly comparable GAAP measure. The underlying combined ratio represents the combined ratio for the current accident year, excluding the impact of current accident year catastrophes and current accident year change in loss reserves upon acquisition of a business. The Company believes this ratio is an important measure of the trend in profitability since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve development. The changes to loss reserves upon acquisition of a business are excluded from underlying combined ratio because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition as such trends are valuable to our investors' ability to assess the Company's financial performance.
A reconciliation of combined ratio to underlying combined ratio is set forth in the Results of Operations section within MD&A - Commercial Lines and Personal Lines.
Underwriting Gain (Loss)- The Hartford's management evaluates profitability of the Commercial and Personal Lines segments primarily on the basis of underwriting gain or loss. Underwriting gain (loss) is a before tax non-GAAP measure that represents earned premiums less incurred losses, loss adjustment expenses and underwriting expenses. Net income (loss) is the most directly comparable GAAP measure. Underwriting gain (loss) is influenced significantly by earned premium growth and the adequacy of The Hartford's pricing. Underwriting profitability over time is also greatly influenced by The Hartford's underwriting discipline, as management strives to manage exposure to loss through favorable risk selection and diversification, effective management of claims, use of reinsurance and its ability to manage its expenses. The Hartford believes that the measure underwriting gain (loss) provides investors with a valuable measure of profitability, before tax, derived from underwriting activities, which are managed separately from the Company's investing activities.
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Reconciliation of Net Income to Underwriting Gain (Loss)
Three Months Ended March 31,
2022 2021
Commercial Lines
Net income $ 383 $ 129
Adjustments to reconcile net income to underwriting gain (loss):
Net servicing income (1) (2)
Net investment income (333) (327)
Net realized losses (gains) 91 (44)
Other expense 7 4
Income tax expense 95 24
Underwriting gain (loss) $ 242 $ (216)
Personal Lines
Net income $ 77 $ 135
Adjustments to reconcile net income to underwriting gain:
Net servicing income (4) (4)
Net investment income (33) (35)
Net realized losses (gains) 9 (7)
Income tax expense 20 35
Underwriting gain $ 69 $ 124
P&C Other Operations
Net income (loss) $ 8 $ (13)
Adjustments to reconcile net income to underwriting loss:
Net investment income (16) (16)
Net realized losses (gains) 4 (2)
Income tax expense (benefit) 1 (4)
Underwriting loss $ (3) $ (35)
Written and Earned Premiums- Written premium represents the amount of premiums charged for policies issued, net of reinsurance, during a fiscal period. Premiums are considered earned and are included in the financial results on a pro rata basis over the policy period. Management believes that written premium is a performance measure that is useful to investors as it reflects current trends in the Company’s sale of property and casualty insurance products. Written and earned premium are recorded net of ceded reinsurance premium.
Traditional life and disability insurance type products, such as those sold by Group Benefits, collect premiums from policyholders in exchange for financial protection for the policyholder from a specified insurable loss, such as death or disability. These premiums together with net investment income earned are used to pay the contractual obligations under these insurance contracts. Two major factors, new sales and persistency, impact premium growth. Sales can increase or decrease in a given year based on a number of factors, including but not limited to, customer demand for the Company’s product offerings, pricing competition, distribution channels and the Company’s reputation and ratings. Persistency refers to the percentage of premium remaining in-force from year-to-year.
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THE HARTFORD’S OPERATIONS
The Hartford conducts business principally in five reporting segments including Commercial Lines, Personal Lines, Property & Casualty Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category reserves for run-off structured settlement and terminal funding agreement liabilities, restructuring costs, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, certain M&A costs, purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments. Corporate also includes investment management fees and expenses related to managing third party business, including management of a portion of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries as well as certain affiliates. In addition, up until June 30, 2021, Corporate included a 9.7% ownership interest in Hopmeadow Holdings LP, the legal entity that acquired Talcott Resolution in May 2018 (Hopmeadow Holdings, LP, Talcott Resolution Life Inc., and its subsidiaries are collectively referred to as "Talcott Resolution"). The sale of Talcott Resolution to a new investor was completed on June 30, 2021. The Company received a total of $217 in connection with the sale of its 9.7% ownership interest, resulting in a realized gain of $46 before tax in 2021.
The Company derives its revenues principally from: (a) premiums earned for insurance coverage provided to insureds; (b) management fees on mutual fund and ETF assets; (c) net investment income; (d) fees earned for services provided to third parties; and (e) net realized gains and losses. Premiums charged for insurance coverage are earned principally on a pro rata basis over the terms of the related policies in-force.
The profitability of the Company's property and casualty insurance businesses over time is greatly influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance, the size of its in force block, actual mortality and morbidity experience, and its ability to manage its expense ratio which it accomplishes through economies of scale and its management of acquisition costs and other underwriting expenses. Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss experience adjusted for known trends, the Company’s response to rate actions taken by competitors, its expense levels and expectations about regulatory and legal developments. The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. For many of its insurance products, the Company is required to obtain approval for its premium rates from state insurance departments and the Lloyd's Syndicate's ability to write business is subject to Lloyd's approval for its premium capacity each year. Most of Personal Lines written premium is associated with our exclusive licensing agreement
with AARP, which is effective through December 31, 2032. This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand.
Similar to property and casualty, profitability of the group benefits business depends, in large part, on the ability to evaluate and price risks appropriately and make reliable estimates of mortality, morbidity, disability and longevity. To manage the pricing risk, Group Benefits generally offers term insurance policies, allowing for the adjustment of rates or policy terms in order to minimize the adverse effect of market trends, loss costs, declining interest rates and other factors. However, as policies are typically sold with rate guarantees of up to three years, pricing for the Company’s products could prove to be inadequate if loss and expense trends emerge adversely during the rate guarantee period or if investment returns are lower than expected at the time the products were sold. For some of its products, the Company is required to obtain approval for its premium rates from state insurance departments. New and renewal business for group benefits business, particularly for long-term disability, are priced using an assumption about expected investment yields over time. While the Company employs asset-liability duration matching strategies to mitigate risk and may use interest-rate sensitive derivatives to hedge its exposure in the Group Benefits investment portfolio, cash flow patterns related to the payment of benefits and claims are uncertain and actual investment yields could differ significantly from expected investment yields, affecting profitability of the business. In addition to appropriately evaluating and pricing risks, the profitability of the Group Benefits business depends on other factors, including the Company’s response to pricing decisions and other actions taken by competitors, its ability to offer voluntary products and self-service capabilities, the persistency of its sold business and its ability to manage its expenses which it seeks to achieve through economies of scale and operating efficiencies.
The financial results of the Company’s mutual fund and ETF businesses depend largely on the amount of assets under management and the level of fees charged based, in part, on asset share class and fund type. Changes in assets under management are driven by the two main factors of net flows and the market return of the funds, which are heavily influenced by the return realized in the equity and bond markets. Net flows are comprised of new sales less redemptions by mutual fund and ETF shareholders. Financial results are highly correlated to the growth in assets under management since these funds generally earn fee income on a daily basis.
The investment return, or yield, on invested assets is an important element of the Company’s earnings since insurance products are priced with the assumption that premiums received can be invested for a period of time before benefits, losses and loss adjustment expenses are paid. Due to the need to maintain sufficient liquidity to satisfy claim obligations, the majority of the Company’s invested assets have been held in available-for-sale securities, including, among other asset classes, corporate bonds, municipal bonds, government debt, short-term debt, mortgage-backed securities, asset-backed securities and collateralized loan obligations. The primary investment objective for the Company is to maximize economic value, consistent with acceptable risk parameters, including the management of credit risk and interest rate sensitivity of invested assets, while
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generating sufficient net of tax income to meet policyholder and corporate obligations. Investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations.
Impact of Ukraine conflict on our results of operations
From the Ukraine conflict, the Company incurred $27 of catastrophe losses, net of reinsurance, in first quarter 2022 that included exposures under political violence and terrorism ("PV&T") policies, including aviation war, as well as under credit and political risk insurance ("CPRI") policies. In the first quarter of 2022, the Company recognized a provision for reinstatement premium of $11 as a result of estimated ceded incurred losses related to the conflict.
The Company’s direct investment exposure is limited to bonds issued by Russian entities with an amortized cost of $16 and a fair value of $7 as of March 31, 2022, recording an allowance for credit losses ("ACL") of $9. The Company does not have any investments in Belarus or Ukraine.
For a discussion of the risks associated with a deterioration in global economic conditions and/or geopolitical conditions, including due to military action, please refer to the Risk Factors in our 2021 Form 10-K, including one entitled “Unfavorable economic, political and global market conditions may adversely impact our business and results of operations” and another entitled “We are vulnerable to losses from catastrophes, both natural and man-made”.
Operational Transformation and Cost Reduction Plan
In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, on July 30, 2020, the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next. Through reduction of its headcount, Information Technology ("IT") investments to further enhance our capabilities, and other activities, relative to 2019, the Company expects to achieve a reduction in annual insurance operating costs and other expenses of approximately $540 by 2022 and $625 by 2023.
To achieve those expected savings, we expect to incur approximately $395 over the course of the program, with $238 expensed cumulatively through March 31, 2022, and expected expenses of $62 over the last nine months of 2022, $38 in 2023, and $57 after 2023, with the expenses after 2023 consisting mostly of amortization of internal use software and capitalized real estate costs. Included in the estimated costs of $395, we expect to incur restructuring costs of approximately $130, including $46 of employee severance, and approximately $84 of other costs, including consulting expenses, lease termination expenses and the cost to retire certain IT applications. Restructuring costs are reported as a charge to net income but not in core earnings.
The following table presents Hartford Next program costs incurred, including restructuring costs, and expense savings realized in the three months ended March 31, 2022 and expected annual costs and expense savings for the full year in 2022 and 2023:
Hartford Next Costs and Expense Savings
Three months ended March 31, 2022 Estimate for 2022 Estimate for 2023
Employee severance $ (2) $ (2) $ —
IT costs to retire applications 2 10 5
Professional fees and other expenses 5 12 —
Estimated restructuring costs 5 20 5
Non-capitalized IT costs 13 45 17
Other costs 3 13 6
Amortization of capitalized IT development costs [1] — 4 9
Amortization of capitalized real estate [2] — 1 1
Estimated costs within core earnings 16 63 33
Total Hartford Next program costs $ 21 $ 83 $ 38
Cumulative savings for the period relative to 2019 (132) (540) (625)
Net expense (savings) before tax: $ (111) $ (457) $ (587)
Net expense (savings) before tax:
Accounted for within core earnings $ (116) $ (477) $ (592)
Restructuring costs recognized outside of core earnings 5 20 5
Net expense (savings) before tax $ (111) $ (457) $ (587)
[1] Does not include approximately $34 of IT asset amortization after 2023.
[2]Does not include approximately $19 of real estate amortization after 2023.
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FINANCIAL HIGHLIGHTS
Net Income Available to Common Stockholders Net Income Available to Common Stockholders per Diluted Share Book Value per Diluted Share
Ý Increased $196 or 80% Ý Increased $0.63 or 94% Þ Decreased $5 or 9.7%
+ A change to favorable P&C prior accident year reserve development
+ Increase in net income available to common stockholders - Decrease in common stockholders' equity largely due to a decrease in AOCI, primarily driven by a change from net unrealized gains to net unrealized losses on available for sale securities as well as common stockholder dividends and share repurchases in excess of net income
+ Share repurchases
+ Lower catastrophe losses
+ In Commercial Lines, higher earned premiums and a lower current accident year loss ratio
+ Reduction in outstanding shares due to share repurchases
+ A decrease in excess mortality losses in group life
- A change to net realized losses
- Higher loss ratio in Group Benefits, excluding the impact of excess mortality
- Higher loss ratio in Personal Lines automobile
- Increase in P&C underwriting expenses and Group Benefits insurance operating costs and other expenses
Investment Yield, After Tax Property & Casualty Combined Ratio Group Benefits Net Income Margin
Þ Decreased 20 bps Þ Improved 13.9 points Þ Decreased 1.0 points
- Lower returns on limited partnerships and other alternative investments
- A change to favorable prior accident year reserve development
- A higher group disability loss ratio due to less favorable prior incurral year development on long-term disability
- Reinvestment at rates below the maturity yield during 2021
- Lower catastrophe losses
- Decrease in COVID-19 incurred losses
- A change from net realized gains to net realized losses in the 2022 period
- Lower current accident year loss ratio before COVID-19 in Commercial Lines
- A higher loss ratio under group accidental death business
+ Higher personal automobile claim frequency and severity
- Higher expense ratio
+ Lower excess mortality in group life
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CONSOLIDATED RESULTS OF OPERATIONS
The Consolidated Results of Operations should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the related Notes as well as with the segment operating results sections of MD&A.
Consolidated Results of Operations
Three Months Ended March 31,
2022 2021 Change
Earned premiums $ 4,651 $ 4,343 7 %
Fee income 362 355 2 %
Net investment income 509 509 — %
Net realized gains (losses) (145) 80 NM
Other revenues 16 12 33 %
Total revenues 5,393 5,299 2 %
Benefits, losses and loss adjustment expenses 3,118 3,350 (7 %)
Amortization of deferred policy acquisition costs 440 416 6 %
Insurance operating costs and other expenses 1,207 1,144 6 %
Interest expense 62 57 9 %
Amortization of other intangible assets 18 18 — %
Restructuring and other costs 5 11 (55 %)
Total benefits, losses and expenses 4,850 4,996 (3 %)
Income, before tax 543 303 79 %
Income tax expense 98 54 81 %
Net income 445 249 79 %
Preferred stock dividends 5 5 — %
Net income available to common stockholders $ 440 $ 244 80 %
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Net income available to common stockholders increased by $196 primarily driven by:
• An increase in P&C underwriting results of $435, before tax, driven by a change to favorable prior accident year development, lower catastrophe losses, the effect of Commercial Lines earned premium growth and a lower Commercial Lines underlying loss and loss adjustment expense ratio, including a benefit from lower COVID-19 losses, partially offset by higher Personal Lines automobile loss costs and higher underwriting expenses; and
• An increase in Group Benefits driven by lower excess mortality claims and COVID-19 related impacts to short-term-disability losses of $93, before tax, and the effect of higher fully insured ongoing premiums, partially offset by a higher loss ratio excluding the impact of COVID-19 and an increase in insurance operating costs and other expenses.
These increases were partially offset by:
• A $225, before tax, change to net realized losses in the 2022 period from net realized gains in the 2021 period,
primarily driven by a decrease in valuation of equity securities during the first quarter of 2022 compared to appreciation in the 2021 period, as well as a net loss on sales of fixed maturity securities in the first quarter of 2022.
For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries.
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REVENUE
Earned Premiums
Earned premiums increased primarily due to:
• An increase in P&C reflecting an 11% increase in Commercial Lines and a 2% decrease in Personal Lines. Contributing to the increase in Commercial Lines was an increase in new business and policy count retention over the prior twelve months, earned pricing increases and the effect of higher audit and endorsement premiums as the result of higher insured exposures given the economic recovery. For Personal Lines, non-renewals outpaced new business despite an increase in new business and the effect of earned pricing increases; and
• An increase in Group Benefits earned premium of 5% compared to the prior year period due to an increase in group disability and higher supplemental health product premiums.
Fee income increased, largely driven by Hartford Funds as a result of higher daily average assets under management due to an increase in equity market levels and net inflows over the preceding twelve months.
Net Investment Income
Net investment income is flat due to:
• Greater income from limited partnerships and other alternative investments driven by the sale of an underlying real estate property in the current period and an increase in valuation of real estate funds, partially offset by lower returns on private equity funds in the 2022 period;
• A higher level of invested assets; and
• An offsetting impact of a lower yield on fixed maturity investments, which resulted from reinvesting at rates below the maturity yield during 2021.
