Item 1. Financial Statements
Item 1.
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of June 30, 2023, the related condensed consolidated statements of operations, comprehensive income (loss), and changes in stockholders' equity for the three-month and six-month periods ended June 30, 2023 and 2022, and of cash flows for the six-month periods ended June 30, 2023 and 2022, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2022, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for the year then ended prior to retrospective adjustment for a change in the Company’s method of accounting for the reserve for future policy benefits (not presented herein); and in our report dated February 24, 2023, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 1 that were applied to retrospectively adjust the December 31, 2022 consolidated balance sheet of the Company (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted condensed consolidated balance sheet as of December 31, 2022.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
July 27, 2023
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except for per share data) 2023 2022 2023 2022
(Unaudited)
Revenues
Earned premiums $ 5,220 $ 4,810 $ 10,283 $ 9,461
Fee income 328 341 647 703
Net investment income 540 541 1,055 1,050
Net realized losses ( 64 ) ( 338 ) ( 71 ) ( 483 )
Other revenues 25 19 45 35
Total revenues 6,049 5,373 11,959 10,766
Benefits, losses and expenses
Benefits, losses and loss adjustment expenses 3,580 3,074 7,062 6,194
Amortization of deferred policy acquisition costs ("DAC")
502 450 993 887
Insurance operating costs and other expenses 1,225 1,225 2,441 2,435
Interest expense 50 51 100 113
Amortization of other intangible assets 17 17 35 35
Restructuring and other costs 3 2 3 7
Total benefits, losses and expenses 5,377 4,819 10,634 9,671
Income before income taxes 672 554 1,325 1,095
Income tax expense 125 110 243 208
Net income 547 444 1,082 887
Preferred stock dividends 5 5 10 10
Net income available to common stockholders $ 542 $ 439 $ 1,072 $ 877
Net income available to common stockholders per common share
Basic $ 1.75 $ 1.34 $ 3.44 $ 2.66
Diluted $ 1.73 $ 1.32 $ 3.39 $ 2.62
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three Months Ended June 30, Six Months Ended June 30,
(in millions) 2023 2022 2023 2022
(Unaudited)
Net income $ 547 $ 444 $ 1,082 $ 887
Other comprehensive income (loss) ("OCI"):
Change in net unrealized gain (loss) on fixed maturities, available for sale ("AFS") ( 269 ) ( 1,597 ) 317 ( 3,489 )
Change in unrealized losses on fixed maturities for which an allowance for credit losses ("ACL") has been recorded 3 — ( 3 ) —
Change in net gain (loss) on cash flow hedging instruments ( 17 ) 25 ( 9 ) 24
Change in foreign currency translation adjustments 3 ( 8 ) 5 ( 8 )
Change in liability for future policy benefits adjustments 5 29 ( 3 ) 72
Change in pension and other postretirement plan adjustments 5 12 10 24
Other comprehensive income (loss), net of tax ( 270 ) ( 1,539 ) 317 ( 3,377 )
Comprehensive income (loss) $ 277 $ ( 1,095 ) $ 1,399 $ ( 2,490 )
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
(in millions, except for share and per share data) June 30,
2023 December 31, 2022
(Unaudited)
Assets
Investments:
Fixed maturities, AFS, at fair value (amortized cost of $ 40,411 and $ 39,533 , and ACL of $ 18 and $ 12 )
$ 37,497 $ 36,231
Fixed maturities, at fair value using the fair value option ("FVO")
320 333
Equity securities, at fair value 895 1,801
Mortgage loans (net of ACL of $ 41 and $ 36 )
6,020 6,000
Limited partnerships and other alternative investments 4,527 4,177
Other investments 173 159
Short-term investments 3,236 3,859
Total investments 52,668 52,560
Cash 150 229
Restricted cash 72 115
Premiums receivable and agents' balances (net of ACL of $ 119 and $ 109 )
5,578 4,949
Reinsurance recoverables (net of allowance for uncollectible reinsurance of $ 110 and $ 105 )
6,912 6,964
Deferred policy acquisition costs 1,096 998
Deferred income taxes, net 1,342 1,437
Goodwill 1,911 1,911
Property and equipment, net 884 927
Other intangible assets, net 743 778
Other assets 2,539 2,140
Total assets $ 73,895 $ 73,008
Liabilities
Unpaid losses and loss adjustment expenses $ 41,219 $ 41,243
Reserve for future policy benefits 489 502
Other policyholder funds and benefits payable 647 658
Unearned premiums 8,589 7,815
Long-term debt 4,360 4,357
Other liabilities 4,439 4,757
Total liabilities 59,743 59,332
Commitments and Contingencies (Note 14)
Stockholders’ Equity
Preferred stock, $ 0.01 par value — 50,000,000 shares authorized, 13,800 shares issued at June 30, 2023 and December 31, 2022, aggregate liquidation preference of $ 345
334 334
Common stock, $ 0.01 par value — 1,500,000,000 shares authorized, 344,960,228 shares issued at June 30, 2023 and December 31, 2022
3 3
Additional paid-in capital 1,864 1,895
Retained earnings 17,865 17,058
Treasury stock, at cost 37,889,534 and 29,848,980 shares
( 2,390 ) ( 1,773 )
Accumulated other comprehensive income (loss) ("AOCI"), net of tax
( 3,524 ) ( 3,841 )
Total stockholders’ equity 14,152 13,676
Total liabilities and stockholders’ equity $ 73,895 $ 73,008
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
Three Months Ended June 30, Six Months Ended June 30,
(in millions, except for share and per share data) 2023 2022 2023 2022
(Unaudited)
Preferred Stock $ 334 $ 334 $ 334 $ 334
Common Stock 3 4 3 4
Additional Paid-in Capital
Additional Paid-in Capital, beginning of period 1,847 3,249 1,895 3,309
Issuance of shares under incentive and stock compensation plans and other ( 5 ) ( 7 ) ( 119 ) ( 122 )
Stock-based compensation plans expense 22 22 88 77
Additional Paid-in Capital, end of period 1,864 3,264 1,864 3,264
Retained Earnings
Retained Earnings, beginning of period 17,454 16,081 17,058 15,770
Net income 547 444 1,082 887
Dividends declared on preferred stock ( 5 ) ( 5 ) ( 10 ) ( 10 )
Dividends declared on common stock ( 131 ) ( 126 ) ( 265 ) ( 253 )
Retained Earnings, end of period 17,865 16,394 17,865 16,394
Treasury Stock, at cost
Treasury Stock, at cost, beginning of period ( 2,044 ) ( 2,068 ) ( 1,773 ) ( 1,740 )
Treasury stock acquired ( 353 ) ( 450 ) ( 707 ) ( 850 )
Issuance of shares under incentive and stock compensation plans from treasury stock and other 7 18 139 142
Net shares acquired related to employee incentive and stock compensation plans — ( 2 ) ( 49 ) ( 54 )
Treasury Stock, at cost, end of period ( 2,390 ) ( 2,502 ) ( 2,390 ) ( 2,502 )
Accumulated Other Comprehensive Income (Loss), net of tax
Accumulated Other Comprehensive Income, net of tax, beginning of period ( 3,254 ) ( 1,710 ) ( 3,841 ) 128
Total other comprehensive income (loss) ( 270 ) ( 1,539 ) 317 ( 3,377 )
Accumulated Other Comprehensive Income (Loss), net of tax, end of period ( 3,524 ) ( 3,249 ) ( 3,524 ) ( 3,249 )
Total Stockholders’ Equity $ 14,152 $ 14,245 $ 14,152 $ 14,245
Preferred Shares Outstanding 13,800 13,800 13,800 13,800
Common Shares Outstanding (in thousands)
Common Shares Outstanding, beginning of period 311,780 330,709 315,111 334,926
Treasury stock acquired ( 5,008 ) ( 6,355 ) ( 9,727 ) ( 12,037 )
Issuance of shares under incentive and stock compensation plans and other 307 411 2,312 2,621
Return of shares under incentive and stock compensation plans to treasury stock ( 8 ) ( 20 ) ( 625 ) ( 765 )
Common Shares Outstanding, at end of period 307,071 324,745 307,071 324,745
Cash dividends declared per common share $ 0.425 $ 0.385 $ 0.850 $ 0.770
Cash dividends declared per preferred share $ 375.00 $ 375.00 $ 750.00 $ 750.00
See Notes to Condensed Consolidated Financial Statements.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30,
(in millions) 2023 2022
Operating Activities (Unaudited)
Net income $ 1,082 $ 887
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized losses 71 483
Amortization of deferred policy acquisition costs 993 887
Additions to deferred policy acquisition costs ( 1,091 ) ( 978 )
Depreciation and amortization 258 338
Loss on extinguishment of debt — 9
Other operating activities, net 147 29
Change in assets and liabilities:
Decrease (increase) in reinsurance recoverables 42 ( 203 )
Net change in accrued and deferred income taxes ( 249 ) ( 127 )
Increase in insurance liabilities 731 1,006
Net change in premiums receivable and agents' balances ( 660 ) ( 580 )
Net change in other assets and other liabilities ( 502 ) ( 348 )
Net cash provided by operating activities 822 1,403
Investing Activities
Proceeds from the sale/maturity/prepayment of:
Fixed maturities, AFS 3,507 10,047
Fixed maturities, FVO 1 1
Equity securities, at fair value 1,856 350
Mortgage loans 562 700
Limited partnership and other alternative investments 147 140
Payments for the purchase of:
Fixed maturities, AFS ( 4,441 ) ( 9,644 )
Fixed maturities, FVO — ( 216 )
Equity securities, at fair value ( 916 ) ( 472 )
Mortgage loans ( 587 ) ( 1,176 )
Limited partnership and other alternative investments ( 545 ) ( 541 )
Net proceeds from (payments for) derivatives ( 37 ) 52
Net additions of property and equipment ( 99 ) ( 77 )
Net proceeds from short-term investments 614 1,207
Other investing activities, net ( 9 ) 16
Net cash provided by investing activities 53 387
Financing Activities
Deposits and other additions to investment and universal life-type contracts 48 46
Withdrawals and other deductions from investment and universal life-type contracts ( 49 ) ( 68 )
Repayment of debt — ( 600 )
Net return of shares under incentive and stock compensation plans ( 25 ) ( 34 )
Treasury stock acquired ( 700 ) ( 850 )
Dividends paid on preferred stock ( 10 ) ( 10 )
Dividends paid on common stock ( 268 ) ( 257 )
Net cash used for financing activities ( 1,004 ) ( 1,773 )
Foreign exchange rate effect on cash 7 ( 6 )
Net increase (decrease) in cash and restricted cash ( 122 ) 11
Cash and restricted cash – beginning of period 344 337
Cash and restricted cash– end of period $ 222 $ 348
Supplemental Disclosure of Cash Flow Information
Income tax paid $ 470 $ 279
Interest paid $ 103 $ 116
See Notes to Condensed Consolidated Financial Statements.