Net realized gains (losses) changed to a net realized loss in the 2022 period from a net realized gain in the 2021 period, primarily driven by:
• Losses on equity securities in the 2022 period driven by depreciation in value compared to gains on equity securities in the 2021 period due to appreciation in value;
• Net realized losses on sales of fixed maturity securities in 2022;
• Net credit losses on fixed maturity securities in the current period, primarily related to corporate securities with exposure to Russia;
• A net increase in ACL on mortgage loans in the 2022 period due to net additions of new loans, compared to a net decrease in the 2021 period driven by improved economic scenarios and higher property valuations; and
• A net realized gain in 2022 on the termination of commodity derivatives driven by an increase in the price of crude oil. For further discussion, see Note 6 - Derivatives of Notes to Condensed Consolidated Financial Statements.
For further discussion of investment results, see MD&A - Investment Results, Net Realized Gains and MD&A - Investment Results, Net Investment Income.
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BENEFITS, LOSSES AND EXPENSES
Losses and LAE Incurred for P&C
Benefits, losses and loss adjustment expenses decreased due to:
• A decline in incurred losses for Property & Casualty of $258 which was driven by:
– A favorable change of $265 in P&C net prior accident year reserve development. Prior accident year reserve development in the 2022 period was a net favorable $36, before tax, primarily driven by reserve decreases in workers' compensation, package business, and commercial property, partially offset by reserve increases in general liability and assumed reinsurance. Prior accident year reserve development in the 2021 period was a net unfavorable $229, before tax, and primarily included reserve increases for sexual molestation and sexual abuse claims. Also included were reserve decreases for workers’ compensation, package business, personal automobile liability, catastrophes and commercial property, partially offset by $6 of adverse development as the result of recognizing a deferred gain on retroactive reinsurance. For further discussion, see Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
Losses and LAE Incurred for Group Benefits
– A decrease in current accident year catastrophe losses of $116, before tax. Catastrophe losses in the 2022 period included $27, net of reinsurance, related to the Ukraine conflict, as well losses from tornado, wind and hail events in the Southeast and winter storms along the East Coast. Catastrophe losses of $214 in the first quarter of 2021 included $176 from February winter storms primarily in the South, with the remainder from various wind and hail events, mostly concentrated in the South and along the Pacific Coast. The $176 of losses from the 2021 February winter storms is net of a $46 reinsurance recoverable under the Company's per occurrence catastrophe treaty that covered 70% of up to $250 in losses in excess of $100 on catastrophe events occurring within a 7-day period other than from earthquakes and named hurricanes and tropical storms, subject to a $50 annual aggregate deductible.
– An increase in P&C current accident year ("CAY") loss and loss adjustment expenses before catastrophes of $123, primarily due to the effect of higher earned premiums in Commercial Lines and higher personal automobile claim frequency and severity, partially offset by lower COVID-19 incurred losses and lower current accident year loss ratios before COVID-19 in workers’ compensation, general liability, non-catastrophe property and global specialty U.S. lines, partially offset by a higher loss ratio in global specialty international.
• An increase in Group Benefits of $25 primarily driven by the effect of an increase in earned premiums, less favorable prior incurral year development on long-term disability and a higher loss ratio under group accidental death business, partially offset by a $93 before tax decrease in excess mortality claims and COVID-19 related impacts to short-term disability losses.
Amortization of deferred policy acquisition costs increased from the prior year period driven by Commercial Lines reflecting an increase in earned premiums across all commercial lines of business.
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Insurance operating costs and other expenses increased due to:
• Increased costs in Group Benefits to handle elevated claim levels resulting from the pandemic;
• Higher technology costs;
• A reduction in doubtful accounts in the 2021 period; and
• An increase in commissions in Commercial Lines due to higher earned premiums.
These increases were partially offset by:
• Lower staffing and other costs driven by the Company’s Hartford Next operational transformation and cost reduction plan; and
• Lower AARP direct marketing costs.
Income tax expense increased primarily due to an increase in income before tax.
For further discussion of income taxes, see Note 12 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
INVESTMENT RESULTS
Composition of Invested Assets
March 31, 2022 December 31, 2021
Amount Percent Amount Percent
Fixed maturities, available-for-sale ("AFS"), at fair value $ 40,233 71.9 % $ 42,847 74.2 %
Fixed maturities, at fair value using the fair value option ("FVO") 288 0.5 % 160 0.3 %
Equity securities, at fair value 1,910 3.4 % 2,094 3.6 %
Mortgage loans (net of ACL of $31 and $29)
5,699 10.2 % 5,383 9.3 %
Limited partnerships and other alternative investments 3,659 6.6 % 3,353 5.8 %
Other investments [1] 225 0.4 % 215 0.4 %
Short-term investments 3,937 7.0 % 3,697 6.4 %
Total investments $ 55,951 100.0 % $ 57,749 100.0 %
[1] Primarily consists of equity fund investments, overseas deposits, consolidated investment funds, and derivative instruments which are carried at fair value.
March 31, 2022 compared to December 31, 2021
Total investments decreased primarily due to a decrease in fixed maturities, AFS, partially offset by an increase in mortgage loans and limited partnerships and other alternative investments.
Fixed maturities, AFS decreased primarily due to a decrease in valuations due to higher interest rates and wider credit spreads.
Mortgage loans increased largely due to funding of multifamily, industrial, and retail commercial whole loans.
Limited partnerships and other alternative investments increased primarily driven by increased valuations and additional investments in real estate joint ventures.
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Net Investment Income
Three Months Ended March 31,
2022 2021
(Before tax) Amount Yield [1] Amount Yield [1]
Fixed maturities [2] $ 331 3.1 % $ 349 3.2 %
Equity securities 12 2.5 % 10 2.8 %
Mortgage loans 50 3.6 % 43 3.8 %
Limited partnerships and other alternative investments 126 14.6 % 112 21.1 %
Other [3] 9 14
Investment expense (19) (19)
Total net investment income $ 509 3.6 % $ 509 3.8 %
Total net investment income excluding limited partnerships and other alternative investments $ 383 2.9 % $ 397 3.1 %
[1] Yields calculated using annualized net investment income divided by the monthly average invested assets at amortized cost, as applicable, excluding repurchase agreement and securities lending collateral, if any, and derivatives book value.
[2] Includes net investment income on short-term investments.
[3] Primarily includes changes in fair value of certain equity fund investments and income from derivatives that qualify for hedge accounting and are used to hedge fixed maturities.
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Total net investment income was flat due to:
• Greater income from limited partnerships and other alternative investments driven by the sale of an underlying real estate property in the 2022 period and higher real estate fund valuations, partially offset by lower returns on private equity funds in the 2022 period;
• A higher level of invested assets; and
• An offsetting impact of a lower yield on fixed maturities resulting from reinvesting at rates below maturity yields in 2021.
Annualized net investment income yield, excluding limited partnerships and other alternative investments, was down primarily due to continued reinvestment at rates below maturity yields during 2021.
Average reinvestment rate, on fixed maturities and mortgage loans, excluding certain U.S. Treasury securities, for the three months ended March 31, 2022, was 3.3%, which was above the average yield of sales and maturities of 3.0%. Average reinvestment rate for the three months ended March 31, 2021, was 2.3%, which was below the average yield of sales and maturities of 2.9%.
For the 2022 calendar year, we expect the annualized net investment income yield, excluding limited partnerships and other alternative investments, to remain consistent with the portfolio yield earned in 2021 due to the rising rate environment. The estimated impact on annualized net investment income yield is subject to variability due to evolving market conditions, active portfolio management, and the level of non-routine income items, such as make-whole payments, prepayment penalties on mortgage loans and yield adjustments on prepayable securities.
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Net Realized Gains (Losses)
Three Months Ended March 31,
(Before tax) 2022 2021
Gross gains on sales of fixed maturities $ 23 $ 31
Gross losses on sales of fixed maturities (95) (31)
Equity securities [1] (107) 43
Net credit losses on fixed maturities, AFS [2] (12) 4
Change in ACL on mortgage loans [3] (2) 4
Intent-to-sell impairments [2] (3) —
Other, net [4] 51 29
Net realized gains (losses) $ (145) $ 80
[1] The net unrealized gains (losses) on equity securities still held as of the end of the period and included in net realized gains (losses) were $(131) and $40 for the three months ended March 31, 2022 and 2021, respectively.
[2] See Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
[3] See ACL on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the MD&A.
[4] For the three months ended March 31, 2022 and 2021 primarily includes gains (losses) from transactional foreign currency revaluation of $6 and $(7), respectively, and gains on non-qualifying derivatives of $47 and $35, respectively.
Three months ended March 31, 2022
Gross gains and losses on sales were primarily due to tender activity and sales of corporate securities and tax-exempt municipals, in addition to sales of U.S. treasuries for duration and risk management.
Equity securities net losses were primarily driven by mark-to-market losses due to the decline in equity market levels.
Other, net gains were primarily due to $32 on interest rate derivatives driven by an increase in interest rates and $14 on the termination of commodity derivatives driven by an increase in the price of crude oil. For further discussion, see Note 6 - Derivatives of Notes to Condensed Consolidated Financial Statements.
Three months ended March 31, 2021
Gross gains and losses on sales were primarily driven by issuer-specific sales of corporate securities, a reduction of exposure in the foreign government sector, and sales of U.S. treasury securities for duration management.
Equity securities net gains were primarily driven by appreciation in value due to higher equity market levels.
Other, net gains were primarily due to $32 of gains on interest rate derivative trades, driven by an increase in interest rates.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ, and in the past have differed, from those estimates.
The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability:
• property and casualty insurance product reserves, net of reinsurance;
• group benefit long-term disability ("LTD") reserves, net of reinsurance;
• evaluation of goodwill for impairment;
• valuation of investments and derivative instruments including evaluation of credit losses on fixed maturities, AFS and ACL on mortgage loans; and
• contingencies relating to corporate litigation and regulatory matters.
In developing these estimates, management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements. Certain of these estimates are particularly sensitive to market conditions, and deterioration and/or volatility in the worldwide debt or equity markets could have a material impact on the Condensed Consolidated Financial Statements.
The Company’s critical accounting estimates are discussed in Part II, Item 7 MD&A in the Company’s 2021 Form 10-K Annual Report. In addition, Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2021 Form 10-K Annual Report should be read in conjunction with this section to assist with obtaining an understanding of the underlying accounting policies related to these estimates. The following discussion updates certain of the Company’s critical accounting estimates as of March 31, 2022.
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| PROPERTY & CASUALTY INSURANCE PRODUCT RESERVES, NET OF REINSURANCE
P&C Loss and Loss Adjustment Expense Reserves, Net of Reinsurance, by Segment as of March 31, 2022
Based on the results of the quarterly reserve review process, the Company determines the appropriate reserve adjustments, if any, to record. Recorded reserve estimates represent the Company's best estimate of the ultimate settlement amount of unpaid losses and loss adjustment expenses. The Company does not use statistical loss distributions or confidence levels in the process of determining its reserve estimate and, as a result, does not disclose reserve ranges. Assumptions used in arriving at the selected actuarial indications consider a number of factors, including the immaturity of emerged claims in recent accident years, emerging trends in the recent past, and the level of volatility within each line of business. In general, adjustments are made more quickly to more mature accident years and less volatile lines of business. Such adjustments of reserves are referred to as “prior accident year development”. Increases in previous estimates of ultimate loss costs are referred to as either an increase in prior accident year reserves or as unfavorable reserve development. Decreases in previous estimates of ultimate loss costs are referred to as either a decrease in prior accident year reserves or as favorable reserve development. Reserve development can influence the comparability of year over year underwriting results and is set forth in the paragraphs and tables that follow.
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Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Three Months Ended March 31, 2022
Commercial Lines Personal
Lines
Property & Casualty Other Operations
Total Property & Casualty
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$ 26,906 $ 1,844 $ 2,699 $ 31,449
Reinsurance and other recoverables 4,480 37 1,564 6,081
Beginning liabilities for unpaid losses and loss adjustment expenses, net
22,426 1,807 1,135 25,368
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes 1,395 438 — 1,833
Current accident year ("CAY") catastrophes 81 17 — 98
Prior accident year development ("PYD") (33) (3) — (36)
Total provision for unpaid losses and loss adjustment expenses
1,443 452 — 1,895
Payments (1,206) (512) (88) (1,806)
Foreign currency adjustment (5) — — (5)
Ending liabilities for unpaid losses and loss adjustment expenses, net
22,658 1,747 1,047 25,452
Reinsurance and other recoverables 4,574 36 1,555 6,165
Ending liabilities for unpaid losses and loss adjustment expenses, gross
$ 27,232 $ 1,783 $ 2,602 $ 31,617
Earned premiums and fee income $ 2,495 $ 728
Loss and loss expense paid ratio [1] 48.3 70.3
Loss and loss expense incurred ratio 58.0 62.8
Prior accident year development (pts) [2] (1.3) (0.4)
[1] The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income.
[2] “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
Current Accident Year Catastrophe Losses, Net of Reinsurance
Three Months Ended March 31, 2022
Commercial
Lines Personal
Lines Total
Wind and hail $ 17 $ 12 $ 29
Winter storms 23 5 28
Ukraine conflict [1] 23 — 23
Catastrophes before assumed reinsurance 63 17 80
Global assumed reinsurance business [1] [2] 18 — 18
Total catastrophe losses $ 81 $ 17 $ 98
[1] Total catastrophe losses resulting from the Ukraine conflict were $27, net of reinsurance, for the three months ended March 31, 2022, including $4 within global assumed reinsurance.
[2] Catastrophe losses incurred on global assumed reinsurance business are not covered under the Company's aggregate property catastrophe treaty. For further information on the treaty, refer to Enterprise Risk Management — Insurance Risk section of this MD&A.
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Unfavorable (Favorable) Prior Accident Year Development for the
Three Months Ended March 31, 2022
Commercial Lines Personal
Lines Property & Casualty Other Operations Total Property & Casualty Insurance
Workers’ compensation $ (45) $ — $ — $ (45)
Workers’ compensation discount accretion 9 — — 9
General liability 12 — — 12
Marine — — — —
Package business (11) — — (11)
Commercial property (15) — — (15)
Professional liability — — — —
Bond — — — —
Assumed reinsurance 12 — — 12
Automobile liability — (5) — (5)
Homeowners — — — —
Net asbestos and environmental reserves — — — —
Catastrophes (3) — — (3)
Uncollectible reinsurance — — — —
Other reserve re-estimates, net 8 2 — 10
Prior accident year development before change in deferred gain (33) (3) — (36)
Change in deferred gain on retroactive reinsurance included in other liabilities — — — —
Total prior accident year development $ (33) $ (3) $ — $ (36)
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Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Three Months Ended March 31, 2021
Commercial
Lines Personal
Lines
Property & Casualty Other Operations Total Property & Casualty Insurance
Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 25,058 $ 1,836 $ 2,728 $ 29,622
Reinsurance and other recoverables 4,271 28 1,426 5,725
Beginning liabilities for unpaid losses and loss adjustment expenses, net 20,787 1,808 1,302 23,897
Provision for unpaid losses and loss adjustment expenses
Current accident year before catastrophes 1,296 414 — 1,710
Current accident year catastrophes 175 39 — 214
Prior accident year development [1] 238 (42) 33 229
Total provision for unpaid losses and loss adjustment expenses 1,709 411 33 2,153
Change in deferred gain on retroactive reinsurance included in other liabilities [2] (6) — — (6)
Payments (1,030) (442) (41) (1,513)
Net reserves transferred to liabilities held for sale (1) — — (1)
Foreign currency adjustment (6) — — (6)
Ending liabilities for unpaid losses and loss adjustment expenses, net 21,453 1,777 1,294 24,524
Reinsurance and other recoverables 4,347 34 1,427 5,808
Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 25,800 $ 1,811 $ 2,721 $ 30,332
Earned premiums and fee income $ 2,244 $ 742
Loss and loss expense paid ratio [2] 45.9 59.6
Loss and loss expense incurred ratio 76.5 56.0
Prior accident year development (pts) [3] 10.6 (5.7)
[1] Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators and Asbestos and Environmental ("A&E") Adverse Development Cover ("ADC") which, under retroactive reinsurance accounting, is deferred and is recognized over the period the ceded losses are recovered in cash from National Indemnity Company ("NICO"), a subsidiary of Berkshire Hathaway Inc. For additional information regarding the two adverse development cover reinsurance agreements, refer to Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
[2] The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income.
[3] “Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
Current Accident Year Catastrophe Losses, Net of Reinsurance
Three Months Ended March 31, 2021
Commercial
Lines
Personal
Lines Total
Wind and hail $ 21 $ 17 $ 38
Winter storms [1] 145 22 167
Catastrophes before assumed reinsurance 166 39 205
Global assumed reinsurance business [2] 9 — 9
Total catastrophe losses $ 175 $ 39 $ 214
[1] Includes catastrophe losses from the February winter storms in Texas and other areas within Commercial Lines and Personal Lines of $194 and $28, respectively, gross of reinsurance, and $154 and $22, respectively, net of reinsurance under the Company's per occurrence property catastrophe treaty covering events other than earthquakes and named hurricanes and tropical storms. The reinsurance covers 70% of up to $250 of losses in excess of $100 from such events occurring within a seven day time period, subject to a $50 annual aggregate deductible. These recoveries do not inure to the benefit of the aggregate property catastrophe treaty reinsurers. For further information on the treaty, refer to Enterprise Risk Management — Insurance Risk section of this MD&A.
[2] Catastrophe losses incurred on global assumed reinsurance business are not covered under the Company's aggregate property catastrophe treaty. For further information on the treaty, refer to Enterprise Risk Management — Insurance Risk section of this MD&A.
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Unfavorable (Favorable) Prior Accident Year Development for the
Three Months Ended March 31, 2021
Commercial Lines Personal
Lines
Property & Casualty Other Operations Total Property & Casualty Insurance
Workers’ compensation $ (40) $ — $ — $ (40)
Workers’ compensation discount accretion 9 — — 9
General liability 307 — — 307
Marine 6 — — 6
Package business (27) — — (27)
Commercial property (13) — — (13)
Professional liability (1) — — (1)
Bond — — — —
Assumed reinsurance 2 — — 2
Automobile liability — (23) — (23)
Homeowners — (3) — (3)
Net asbestos and environmental reserves — — — —
Catastrophes (4) (12) — (16)
Uncollectible reinsurance (5) — (4) (9)
Other reserve re-estimates, net (2) (4) 37 31
Total prior accident year development 232 (42) 33 223
Change in deferred gain on retroactive reinsurance included in other liabilities 6 — — 6
Total prior accident year development $ 238 $ (42) $ 33 $ 229
For discussion of the factors contributing to unfavorable (favorable) prior accident year reserve development for both the 2022 and 2021 three month periods, please refer to Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
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SEGMENT OPERATING SUMMARIES
| COMMERCIAL LINES - RESULTS OF OPERATIONS
Underwriting Summary
Three Months Ended March 31,
2022 2021 Change
Written premiums $ 2,809 $ 2,503 12 %
Change in unearned premium reserve 323 268 21 %
Earned premiums 2,486 2,235 11 %
Fee income 9 9 — %
Losses and loss adjustment expenses
Current accident year before catastrophes 1,395 1,296 8 %
Current accident year catastrophes [1] 81 175 (54 %)
Prior accident year development [1] (33) 238 (114 %)
Total losses and loss adjustment expenses 1,443 1,709 (16 %)
Amortization of deferred policy acquisition costs 371 344 8 %
Underwriting expenses 425 394 8 %
Amortization of other intangible assets 7 7 — %
Dividends to policyholders 7 6 17 %
Underwriting gain (loss) 242 (216) NM
Net servicing income 1 2 (50 %)
Net investment income [2] 333 327 2 %
Net realized gains (losses) [2] (91) 44 NM
Other expenses (7) (4) (75 %)
Income before income taxes 478 153 NM
Income tax expense [3] 95 24 NM
Net income $ 383 $ 129 197 %
[1] For additional information on current accident year catastrophes and prior accident year development, see MD&A - Critical Accounting Estimates, Property and Casualty Insurance Product Reserves Development, Net of Reinsurance and Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
[2] For discussion of consolidated investment results, see MD&A - Investment Results.
[3] For discussion of income taxes, see Note 12 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
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Premium Measures
Three Months Ended March 31,
2022 2021
Small Commercial:
Net new business premium $ 186 $ 176
Policy count retention [1] 86 % 84 %
Renewal written price increases 2.9 % 2.4 %
Renewal earned price increases 3.2 % 2.2 %
Policies in-force as of end of period (in thousands) 1,378 1,304
Middle Market [2]:
Net new business premium $ 120 $ 122
Policy count retention [1] 84 % 80 %
Renewal written price increases 4.8 % 6.0 %
Renewal earned price increases 6.0 % 8.0 %
Global Specialty:
Global specialty gross new business premium [3] $ 206 $ 216
Renewal written price increases [4] 8.3 % 17.2 %
Renewal earned price increases [4] 12.1 % 24.1 %
[1] Policy count retention represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar year period before considering policies cancelled subsequent to renewal.
[2] Except for net new business premium, metrics for middle market exclude loss sensitive and programs businesses.
[3] Excludes Global Re and Continental Europe Operations and is before ceded reinsurance.
[4] Excludes Global Re, offshore energy policies, credit and political risk insurance policies , political violence and terrorism policies, and any business under which the managing agent of our Lloyd's Syndicate delegates underwriting authority to coverholders and other third parties.
Underwriting Ratios
Three Months Ended March 31,
2022 2021 Change
Loss and loss adjustment expense ratio
Current accident year before catastrophes 56.1 58.0 (1.9)
Current accident year catastrophes 3.3 7.8 (4.5)
Prior accident year development (1.3) 10.6 (11.9)
Total loss and loss adjustment expense ratio 58.0 76.5 (18.5)
Expense ratio 31.9 32.9 (1.0)
Policyholder dividend ratio 0.3 0.3 —
Combined ratio 90.3 109.7 (19.4)
Impact of current accident year catastrophes and prior year development (2.0) (18.4) 16.4
Underlying combined ratio 88.3 91.2 (2.9)
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Net Income
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Net income for the three months ended March 31, 2022 increased primarily due to a change from an underwriting loss to an underwriting gain, partially offset by a change from net realized gains to net realized losses. For further discussion of investment results, see MD&A - Investment Results.
Underwriting Gain (Loss)
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Underwriting gain for the three month period ended March 31, 2022 compared to an underwriting loss for the prior year three month period with the improvement primarily due to a change from unfavorable prior accident year development in the prior year period to favorable prior accident year development in the current year period, lower current accident year
catastrophes and the effect of earned premium growth. A decrease in the current accident year loss and loss adjustment expense ratio before catastrophes, partly driven by $24 before tax of COVID-19 incurred losses in the 2021 period, was largely offset by an increase in underwriting expenses. Underwriting expenses increased due to higher technology costs and a decrease in the allowance for credit losses on premiums receivable in the 2021 period, partially offset by incremental savings from Hartford Next initiatives.
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Earned Premiums
[1] Other earned premiums of $11 and $11, for the three months ended March 31, 2021, and 2022, respectively, is included in the total.
Written Premiums
[1] Other written premiums of $10 and $12, for the three months ended March 31, 2021, and 2022, respectively, is included in the total.
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Earned premiums for the three month period increased in 2022 due to written premium increases over the prior 12 months as well as due to higher premiums from audits and endorsements, principally in workers’ compensation due to an increasing exposure base from higher payrolls.
Written premiums f or the three month period increased in 2022 driven by growth in small commercial, middle & large commercial and global specialty across most lines of business.
• Small commercial written premium increased in the 2022 period driven by exposure growth from higher audit and endorsement premium, new business growth, higher policy count retention, and renewal written pricing increases in all lines. Written premium grew in all lines of business, with the most significant growth in workers' compensation and package business.
• Middle & large commercial written premium increased in 2022 driven by renewal written pricing increases in all lines, improved policy count retention and higher audit and endorsement premium. Written premium grew in most lines of business, including general industries, national accounts and programs business.
• Global specialty written premium increased in 2022 driven by written pricing increases and higher retention. Written premium grew in all lines except international, with the most significant growth in global reinsurance, U.S. wholesale and financial lines.
Renewal written pricing increases were recognized in nearly all lines in 2022, with moderating price increases across most lines in middle market and global specialty.
• In small commercial, renewal written price increases were higher in 2022 than in the 2021 period, with workers' compensation pricing slightly positive in 2022 due to rising wages offset by lower rates, along with mid-single digit increases in most other lines.
• In middle market, the Company recognized mid single-digit increases in most lines other than workers’ compensation, which experienced slightly positive written pricing increases as the effect of higher wages offset lower rates.
• In global specialty, we achieved renewal written pricing increases of approximately 8%, with the largest increases in marine, property and international lines.
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Current Accident Year Loss and LAE Ratio before Catastrophes
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Current accident year loss and LAE ratio before catastrophes decreased in the first quarter of 2022 primarily due to lower COVID-19 incurred losses as well as due to lower loss ratios in workers’ compensation, general liability, property and global specialty US lines, partially offset by a higher loss ratio in global specialty international. The higher loss ratio in global specialty international was mostly driven by the effect on the ratio of $11 before tax in reinstatement premium owed to reinsurers related to ceding Ukraine conflict losses and a large ocean marine loss from an oil spill off the coast of Peru. There were no COVID-19 incurred losses in the three months ended March 31, 2022 compared to $24 of COVID-19 incurred losses in the three months ended March 31, 2021, which included losses of $20 in workers’ compensation and $4 in financial and other lines.
Catastrophes and Unfavorable (Favorable) Prior Accident Year Development
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Current accident year catastrophe losses for the three months ended March 31, 2022 included losses from tornado, wind and hail events in the Southeast, winter storms along the East Coast and $27 of losses, net of reinsurance, related to the Ukraine conflict.
Current accident year catastrophe losses for the three months ended March 31, 2021 included $154 of losses from February winter storms primarily in the South, with the remaining losses from wind and hail events, mostly concentrated in the South and along the Pacific coast.
Prior accident year development was net favorable for 2022. Reserve development in the three months ended March 31, 2022 included reserve decreases for workers' compensation, commercial property and package business, partially offset by reserve increases for general liability and assumed reinsurance.
Prior accident year development was a net unfavorable $238 in the 2021 period primarily due to an increase in general liability that included a reserve increase related to the settlement with Boy Scouts of America of sexual molestation and sexual abuse claims, partially offset by reserve decreases in workers’ compensation, package business and commercial property.
Prior accident year development in the 2021 period included $6 of reserve increases related to Navigators Group on 2018 and prior accident years that was economically ceded to NICO but for which the benefit was not recognized in earnings as it has been recorded as a deferred gain on retroactive reinsurance.
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| PERSONAL LINES - RESULTS OF OPERATIONS
Underwriting Summary
Three Months Ended March 31,
2022 2021 Change
Written premiums $ 707 $ 715 (1 %)
Change in unearned premium reserve (13) (19) 32 %
Earned premiums 720 734 (2 %)
Fee income 8 8 — %
Losses and loss adjustment expenses
Current accident year before catastrophes 438 414 6 %
Current accident year catastrophes [1] 17 39 (56 %)
Prior accident year development [1] (3) (42) 93 %
Total losses and loss adjustment expenses 452 411 10 %
Amortization of DAC 57 58 (2 %)
Underwriting expenses 149 148 1 %
Amortization of other intangible assets 1 1 — %
Underwriting gain 69 124 (44 %)
Net servicing income [2] 4 4 — %
Net investment income [3] 33 35 (6 %)
Net realized gains (losses) [3] (9) 7 NM
Income before income taxes 97 170 (43 %)
Income tax expense [4] 20 35 (43 %)
Net income $ 77 $ 135 (43) %
[1] For additional information on current accident year catastrophes and prior accident year development, see MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves, Net of Reinsurance and Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
[2] Includes servicing revenues of $17 and $19 for the three months ended March 31, 2022 and 2021, respectively. Includes servicing expenses of $13 and $15 for the three months ended March 31, 2022 and 2021, respectively.
[3] For discussion of consolidated investment results, see MD&A - Investment Results.
[4] For discussion of income taxes, see Note 12 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
Written and Earned Premiums
Three Months Ended March 31,
Written Premiums 2022 2021 Change
Product Line
Automobile $ 497 $ 508 (2 %)
Homeowners 210 207 1 %
Total $ 707 $ 715 (1 %)
Earned Premiums
Product Line
Automobile $ 493 $ 507 (3 %)
Homeowners 227 227 — %
Total $ 720 $ 734 (2 %)
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Premium Measures
Three Months Ended March 31,
Premium Measures 2022 2021
Policies in-force end of period (in thousands)
Automobile 1,315 1,357
Homeowners 765 815
Net new business premium
Automobile $ 58 $ 53
Homeowners $ 15 $ 13
Policy count retention [1]
Automobile 84 % 85 %
Homeowners 84 % 85 %
Renewal written price increase
Automobile 2.9 % 1.8 %
Homeowners 8.8 % 9.4 %
Renewal earned price increase
Automobile 2.3 % 2.2 %
Homeowners 8.4 % 7.1 %
[1] Policy count retention represents the ratio of the number of renewal policies issued during the current year period divided by the number of policies issued in the previous calendar period before considering policies cancelled subsequent to renewal.
Underwriting Ratios
Three Months Ended March 31,
Underwriting Ratios 2022 2021 Change
Loss and loss adjustment expense ratio
Current accident year before catastrophes 60.8 56.4 4.4
Current accident year catastrophes 2.4 5.3 (2.9)
Prior year development (0.4) (5.7) 5.3
Total loss and loss adjustment expense ratio 62.8 56.0 6.8
Expense ratio 27.6 27.1 0.5
Combined ratio 90.4 83.1 7.3
Impact of current accident year catastrophes and prior year development (2.0) 0.4 (2.4)
Underlying combined ratio 88.5 83.5 5.0
Product Combined Ratios
Three Months Ended March 31,
2022 2021 Change
Automobile
Combined ratio 92.8 83.5 9.3
Underlying combined ratio 93.3 86.3 7.0
Homeowners
Combined ratio 85.2 86.8 (1.6)
Underlying combined ratio 77.4 77.2 0.2
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Net Income
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Net income decreased in the three months ended March 31, 2022, largely driven by a decrease in underwriting gain and a change from net realized gains to net realized losses in the 2022 period.
Underwriting Gain
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Underwriting gain decreased in the 2022 period, primarily due to a decrease in net favorable prior accident year reserve development and higher current accident year personal automobile loss costs, partially offset by lower current accident year catastrophe losses and, to a lesser extent, the effect of a decline in earned premiums.
Underwriting expenses were relatively flat to the prior year period as higher technology costs were largely offset by lower AARP direct marketing costs and cost savings from the Hartford Next initiative.
Earned Premiums
Written Premiums
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Earned premiums decreased in the 2022 period due to the effect of a decline in written premium over the prior twelve months in both Agency channels and in AARP Direct due to non-renewals exceeding new business. A decrease in automobile written premiums across channels in the three month period was partially offset by an increase in homeowners’ written premiums.
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Written premiums decreased in automobile in the 2022 period due to the effect of non-renewed premium exceeding new business, despite an increase in new business over the comparable 2021 period. Written premiums increased in homeowners primarily due to an increase in new business and the effect of written pricing increases, partially offset by slightly lower policy count retention.
Renewal written pricing increases were modestly higher for automobile in the 2022 period in response to recent higher loss cost trends while renewal written pricing increases for homeowners were in the high single-digits for both the 2022 and 2021 three month periods.