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Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide property and casualty insurance, group life and disability products and mutual funds and exchange-traded funds ("ETF") to individual and business customers in the United States as well as in the United Kingdom and other international locations (collectively, “The Hartford”, the “Company”, “we” or “our”).
The Condens ed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, which differ materially from the accounting practices prescribed by various insurance regulatory authorities. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2022 Form 10-K Annual Report. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.
The accompanying Condensed Consolidated Financial Statements and Notes are unaudited. These financial statements reflect all adjustments (generally consisting only of normal accruals) which are, in the opinion of management, necessary for the fair statement of the financial position, results of operations and cash flows for the interim periods. The Company's significant accounting policies are summarized in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements included in the Company's 2022 Form 10-K Annual Report.
Consolidation
The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., and entities in which the Company directly or indirectly has a controlling financial interest. Entities in which the Company has significant influence over the operating and financing decisions but does not control are reported using the equity method. Intercompany transactions and balances between The Hartford and its subsidiaries and affiliates have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
The most significant estimates include those used in determining property and casualty and group long-term disability insurance product reserves, net of reinsurance; evaluation of goodwill for impairment; valuation of investments and derivative instruments; and contingencies relating to corporate litigation and regulatory matters.
Reclassifications
Certain reclassifications have been made to prior period financial information to conform to the current period presentation.
Adoption of New Accounting Standards
Reserve for Future Policy Benefits
On January 1, 2023, the Company adopted the Financial Accounting Standard Board's ("FASB") updated guidance on accounting for long duration insurance contracts, which was applied on a modified retrospective basis as of January 1, 2021.
The new guidance requires the discount rate assumption to be updated, as of the transition date and quarterly going forward, to a current upper-medium grade fixed-income investment yield, which has been interpreted to represent a yield based on single-A credit rated fixed maturity instruments with similar duration to the liability. The new guidance also eliminated the requirement to adjust the reserve for future policy benefits for unrealized gains and losses on fixed maturity investments as if those unrealized gains and losses were realized (referred to as shadow reserves). The change in the reserve estimate resulting from updating the discount rate assumptions and eliminating shadow reserves was recognized as a net cumulative effect adjustment that increased the reserve for future policy benefits by $ 85 and decreased AOCI by $ 65 , net of deferred tax effects as of January 1, 2021.
The new guidance also requires that underlying cash flow assumptions (i.e., mortality, lapse and expense) in the reserve for future policy benefits be based on best estimate assumptions. The adjustments to the reserve for future policy benefits at adoption resulted in establishing a deferred profit liability ("DPL") on limited pay contracts of $ 18 representing the estimated profits based on best estimate cash flow assumptions.
The effect of adopting this guidance on the Company’s reserve for future policy benefits was as follows:
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Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Impact of Adoption on Reserve for Future Policy Benefits
Payout Annuities Life Conversions Paid-up Life DPL Other Total
Reserve for Future Policy Benefits as of December 31, 2020 $ 189 $ 94 $ 267 $ — $ 88 $ 638
Adjustments:
Removal of shadow reserve [1] ( 26 ) — — — — ( 26 )
Update cash flow assumptions and establish DPL ( 16 ) — ( 2 ) 18 — —
Effect of measurement at current single-A rate [1] 59 21 29 — 2 111
Total Adjustments 17 21 27 18 2 85
Reserve for Future Policy Benefits as of January 1, 2021 206 115 294 18 90 723
Change in reserves due to changes in the single-A rate ( 11 ) ( 7 ) ( 15 ) — — ( 33 )
Other changes in reserves ( 7 ) ( 14 ) ( 17 ) 2 ( 8 ) ( 44 )
Reserve for Future Policy Benefits as of December 31, 2021 $ 188 $ 94 $ 262 $ 20 $ 82 $ 646
[1] These changes were reflected as an adjustment to opening AOCI as of January 1, 2021, with a corresponding deferred tax benefit and increase in reinsurance recoverables of $ 18 and $ 2 , respectively, resulting in a net decrease to AOCI of $ 65 .
The effect of adopting this guidance on the Company’s Condensed Consolidated Balance Sheets as of January 1, 2021 as well as December 31, 2022 and 2021, Condensed
Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2022 was as follows:
Impact of Adoption on Condensed Consolidated Balance Sheets
As of December 31, 2022 As of December 31, 2021 As of January 1, 2021
As previously reported Effect of change As currently reported As previously reported Effect of change As currently reported Balance prior to adoption Effect of change As currently reported
Reinsurance recoverables $ 6,966 $ ( 2 ) $ 6,964 $ 6,523 $ 1 $ 6,524 $ 6,011 $ 2 $ 6,013
Deferred income taxes, net $ 1,449 $ ( 12 ) $ 1,437 $ 270 $ 11 $ 281 $ 46 $ 18 $ 64
Reserve for future policy benefits $ 561 $ ( 59 ) $ 502 $ 596 $ 50 $ 646 $ 638 $ 85 $ 723
Retained earnings $ 17,048 $ 10 $ 17,058 $ 15,764 $ 6 $ 15,770 $ 13,918 $ — $ 13,918
AOCI $ ( 3,876 ) $ 35 $ ( 3,841 ) $ 172 $ ( 44 ) $ 128 $ 1,170 $ ( 65 ) $ 1,105
Total stockholders' equity $ 13,631 $ 45 $ 13,676 $ 17,843 $ ( 38 ) $ 17,805 $ 18,556 $ ( 65 ) $ 18,491
Impact of Adoption on Condensed Consolidated Statements of Operations
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
As previously reported Effect of change As currently reported As previously reported Effect of change As currently reported
Benefits, losses and loss adjustment expenses $ 3,076 $ ( 2 ) $ 3,074 $ 6,194 $ — $ 6,194
Income before income taxes $ 552 $ 2 $ 554 $ 1,095 $ — $ 1,095
Income tax expense $ 110 $ — $ 110 $ 208 $ — $ 208
Net income $ 442 $ 2 $ 444 $ 887 $ — $ 887
Net income available to common stockholders $ 437 $ 2 $ 439 $ 877 $ — $ 877
Net income available to common stockholders per common share
Basic $ 1.33 $ 0.01 $ 1.34 $ 2.66 $ — $ 2.66
Diluted $ 1.32 $ — $ 1.32 $ 2.62 $ — $ 2.62
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Note 1 - Basis of Presentation and Significant Accounting Policies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Impact of Adoption on Condensed Consolidated Statements of Comprehensive Income
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022
As previously reported Effect of change As currently reported As previously reported Effect of change As currently reported
Change in net unrealized gain (loss) on fixed maturities, AFS $ ( 1,592 ) $ ( 5 ) $ ( 1,597 ) $ ( 3,474 ) $ ( 15 ) $ ( 3,489 )
Change in liability for future policy benefits adjustments $ — $ 29 $ 29 $ — $ 72 $ 72
Other comprehensive loss, net of tax $ ( 1,563 ) $ 24 $ ( 1,539 ) $ ( 3,434 ) $ 57 $ ( 3,377 )
Comprehensive loss $ ( 1,121 ) $ 26 $ ( 1,095 ) $ ( 2,547 ) $ 57 $ ( 2,490 )
SIGNIFICANT ACCOUNTING POLICIES
Reserve for Future Policy Benefits
The Company’s reserves for future policy benefits includes paid-up life insurance and whole-life policies resulting from conversion from group life policies included within the Group Benefits segment and reserves for run-off structured settlement and terminal funding agreement liabilities, which are reported in the Corporate category.
Contracts are grouped into cohorts by contract type and issue year. The Company establishes reserves for future policy benefits using the net premium approach, which represents the present value of future policyholder benefits and related expenses less the present value of future net premiums. Net premiums are calculated by multiplying gross premiums for the contracts in a specific cohort by a net premium ratio. The net premium ratio is determined for the lifetime of a given cohort as the present value of net benefits divided by the present value of gross premiums. Related expenses include termination and settlement costs and exclude acquisition costs and non-claim related costs, such as costs relating to investments, general administration, policy maintenance, product development, market research and general overhead or any other costs, which are expensed as incurred.
The Company estimates premiums, benefits and related expense cash flows using methods that include assumptions, such as estimates of mortality, lapse, and claim-related expenses, and the possible impact of inflation on those expenses. Benefits include all guaranteed cash flows to be paid to the policyholder.
The reserve for future policy benefits is adjusted for differences between actual and expected experience. Each quarter, the Company updates its estimates of cash flows expected over the life of a group of contracts using actual historical experience. These updated cash flows are used to calculate the revised net premiums and net premium ratio, which are used to derive an updated reserve for future policy benefits. In subsequent periods, the revised net premiums are used to measure the reserve for future policy benefits, subject to future revisions. Future cash flow assumptions, including mortality, lapse and expense are reviewed and, if a change is indicated, updated at least annually in the third quarter.
The difference between the newly calculated reserve balance and the reserve balance before updating for actual experience and/or future cash flow assumptions is the remeasurement gain or loss, which is immaterial for the three and six months ended June 30, 2023 and 2022, and is presented in benefits losses and loss adjustments expense in the Condensed Consolidated Statements of Operations. Changes to the reserve due to updates to cash flow assumptions discounted at the discount rate used immediately prior to transition are recognized on a catch-up basis in the Condensed Consolidated Statement of Operations.
The discount rate assumption is an equivalent single rate that is based on a current market observable, upper-medium grade fixed maturity yield. This has been interpreted to represent a yield based on single-A credit rated fixed maturity instruments with similar duration to the liability. The Company uses the yield of a market observable index of single-A credit rated fixed maturities as the basis for setting the discount rate. The discount rate assumption is updated quarterly and the change in the reserve estimate resulting from updating the discount rate assumption is recognized in other comprehensive income.
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Note 2 - Earnings Per Common Share
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. EARNINGS PER COMMON SHARE
Computation of Basic and Diluted Earnings per Common Share
Three Months Ended June 30, Six Months Ended June 30,
(In millions, except for per share data) 2023 2022 2023 2022
Earnings
Net income $ 547 $ 444 $ 1,082 $ 887
Less: Preferred stock dividends 5 5 10 10
Net income available to common stockholders $ 542 $ 439 $ 1,072 $ 877
Shares
Weighted average common shares outstanding, basic 309.4 327.4 311.7 329.9
Dilutive effect of stock-based awards under compensation plans 3.9 4.4 4.3 4.7
Weighted average common shares outstanding and dilutive potential common shares 313.3 331.8 316.0 334.6
Net income available to common stockholders per common share
Basic $ 1.75 $ 1.34 $ 3.44 $ 2.66
Diluted $ 1.73 $ 1.32 $ 3.39 $ 2.62
3. SEGMENT INFORMATION
The Company currently conducts business principally in five reporting segments including Commercial Lines, Personal Lines, Property & Casualty ("P&C") Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category.
Net Income (Loss)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Commercial Lines $ 458 $ 389 $ 879 $ 772
Personal Lines ( 60 ) 6 ( 61 ) 83
Property & Casualty Other Operations 9 ( 20 ) 15 ( 12 )
Group Benefits 121 106 213 98
Hartford Funds 45 34 86 76
Corporate ( 26 ) ( 71 ) ( 50 ) ( 130 )
Net income 547 444 1,082 887
Preferred stock dividends 5 5 10 10
Net income available to common stockholders $ 542 $ 439 $ 1,072 $ 877
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Note 3 - Segment Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Revenues
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Earned premiums and fee income:
Commercial Lines
Workers’ compensation $ 924 $ 869 $ 1,822 $ 1,704
Liability 502 453 988 877
Marine 66 54 125 115
Package business 514 449 998 884
Property 244 212 472 402
Professional liability 196 182 384 360
Bond 80 77 157 149
Assumed reinsurance 143 118 281 218
Automobile 227 211 445 411
Total Commercial Lines 2,896 2,625 5,672 5,120
Personal Lines
Automobile 528 502 1,043 1,001
Homeowners 239 231 471 460
Total Personal Lines [1] 767 733 1,514 1,461
Group Benefits
Group disability 878 828 1,744 1,634
Group life 650 599 1,293 1,196
Other 102 90 202 177
Total Group Benefits 1,630 1,517 3,239 3,007
Hartford Funds
Mutual fund and ETF 226 243 449 508
Third-party life and annuity separate accounts 18 20 36 42
Total Hartford Funds 244 263 485 550
Corporate
11 13 20 26
Total earned premiums and fee income 5,548 5,151 10,930 10,164
Net investment income 540 541 1,055 1,050
Net realized losses ( 64 ) ( 338 ) ( 71 ) ( 483 )
Other revenues 25 19 45 35
Total revenues
$ 6,049 $ 5,373 $ 11,959 $ 10,766
[1] For the three months ended June 30, 2023 and 2022, AARP members accounted for earned premiums of $ 710 and $ 675 , respectively. For the six months ended June 30, 2023 and 2022, AARP members accounted for earned premiums of $ 1.40 billion and $ 1.34 billion, respectively.
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Note 3 - Segment Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Non-Insurance Revenue from Contracts with Customers
Three Months Ended June 30, Six Months Ended June 30,
Revenue Line Item 2023 2022 2023 2022
Commercial Lines
Installment billing fees Fee income $ 10 $ 10 $ 20 $ 19
Personal Lines
Installment billing fees Fee income 7 7 15 15
Insurance servicing revenues Other revenues 24 19 43 36
Group Benefits
Administrative services Fee income 56 48 107 93
Hartford Funds
Advisory, servicing and distribution fees Fee income 244 263 485 550
Corporate
Investment management and other fees Fee income 11 13 20 26
Other Other revenues — 1 — 1
Total non-insurance revenues with customers $ 352 $ 361 $ 690 $ 740
4. FAIR VALUE MEASUREMENTS
The Company carries certain financial assets and liabilities at estimated fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. Our fair value framework includes a hierarchy that gives the highest priority to the use of quoted prices in active markets, followed by the use of market observable inputs, followed by the use of unobservable inputs. The fair value hierarchy levels are as follows:
Level 1 Fair values based primarily on unadjusted quoted prices for identical assets or liabilities, in active markets that the Company has the ability to access at the measurement date.
Level 2 Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
Level 3 Fair values derived when one or more of the significant inputs are unobservable (including assumptions about risk). With little or no observable market, the determination of fair values uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. Also included are securities that are traded within illiquid markets and/or priced by independent brokers.
The Company will classify the financial asset or liability by level based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable inputs (e.g., changes in interest rates) and unobservable inputs (e.g., changes in risk assumptions) are used to determine fair values that the Company has classified within Level 3.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of June 30, 2023
Total Quoted Prices in
Active Markets
for Identical
Assets
(Level 1) Significant
Observable
Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
Asset backed securities ("ABS")
$ 2,685 $ — $ 2,685 $ —
Collateralized loan obligations ("CLO")
2,981 — 2,896 85
Commercial mortgage-backed securities ("CMBS")
3,227 — 2,989 238
Corporate 16,096 — 14,474 1,622
Foreign government/government agencies 539 — 539 —
Municipal 6,226 — 6,226 —
Residential mortgage-backed securities ("RMBS")
3,729 — 3,660 69
U.S. Treasuries 2,014 — 2,014 —
Total fixed maturities, AFS 37,497 — 35,483 2,014
Fixed maturities, FVO 320 — 157 163
Equity securities, at fair value 895 357 479 59
Derivative assets
Foreign exchange derivatives 5 — 5 —
Interest rate derivatives 1 — 1 —
Total derivative assets [1] 6 — 6 —
Short-term investments 3,236 1,749 1,301 186
Total assets accounted for at fair value on a recurring basis $ 41,954 $ 2,106 $ 37,426 $ 2,422
Liabilities accounted for at fair value on a recurring basis
Derivative liabilities
Credit derivatives $ ( 71 ) $ — $ ( 71 ) $ —
Foreign exchange derivatives 33 — 33 —
Interest rate derivatives ( 3 ) — ( 3 ) —
Total derivative liabilities [2] ( 41 ) — ( 41 ) —
Total liabilities accounted for at fair value on a recurring basis $ ( 41 ) $ — $ ( 41 ) $ —
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2022
Total Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Assets accounted for at fair value on a recurring basis
Fixed maturities, AFS
ABS $ 1,941 $ — $ 1,911 $ 30
CLO 2,941 — 2,826 115
CMBS 3,368 — 3,146 222
Corporate 15,233 — 13,644 1,589
Foreign government/government agencies 547 — 547 —
Municipal 6,296 — 6,296 —
RMBS 3,708 — 3,613 95
U.S. Treasuries 2,197 — 2,197 —
Total fixed maturities, AFS 36,231 — 34,180 2,051
Fixed maturities, FVO 333 — 155 178
Equity securities, at fair value 1,801 1,261 479 61
Derivative assets
Credit derivatives 2 — 2 —
Foreign exchange derivatives 32 — 32 —
Total derivative assets [1] 34 — 34 —
Short-term investments 3,859 1,429 2,237 193
Total assets accounted for at fair value on a recurring basis $ 42,258 $ 2,690 $ 37,085 $ 2,483
Liabilities accounted for at fair value on a recurring basis
Derivative liabilities
Credit derivatives $ ( 2 ) $ — $ ( 2 ) $ —
Foreign exchange derivatives 21 — 21 —
Interest rate derivatives ( 6 ) — ( 6 ) —
Total derivative liabilities [2] 13 — 13 —
Total liabilities accounted for at fair value on a recurring basis $ 13 $ — $ 13 $ —
[1] Includes derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law. See footnote 2 to this table for derivative liabilities.