Policy count retention was modestly lower for both automobile and homeowners.
Policies in-force decreased in the 2022 period in both automobile and homeowners driven by not generating enough new business to offset the loss of non-renewed policies.
Current Accident Year Loss and LAE Ratio before Catastrophes
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Current accident year Loss and LAE ratio before catastrophes in creased in the first quarter of 2022 by 6.4 points in automobile and was flat in homeowners. The increase in automobile was due to higher claim frequency, due to an increase in miles driven, and an increase in average claim severity. For homeowners, the current accident year loss and LAE ratio before catastrophes was flat as an increase in severity of weather and non-weather claims was offset by lower frequency of weather claims and the effect of earned pricing increases. Contributing to the increase in homeowners severity was the effect of higher rebuilding costs and a shift to non-weather claims which have higher average severity.
Current Accident Year Catastrophes and Unfavorable (Favorable) Prior Accident Year Development
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Current accident year catastrophe losses d ecreased in the three months ended March 31, 2022 compared to the prior year period. Current accident year catastrophe losses for the 2022 period primarily included tornado, wind and hail events in the Southeast and East coast winter storms. Current accident year catastrophe losses for the 2021 period primarily included February winter storms primarily in the South, as well as losses from wind and hail events in the South and Pacific Coa st.
Prior accident year development w as less favorable in the 2022 period, with lower reserve reductions for automobile liability and prior year catastrophes. Net favorable prior accident year development in the 2022 period was primarily driven by automobile liability. Net favorable prior accident year development in the 2021 period was driven mostly by reserve reductions in automobile for the 2017 to 2019 accident years and a reduction in prior accident year catastrophes driven by an expected subrogation recovery related to a 2018 California wildfire.
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| PROPERTY & CASUALTY OTHER OPERATIONS -
RESULTS OF OPERATIONS
Underwriting Summary
Three Months Ended March 31,
2022 2021 Change
Losses and loss adjustment expenses
Prior accident year development [1] $ — $ 33 (100 %)
Total losses and loss adjustment expenses — 33 (100 %)
Underwriting expenses 3 2 50 %
Underwriting loss (3) (35) 91 %
Net investment income [2] 16 16 — %
Net realized gains (losses) [2] (4) 2 NM
Income (loss) before income taxes 9 (17) 153 %
Income tax expense (benefit) [3] 1 (4) 125 %
Net income (loss) $ 8 $ (13) 162 %
[1] For additional information on prior accident year development, see Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
[2] For discussion of consolidated investment results, see MD&A - Investment Results.
[3] For discussion of income taxes, see Note 12 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
Net income (loss)
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Net income (loss) improved to net income in the three months ended March 31, 2022 compared to a net loss in the 2021 period, primarily due to unfavorable prior accident year reserve development in the 2021 period, partially offset by a change from net realized gains in the 2021 period to net realized losses in the 2022 period.
Underwriting loss decreased in the three month period, primarily due to unfavorable prior accident year reserve development in the 2021 period primarily consisting of an increase in reserves for sexual molestation and sexual abuse claims, primarily on assumed reinsurance, partially offset by a reduction in the allowance for uncollectible reinsurance.
Asbestos and environmental reserve comprehensive annual reviews will occur in the fourth quarter of 2022. For information on A&E reserves, see MD&A - Critical Accounting Estimates, Asbestos and Environmental Reserves included in the Company's 2021 Form 10-K Annual Report.
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| GROUP BENEFITS - RESULTS OF OPERATIONS
Operating Summary
Three Months Ended March 31,
2022 2021 Change
Premiums and other considerations $ 1,490 $ 1,418 5 %
Net investment income [1] 123 127 (3 %)
Net realized gains (losses) [1] (16) 19 (184 %)
Total revenues 1,597 1,564 2 %
Benefits, losses and loss adjustment expenses 1,221 1,196 2 %
Amortization of DAC 9 11 (18 %)
Insurance operating costs and other expenses 367 339 8 %
Amortization of other intangible assets 10 10 — %
Total benefits, losses and expenses 1,607 1,556 3 %
Income before income taxes (10) 8 NM
Income tax benefit [2] (4) (1) NM
Net income (loss) $ (6) $ 9 (167 %)
[1] For discussion of consolidated investment results, see MD&A - Investment Results.
[2] For discussion of income taxes, see Note 12 - Income Taxes of Notes to the Condensed Consolidated Financial Statements.
Premiums and Other Considerations
Three Months Ended March 31,
2022 2021 Change
Fully insured – ongoing premiums $ 1,438 $ 1,372 5 %
Buyout premiums 7 2 NM
Fee income 45 44 2 %
Total premiums and other considerations $ 1,490 $ 1,418 5 %
Fully insured ongoing sales, excluding buyouts $ 389 $ 512 (24 %)
Ratios, Excluding Buyouts
Three Months Ended March 31,
2022 2021 Change
Group disability loss ratio 73.2 % 68.4 % 4.8
Group life loss ratio 98.4 % 108.3 % (9.9)
Total loss ratio
81.9 % 84.3 % (2.4)
Expense ratio [1] 25.9 % 25.3 % 0.6
[1]Integration and transaction costs related to the acquisition of Aetna's U.S. group life and disability business are not included in the expense ratio.
Margin
Three Months Ended March 31,
2022 2021 Change
Net income (loss) margin (0.4 %) 0.6 % (1.0)
Adjustments to reconcile net income margin to core earnings (losses) margin:
Net realized losses (gains) excluded from core earnings, before tax 1.0 % (1.1 %) 2.1
Integration and other non-recurring M&A costs, before tax 0.1 % 0.1 % —
Income tax expense (benefit) (0.2 %) 0.2 % (0.4)
Core earnings (losses) margin 0.5 % (0.2 %) 0.7
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Net Income (Loss)
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Net income (loss) decreased to a net loss in the three months ended March 31, 2022 from net income in the comparable 2021 period, largely driven by a change from net realized gains in the 2021 period to net realized losses in the 2022 period and the effect of higher insurance operating costs and other expenses, partially offset by the effect of higher earned premiums and a lower total loss ratio.
Insurance operating costs and other expenses were higher year over year as higher claim costs to handle elevated claim levels resulting from the pandemic and an increase in technology spend were partially offset by expense savings from the Hartford Next operational transformation and cost reduction program.
Fully Insured Ongoing Premiums
[1]Other of $77 and $87 for the three months ended March 31, 2021 and 2022, respectively, which includes other group coverages such as retiree health insurance, critical illness, accident, hospital indemnity and participant accident coverages.
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Fully insured ongoing premiums increased primarily in group disability driven by an increase in exposure on existing accounts as our customers emerge from the pandemic, as well as strong persistency.
Fully insured ongoing sales, excluding buyouts decreased primarily due to the prior year period benefiting from the expansion of paid medical leave in several states.
Ratios
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Total loss ratio decreased 2.4 points in first quarter 2022 compared to the prior year period, reflecting a lower group life loss ratio, partially offset by a higher group disability loss ratio. The group life loss ratio decreased 9.9 points driven by a 14.6 point decrease in excess mortality primarily caused by direct and indirect impacts of COVID-19, partially offset by a higher loss ratio on accidental death business. For the three month periods ended March 31, 2022 and 2021, excess mortality losses were $96 and $185, respectively. The $96 of excess mortality losses in the first quarter of 2022 included $122 of losses with dates of loss in the first quarter of 2022 and a $26 net decrease of estimated losses from prior incurral years.
The group disability loss ratio increased 4.8 points in the three month period ended March 31, 2022 primarily due to less favorable prior period development on long-term disability as the 2021 period benefited from low incidence levels earlier in the pandemic. COVID-19 related short-term disability claims for the three months ended March 31, 2022 and 2021 were $9 and $13, respectively.
Expense ratio increased 0.6 points in the three month period driven by higher claim costs to handle elevated claim levels resulting from the pandemic and an increase in technology spend, partially offset by expense savings from the Hartford Next operational transformation and cost reduction program and higher earned premiums.
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| HARTFORD FUNDS - RESULTS OF OPERATIONS
Operating Summary
Three Months Ended March 31,
2022 2021 Change
Fee income and other revenue $ 287 $ 282 2 %
Net investment income 1 1 — %
Net realized gains (losses) (9) 2 NM
Total revenues 279 285 (2 %)
Amortization of contingent deferred commissions [1] 3 3 — %
Operating costs and other expenses 226 224 1 %
Total benefits, losses and expenses 229 227 1 %
Income before income taxes 50 58 (14 %)
Income tax expense [2] 8 11 (27 %)
Net income $ 42 $ 47 (11 %)
Daily average Hartford Funds AUM $ 150,131 $ 143,164 5 %
ROA [3] 11.2 13.1 (15 %)
Adjustment to reconcile ROA to ROA, core earnings:
Effect of net realized losses excluded from core earnings, before tax 2.4 (0.5) NM
Effect of income tax expense (benefit) (0.3) — NM
ROA, core earnings [3] 13.3 12.6 6 %
[1]Reported in amortization of DAC in the Condensed Consolidated Statements of Operations.
[2]For discussion of income taxes, see Note 12 - Income Taxes of Notes to Condensed Consolidated Financial Statements.
[3]Represents annualized earnings divided by a daily average of assets under management, as measured in basis points.
Hartford Funds Segment AUM
Three Months Ended March 31,
2022 2021 Change
Mutual Fund and ETF AUM - beginning of period $ 142,632 $ 124,627 14 %
Sales - mutual fund 9,478 9,198 3 %
Redemptions - mutual fund (10,045) (8,428) (19 %)
Net flows - ETF 143 4 NM
Net flows - mutual fund and ETF (424) 774 (155 %)
Change in market value and other (8,223) 4,853 NM
Mutual Fund and ETF AUM - end of period 133,985 130,254 3 %
Talcott Resolution life and annuity separate account AUM [1]
14,061 14,944 (6 %)
Hartford Funds AUM - end of period
$ 148,046 $ 145,198 2 %
[1]Represents AUM of the life and annuity business sold in May 2018 that is still managed by the Company's Hartford Funds segment.
Mutual Fund and ETF AUM by Asset Class
As of March 31,
2022 2021 Change
Equity $ 89,282 $ 87,456 2 %
Fixed Income 18,889 17,705 7 %
Multi-Strategy Investments [1] 22,603 22,170 2 %
Exchange-Traded Funds 3,211 2,923 10 %
Mutual Fund and ETF AUM $ 133,985 $ 130,254 3 %
[1]Includes balanced, allocation, and alternative investment products.
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Net Income
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Net income decreased primarily due to a change from net realized gains to net realized losses related to investments in funds seeded by the company, partially offset by higher fee income as a result of an increase in daily average assets under management.
Hartford Funds AUM
March 31, 2022 compared to March 31, 2021
Hartford Funds AUM increased primarily due to net inflows and an increase in market values over the previous
twelve months. Net outflows on mutual fund and ETF of $424 in the three months ended March 31, 2022 compared to net inflows of $774 for the 2021 period. While market values of the funds increased over the previous twelve months, there was a net decrease in market value of $8.2 billion in the three months ended March 31, 2022.
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| CORPORATE - RESULTS OF OPERATIONS
Operating Summary
Three Months Ended March 31,
2022 2021 Change
Fee income [1] $ 13 $ 12 8 %
Other revenue (loss) 1 (8) 113 %
Net investment income 3 3 — %
Net realized gains (losses) (16) 6 NM
Total revenues 1 13 (92 %)
Benefits, losses and loss adjustment expenses [2] 2 1 100 %
Insurance operating costs and other expenses [1] 13 13 — %
Interest expense [3] 62 57 9 %
Restructuring and other costs 5 11 (55 %)
Total benefits, losses and expenses 82 82 — %
Loss before income taxes (81) (69) (17 %)
Income tax benefit [4] (22) (11) (100 %)
Net loss (59) (58) (2 %)
Preferred stock dividends 5 5 — %
Net loss available to common stockholders $ (64) $ (63) (2) %
[1]Includes investment management fees and expenses related to managing third party business, including management of the invested assets of Talcott Resolution.
[2]Includes benefits expense on life and annuity business previously underwritten by the Company.
[3]For discussion of debt, see Note 14 - Debt of Notes to Consolidated Financial Statements in The Hartford's 2021 Form 10-K Annual Report.
[4]For discussion of income taxes, see Note 12 - Income Taxes of Notes to the Condensed Consolidated Financial Statements.
Net Loss
Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Net loss available to common stockholders for the three months ended March 31, 2022 increased slightly from
the comparable 2021 period, primarily due a change from net realized gains to net realized losses in the 2022 period and higher interest expense, largely offset by the effect of a loss of $8 before tax in the 2021 period from the Company’s previously owned equity interest in Talcott Resolution, lower restructuring and other costs and a higher tax benefit in the 2022 period for stock-based compensation.
Interest Expense
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Three months ended March 31, 2022 compared to the three months ended March 31, 2021
Interest expense increased for the three months ended March 31, 2022, largely due to the issuance of $600 of 2.9% senior notes in September 2021.
ENTERPRISE RISK MANAGEMENT
The Company’s Board of Directors has ultimate responsibility for risk oversight, as described more fully in our Proxy Statement, while management is tasked with the day-to-day management of the Company’s risks.
The Company manages and monitors risk through risk policies, controls and limits. At the senior management level, an Enterprise Risk and Capital Committee (“ERCC”) oversees the risk profile and risk management practices of the Company.
The Company's enterprise risk management ("ERM") function supports the ERCC and functional committees, and is tasked with, among other things:
• risk identification and assessment;
• the development of risk appetites, tolerances, and limits;
• risk monitoring; and
• internal and external risk reporting.
The Company categorizes its main risks as insurance risk, operational risk and financial risk. Insurance risk and financial risk are described in more detail below. Operational risk, including cybersecurity, and specific risk tolerances for natural catastrophes, terrorism and pandemic risk are described in the ERM section of the MD&A in The Hartford’s 2021 Form 10-K Annual Report.
| INSURANCE RISK
Insurance risk is the risk of losses of both a catastrophic and non-catastrophic nature on the P&C and Group Benefits products the Company has sold. Catastrophe insurance risk is the exposure arising from both natural (e.g., weather, earthquakes, wildfires, pandemics) and man-made catastrophes (e.g., terrorism, cyber-attacks) that create a concentration or aggregation of loss across the Company's insurance or asset portfolios.
Sources of Insurance Risk Non-catastrophe insurance risks exist within each of the Company's segments except Hartford Funds and include:
• Property- Risk of loss to personal or commercial property from automobile related accidents, weather, explosions, smoke, shaking, fire, theft, vandalism, inadequate installation, faulty equipment, collisions and falling objects, and/or machinery mechanical breakdown resulting in physical damage, losses from PV&T and other covered perils.
• Liability- Risk of loss from automobile related accidents, uninsured and underinsured drivers, lawsuits from accidents, defective products, breach of warranty, negligent
acts by professional practitioners, environmental claims, latent exposures, fraud, coercion, forgery, failure to fulfill obligations per contract surety, liability from errors and omissions, losses from CPRI coverages, losses from derivative lawsuits, and other securities actions and covered perils.
• Mortality- Risk of loss from unexpected trends in insured deaths impacting timing of payouts from group life insurance, personal or commercial automobile related accidents, and death of employees or executives during the course of employment, while on disability, or while collecting workers compensation benefits.
• Morbidity- Risk of loss to an insured from illness incurred during the course of employment or illness from other covered perils.
• Disability- Risk of loss incurred from personal or commercial automobile related losses, accidents arising outside of the workplace, injuries or accidents incurred during the course of employment, or from equipment, with each loss resulting in short term or long-term disability payments.
• Longevity- Risk of loss from increased life expectancy trends among policyholders receiving long-term benefit payments.
• Cyber Insurance - Risk of loss to property, breach of data and business interruption from various types of cyber-attacks.
Catastrophe risk primarily arises in the property, automobile, workers' compensation, casualty, group life, and group disability lines of business but could also arise from other coverages such as losses under PV&T and CPRI policies. Not all insurance losses arising from catastrophe risk are categorized as catastrophe losses within the segment operating results. See the term Current Accident Year Catastrophe Ratio within the Key Performance Measures section of MD&A for an explanation of how the Company defines catastrophe losses in its financial reporting.
Impact Non-catastrophe insurance risk can arise from unexpected loss experience, underpriced business and/or underestimation of loss reserves and can have significant effects on the Company’s earnings. Catastrophe insurance risk can arise from various unpredictable events and can have significant effects on the Company's earnings and may result in losses that could constrain its liquidity.
Management The Company's policies and procedures for managing these risks include disciplined underwriting protocols, exposure controls, sophisticated risk-based pricing, risk modeling, risk transfer, and capital management strategies. The Company has established underwriting guidelines for both individual risks, including individual policy limits, and risks in the aggregate, including aggregate exposure limits by geographic zone and peril. The Company uses both internal and third-party
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models to estimate the potential loss resulting from various catastrophe events and the potential financial impact those events would have on the Company's financial position and results of operations across its businesses.
In addition, certain insurance products offered by The Hartford provide coverage for losses incurred due to cyber events and the Company has assessed and modeled how those products would respond to different events in order to manage its aggregate exposure to losses incurred under the insurance policies we sell. The Company models numerous deterministic scenarios including losses caused by malware, data breach, distributed denial of service attacks, intrusions of cloud environments and attacks of power grids.
Among specific risk tolerances set by the Company, risk limits are set for natural catastrophes, terrorism risk and pandemic risk.
Reinsurance as a Risk Management Strategy
The Company uses reinsurance to transfer certain risks to reinsurance companies based on specific geographic or risk concentrations. A variety of traditional reinsurance products are used as part of the Company's risk management strategy, including excess of loss occurrence-based products that reinsure property and workers' compensation exposures, and individual risk (including facultative reinsurance) or quota share arrangements, that reinsure losses from specific classes or lines of business. The Company has no significant finite risk contracts in place and the statutory surplus benefit from all such prior year
contracts is immaterial. The Hartford also participates in governmentally administered reinsurance facilities such as the Florida Hurricane Catastrophe Fund (“FHCF”), the Terrorism Risk Insurance Program (“TRIPRA”) and other reinsurance programs relating to particular risks or specific lines of business.
Reinsurance for Catastrophes- The Company utilizes various reinsurance programs to mitigate catastrophe losses including excess of loss occurrence-based treaties covering property and workers’ compensation, and an aggregate property catastrophe treaty as well as individual risk agreements (including facultative reinsurance) that reinsure losses from specific classes or lines of business. The aggregate property catastrophe treaty covers the aggregate of catastrophe events designated by the Property Claim Services office of Verisk and, for international business, net losses arising from two or more risks involved in the same loss occurrence totaling at least $500 thousand, in excess of a $700 retention. The occurrence-based property catastrophe treaties respond in excess of $100 per occurrence for all perils other than earthquakes and named hurricanes and tropical storms (subject to a $50 annual aggregate deductible). Beginning with the January 1, 2021 renewal, our per occurrence property catastrophe treaty and workers’ compensation catastrophe treaty incepting January 1, 2021 do not cover pandemic losses, as most industry reinsurance programs exclude communicable disease. The Company has reinsurance in place to cover individual group life losses in excess of $1 per person.
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Primary Catastrophe Treaty Reinsurance Coverages as of March 31, 2022 [1]
Portion of losses reinsured Portion of losses retained by The Hartford
Per Occurrence Property Catastrophe Treaty from 1/1/2022 to 12/31/2022 [1] [2]
Losses of $0 to $100 None 100% retained
Losses of $100 to $350 for earthquakes and named hurricanes and tropical storms [3] None 100% retained
Losses of $100 to $350 from one event other than earthquakes and named hurricanes and tropical storms (subject to a $50 Annual Aggregate Deductible ("AAD")) [3] 70% of $250 in excess of $100 30% co-participation
Losses of $350 to $500 from one event (all perils) 75% of $150 in excess of $350 25% co-participation
Losses of $500 to $1.1 billion from one event [4] (all perils) 90% of $600 in excess $500 10% co-participation
Aggregate Property Catastrophe Treaty for 1/1/2022 to 12/31/2022 [5]
$0 to $700 of aggregate losses None 100% retained
$700 to $900 of aggregate losses 100% None
Workers' Compensation Catastrophe Treaty for 1/1/2022 to 12/31/2022
Losses of $0 to $100 from one event None 100% retained
Losses of $100 to $450 from one event [6] 80% of $350 in excess of $100 20% co-participation
[1] These treaties do not cover the assumed reinsurance business which purchases its own retrocessional coverage.
[2] In addition to the Per Occurrence Property Catastrophe Treaty, for Florida wind events, The Hartford has purchased the mandatory FHCF reinsurance for the annual period starting at June 1, 2021. Retention and coverage varies by writing company. The writing company with the largest coverage under FHCF is Hartford Insurance Company of the Midwest, with coverage estimated at approximately 90% of $52 in per event losses in excess of a $21 retention (estimates are based on best available information at this time and are periodically updated as information is made available by Florida).
[3] Named hurricanes and tropical storms are defined as any storm or storm system declared to be a hurricane or tropical storm by the US National Hurricane Center, US Weather Prediction Center, or their successor organizations (being divisions of the US National Weather Service).
[4] Portions of this layer of coverage extend beyond a traditional one year term.
[5] The aggregate treaty is not limited to a single event; rather, it is designed to provide reinsurance protection for the aggregate of all catastrophe events (up to $350 per event), either designated by the Property Claim Services office of Verisk or, for international business, net losses arising from two or more risks involved in the same loss occurrence totaling at least $500 thousand. All catastrophe losses, except assumed reinsurance business losses, apply toward satisfying the $700 attachment point under the aggregate treaty.
[6] In addition to the limits shown, the workers' compensation reinsurance includes a non-catastrophe, industrial accident layer, providing coverage for 80% of $30 in per event losses in excess of a $20 retention.
In addition to the property catastrophe reinsurance coverage described in the above table, the Company has other reinsurance agreements that cover property catastrophe losses, some of which provide for reinstatement of limits in the event of a loss with reinstatement provisions varying depending on the layer of coverage. The Per Occurrence Property Catastrophe Treaty, and Workers' Compensation Catastrophe Treaty include a provision to reinstate one limit in the event that a catastrophe loss exhausts limits on one or more layers under the treaties.
Reinsurance for Terrorism- For the risk of terrorism, private sector catastrophe reinsurance capacity is generally limited and largely unavailable for terrorism losses caused by nuclear, biological, chemical or radiological attacks. As such, the Company's principal reinsurance protection against large-scale terrorist attacks is the coverage currently provided through TRIPRA to the end of 2027.
TRIPRA provides a backstop for insurance-related losses resulting from any “act of terrorism”, which is certified by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General, for losses that exceed a threshold of industry losses of $200. Under the program, in any one calendar year, the federal government will pay a percentage of losses incurred from a certified act of terrorism after an insurer's losses exceed 20% of the Company's eligible direct commercial earned premiums of the
prior calendar year up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. The percentage of losses paid by the federal government is 80%. The Company's estimated deductible under the program is $1.7 billion for 2022. If an act of terrorism or acts of terrorism result in covered losses exceeding the $100 billion annual industry aggregate limit, Congress would be responsible for determining how additional losses in excess of $100 billion will be paid.
Reinsurance for A&E and Navigators Group Reserve Development - The Company has two ADC reinsurance agreements in place, both of which are accounted for as retroactive reinsurance. One agreement covers substantially all A&E reserve development for 2016 and prior accident years (the “A&E ADC”) up to an aggregate limit of $1.5 billion and the other covered substantially all reserve development of Navigators Insurance Company and certain of its affiliates for 2018 and prior accident years (“Navigators ADC”) up to an aggregate limit of $300. As the Company has ceded all of the $300 available limit under the Navigators ADC, there is no remaining limit available as of March 31, 2022. For more information on the A&E ADC and the Navigators ADC, see Note 1, Basis of Presentation and Significant Accounting Policies, and Note 9 -, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Condensed Consolidated Financial Statements.
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| FINANCIAL RISK
Financial risks include direct and indirect risks to the Company's financial objectives from events that impact financial market conditions and the value of financial assets. Some events may cause correlated movement in multiple risk factors. The primary sources of financial risks are the Company's invested assets.
Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss on a U.S. GAAP, statutory, and economic basis. Exposures are actively monitored and managed, with risks mitigated where appropriate. The Company uses various risk management strategies, including limiting aggregation of risk, portfolio re-balancing and hedging with over-the-counter and exchange-traded derivatives with counterparties meeting the appropriate regulatory and due diligence requirements. Derivatives are utilized to achieve the following Company-approved objectives: (1) hedging risk arising from interest rate, equity market, commodity market, credit spread and issuer default, price or currency exchange rate risk or volatility; (2) managing liquidity; (3) controlling transaction costs; and (4) engaging in income generation covered call transactions and synthetic replication transactions. Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management. The Company identifies different categories of financial risk, including liquidity, credit, interest rate, equity, and foreign currency exchange.
Liquidity Risk
Liquidity risk is the risk to current or prospective earnings or capital arising from the Company's inability or perceived inability to meet its contractual funding obligations as they come due.
Sources of Liquidity Risk Sources of liquidity risk include funding risk, company-specific liquidity risk and market liquidity risk resulting from differences in the amount and timing of sources and uses of cash as well as company-specific and general market conditions. Stressed market conditions may impact the ability to sell assets or otherwise transact business and may result in a significant loss in value.
Impact Inadequate capital resources and liquidity could negatively affect the Company’s overall financial strength and its ability to generate cash flows from its businesses, borrow funds at competitive rates, and raise new capital to meet operating and growth needs.
Management The Company has defined ongoing monitoring and reporting requirements to assess liquidity across the enterprise under both current and stressed market conditions. The Company measures and manages liquidity risk exposures and funding needs within prescribed limits across legal entities, taking into account legal, regulatory and operational limitations to the transferability of liquid assets among legal entities. The Company also monitors internal and external conditions, and identifies material risk changes and emerging risks that may impact operating cash flows or liquid assets. The liquidity requirements of The Hartford Financial Services Group, Inc. ("HFSG Holding Company") have been and will continue to be met by the HFSG Holding Company's fixed maturities, short-term investments and cash, and dividends from its subsidiaries, principally its insurance operations, as well
as the issuance of common stock, debt or other capital securities and borrowings from its credit facilities as needed. The Company maintains multiple sources of contingent liquidity including a revolving credit facility, an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates, and access to collateralized advances from the Federal Home Loan Bank of Boston ("FHLBB") for certain affiliates. The Company's CFO has primary responsibility for liquidity risk.
Credit Risk and Counterparty Risk
Credit risk is the risk to earnings or capital due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with contractually agreed upon terms. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value due to changes in credit spreads.
Sources of Credit Risk The majority of the Company’s credit risk is concentrated in its investment holdings and use of derivatives, but it is also present in the Company’s ceded reinsurance activities and various insurance products.
Impact A decline in creditworthiness is typically reflected as an increase in an investment’s credit spread and an associated decline in the investment's fair value, potentially resulting in recording an ACL and an increased probability of a realized loss upon sale. In certain instances, counterparties may default on their obligations and the Company may realize a loss on default. Premiums receivable, including premiums for retrospectively rated plans, reinsurance recoverable and deductible losses recoverable are also subject to credit risk based on the counterparty’s inability to pay.
Management The objective of the Company’s enterprise credit risk management strategy is to identify, quantify and manage credit risk in aggregate and to limit potential losses in accordance with the Company's credit risk management policy. The Company manages its credit risk by managing aggregations of risk, holding a diversified mix of issuers and counterparties across its investment, reinsurance and insurance portfolios and limiting exposure to any specific reinsurer or counterparty. Potential credit losses can be mitigated through diversification (e.g., geographic regions, asset types, industry sectors), hedging and the use of collateral to reduce net credit exposure.
The Company manages credit risk through the use of various surveillance, analyses and governance processes. The investment, and reinsurance areas have formal policies and procedures for counterparty approvals and authorizations, which establish criteria defining minimum levels of creditworthiness and financial stability for eligible counterparties. Potential investments are subject to underwriting reviews and private securities are subject to management approval. Mitigation strategies vary across the three sources of credit risk, but may include:
• Investing in a portfolio of high-quality and diverse securities;
• Selling investments subject to credit risk;
• Hedging through use of credit default swaps;
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• Clearing derivative transactions through central clearing houses that require daily variation margin;
• Entering into derivative and reinsurance contracts only with strong creditworthy institutions;
• Requiring collateral; and
• Non-renewing policies/contracts or reinsurance treaties.
The Company has developed credit exposure thresholds which are based upon counterparty ratings. Aggregate counterparty credit quality and exposure are monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis and aggregated by ultimate parent of the counterparty across investments, reinsurance receivables, insurance products with credit risk, and derivatives.
As of March 31, 2022, the Company had no investment exposure to any credit concentration risk of a single issuer or counterparty greater than 10% of the Company’s stockholders' equity, other than the U.S. government and certain U.S. government agencies. For further discussion of concentration of credit risk in the investment portfolio, see the Concentration of Credit Risk section in Note 5 - Investments of Notes to Condensed Consolidated Financial Statements.
Credit Risk of Derivatives
The Company uses various derivative counterparties in executing its derivative transactions. The use of counterparties creates credit risk that the counterparty may not perform in accordance with the terms of the derivative transaction.
Downgrades to the credit ratings of the Company’s insurance operating companies may have adverse implications for its use of derivatives. In some cases, downgrades may give derivative counterparties for over-the-counter ("OTC") derivatives and clearing brokers for OTC-cleared derivatives the right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition, downgrades may result in counterparties and clearing brokers becoming unwilling to engage in or clear additional derivatives or may require additional collateralization before entering into any new trades.
The Company also has derivative counterparty exposure policies which limit the Company’s exposure to credit risk. Credit exposures are generally quantified based on the prior business day’s net fair value, including income accruals, of all derivative positions transacted with a single counterparty for each separate legal entity. The Company enters into collateral arrangements in connection with its derivatives positions and collateral is pledged to or held by, or on behalf of, the Company to the extent the exposure is greater than zero, subject to minimum transfer thresholds. For the three months ended March 31, 2022, the Company incurred no losses on derivative instruments due to counterparty default. For further discussion, see the Derivative Commitments section of Note 13 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements.
Use of Credit Derivatives
The Company may also use credit default swaps to manage credit exposure or to assume credit risk to enhance yield.
Credit Risk Reduced Through Credit Derivatives
The Company uses credit derivatives to purchase credit protection with respect to a single entity or referenced index. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio.
Credit Risk Assumed Through Credit Derivatives
The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies. These swaps primarily reference investment grade single corporate issuers and indexes.
For further information on credit derivatives, see Note 6 - Derivatives of Notes to Condensed Consolidated Financial Statements.
Credit Risk of Business Operations
The Company is subject to credit risk related to the Company's commercial business that is written with large deductible policies or retrospectively-rated plans (referred to as "loss sensitive business"). The Company’s results of operations could be adversely affected if a significant portion of such contract holders failed to reimburse the Company for the deductible amount or the retrospectively rated policyholders failed to pay additional premiums owed. While the Company attempts to manage the risks discussed above through underwriting, credit analysis, collateral requirements, provision for bad debt, and other oversight mechanisms, the Company’s efforts may not be successful.
Interest Rate Risk
Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities arising from movements in interest rates. Interest rate risk encompasses exposures with respect to changes in the level of interest rates, the shape of the term structure of rates and the volatility of interest rates. Interest rate risk does not include exposure to changes in credit spreads.