[2] Includes derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law.
The Company has overseas deposits included in other investments of $ 70 and $ 62 as of June 30, 2023 and December 31, 2022, respectively, which are measured at fair value using the net asset value as a practical expedient.
Fixed Maturities, Equity Securities, Short-term Investments, and Derivatives
Valuation Techniques
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted
into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources and techniques, which are listed in priority order:
• Quoted prices, unadjusted, for identical assets or liabilities in active markets, which are classified as Level 1.
• Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs available through the reporting date. If there are no recently reported trades, they may use a discounted cash flow technique to develop a price using expected cash flows based upon the anticipated future performance of the underlying collateral discounted at an estimated market rate. Both techniques develop prices that consider the time
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
value of future cash flows and provide a margin for risk, including liquidity and credit risk. Most prices provided by third-party pricing services are classified as Level 2 because the inputs used in pricing the securities are observable. However, some securities that are less liquid or trade less actively are classified as Level 3. Additionally, certain long-dated securities, such as municipal securities and bank loans, include benchmark interest rate or credit spread assumptions that are not observable in the marketplace and are thus classified as Level 3.
• Internal matrix pricing is a valuation process internally developed for private placement securities for which the Company is unable to obtain a price from a third-party pricing service. Internal pricing matrices determine credit spreads that, when combined with risk-free rates, are applied to contractual cash flows to develop a price. The Company develops credit spreads using market based data for public securities adjusted for credit spread differentials between public and private securities, which are obtained from a survey of multiple private placement brokers. The market-based reference credit spread considers the issuer’s sector, financial strength, and term to maturity, using an independent public security index, while the credit spread differential considers the non-public nature of the security. Securities priced using internal matrix pricing are classified as Level 2 because the significant inputs are observable or can be corroborated with observable data.
• Independent broker quotes, which are typically non-binding, use inputs that can be difficult to corroborate with observable market-based data. Brokers may use present value techniques using assumptions specific to the security types, or they may use recent transactions of similar securities. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on independent broker quotes are classified as Level 3.
The fair value of derivative instruments is determined primarily using a discounted cash flow model or option model technique and incorporates counterparty credit risk. In some cases, quoted market prices for exchange-traded and over-the-counter ("OTC") cleared derivatives may be used and in other cases independent broker quotes may be used. The pricing valuation models primarily use inputs that are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may include significant inputs that are unobservable, such as volatility levels, and reflect the Company’s view of what other market participants would use when pricing such instruments.
Valuation Controls
The process for determining the fair value of investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company. The purpose of the Valuation Committee is to provide oversight of the pricing policy, procedures, and controls, including approval of valuation methodologies and pricing sources. The Valuation Committee reviews market data trends, pricing statistics and trading statistics to ensure that prices are reasonable and consistent with our fair value framework. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews. Controls include, but are not limited to, reviewing daily and monthly price changes, stale prices, and missing prices and comparing new trade prices to third-party pricing services, weekly price changes to published bond index prices, and daily OTC derivative market valuations to counterparty valuations. The Company has a dedicated pricing group that works with trading and investment professionals to challenge prices received by a third-party pricing source if the Company believes that the valuation received does not accurately reflect the fair value. New valuation models and changes to current models require approval by the Valuation Committee. In addition, the Company’s enterprise-wide Operational Risk Management function provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and consist of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, certain short-term investments, and exchange traded derivative instruments.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
Level 2
Primary Observable Inputs
Level 3
Primary Unobservable Inputs
Fixed Maturity Investments
Structured securities (includes ABS, CLO, CMBS and RMBS)
• Benchmark yields and spreads
• Monthly payment information
• Collateral performance, which varies by vintage year and includes delinquency rates, loss severity rates and refinancing assumptions
• Credit default swap indices
Other inputs for ABS, CLO, and RMBS:
• Estimate of future principal prepayments, derived from the characteristics of the underlying structure
• Prepayment speeds previously experienced at the interest rate levels projected for the collateral • Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for less liquid securities or those that trade less actively, including subprime RMBS:
• Estimated cash flows
• Credit spreads, which include illiquidity premium
• Constant prepayment rates
• Constant default rates
• Loss severity
Corporates
• Benchmark yields and spreads
• Reported trades, bids, offers of the same or similar securities
• Issuer spreads and credit default swap curves
Other inputs for investment grade privately placed securities that utilize internal matrix pricing:
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for below investment grade privately placed securities and private bank loans:
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
U.S. Treasuries, Municipals, and Foreign government/government agencies
• Benchmark yields and spreads
• Issuer credit default swap curves
• Political events in emerging market economies
• Municipal Securities Rulemaking Board reported trades and material event notices
• Issuer financial statements • Credit spreads beyond observable curve
• Interest rates beyond observable curve
Equity Securities
• Quoted prices in markets that are not active • For privately traded equity securities, internal discounted cash flow models utilizing earnings multiples or other cash flow assumptions that are not observable
Short-term Investments
• Benchmark yields and spreads
• Reported trades, bids, offers
• Issuer spreads and credit default swap curves
• Material event notices and new issue money market rates
• Independent broker quotes
Derivatives
Credit derivatives
• Swap yield curve
• Credit default swap curves
• Not applicable
Foreign exchange derivatives
• Swap yield curve
• Currency spot and forward rates
• Cross currency basis curves
• Not applicable
Interest rate derivatives
• Swap yield curve • Not applicable
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Significant Unobservable Inputs for Level 3 - Securities
Assets accounted for at fair value on a recurring basis Fair
Value Predominant
Valuation
Technique Significant
Unobservable Input Minimum Maximum Weighted Average [1] Impact of
Increase in
Input on Fair Value [2]
As of June 30, 2023
CLO $ 85 Discounted cash flows Spread 313 bps 313 bps 313 bps Decrease
CMBS [3] $ 235 Discounted cash flows Spread (encompasses prepayment, default risk and loss severity) 349 bps 1,513 bps 491 bps Decrease
Corporate [4] $ 1,577 Discounted cash flows Spread 63 bps 1,079 bps 360 bps Decrease
RMBS $ 69 Discounted cash flows Spread [6] 54 bps 225 bps 133 bps Decrease
Constant prepayment rate [6] 2 % 10 % 6 % Decrease [5]
Constant default rate [6] 1 % 4 % 2 % Decrease
Loss severity [6] 10 % 100 % 41 % Decrease
Short-term investments [3] $ 153 Discounted cash flows Spread 245 bps 577 bps 251 bps Decrease
As of December 31, 2022
CLO $ 115 Discounted cash flows Spread 337 bps 337 bps 337 bps Decrease
CMBS [3] $ 219 Discounted cash flows Spread (encompasses prepayment, default risk and loss severity) 419 bps 1,307 bps 527 bps Decrease
Corporate [4] $ 1,541 Discounted cash flows Spread 77 bps 642 bps 360 bps Decrease
RMBS [3] $ 65 Discounted cash flows Spread [6] 62 bps 249 bps 160 bps Decrease
Constant prepayment rate [6] 1 % 10 % 7 % Decrease [5]
Constant default rate [6] 1 % 4 % 2 % Decrease
Loss severity [6] 10 % 100 % 38 % Decrease
[1] The weighted average is determined based on the fair value of the securities.
[2] Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
[3] Excludes securities for which the Company bases fair value on broker quotations.
[4] Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
[5] Decrease for above market rate coupons and increase for below market rate coupons.
[6] Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads .
As of June 30, 2023 and December 31, 2022, the fair values of the Company's level 3 derivatives were less than $ 1 for both periods.
The table above excludes certain securities for which fair values are predominately based on independent broker quotes. While the Company does not have access to the significant unobservable inputs that independent brokers may use in their pricing process, the Company believes brokers likely use inputs similar to those used by the Company and third-party pricing services to price similar instruments. As such, in their pricing models, brokers likely use estimated loss severity rates, prepayment rates, constant default rates and credit spreads. Therefore, similar to non-broker priced securities, increases in these inputs would generally cause fair values to decrease. As of June 30, 2023, no significant adjustments were made by the Company to broker prices received.
Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs
The Company uses derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified within the same fair value hierarchy level as the associated asset or liability.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Three Months Ended June 30, 2023
Total realized/unrealized gains (losses)
Fair value as of March 31, 2023 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of June 30, 2023
Assets
Fixed maturities, AFS
ABS $ 36 $ — $ — $ — $ — $ — $ — $ ( 36 ) $ —
CLO 151 — — — ( 26 ) — — ( 40 ) 85
CMBS 231 ( 2 ) 7 2 ( 1 ) ( 5 ) 6 — 238
Corporate 1,643 ( 2 ) ( 3 ) 51 ( 30 ) ( 2 ) 4 ( 39 ) 1,622
RMBS 57 — — 19 ( 7 ) — — — 69
Total fixed maturities, AFS 2,118 ( 4 ) 4 72 ( 64 ) ( 7 ) 10 ( 115 ) 2,014
Fixed maturities, FVO 172 ( 5 ) — — ( 4 ) — — — 163
Equity securities, at fair value 60 ( 1 ) — — — — — — 59
Short-term investments 187 — — 3 ( 4 ) — — — 186
Total Assets $ 2,537 $ ( 10 ) $ 4 $ 75 $ ( 72 ) $ ( 7 ) $ 10 $ ( 115 ) $ 2,422
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Six Months Ended June 30, 2023
Total realized/unrealized gains (losses)
Fair value as of January 1, 2023 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of June 30, 2023
Assets
Fixed Maturities, AFS
ABS $ 30 $ — $ — $ 36 $ — $ — $ — $ ( 66 ) $ —
CLO 115 — — 40 ( 30 ) — — ( 40 ) 85
CMBS 222 ( 2 ) 2 6 ( 1 ) ( 5 ) 16 — 238
Corporate 1,589 ( 1 ) 28 117 ( 81 ) ( 9 ) 31 ( 52 ) 1,622
RMBS 95 — — 19 ( 15 ) — — ( 30 ) 69
Total Fixed Maturities, AFS 2,051 ( 3 ) 30 218 ( 127 ) ( 14 ) 47 ( 188 ) 2,014
Fixed maturities, FVO 178 ( 13 ) — — ( 2 ) — — — 163
Equity Securities, at fair value 61 ( 2 ) — 1 ( 1 ) — — — 59
Short-term investments 193 — — 4 ( 11 ) — — — 186
Total Assets $ 2,483 $ ( 18 ) $ 30 $ 223 $ ( 141 ) $ ( 14 ) $ 47 $ ( 188 ) $ 2,422
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Three Months Ended June 30, 2022
Total realized/unrealized gains (losses)
Fair value as of March 31, 2022 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of June 30, 2022
Assets
Fixed Maturities, AFS
ABS $ 19 $ — $ — $ — $ — $ — $ — $ ( 19 ) $ —
CLO 214 — ( 1 ) 28 ( 23 ) — — ( 54 ) 164
CMBS 236 — ( 10 ) — ( 2 ) — — — 224
Corporate 1,515 1 ( 99 ) 264 ( 62 ) ( 14 ) 21 ( 17 ) 1,609
Foreign Govt./Govt. Agencies 4 ( 1 ) ( 1 ) — — — 3 — 5
RMBS 301 — ( 4 ) — ( 30 ) — — ( 137 ) 130
Total Fixed Maturities, AFS 2,289 — ( 115 ) 292 ( 117 ) ( 14 ) 24 ( 227 ) 2,132
Fixed maturities, FVO 174 ( 13 ) — 35 ( 3 ) — — — 193
Equity Securities, at fair value 57 2 — 2 ( 1 ) — — — 60
Short-term investments 32 — — 32 ( 4 ) — — — 60
Total Assets $ 2,552 $ ( 11 ) $ ( 115 ) $ 361 $ ( 125 ) $ ( 14 ) $ 24 $ ( 227 ) $ 2,445
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the
Six Months Ended June 30, 2022
Total realized/unrealized gains (losses)
Fair value as of January 1, 2022 Included in net income [1] Included in OCI [2] Purchases Settlements Sales Transfers into Level 3 [3] Transfers out of Level 3 [3] Fair value as of June 30, 2022
Assets
Fixed Maturities, AFS
ABS $ — $ — $ — $ 19 $ — $ — $ — $ ( 19 ) $ —
CLO 257 — ( 2 ) 82 ( 40 ) — — ( 133 ) 164
CMBS 196 — ( 15 ) 46 ( 3 ) — — — 224
Corporate 1,618 ( 1 ) ( 158 ) 323 ( 132 ) ( 21 ) 21 ( 41 ) 1,609
Foreign Govt./Govt. Agencies 5 ( 1 ) ( 1 ) — — ( 1 ) 3 — 5
RMBS 328 — ( 10 ) 137 ( 64 ) — — ( 261 ) 130
Total Fixed Maturities, AFS 2,404 ( 2 ) ( 186 ) 607 ( 239 ) ( 22 ) 24 ( 454 ) 2,132
Fixed maturities, FVO 160 ( 11 ) — 55 ( 11 ) — — — 193
Equity Securities, at fair value 64 9 — 2 ( 15 ) — — — 60
Short-term investments 80 — — 36 ( 6 ) — — ( 50 ) 60
Total Assets $ 2,708 $ ( 4 ) $ ( 186 ) $ 700 $ ( 271 ) $ ( 22 ) $ 24 $ ( 504 ) $ 2,445
[1] Amounts in these columns are generally reported in net realized gains (losses). All amounts are before income taxes.
[2] All amounts are before income taxes.
[3] Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.
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Note 4 - Fair Value Measurements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as
Level 3 Still Held at End of Period
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022 2023 2022 2023 2022
Changes in Unrealized Gains (Losses) included in Net Income [1] [2] Changes in Unrealized Gains (Losses) included in OCI [3] Changes in Unrealized Gain/(Loss) included in Net Income [1] [2] Changes in Unrealized Gain/(Loss) included in OCI [3]
Assets
Fixed Maturities, AFS
CLO $ — $ — $ — $ ( 1 ) $ — $ — $ — $ ( 2 )
CMBS — — 6 ( 10 ) — — 2 ( 15 )
Corporate ( 2 ) 1 ( 3 ) ( 99 ) ( 2 ) ( 1 ) 28 ( 157 )
Foreign Govt./Govt. Agencies — ( 1 ) — ( 1 ) — ( 1 ) — ( 1 )
RMBS — — — ( 4 ) — — — ( 10 )
Total Fixed Maturities, AFS ( 2 ) — 3 ( 115 ) ( 2 ) ( 2 ) 30 ( 185 )
Fixed maturities, FVO ( 5 ) ( 13 ) — — ( 13 ) ( 11 ) — —
Equity Securities, at fair value ( 1 ) 1 — — ( 1 ) 1 — —
Total Assets $ ( 8 ) $ ( 12 ) $ 3 $ ( 115 ) $ ( 16 ) $ ( 12 ) $ 30 $ ( 185 )
[1] All amounts in these rows are reported in net realized gains (losses). All amounts are before income taxes.
[2] Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
[3] Changes in unrealized gains (losses) on fixed maturities, AFS are reported in changes in net unrealized gain (loss) on fixed maturities in the Condensed Consolidated Statements of Comprehensive Income.
Fair Value Option
The Company has elected the fair value option for certain investments in residual interests of securitizations and other securities that contain embedded credit derivatives with underlying credit risk related to residential real estate in order to reflect changes in fair value in earnings. These instruments are included within fixed maturities, FVO on the Condensed Consolidated Balance Sheets and changes in the fair value of these investments are reported in net realized gains and losses.
As of June 30, 2023 and December 31, 2022, the fair value of assets using the fair value option was $ 320 and $ 333 ,
respectively, of which $ 163 and $ 178 , respectively, were residual interests of securitizations.
For the three and six months ended June 30, 2023, realized losses related to the change in fair value of assets using the fair value option were $ 3 and $ 11 , respectively. For the three and six months ended June 30, 2022, realized losses related to the change in fair value of assets using the fair value option were $ 20 and $ 23 , respectively.