Sources of Interest Rate Risk The Company has exposure to interest rate risk arising from investments in fixed maturities and commercial mortgage loans, issuances by the Company of debt securities, preferred stock and similar securities, discount rate assumptions associated with the Company’s claim reserves and pension and other postretirement benefit obligations, and assets that support the Company's pension and other postretirement benefit plans.
Impact Changes in interest rates from current levels can have both favorable and unfavorable effects for the Company.
Management The Company manages its exposure to interest rate risk by constructing investment portfolios that seek to protect the Company from the economic impact associated with changes in interest rates by setting portfolio duration targets that are aligned with the duration of the liabilities that they support. The Company analyzes interest rate risk using various models including parametric models and cash flow simulation under various market scenarios of the liabilities and their supporting investment portfolios. Key metrics that the
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Company uses to quantify its exposure to interest rate risk inherent in its invested assets and the associated liabilities include duration, convexity and key rate duration.
The Company primarily utilizes interest rate swaps and, to a lesser extent, futures to mitigate interest rate risk associated with its investment portfolio or liabilities and to manage portfolio duration.
Equity Risk
Equity risk is the risk of financial loss due to changes in the value of global equities or equity indices.
Sources of Equity Risk The Company has exposure to equity risk from invested assets, assets that support the Company’s pension and other postretirement benefit plans, and fee income derived from Hartford Funds assets under management.
Impact The investment portfolio is exposed to losses from market declines affecting equity securities and derivatives, which could negatively impact the Company's reported earnings. In addition, investments in limited partnerships and other alternative investments generally have a level of correlation to domestic equity market levels and can expose the Company to losses in earnings if valuations decline; however, earnings impacts are recognized on a lag as results from private equity investments and other funds are generally reported on a three-month delay. For assets supporting pension and other postretirement benefit plans, the Company may be required to make additional plan contributions if equity investments in the plan portfolios decline in value. Hartford Funds earnings are also significantly influenced by the U.S. and other equity markets. Generally, declines in equity markets will reduce the value of average daily assets under management and the amount of fee income generated from those assets. Increases in equity markets will generally have the inverse impact.
Management The Company uses various approaches in managing its equity exposure, including limits on the proportion of assets invested in equities, diversification of the equity portfolio, and, at times, hedging of changes in equity indices. For assets supporting pension and other postretirement benefit plans, the asset allocation mix is reviewed on a periodic basis.
In order to minimize risk, the pension plans maintain a listing of permissible and prohibited investments and impose concentration limits and investment quality requirements on permissible investment options.
Foreign Currency Exchange Risk
Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies.
Sources of Currency Risk The Company has foreign currency exchange risk in non-U.S. dollar denominated cash, fixed maturities, equities, and derivative instruments. In addition, the Company has non-U.S. subsidiaries, some with functional currencies other than U.S. dollar, and which transact business in multiple currencies resulting in assets and liabilities denominated in foreign currencies.
Impact Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains and losses on changes in the fair value of assets and liabilities.
Management The Company manages its foreign currency exchange risk primarily through asset-liability matching and through the use of derivative instruments. However, legal entity capital is invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations. The foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using foreign currency swaps and forwards.
Investment Portfolio Risk
The following table presents the Company’s fixed maturities, AFS, by credit quality. The credit ratings referenced throughout this section are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used. Accrued interest receivable related to fixed maturities are recorded in other assets on the Condensed Consolidated Balance Sheets and are not included in the amortized cost or fair value of the fixed maturities. For further information refer to Note 5 - Investments of Notes to Condensed Consolidated Financial Statements.
Fixed Maturities, AFS by Credit Quality
March 31, 2022 December 31, 2021
Amortized Cost Fair Value Percent of Total Fair Value Amortized Cost Fair Value Percent of Total Fair Value
United States Government/Government agencies $ 5,517 $ 5,426 13.5 % $ 5,706 $ 5,881 13.7 %
AAA 5,745 5,728 14.2 % 5,917 6,133 14.3 %
AA 7,319 7,324 18.2 % 7,279 7,718 18.0 %
A 10,309 10,300 25.6 % 10,277 10,962 25.6 %
BBB 9,194 9,060 22.5 % 9,196 9,708 22.7 %
BB & below 2,496 2,395 6.0 % 2,413 2,445 5.7 %
Total fixed maturities, AFS $ 40,580 $ 40,233 100.0 % $ 40,788 $ 42,847 100.0 %
The fair value of fixed maturities, AFS decreased as compared to December 31, 2021, primarily due to higher interest rates and wider credit spreads.
Fixed maturities, FVO are not included in the preceding table. For further discussion on FVO securities, see Note 4 - Fair
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Value Measurements of Notes to Condensed Consolidated Financial Statements.
Fixed Maturities, AFS by Type
March 31, 2022 December 31, 2021
Amortized Cost ACL Gross Unrealized Gains Gross Unrealized Losses Fair Value Percent of Total Fair Value Amortized Cost ACL Gross Unrealized Gains Gross Unrealized Losses Fair Value Percent of Total Fair Value
Asset-backed securities ("ABS")
Consumer loans $ 760 $ — $ 4 $ (15) $ 749 1.9 % $ 959 $ — $ 11 $ (2) $ 968 2.3 %
Other 200 — — (7) 193 0.5 % 166 — 2 (1) 167 0.4 %
Collateralized loan obligations ("CLOs") 2,987 — 7 (23) 2,971 7.4 % 3,019 — 8 (2) 3,025 7.1 %
Commercial Mortgage-Backed Securities ("CMBS")
Agency [1] 1,282 (1) 27 (25) 1,283 3.2 % 1,390 — 75 (5) 1,460 3.4 %
Bonds 2,264 — 8 (60) 2,212 5.5 % 2,327 — 92 (9) 2,410 5.6 %
Interest only 227 — 7 (7) 227 0.6 % 238 — 12 (1) 249 0.6 %
Corporate
Basic industry 792 (3) 12 (24) 777 1.9 % 761 — 34 (5) 790 1.8 %
Capital goods 1,375 — 26 (35) 1,366 3.4 % 1,442 — 84 (9) 1,517 3.5 %
Consumer cyclical 1,191 (1) 13 (38) 1,165 2.9 % 1,161 (1) 50 (5) 1,205 2.8 %
Consumer non-cyclical 2,395 — 37 (67) 2,365 5.9 % 2,473 — 134 (8) 2,599 6.1 %
Energy 1,383 (2) 30 (22) 1,389 3.5 % 1,405 — 99 (2) 1,502 3.5 %
Financial services 4,896 — 47 (143) 4,800 11.9 % 4,648 — 214 (20) 4,842 11.3 %
Tech./comm. 2,630 (1) 77 (72) 2,634 6.6 % 2,658 — 216 (11) 2,863 6.7 %
Transportation 717 — 6 (23) 700 1.7 % 744 — 43 (3) 784 1.8 %
Utilities 1,944 (2) 43 (60) 1,925 4.8 % 1,917 — 141 (8) 2,050 4.8 %
Other 508 — 3 (14) 497 1.2 % 535 — 23 (3) 555 1.3 %
Foreign govt./govt. agencies 799 (3) 11 (23) 784 1.9 % 883 — 33 (6) 910 2.1 %
Municipal bonds
Taxable 1,068 — 21 (31) 1,058 2.6 % 1,079 — 83 (2) 1,160 2.7 %
Tax-exempt 6,369 — 279 (112) 6,536 16.2 % 6,394 — 704 (1) 7,097 16.6 %
Residential Mortgage-Backed Securities ("RMBS")
Agency 1,527 — 6 (56) 1,477 3.7 % 1,337 — 44 (11) 1,370 3.2 %
Non-agency 2,422 — 1 (103) 2,320 5.8 % 2,101 — 11 (16) 2,096 4.9 %
Alt-A 11 — — — 11 — % 12 — 1 — 13 — %
Sub-prime 125 — 3 — 128 0.3 % 160 — 4 — 164 0.4 %
U.S. Treasuries 2,708 — 40 (82) 2,666 6.6 % 2,979 — 86 (14) 3,051 7.1 %
Total fixed maturities, AFS $ 40,580 $ (13) $ 708 $ (1,042) $ 40,233 100.0 % $ 40,788 $ (1) $ 2,204 $ (144) $ 42,847 100.0 %
Fixed maturities, FVO $ 288 $ 160
[1] Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.
The fair value of fixed maturities, AFS decreased as compared with December 31, 2021, primarily due to higher interest rates and wider credit spreads. In the first quarter of 2022, the
Company primarily decreased holdings of U.S. treasuries, consumer loans, and CMBS, while primarily increasing holdings in non-agency and agency RMBS.
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Commercial & Residential Real Estate
The following table presents the Company’s exposure to CMBS and RMBS by credit quality included in the preceding Fixed Maturities, AFS by Type table.
Exposure to CMBS & RMBS Bonds as of March 31, 2022
AAA AA A BBB BB and Below Total
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
CMBS
Agency [1] $ 1,277 $ 1,278 $ 5 $ 5 $ — $ — $ — $ — $ — $ — $ 1,282 $ 1,283
Bonds 842 831 570 555 440 427 182 177 230 222 2,264 2,212
Interest Only 130 130 87 87 — — 9 9 1 1 227 227
Total CMBS 2,249 2,239 662 647 440 427 191 186 231 223 3,773 3,722
RMBS
Agency 1,506 1,456 21 21 — — — — — — 1,527 1,477
Non-Agency 1,212 1,180 552 525 386 361 241 224 31 30 2,422 2,320
Alt-A — — — — — — — — 11 11 11 11
Sub-Prime 8 8 34 35 35 36 10 10 38 39 125 128
Total RMBS 2,726 2,644 607 581 421 397 251 234 80 80 4,085 3,936
Total CMBS & RMBS $ 4,975 $ 4,883 $ 1,269 $ 1,228 $ 861 $ 824 $ 442 $ 420 $ 311 $ 303 $ 7,858 $ 7,658
Exposure to CMBS & RMBS Bonds as of December 31, 2021
AAA AA A BBB BB and Below Total
Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value
CMBS
Agency [1] $ 1,380 $ 1,450 $ 10 $ 10 $ — $ — $ — $ — $ — $ — $ 1,390 $ 1,460
Bonds 950 995 571 593 439 453 182 186 185 183 2,327 2,410
Interest Only 134 141 92 96 1 1 10 10 1 1 238 249
Total CMBS 2,464 2,586 673 699 440 454 192 196 186 184 3,955 4,119
RMBS
Agency 1,315 1,347 22 23 — — — — — — 1,337 1,370
Non-Agency 840 845 554 552 477 473 199 196 31 30 2,101 2,096
Alt-A — — — — — — — — 12 13 12 13
Sub-Prime 6 7 34 35 47 48 24 24 49 50 160 164
Total RMBS 2,161 2,199 610 610 524 521 223 220 92 93 3,610 3,643
Total CMBS & RMBS $ 4,625 $ 4,785 $ 1,283 $ 1,309 $ 964 $ 975 $ 415 $ 416 $ 278 $ 277 $ 7,565 $ 7,762
[1] Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.
The Company also has exposure to commercial mortgage loans. These loans are collateralized by real estate properties that are diversified both geographically throughout the United States and by property type. These commercial loans are originated by the Company as high quality whole loans, and the Company may sell participation interests in one or more loans to third parties. A loan participation interest represents a pro-rata share in interest and principal payments generated by the participated loan, and the relationship between the Company as loan originator, lead participant and servicer and the third party as a participant are governed by a participation agreement.
As of March 31, 2022, mortgage loans had an amortized cost of $5.7 billion and carrying value of $5.7 billion, with an ACL of $31. As of December 31, 2021, mortgage loans had an amortized cost of $5.4 billion and carrying value of $5.4 billion,
with an ACL of $29. The increase in the allowance is primarily attributable to net additions of new loans.
The Company funded $442 of commercial mortgage loans with a weighted average loan-to-value (“LTV”) ratio of 56% and a weighted average yield of 2.9% during the three months ended March 31, 2022. The Company continues to originate commercial mortgage loans in high growth markets across the country focusing primarily on institutional-quality industrial, multi-family, and retail properties with strong LTV ratios. There were no mortgage loans held for sale as of March 31, 2022 or December 31, 2021.
Municipal Bonds
The following table presents the Company's exposure to municipal bonds by type and weighted average credit quality included in the preceding Securities by Type table.
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Available For Sale Investments in Municipal Bonds
March 31, 2022 December 31, 2021
Amortized Cost Fair Value Weighted Average Credit Quality Amortized Cost Fair Value Weighted Average Credit Quality
General Obligation $ 892 $ 932 AA+ $ 910 $ 1,031 AA+
Pre-refunded [1] 454 473 AAA 487 519 AAA
Revenue
Transportation 1,492 1,522 A+ 1,404 1,579 A+
Health Care 1,359 1,378 A+ 1,274 1,397 A+
Leasing [2] 787 789 AA- 813 874 AA-
Education 671 686 AA 670 748 AA
Water & Sewer 455 456 AA 504 538 AA
Sales Tax 359 380 AA 370 436 AA
Power 290 303 A 317 357 A+
Housing 78 74 AA- 98 103 AA
Other 600 601 AA- 626 675 AA-
Total Revenue 6,091 6,189 AA- 6,076 6,707 AA-
Total Municipal $ 7,437 $ 7,594 AA- $ 7,473 $ 8,257 AA-
[1] Pre-refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to fund the remaining payments of principal and interest.
[2] Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases facilities back to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality, or the municipality may be obligated to appropriate general tax revenues to make lease payments.
As of both March 31, 2022 and December 31, 2021, the largest issuer concentrations were the New York State Dormitory Authority, the Pennsylvania State Turnpike Commission, and the State of California, which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation and revenue bonds. In total, municipal bonds make up 14% of the fair value of the Company's investment portfolio.
Limited Partnerships and Other Alternative Investments
The following table presents the Company’s investments in limited partnerships and other alternative investments which include hedge funds, real estate funds, and private equity funds.
Real estate funds consist of investments primarily in real estate joint ventures and, to a lesser extent, equity funds. Private equity funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential and strong owner sponsorship, as well as limited exposure to public markets.
Income or losses on investments in limited partnerships and other alternative investments are recognized on a lag as results from private equity investments and other funds are generally reported on a three-month delay.
Limited Partnerships and Other Alternative Investments - Net Investment Income
Three Months Ended March 31,
2022 2021
Amount Yield [1] Amount Yield [1]
Hedge funds $ 8 11.0 % $ 8 18.2 %
Real estate funds 51 14.7 % 1 0.9 %
Private equity funds 68 21.4 % 97 41.8 %
Other alternative investments [2] (1) (0.7 %) 6 5.7 %
Total $ 126 14.6 % $ 112 21.1 %
[1]Yields calculated using annualized net investment income divided by the monthly average invested assets.
[2]Consists of an insurer-owned life insurance policy which is primarily invested in private equity, fixed income, hedge funds, and public equity.
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Investments in Limited Partnerships and Other Alternative Investments
March 31, 2022 December 31, 2021
Amount Percent Amount Percent
Hedge funds $ 303 8.3 % $ 274 8.2 %
Real estate funds 1,501 41.0 % 1,315 39.2 %
Private equity and other funds 1,348 36.8 % 1,256 37.5 %
Other alternative investments [1] 507 13.9 % 508 15.1 %
Total
$ 3,659 100.0 % $ 3,353 100.0 %
[1]Consists of an insurer-owned life insurance policy which is primarily invested in private equity, fixed income, hedge funds, and public equity.
Fixed Maturities, AFS — Unrealized Loss Aging
The total gross unrealized losses were $1.0 billion as of March 31, 2022 and have increased $898, from December 31, 2021, primarily due to higher interest rates and wider credit spreads. As of March 31, 2022, $1.031 billion of the gross unrealized losses were associated with fixed maturities, AFS depressed less than 20% of amortized cost. The remaining $11 of gross unrealized losses were associated with fixed maturities, AFS depressed greater than 20%. The fixed maturities, AFS depressed more than 20%, primarily related to corporate fixed maturities with long-dated maturities that are mainly depressed because current interest rates are higher and market spreads are wider than at the respective purchase dates, and because current market spreads on commercial real estate securities are wider than at the respective purchase dates.