Financial Instruments Not Carried at Fair Value
Financial Assets and Liabilities Not Carried at Fair Value
June 30, 2023 December 31, 2022
Fair Value Hierarchy Level Carrying Amount [1] Fair Value Fair Value Hierarchy Level Carrying Amount [1] Fair Value
Assets
Mortgage loans Level 3 $ 6,020 $ 5,415 Level 3 $ 6,000 $ 5,362
Liabilities
Other policyholder funds and benefits payable Level 3 $ 647 $ 647 Level 3 $ 658 $ 658
Senior notes [2] Level 2 $ 3,861 $ 3,377 Level 2 $ 3,858 $ 3,339
Junior subordinated debentures [2] Level 2 $ 499 $ 415 Level 2 $ 499 $ 419
[1] As of June 30, 2023 and December 31, 2022, the carrying amount of mortgage loans is net of ACL of $ 41 and $ 36 , respectively.
[2] Included in long-term debt in the Condensed Consolidated Balance Sheets, except for any current maturities, which are included in short-term debt when applicable.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENTS
Net Realized Gains (Losses)
Three Months Ended June 30, Six Months Ended June 30,
(Before tax) 2023 2022 2023 2022
Gross gains on sales of fixed maturities
$ 3 $ 15 $ 20 $ 38
Gross losses on sales of fixed maturities
( 21 ) ( 80 ) ( 60 ) ( 175 )
Equity securities [1]
Net realized gains (losses) on sales of equity securities 24 5 74 45
Change in net unrealized gains (losses) of equity securities ( 14 ) ( 267 ) ( 29 ) ( 414 )
Net realized and unrealized gains (losses) on equity securities 10 ( 262 ) 45 ( 369 )
Net credit losses on fixed maturities, AFS ( 3 ) — ( 8 ) ( 12 )
Change in ACL on mortgage loans ( 5 ) ( 5 ) ( 5 ) ( 7 )
Intent-to-sell impairments — — — ( 3 )
Other, net [2] ( 48 ) ( 6 ) ( 63 ) 45
Net realized gains (losses) $ ( 64 ) $ ( 338 ) $ ( 71 ) $ ( 483 )
[1] The change in net unrealized gains (losses) on equity securities still held as of June 30, 2023 and included in net realized gains (losses) were $ 7 and $ 7 for the three and six months ended June 30, 2023, respectively. The change in net unrealized gains (losses) on equity securities still held as of June 30, 2022 and included in net realized gains (losses) were $( 259 ) and $( 366 ) for the three and six months ended June 30, 2022, respectively.
[2] For the three and six months ended June 30, 2023 includes gains (losses) from transactional foreign currency revaluation of $( 9 ) and $( 16 ), respectively, and gains (losses) on non-qualifying derivatives of $( 39 ) and $( 34 ), respectively. For the three and six months ended June 30, 2022 includes gains (losses) from transactional foreign currency revaluation of $ 15 and $ 21 , respectively, and gains (losses) on non-qualifying derivatives of $ 14 and $ 61 , respectively.
Proceeds from the sales of fixed maturities, AFS totaled $ 0.6 billion and $ 2.0 billion for the three and six months ended June 30, 2023, respectively, and $ 2.6 billion and $ 8.1 billion for the three and six months ended June 30, 2022, respectively.
Accrued Interest Receivable on Fixed Maturities, AFS and Mortgage Loans
As of June 30, 2023 and December 31, 2022, the Company reported accrued interest receivable related to fixed maturities, AFS of $ 346 and $ 338 , respectively, and accrued interest receivable related to mortgage loans of $ 19 and $ 18 , respectively. These amounts are recorded in other assets on the Condensed Consolidated Balance Sheets and are not included in the carrying value of the fixed maturities or mortgage loans. The Company does not include the current accrued interest receivable balance when estimating the ACL. The Company has a policy to write-off accrued interest receivable balances that are more than 90 days past due. Write-offs of accrued interest receivable are recorded as a credit loss component of net realized gains and losses.
Interest income on fixed maturities and mortgage loans is accrued unless it is past due over 90 days or management deems the interest uncollectible.
Recognition and Presentation of Intent-to-Sell Impairments and ACL on Fixed Maturities, AFS
The Company will record an "intent-to-sell impairment" as a reduction to the amortized cost of fixed maturities, AFS in an unrealized loss position if the Company intends to sell or it is more likely than not that the Company will be required to sell the
fixed maturity before a recovery in value. A corresponding charge is recorded in net realized losses equal to the difference between the fair value on the impairment date and the amortized cost basis of the fixed maturity before recognizing the impairment.
For fixed maturities where a credit loss has been identified and no intent-to-sell impairment has been recorded, the Company will record an ACL for the portion of the unrealized loss related to the credit loss. Any remaining unrealized loss on a fixed maturity after recording an ACL is the non-credit amount and is recorded in OCI. The ACL is the excess of the amortized cost over the greater of the Company's best estimate of the present value of expected future cash flows or the security's fair value. Cash flows are discounted at the effective yield that is used to record interest income. The ACL cannot exceed the unrealized loss and, therefore, it may fluctuate with changes in the fair value of the fixed maturity if the fair value is greater than the Company's best estimate of the present value of expected future cash flows. The initial ACL and any subsequent changes are recorded in net realized gains and losses. The ACL is written off against the amortized cost in the period in which all or a portion of the related fixed maturity is determined to be uncollectible .
Developing the Company’s best estimate of expected future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions regarding the future performance. The Company's considerations include, but are not limited to, (a) changes in the financial condition of the issuer and/or the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, instrument-specific developments including changes in credit ratings, industry earnings multiples and the issuer’s ability to restructure, access capital markets, and execute asset sales.
For structured securities, assumptions include, but are not limited to, various performance indicators such as historical and
projected default and recovery rates, credit ratings, current and projected delinquency rates, loan-to-value (" LTV") ratios, average cumulative collateral loss rates that vary by vintage year, prepayment speeds, and property value declines. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value.
ACL on Fixed Maturities, AFS by Type
Three Months Ended June 30,
2023 2022
(Before tax) Corporate CMBS Total Corporate Foreign govt./govt. agencies CMBS Total
Balance as of beginning of period $ 6 $ 11 $ 17 $ 9 $ 3 $ 1 $ 13
Credit losses on fixed maturities where an allowance was not previously recorded 2 — 2 — — — —
Reduction due to sales ( 2 ) — ( 2 ) — — — —
Net increases (decreases) on fixed maturities where an allowance was previously recorded — 1 1 ( 1 ) 1 — —
Balance as of end of period $ 6 $ 12 $ 18 $ 8 $ 4 $ 1 $ 13
ACL on Fixed Maturities, AFS by Type
Six Months Ended June 30,
2023 2022
(Before tax) Corporate CMBS Total Corporate Foreign govt./govt. agencies CMBS Total
Balance as of beginning of period $ 2 $ 10 $ 12 $ 1 $ — $ — $ 1
Credit losses on fixed maturities where an allowance was not previously recorded 6 — 6 8 3 1 12
Reduction due to sales ( 2 ) — ( 2 ) — — — —
Net increases (decreases) on fixed maturities where an allowance was previously recorded — 2 2 ( 1 ) 1 — —
Balance as of end of period $ 6 $ 12 $ 18 $ 8 $ 4 $ 1 $ 13
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Fixed Maturities, AFS
Fixed Maturities, AFS, by Type
June 30, 2023 December 31, 2022
Amortized
Cost ACL Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
Amortized
Cost ACL Gross
Unrealized
Gains Gross
Unrealized
Losses Fair
Value
ABS $ 2,757 $ — $ 1 $ ( 73 ) $ 2,685 $ 2,016 $ — $ — $ ( 75 ) $ 1,941
CLO 3,046 — 3 ( 68 ) 2,981 3,040 — 3 ( 102 ) 2,941
CMBS 3,607 ( 12 ) 19 ( 387 ) 3,227 3,715 ( 10 ) 21 ( 358 ) 3,368
Corporate 17,467 ( 6 ) 39 ( 1,404 ) 16,096 16,794 ( 2 ) 33 ( 1,592 ) 15,233
Foreign govt./govt. agencies 579 — — ( 40 ) 539 596 — — ( 49 ) 547
Municipal 6,523 — 96 ( 393 ) 6,226 6,718 — 93 ( 515 ) 6,296
RMBS 4,202 — 1 ( 474 ) 3,729 4,214 — 2 ( 508 ) 3,708
U.S. Treasuries 2,230 — — ( 216 ) 2,014 2,440 — — ( 243 ) 2,197
Total fixed maturities, AFS $ 40,411 $ ( 18 ) $ 159 $ ( 3,055 ) $ 37,497 $ 39,533 $ ( 12 ) $ 152 $ ( 3,442 ) $ 36,231
Fixed Maturities, AFS, by Contractual Maturity Year
June 30, 2023 December 31, 2022
Amortized Cost Fair Value Amortized Cost Fair Value
One year or less $ 1,320 $ 1,298 $ 1,417 $ 1,396
Over one year through five years 9,416 8,962 8,340 7,930
Over five years through ten years 6,910 6,277 7,259 6,485
Over ten years 9,153 8,338 9,532 8,462
Subtotal 26,799 24,875 26,548 24,273
Mortgage-backed and asset-backed securities 13,612 12,622 12,985 11,958
Total fixed maturities, AFS $ 40,411 $ 37,497 $ 39,533 $ 36,231
Estimated maturities may differ from contractual maturities due to call or prepayment provisions. Due to the potential for variability in payment speeds (i.e., prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio including issuer, sector and geographic stratification, where