As part of the Company’s ongoing investment monitoring process, the Company has reviewed its fixed maturities, AFS in an unrealized loss position and concluded that these fixed maturities are temporarily depressed and are expected to recover in value as the investments approach maturity or as market spreads tighten. For these fixed maturities in an unrealized loss position where an ACL has not been recorded, the Company’s best estimate of expected future cash flows are sufficient to recover the amortized cost basis of the investment. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these investments. For further information regarding the Company’s ACL analysis, see the Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments section below.
Unrealized Loss Aging for Fixed Maturities, AFS Securities
March 31, 2022 December 31, 2021
Consecutive Months
Items Amortized Cost ACL Unrealized Loss Fair Value Items Amortized Cost ACL Unrealized Loss Fair Value
Three months or less 2,063 $ 14,471 $ — $ (457) $ 14,014 640 $ 6,193 $ — $ (32) $ 6,161
Greater than three to six months 574 4,266 — (215) 4,051 404 3,249 — (55) 3,194
Greater than six to nine months 384 2,941 — (234) 2,707 101 571 — (5) 566
Greater than nine to eleven months 94 530 — (14) 516 171 1,041 — (29) 1,012
Twelve months or more 318 1,529 (3) (122) 1,404 184 631 — (23) 608
Total 3,433 $ 23,737 $ (3) $ (1,042) $ 22,692 1,500 $ 11,685 $ — $ (144) $ 11,541
Unrealized Loss Aging for Fixed Maturities, AFS Continuously Depressed Over 20%
March 31, 2022 December 31, 2021
Consecutive Months
Items Amortized Cost Unrealized Loss Fair Value Items Amortized Cost Unrealized Loss Fair Value
Three months or less 10 $ 36 $ (9) $ 27 — $ — $ — $ —
Twelve months or more 19 5 (2) 3 20 5 (3) 2
Total 29 $ 41 $ (11) $ 30 20 $ 5 $ (3) $ 2
Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments
Three months ended March 31, 2022
The Company recorded a net increase in the ACL of $12. The increase was primarily attributable to new expected credit losses on four issuers with Russian exposure. Unrealized losses on securities with an ACL recognized in other comprehensive income were less than $1. For further information, refer to Note
5 - Investments of Notes to Condensed Consolidated Financial Statements.
Intent-to-sell impairments of $3 were related to one corporate issuer in the financial services sector.
The Company incorporates its best estimate of future performance using internal assumptions and judgments that are informed by economic and industry specific trends, as well as our expectations with respect to security specific developments.
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Future intent-to-sell impairments or credit losses may develop as the result of changes in our intent to sell specific securities that are in an unrealized loss position or if modeling assumptions, such as macroeconomic factors or security specific developments, change unfavorably from our current modeling assumptions, resulting in lower cash flow expectations.
Three months ended March 31, 2021
The Company recorded net reversals of credit losses on fixed maturities, AFS of $4, including reversals of $6 and additions of $2. The reversals were primarily attributable to increases in the fair value of corporate issuers that had an ACL, primarily related to a large regional and commercial aircraft lessor. Additions relate to new expected credit losses on a media/entertainment company. Unrealized losses on securities with an ACL recognized in other comprehensive income were $0.
There were no intent-to-sell impairments.
ACL on Mortgage Loans
Three months ended March 31, 2022
The Company reviews mortgage loans on a quarterly basis to estimate the ACL with changes in the ACL recorded in net realized gains and losses. Apart from an ACL recorded on individual mortgage loans where the borrower is experiencing financial difficulties, the Company records an ACL on the pool of mortgage loans based on lifetime expected credit losses. For further information, refer to Note 5 - Investments of Notes to Condensed Consolidated Financial Statements.
The Company recorded an increase in the ACL on mortgage loans of $2, primarily driven by net additions of new loans. The Company did not record an ACL on any individual mortgage loans.
Three months ended March 31, 2021
The Company recorded a decrease in the ACL on mortgage loans of $4. The decrease in the allowance was the result of improved economic scenarios and higher property valuations as compared to the prior quarter. The Company did not record an ACL on any individual mortgage loans.
CAPITAL RESOURCES AND LIQUIDITY
The following section discusses the overall financial strength of The Hartford and its insurance operations including their ability to generate cash flows from each of their business segments, borrow funds at competitive rates and raise new capital to meet operating and growth needs.
| SUMMARY OF CAPITAL RESOURCES AND LIQUIDITY
Capital available to the holding company as of March 31, 2022:
• $1.7 billion in fixed maturities, short-term investments, investment sales receivable and cash at The HFSG Holding Company.
• A senior unsecured revolving credit facility that provides for borrowing capacity up to $750 of unsecured credit through October 27, 2026. As of March 31, 2022, there were no borrowings outstanding; and
• An intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. As of March 31, 2022, there were no borrowings outstanding.
2022 expected dividends and other sources of capital:
The future payment of dividends from our subsidiaries is dependent on several factors including the business results, capital position and liquidity of our subsidiaries.
• P&C - The Company's U.S. property and casualty insurance subsidiaries have dividend capacity of $2.0 billion for 2022, with $1.3 billion to $1.4 billion of net dividends expected in 2022, including $312 paid to HFSG Holding Company through March 31, 2022.
• Group Benefits - Hartford Life and Accident Insurance Company ("HLA") has dividend capacity of $241 in 2022 with $175 to $200 of dividends expected in 2022, including $16 paid to HFSG Holding Company through March 31, 2022.
• Hartford Funds - HFSG Holding Company expects to receive $175 to $200 in dividends from Hartford Funds in 2022, including $51 received through March 31, 2022.
Expected liquidity requirements for the next twelve months as of March 31, 2022:
• $195 of interest on debt;
• $21 dividends on preferred stock, subject to the discretion of the Board of Directors;
• $515 of common stockholders' dividends, subject to the discretion of the Board of Directors and before share repurchases; and
• $600 7.875% junior subordinated debentures redeemed at par on April 15, 2022.
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Expected liquidity requirements for beyond the next twelve months as of March 31, 2022:
• Interest on debt and debt repayments, see Note 14 - Debt of Notes to Consolidated Financial Statements in The Hartford's 2021 Form 10-K Annual Report
• Preferred stock and common stock dividends, subject to the discretion of the Board of Directors.
Equity repurchase program:
During the three months ended March 31, 2022, the Company repurchased 5.7 million common shares for $400 under the $3.0 billion share repurchase program authorized by the Board of Directors, effective through December 31, 2022. As of March 31, 2022, the Company has $898 remaining for equity repurchases under this share repurchase program. During the period April 1, 2022 through April 27, 2022, the Company repurchased approximately 1.9 million common shares for $139.
The timing of any future repurchases will be dependent upon several factors, including the market price of the Company's securities, the Company's capital position, consideration of the effect of any repurchases on the Company's financial strength or credit ratings, the Company's blackout periods, and other considerations.
| LIQUIDITY REQUIREMENTS AND SOURCES OF CAPITAL
The Hartford Financial Services Group, Inc. ("HFSG Holding Company")
The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc. will primarily be met by HFSG Holding Company's fixed maturities; short-term investments and cash; and dividends from its subsidiaries, principally its insurance operations . The Company maintains sufficient liquidity and has a variety of contingent liquidity resources to manage liquidity across a range of economic scenarios.
The HFSG Holding Company expects to continue to receive dividends from its operating subsidiaries in the future and manages capital in its operating subsidiaries to be sufficient under significant economic stress scenarios. Dividends from subsidiaries and other sources of funds at the holding company may be used to repurchase shares under the authorized share repurchase program at the discretion of management.
Under significant economic stress scenarios, the Company has the ability to meet short-term cash requirements, if needed, by borrowing under its revolving credit facility or by having its insurance subsidiaries take collateralized advances under a facility with the FHLBB. The Company could also choose to have its insurance subsidiaries sell certain highly liquid, high quality fixed maturities or the Company could issue debt in the
public markets under its shelf registration.
Debt
On April 15, 2022, The Hartford redeemed at par $600 aggregate principal amount of its 7.875% junior subordinated debentures due 2042 and, in the second quarter 2022, will recognize a loss on extinguishment of debt of $ 9 , before tax, for unamortized debt issuance costs. For additional information on the redemption, see Note 11 - Debt of Notes to Condensed Consolidated Financial Statements.
| DIVIDENDS
The Hartford's Board of Directors declared the following quarterly dividends since January 1, 2022:
Common Stock Dividends
Declared Record Payable Amount per share
February 16, 2022 March 1, 2022 April 4, 2022 $ 0.385
Preferred Stock Dividends
Declared Record Payable Amount per share
February 16, 2022 May 2, 2022 May 16, 2022 $ 375.00
There are no current restrictions on the HFSG Holding Company's ability to pay dividends to its stockholders.
For a discussion of restrictions on dividends to the HFSG Holding Company from its insurance subsidiaries, see the following "Dividends from Subsidiaries" discussion. For a discussion of potential restrictions on the HFSG Holding Company's ability to pay dividends, see the risk factor "Our ability to declare and pay dividends is subject to limitations" in Item 1A of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
| DIVIDENDS FROM SUBSIDIARIES
Dividends to HFSG Holding Company from its insurance subsidiaries are restricted by insurance regulation. The Company’s principal insurance subsidiaries are domiciled in the United States and, the United Kingdom.
The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s statutory policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the preceding year, in each case determined under statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner.
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Property casualty insurers domiciled in New York, including Navigators Insurance Company ("NIC") and Navigators Specialty Insurance Company ("NSIC"), generally may not, without notice to and approval by the state insurance commissioner, pay dividends out of earned surplus in any twelve-month period that exceeds the lesser of (i) 10% of the insurer’s statutory policyholders’ surplus as of the most recent financial statement on file, or (ii) 100% of its adjusted net investment income, as defined, for the same twelve month period.
The insurance holding company laws of the other jurisdictions in which The Hartford’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances more restrictive) limitations on the payment of dividends. In addition to statutory limitations on paying dividends, the Company also takes other items into consideration when determining dividends from subsidiaries. These considerations include, but are not limited to, expected earnings and capitalization of the subsidiaries, regulatory capital requirements and liquidity requirements of the individual operating company.
Corporate members of Lloyd's syndicates may pay dividends to its parent to the extent of available profits that have been distributed from the syndicate in excess of the Funds at Lloyd's ("FAL") capital requirement and subject to restrictions imposed under UK Company Law. The FAL is determined based on the syndicate’s solvency capital requirement ("SCR") under the Solvency II capital adequacy model, the current regulatory framework governing UK domiciled insurers, plus a Lloyd’s specific economic capital assessment.
Insurers domiciled in the United Kingdom may pay dividends to their parent out of their statutory profits subject to restrictions imposed under U.K. Company law and Solvency II.
Through the first three months of 2022, HFSG Holding Company received $379 of net dividends from its subsidiaries, including $16 from HLA, $51 from Hartford Funds and $312 from its U.S. P&C subsidiaries, excluding $95 of P&C dividends that were subsequently contributed to P&C subsidiaries and $12 of P&C dividends related to interest payments on an intercompany note owed by Hartford Holdings, Inc. ("HHI") to Hartford Fire Insurance Company.
Over the remainder of 2022, the Company anticipates receiving approximately $1.0 billion to $1.1 billion of net dividends from its U.S. P&C subsidiaries, $160 to $185 of dividends from HLA and $125 to $150 of dividends from Hartford Funds.
| OTHER SOURCES OF CAPITAL FOR THE HFSG HOLDING COMPANY
The Hartford endeavors to maintain a capital structure that provides financial and operational flexibility to its insurance subsidiaries, ratings that support its competitive position in the financial services marketplace (see the "Ratings" section below for further discussion), and stockholder returns. As a result, the Company may from time to time raise capital from the issuance of debt, common equity, preferred stock, equity-related debt or other capital securities and is continuously evaluating strategic
opportunities. The issuance of debt, common equity, equity-related debt or other capital securities could result in the dilution of stockholder interests or reduced net income to common stockholders due to additional interest expense or preferred stock dividends.
Shelf Registrations
The Hartford filed an automatic shelf registration statement with the Securities and Exchange Commission ("the SEC") on February 22, 2022 that permits it to offer and sell debt and equity securities during the three-year life of the registration statement.
For further information regarding Shelf Registrations, see Note Note 11 - Debt of Notes to Condensed Consolidated Financial Statements.
Revolving Credit Facility
The Hartford has a senior unsecured revolving credit facility (the "Credit Facility") that provides up to $750 of unsecured credit through October 27, 2026. As of March 31, 2022, no borrowings were outstanding and no letters of credit were issued under the Credit Facility and The Hartford was in compliance with all financial covenants. For further information regarding the Credit Facility, see Note 14 - Debt of Notes to Consolidated Financial Statements included in the Company’s 2021 Form 10-K Annual Report.
Intercompany Liquidity Agreements
The Company has $2.0 billion available under an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. The Connecticut Department of Insurance ("CTDOI") granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes.
As of March 31, 2022 there were no amounts outstanding at the HFSG Holding Company.
Collateralized Advances with Federal Home Loan Bank of Boston
The Company’s subsidiaries, Hartford Fire Insurance Company (“Hartford Fire”) and Hartford Life and Accident Insurance Company (“HLA”), are members of the FHLBB. Membership allows these subsidiaries access to collateralized advances, which may be short- or long-term with fixed or variable rates. Advances may be used to support general corporate purposes, which would be presented as short- or long-term debt, or to earn incremental investment income, which would be presented in other liabilities consistent with other collateralized financing transactions. As of March 31, 2022, there were no advances outstanding.
For further information regarding collateralized advances with FHLBB, see Note 14 - Debt of Notes to Consolidated Financial Statements included in the Company’s 2021 Form 10-K Annual Report.
Lloyd's Letter of Credit Facilities
The Hartford has entered into a committed credit facility agreement with a syndicate of lenders (the "Club Facility") as well as a non-committed $25 credit facility with a lender (the "Bilateral Facility"). The Club Facility has two tranches with one
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tranche extending a $104 commitment and the other tranche extending a £85 million ($112 as of March 31, 2022) commitment. As of March 31, 2022, letters of credit with an aggregate face amount of $104 and £65 million, or $86, were outstanding under the Club Facility and no letters of credit were outstanding under the Bilateral Facility.
Among other covenants, the Club Facility and Bilateral Facility contain financial covenants regarding The Hartford's consolidated net worth and financial leverage and that limit the amount of letters of credit that can support Funds and Lloyd's, consistent with Lloyd's requirements. As of March 31, 2022, The Hartford was in compliance with all financial covenants of both facilities.
For further information regarding the Club Facility and the Bilateral Facility, see Note 14 - Debt of Notes to Consolidated Financial Statements included in the Company’s 2021 Form 10-K Annual Report.
| PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company does not have a 2022 required minimum funding contribution for the U.S. qualified defined benefit pension plan and the funding requirements for all pension plans are expected to be immaterial. The Company has not determined whether, and to what extent, contributions may be made to the U.S. qualified defined benefit pension plan in 2022. The Company will monitor the funded status of the U.S. qualified defined benefit pension plan during 2022 to make this determination. For further discussion of pension and other postretirement benefit obligations, see Note 16 - Employee Benefit Plans of Notes to Condensed Consolidated Financial Statements.
| DERIVATIVE COMMITMENTS
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical rating agencies, of the individual legal entity that entered into the derivative agreement. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could terminate agreements and demand immediate settlement of the outstanding net derivative positions transacted under each agreement. For further information, refer to Note 13 - Commitments and Contingencies of Notes to Condensed Consolidated Financial Statements.