applicable, and has established certain exposure limits, diversification standards and review procedures to mitigate credit risk. The Company had no investment exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity as of June 30, 2023 or December 31, 2022 other than U.S. government securities and certain U.S. government agencies.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unrealized Losses on Fixed Maturities, AFS
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of June 30, 2023
Less Than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
ABS $ 1,758 $ ( 24 ) $ 767 $ ( 49 ) $ 2,525 $ ( 73 )
CLO 128 ( 2 ) 2,738 ( 66 ) 2,866 ( 68 )
CMBS 458 ( 30 ) 2,656 ( 357 ) 3,114 ( 387 )
Corporate 4,078 ( 111 ) 10,121 ( 1,293 ) 14,199 ( 1,404 )
Foreign govt./govt. agencies 91 ( 3 ) 407 ( 37 ) 498 ( 40 )
Municipal 1,353 ( 28 ) 2,864 ( 365 ) 4,217 ( 393 )
RMBS 690 ( 31 ) 2,867 ( 443 ) 3,557 ( 474 )
U.S. Treasuries 412 ( 29 ) 1,595 ( 187 ) 2,007 ( 216 )
Total fixed maturities, AFS in an unrealized loss position $ 8,968 $ ( 258 ) $ 24,015 $ ( 2,797 ) $ 32,983 $ ( 3,055 )
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of December 31, 2022
Less Than 12 Months 12 Months or More Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
ABS $ 1,577 $ ( 50 ) $ 281 $ ( 25 ) $ 1,858 $ ( 75 )
CLO 1,490 ( 48 ) 1,378 ( 54 ) 2,868 ( 102 )
CMBS 2,560 ( 270 ) 521 ( 88 ) 3,081 ( 358 )
Corporate 11,157 ( 1,071 ) 2,575 ( 521 ) 13,732 ( 1,592 )
Foreign govt./govt. agencies 308 ( 26 ) 224 ( 23 ) 532 ( 49 )
Municipal 4,270 ( 461 ) 228 ( 54 ) 4,498 ( 515 )
RMBS 2,311 ( 249 ) 1,250 ( 259 ) 3,561 ( 508 )
U.S. Treasuries 1,554 ( 145 ) 633 ( 98 ) 2,187 ( 243 )
Total fixed maturities, AFS in an unrealized loss position $ 25,227 $ ( 2,320 ) $ 7,090 $ ( 1,122 ) $ 32,317 $ ( 3,442 )
As of June 30, 2023, fixed maturities, AFS in an unrealized loss position consisted of 4,667 instruments, and were primarily depressed due to higher interest rates and/or wider credit spreads since the purchase date. As of June 30, 2023, 93 % of these fixed maturities were depressed less than 20% of cost or amortized cost. The decrease in unrealized losses during the six months ended June 30, 2023, was primarily attributable to tighter credit spreads.
Most of the fixed maturities depressed for twelve months or more relate to the corporate sector, RMBS, municipal bonds, and CMBS which were primarily depressed because current rates are higher and/or market spreads are wider than at the respective purchase dates. The Company neither has an intention to sell nor does it expect to be required to sell the fixed maturities outlined in the preceding discussion. The decision to record credit losses on fixed maturities, AFS in the form of an ACL requires us to make qualitative and quantitative estimates of expected future cash flows.
Mortgage Loans
ACL on Mortgage Loans
The Company reviews mortgage loans on a quarterly basis to estimate the ACL with changes in the ACL recorded in net realized gains and losses. Apart from an ACL recorded on individual mortgage loans where the borrower is experiencing financial difficulties, the Company records an ACL on the pool of mortgage loans based on lifetime expected credit losses. The Company utilizes a third-party forecasting model to estimate lifetime expected credit losses at a loan level under multiple economic scenarios. The scenarios use macroeconomic data provided by an internationally recognized economics firm that generates forecasts of varying economic factors such as GDP growth, unemployment and interest rates. The economic scenarios are projected over 10 years. The first two to four years of the 10-year period assume a specific modeled economic scenario (including moderate upside, moderate recession and severe recession scenarios) and then revert to historical long-term assumptions over the remaining period. Using these economic scenarios, the forecasting model projects property-specific operating income and capitalization rates used to estimate the value of a future operating income stream. The
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
operating income and the property valuations derived from capitalization rates are compared to loan payment and principal amounts to create debt service coverage ratios ("DSCRs") and LTVs over the forecast period. The Company's process also considers qualitative factors. The model overlays historical data about mortgage loan performance based on DSCRs and LTVs and projects the probability of default, amount of loss given a default and resulting expected loss through maturity for each loan under each economic scenario. Economic scenarios are probability-weighted based on a statistical analysis of the forecasted economic factors and qualitative analysis. The Company records the change in the ACL on mortgage loans based on the weighted-average expected credit losses across the selected economic scenarios.
When a borrower is experiencing financial difficulty, including when foreclosure is probable, the Company measures an ACL on individual mortgage loans. The ACL is established for any shortfall between the amortized cost of the loan and the fair value of the collateral less costs to sell. Estimates of collectibility from an individual borrower require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, cash flow projections may change based upon new information about the borrower's ability to pay and/or the value of underlying collateral such as changes in projected property value estimates. As of June 30, 2023, the Company did no t have any mortgage loans for which an ACL was established on an individual basis.
There were no mortgage loans held-for-sale as of June 30, 2023 or December 31, 2022. For the three and six months ended June 30, 2023 and 2022, respectively, the Company had no
mortgage loans that have had extensions or restructurings other than what is allowable under the original terms of the contract.
ACL on Mortgage Loans
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
ACL as of beginning of period $ 36 $ 31 $ 36 $ 29
Current period provision (release) 5 5 5 7
ACL as of June 30, $ 41 $ 36 $ 41 $ 36
The increase in the allowance for the 2023 period is primarily attributable to the overall weaker projected real estate fundamentals, and to a lesser extent, net additions of new loans.
The weighted-average LTV ratio of the Company’s mortgage loan portfolio was 52 % as of June 30, 2023, while the weighted-average LTV ratio at origination of these loans was 59 %. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan with property values based on appraisals updated no less than annually. Factors considered in estimating property values include, among other things, actual and expected property cash flows, geographic market data and the ratio of the property's net operating income to its value. DSCR compares a property’s net operating income to the borrower’s principal and interest payments and are updated no less than annually through reviews of underlying properties.
Mortgage Loans LTV & DSCR by Origination Year as of June 30, 2023
2023 2022 2021 2020 2019 2018 & Prior Total
Loan-to-value Amortized Cost Avg. DSCR
Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost [1]
Avg. DSCR
Greater than 80% $ — — x $ — — x $ — — x $ — — x $ — — x $ 10 1.93 x $ 10 1.93 x
65% - 80% — — x 16 2.02 x 58 1.75 x 72 2.81 x 99 2.01 x 197 1.32 x 442 1.80 x
Less than 65% 196 1.86 x 881 2.45 x 1,530 2.83 x 637 3.03 x 678 2.93 x 1,687 2.50 x 5,609 2.67 x
Total mortgage loans
$ 196 1.86 x $ 897 2.44 x $ 1,588 2.79 x $ 709 3.01 x $ 777 2.81 x $ 1,894 2.37 x $ 6,061 2.61 x
[1] Amortized cost of mortgage loans excludes ACL of $ 41 .
Mortgage Loans LTV & DSCR by Origination Year as of December 31, 2022
2022 2021 2020 2019 2018 2017 & Prior Total
Loan-to-value Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost Avg. DSCR Amortized Cost [1] Avg. DSCR
Greater than 80% $ — — x $ — — x $ — — x $ — — x $ — — x $ 23 1.40 x $ 23 1.40 x
65% - 80% 16 2.02 x 59 2.61 x 43 2.78 x 100 1.95 x 108 1.11 x 117 1.91 x 443 1.91 x
Less than 65% 839 2.43 x 1,475 2.79 x 663 3.02 x 680 2.77 x 437 2.21 x 1,476 2.54 x 5,570 2.65 x
Total mortgage loans
$ 855 2.42 x $ 1,534 2.78 x $ 706 3.01 x $ 780 2.66 x $ 545 1.99 x $ 1,616 2.48 x $ 6,036 2.59 x
[1] Amortized cost of mortgage loans excludes ACL of $ 36 .
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Mortgage Loans by Region
June 30, 2023 December 31, 2022
Amortized Cost Percent of Total Amortized Cost Percent of Total
East North Central $ 358 5.9 % $ 317 5.3 %
Middle Atlantic 253 4.2 % 316 5.2 %
Mountain 707 11.7 % 707 11.7 %
New England 353 5.8 % 395 6.5 %
Pacific 1,304 21.5 % 1,299 21.5 %
South Atlantic 1,776 29.3 % 1,670 27.7 %
West North Central 116 1.9 % 105 1.7 %
West South Central 448 7.4 % 421 7.0 %
Other [1] 746 12.3 % 806 13.4 %
Total mortgage loans 6,061 100.0 % 6,036 100.0 %
ACL ( 41 ) ( 36 )
Total mortgage loans, net of ACL $ 6,020 $ 6,000
[1] Primarily represents loans collateralized by multiple properties in various regions.