As of March 31, 2022, no derivative positions would be subject to immediate termination in the event of a downgrade of one level below the current financial strength ratings. This could change as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated.
| INSURANCE OPERATIONS
While subject to variability period to period, underwriting and investment cash flows continue to provide sufficient liquidity to meet anticipated demands. The principal sources of operating funds are premiums, fees earned from insurance and administrative service agreements, and investment income,
while investing cash flows primarily originate from maturities and sales of invested assets.
The Company’s insurance operations consist of property and casualty insurance products (collectively referred to as “Property & Casualty Operations”) and Group Benefits.
The Company's insurance operations hold fixed maturity securities including a significant short-term investment position (securities with maturities of one year or less at the time of purchase) to meet liquidity needs. Liquidity requirements that are unable to be funded by the Company's insurance operations' short-term investments would be satisfied with current operating funds, including premiums or investing cash flows, which includes proceeds received through the sale of invested assets. A sale of invested assets could result in significant realized losses.
The following tables represent the fixed maturity holdings, including the aforementioned cash and short-term investments available to meet liquidity needs, for each of the Company’s insurance operations.
Property & Casualty
As of March 31, 2022
Fixed maturities $ 31,442
Short-term investments 1,682
Cash 198
Less: Derivative collateral 25
Total $ 33,297
Property & Casualty operations invested assets also include $1.3 billion in equity securities, $4.1 billion in mortgage loans and $2.9 billion in limited partnerships and other alternative investments.
Group Benefits Operations
As of March 31, 2022
Fixed maturities $ 8,742
Short-term investments 389
Cash 20
Less: Derivative collateral 16
Total $ 9,135
Group Benefits operations invested assets also include $342 in equity securities, $1.6 billion in mortgage loans and $734 in limited partnerships and other alternative investments.
The primary uses of funds are to pay claims, claim adjustment expenses, commissions and other underwriting and insurance operating costs, to pay taxes, to purchase new investments and to make dividend payments to the HFSG Holding Company.
Property & Casualty reserves for unpaid losses and loss adjustment expenses as of March 31, 2022 were $31.6 billion. Reserves for Property & Casualty unpaid losses and loss adjustment expenses include case reserves and incurred but not reported ("IBNR"). The ultimate amount to be paid to settle both case reserves and IBNR is an estimate, subject to significant uncertainty. The actual amount to be paid is not finally determined until the Company reaches a settlement with the claimant. Final claim settlements may vary significantly from the present estimates, particularly since many claims will not be settled until well into the future. For a discussion of The Hartford’s judgment in estimating reserves for Property &
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Casualty see Part II, Item 7, MD&A - Critical Accounting Estimates, Property & Casualty Insurance Product Reserves in the Company's 2021 Form 10-K Annual Report, and for historical payments by reserve line net of reinsurance, see Note 12, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements included in the Company's 2021 Form 10-K Annual Report. The timing of future payments for the next twelve months and for beyond twelve months could vary materially from historical payment patterns due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements. In particular, there is significant uncertainty over the claim payment patterns of asbestos and environmental claims.
Group Benefits reserves as of March 31, 2022 were $9 billion. Estimated group life and disability obligations are based on assumptions comparable with the Company’s historical experience, modified for recent observed trends. For a discussion of The Hartford’s judgment in estimating reserves for Group Benefits see Part II, Item 7, MD&A - Critical Accounting Estimates, Group Benefit Reserves, Net of Reinsurance, in the Company’s 2021 Form 10-K Annual Report. For additional information about future policy benefits, see Note 10 Reserve for Future Policy Benefits and for historical payments by reserve line, net of reinsurance, see Note 12, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements included in the Company's 2021 Form 10-K Annual Report. Due to the significance of the assumptions used, payments for the next twelve months and beyond twelve months could materially differ from historical patterns.
Corporate includes reserves of $443 as of March 31, 2022 related to retained run-off liabilities of its former life and annuity
business. For additional information about future policy benefits, see Note 10 - Reserve for Future Policy Benefits.
Hartford Funds
Hartford Funds principal sources of operating funds are fees earned from basis points on assets under management with uses primarily for payments to subadvisors and other general operating expenses. As of March 31, 2022, Hartford Funds cash and short-term investments were $298.
| PURCHASE AND OTHER OBLIGATIONS
The Hartford’s unfunded commitments to purchase investments in limited partnerships and other alternative investments, private placements, and mortgage loans are disclosed in Note 15 - Commitments and Contingencies of Notes to Consolidated Financial Statements in The Hartford's 2021 Form 10-K Annual Report. It is anticipated that these unfunded commitments will be funded through the Company’s normal operating and investing activities.
In the normal course of business, the Company enters into contractual commitments to purchase various goods and services such as maintenance, human resources, and information technology. The Company’s operating lease commitments are disclosed in Note 21 - Leases of Notes to Consolidated Financial Statements in The Hartford's 2021 Form 10-K Annual Report. It is anticipated that these purchase commitments and operating lease obligations will be funded through the Company’s normal operating and investing activities.
| CAPITALIZATION
Capital Structure
March 31, 2022 December 31, 2021 Change
Short-term debt (includes current maturities of long-term debt) $ 591 $ — NM
Long-term debt $ 4,354 $ 4,944 (12 %)
Total debt
4,945 4,944 — %
Common stockholders' equity excluding AOCI, net of tax 17,262 17,337 — %
Preferred stock 334 334 — %
AOCI, net of tax (1,699) 172 NM
Total stockholders’ equity
15,897 17,843 (11 %)
Total capitalization
$ 20,842 $ 22,787 (9 %)
Debt to stockholders’ equity 31 % 28 %
Debt to capitalization 24 % 22 %
Total capitalization decreased $1,945 as of March 31, 2022 compared to December 31, 2021 primarily due to net unrealized losses on fixed maturities, available for sale, in first quarter 2022 and due to share repurchases and common stockholder dividends in excess of net income in the period.
For additional information on AOCI, net of tax, including net unrealized gain (losses) from securities, see Note 15 - Changes In and Reclassifications From Accumulated Other
Comprehensive Income (Loss) and Note 5 - Investments of Notes to Condensed Consolidated Financial Statements. For additional information on debt, see Note 11 - Debt of Notes to Condensed Consolidated Financial Statement and Note 14 - Debt of Notes to Consolidated Financial Statement in The Hartford's 2021 Form 10-K Annual Report.
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| CASH FLOW[1]
Three Months Ended March 31,
2022 2021
Net cash provided by operating activities $ 429 $ 759
Net cash provided by (used for) investing activities $ 126 $ (450)
Net cash used for financing activities $ (586) $ (266)
Cash and restricted cash– end of period $ 306 $ 280
[1] Cash activities in 2021 include cash flows related to Continental Europe Operations that was sold on December 29, 2021. See Note 22 - Business Dispositions of Notes to Consolidated Financial Statements included in The Hartford's 2021 Form 10-K Annual Report for discussion of this transaction.
Cash provided by operating activities decreased in 2022 as compared to the prior year period primarily driven by an increase in P&C and Group Benefits loss and loss adjustment expenses paid, higher operating expenses, including payroll and employee related expenditures, increased commission and higher premium taxes as well as net tax proceeds in the prior year quarter, partially offset by an increase in P&C and Group Benefits premiums received.
Cash provided by (used for) investing activities increased from net outflows in the 2021 period to net inflows in the 2022 period as a result of an increase in net proceeds from fixed maturities and a decrease in net payments for equity securities, partially offset by an increase in net payments for mortgages and an increase in net payments for short-term investments.
Cash used for financing activities increased primarily due an increase in share repurchases in 2022.
Operating cash flow for the three months ended March 31, 2022 has been adequate to meet liquidity requirements.
| EQUITY MARKETS
For a discussion of the potential impact of the equity markets on capital and liquidity, see the Financial Risk section in this MD&A and the Financial Risk on Statutory Capital section of the MD&A in the Company's 2021 Form 10-K Annual Report.
| RATINGS
Ratings are an important factor in establishing a competitive position in the insurance marketplace and impact the Company's ability to access financing and its cost of borrowing. There can be no assurance that the Company’s ratings will continue for any given period of time, or that they will not be changed. In the event the Company’s ratings are downgraded,
the Company’s competitive position, ability to access financing, and its cost of borrowing, may be adversely impacted.
Insurance Financial Strength Ratings as of
April 27, 2022
A.M. Best Standard & Poor’s Moody’s
Hartford Fire Insurance Company A+ A+ A1
Hartford Life and Accident Insurance Company A+ A+ A1
Navigators Insurance Company A+ A Not Rated
Other Ratings:
The Hartford Financial Services Group, Inc.:
Senior debt a- BBB+ Baa1
These ratings are not a recommendation to buy, sell or hold any of The Hartford's securities and they may be revised or withdrawn at any time at the discretion of the rating organization. Each agency's rating should be evaluated independently of any other agency's rating. The system and the number of rating categories can vary across rating agencies.
Among other factors, rating agencies consider the level of statutory capital and surplus of our U.S. insurance subsidiaries as well as the level of a measure of GAAP capital held by the Company in determining the Company's financial strength and credit ratings. Rating agencies may implement changes to their capital formulas that have the effect of increasing the amount of capital we must hold in order to maintain our current ratings. See Risk Factors disclosed in Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2021.
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| STATUTORY CAPITAL
U.S. Statutory Capital Rollforward for the Company's Insurance Subsidiaries
Property and Casualty Insurance Subsidiaries [1] [2] Group Benefits Insurance Subsidiary Total
U.S statutory capital at January 1, 2022
$ 11,914 $ 2,410 $ 14,324
Statutory income 486 (11) 475
Contributions from (dividends to) parent (312) (16) (328)
Other items (60) 9 (51)
Net change to U.S. statutory capital 114 (18) 96
U.S statutory capital at March 31, 2022
$ 12,028 $ 2,392 $ 14,420
[1] The statutory capital for property and casualty insurance subsidiaries in this table does not include the value of an intercompany note owed by HHI to Hartford Fire Insurance Company.
[2] Excludes insurance operations in the U.K.
| CONTINGENCIES
Legal Proceedings
For a discussion regarding The Hartford’s legal proceedings, see the information contained in Note 13 - Commitments and Contingencies of the Notes to Condensed Consolidated Financial Statements.
Legislative and Regulatory Developments
COVID-19 Global Pandemic
State and federal lawmakers continue to propose legislation and regulation to address the effects of the COVID-19 pandemic and to promote recovery from the pandemic. There have been proposals to impose retroactive coverage of COVID-19 claims under existing business interruption coverage provisions. If such proposals were enacted, they could represent a material exposure for the Company. Further, some states have adopted, or are considering incorporating, a presumption that if certain workers become infected with COVID-19, such infection would constitute an occupational disease triggering workers’ compensation coverage. In addition, state insurance regulators, including California, New Jersey and New York, have encouraged (and in some cases required) insurers to offer immediate relief to policyholders. As the COVID-19 global pandemic continues, regulators may require us or we may elect to provide additional consumer and/or business financial relief. We may also see this manifest in the review and approval of new rate filings, with regulators applying heightened scrutiny even when rate reductions are proposed. The duration and scope of such regulatory/Company actions are uncertain, and the impacts of such actions could adversely affect the Company’s insurance business.
Proposals have been introduced in Congress to enact a pandemic risk insurance coverage through a risk sharing mechanism between insurers and the federal government for future pandemics. Timing for any Congressional action with respect to these proposals is uncertain at this time. If such a program were to be enacted, it could represent a significant obligation for the Company in terms of deductible and co-share obligations.
Biden Administration Build Back Better Agenda
During 2021, the Biden Administration called for Congressional action on the President’s Build Back Better Agenda, which outlined funding across traditional infrastructure and human infrastructure in the U.S.
On November 15, 2021, President Biden signed the bipartisan “Infrastructure Investment and Jobs Act” into law, which provided funding for traditional infrastructure such as roads, bridges and highways.
The second phase of Build Back Better proposes funding for a national paid family and medical leave program, clean energy initiatives, affordable childcare and more in the Build Back Better Act.
Notably, a national paid family and medical leave program could affect existing state-based disability and paid leave programs or other products and services that the Company provides through its Group Benefits business.
If enacted, the effect of new proposals from the Build Back Better agenda on the Company’s operations, including the ability to attract new business and retain existing customers is unclear. While Congress is considering partisan action on the Build Back Better agenda, the nature and timing of such action is unclear.
US Tax Reform
As Congress debates action on various spending initiatives, it may consider a variety of proposals to fund the cost of new spending with revenue raising measures. Proposals from the Build Back Better agenda, as well as the Biden Administration commitment to the OECD global minimum tax, could be drivers of tax policy changes, including a possible increase in the corporate tax rate, creation of a corporate minimum tax and other changes to taxes owed on income earned outside of the U.S. These and other tax proposals and regulatory initiatives that may be considered by Congress and/or the U.S. Treasury Department could have a material effect on the Company and its insurance businesses. The nature and timing of any Congressional or regulatory action with respect to any such efforts is unclear.
Post-Brexit UK Regulatory Reforms
The UK Prudential Regulation Authority (“PRA”) is reviewing the Solvency II regime, introduced across the EU during 2016 to align insurance entities’ risk frameworks for managing capital
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adequacy and risk management practices, as well as increased transparency and enhanced regulatory supervision.
The PRA also recognizes that climate change presents a material financial risk to insurers and the financial system and for 2022 the PRA will incorporate the financial risks posed by supervision into its core supervisory approach.
IMPACT OF NEW ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in The Hartford’s 2021 Form 10-K Annual Report.
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ACRONYMS
A&E Asbestos and Environmental
HIMCO Hartford Investment Management Company
ABS Asset Backed Securities
HLA Hartford Life and Accident Insurance Company
ACL Allowance for Credit Losses
IBNR Incurred But Not Reported
ADC Adverse Development Cover
IT Information Technology
AFS Available-For-Sale
LCL Liability for Credit Losses
ALAE Allocated Loss Adjustment Expenses
LIBOR London Inter-Bank Offered Rate
AOCI Accumulated Other Comprehensive Income
LTD Long-Term Disability
AUM Assets Under Management
LTV Loan-to-Value
BSA Boy Scouts of America
MD&A Management's Discussion and Analysis of Financial Conditions and Results of Operations
CAY Current Accident Year
NAIC National Association of Insurance Commissioners
CLO Collateralized Loan Obligation
NIC Navigators Insurance Company
CMBS Commercial Mortgage-Backed Securities
NICO National Indemnity Company, a subsidiary of Berkshire Hathaway Inc. (“Berkshire”)
CPRI Credit and Political Risk Insurance
NM Not Meaningful
DAC Deferred Policy Acquisition Costs
NOLs Net Operating Loss Carryforwards or Carrybacks
DEI Diversity, Equity and Inclusion
NSIC Navigators Specialty Insurance Company
DLR Disabled Life Reserve
OCI Other Comprehensive Income
DSCR Debt Service Coverage Ratio
OTC Over-the-Counter
ERCC Enterprise Risk and Capital Committee
P&C Property and Casualty
ESPP The Hartford Employee Stock Purchase Plan
PG&E PG&E Corporation and Pacific Gas and Electric Company
ETF Exchange-Traded Funds
PV&T Political Violence and Terrorism
FAL Funds at Lloyd's
PYD Prior Year Development
FASB Financial Accounting Standards Board
RBC Risk-Based Capital
FHLBB Federal Home Loan Bank of Boston
RMBS Residential Mortgage-Backed Securities
FVO Fair Value Option
ROA Return on Assets
GAAP Generally Accepted Accounting Principles
ROE Return on Equity
GB Group Benefits
SCR Solvency Capital Requirement
HFSG Hartford Financial Services Group, Inc.
SOFR Secured Overnight Funding Rate
HHI Hartford Holdings, Inc.
ULAE Unallocated Loss Adjustment Expenses
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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.