Mortgage Loans by Property Type
June 30, 2023 December 31, 2022
Amortized Cost Percent of Total Amortized Cost Percent of Total
Commercial
Industrial $ 2,282 37.7 % $ 2,217 36.7 %
Multifamily 2,243 37.0 % 2,247 37.2 %
Office 583 9.6 % 585 9.7 %
Retail [1] 953 15.7 % 947 15.7 %
Other — — % 40 0.7 %
Total mortgage loans 6,061 100.0 % 6,036 100.0 %
ACL ( 41 ) ( 36 )
Total mortgage loans, net of ACL $ 6,020 $ 6,000
[1] Primarily comprised of grocery-anchored retail centers, with no exposure to regional shopping malls.
Past-Due Mortgage Loans
Mortgage loans are considered past due if a payment of principal or interest is not received according to the contractual terms of the loan agreement, which typically includes a grace period. As of June 30, 2023 and December 31, 2022, the Company held no mortgage loans considered past due.
Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fee income over the period that services are performed. As of June 30, 2023, under this program, the Company serviced mortgage loans with a total outstanding principal of $ 9.5 billion, of which $ 4.5 billion was serviced on behalf of third parties and $ 5.0 billion was retained and reported
in total investments on the Company's Condensed Consolidated Balance Sheets. As of December 31, 2022, the Company serviced mortgage loans with a total outstanding principal balance of $ 9.3 billion, of which $ 4.4 billion was serviced on behalf of third parties and $ 4.9 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or fair value and were $ 0 as of June 30, 2023 and December 31, 2022, because servicing fees were market-level fees at origination and remain adequate to compensate the Company for servicing the loans.
Variable Interest Entities
The Company is engaged with various special purpose entities and other entities that are deemed to be VIEs primarily as an investor through normal investment activities or, at times, as an investment manager.
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.
Consolidated VIEs
As of June 30, 2023 and December 31, 2022, the Company did no t hold any securities for which it is the primary beneficiary.
Non-Consolidated VIEs
The Company, through normal investment activities, makes passive investments in limited partnerships and other alternative investments. For these non-consolidated VIEs, the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. The Company’s maximum exposure to loss as of June 30, 2023 and December 31, 2022 was limited to the total carrying value of $ 2.7 billion and $ 2.6 billion, respectively, which are a portion of the investments in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets that are primarily recorded using the equity method of accounting. As of June 30, 2023 and December 31, 2022, the Company has outstanding commitments totaling $ 1.8 billion for both periods, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. These investments are generally of a passive nature in that the Company does not take an active role in management. For further discussion of these investments, see Equity Method Investments within Note 5 - Investments of Notes to Consolidated Financial Statements included in the Company’s 2022 Form 10-K Annual Report.
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Note 5 - Investments
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In addition, the Company makes passive investments in structured securities issued by VIEs for which the Company is not the manager. These investments are included in ABS, CLO, CMBS, and RMBS and are reported in fixed maturities, AFS, and fixed maturities, FVO, on the Company's Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs, and, where applicable, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
Reverse Repurchase Agreements, Other Collateral Transactions and Restricted Investments
Reverse Repurchase Agreements
From time to time, the Company enters into reverse repurchase agreements where the Company purchases securities and simultaneously agrees to resell the same or substantially the same securities. The maturity of these transactions is generally within one year. The agreements require additional collateral to be transferred to the Company under specified conditions and the Company has the right to sell or re-pledge the securities received. The Company accounts for reverse repurchase agreements as collateralized financing. As of June 30, 2023 and
December 31, 2022, the Company reported $ 33 and $ 41 , respectively, within short-term investments on the Condensed Consolidated Balance Sheets representing a receivable for the amount of cash transferred to purchase the securities.
Other Collateral Transactions
As of June 30, 2023 and December 31, 2022, the Company pledged collateral of $ 7 and $ 7 , respectively, of U.S. government securities or cash primarily related to certain bank loan participations committed through a limited partnership agreement.
For disclosure of collateral in support of derivative transactions, refer to the Derivative Collateral Arrangements section in Note 6 - Derivatives of Notes to Condensed Consolidated Financial Statements.
Other Restricted Investments
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. In addition, the Company is required to hold fixed maturities and short-term investments in trust for the benefit of syndicate policyholders, hold fixed maturities in a Lloyd's of London ("Lloyd's") trust account to provide a portion of the required capital, and maintain other investments primarily consisting of overseas deposits in various countries with Lloyd's to support underwriting activities in those countries. Lloyd's is an insurance market-place operating worldwide. Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate"). The following table presents the components of the Company’s exposure to other restricted investments.
June 30, 2023 December 31, 2022
Fair Value Fair Value
Securities on deposit with government agencies $ 2,291 $ 2,189
Fixed maturities in trust for benefit of Lloyd's Syndicate policyholders 797 718
Short-term investments in trust for benefit of Lloyd's Syndicate policyholders 6 8
Fixed maturities in Lloyd's trust account 163 161
Other investments 70 62
Total Other Restricted Investments $ 3,327 $ 3,138
6. DERIVATIVES
The Company utilizes a variety of OTC, OTC-cleared and exchange traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions or income generation covered call transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, commodity market, credit spread, issuer default, price, and currency exchange rate or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies.
Strategies that Qualify for Hedge Accounting
Some of the Company's derivatives satisfy hedge accounting requirements as outlined in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements, included in The Hartford’s 2022 Form 10-K Annual Report. Typically, these hedging instruments include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities or debt instruments issued.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives primarily convert interest receipts on variable-rate fixed maturity securities to fixed rates. The Company has also entered into interest rate swaps to convert the variable interest payments on the $ 500 junior subordinated debentures due 2067 to fixed interest payments. For further information, see the Junior Subordinated Debentures section within Note 13 - Debt of Notes to Condensed Consolidated Financial Statements and Note 13 - Debt of Notes to the Consolidated Financial Statements, included in The Hartford's 2022 Form 10-K Annual Report.
Foreign currency swaps are used to convert foreign currency denominated cash flows related to certain investment receipts to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include hedges of interest rate, foreign currency, equity, and commodity risk of certain fixed maturities and equities. In addition, hedging and replication strategies that utilize credit default swaps do not qualify for hedge accounting. The non-qualifying strategies include:
Credit Contracts
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in the value of fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty or the Company should the referenced security issuers experience a credit event, as defined in the contract. The Company also enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Interest Rate Swaps and Futures
The Company uses interest rate swaps and futures to manage interest rate duration between assets and liabilities. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap going forward. As of June 30, 2023 and December 31, 2022, the notional amount of interest rate swaps
in offsetting relationships was $ 13.1 billion and $ 6.6 billion, respectively. As of June 30, 2023 the notional amount of interest rate swaps in offsetting relationships included $ 6.5 billion of OTC-cleared swaps as part of the Chicago Mercantile Exchange ("CME") cleared swap conversion process related to reference rate reform. These swaps are expected to mature by September 30, 2023.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars.
Equity Index Options
The Company may enter into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. The Company has also previously entered into covered call options on equity securities to generate additional return.
Commodity Options
The Company previously purchased call option contracts on oil futures in order to partially offset potential changes in value related to certain fixed maturity securities that could arise if oil prices increased substantially.
Derivative Balance Sheet Classification
For reporting purposes, the Company has elected to offset within assets or liabilities based upon the net of the fair value amounts, income accruals and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The following fair value amounts do not include income accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. The notional amount of derivative contracts represents the basis upon which payments or receipts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Derivative Balance Sheet Presentation
Net Derivatives Asset
Derivatives
Liability Derivatives
Notional Amount Fair Value Fair Value Fair Value
Hedge Designation/ Derivative Type Jun 30, 2023 Dec. 31, 2022 Jun 30, 2023 Dec. 31, 2022 Jun 30, 2023 Dec. 31, 2022 Jun 30, 2023 Dec. 31, 2022
Cash flow hedges
Interest rate swaps [1] $ 3,650 $ 2,155 $ — $ — $ — $ — $ — $ —
Foreign currency swaps 568 568 38 53 47 57 ( 9 ) ( 4 )
Total cash flow hedges 4,218 2,723 38 53 47 57 ( 9 ) ( 4 )
Non-qualifying strategies
Interest rate contracts
Interest rate swaps and futures [1] 14,045 7,245 ( 2 ) ( 6 ) 3 2 ( 5 ) ( 8 )
Foreign exchange contracts
Foreign currency swaps and forwards 568 569 — — — — — —
Credit contracts
Credit derivatives that purchase credit protection 4,411 11 ( 71 ) — — — ( 71 ) —
Credit derivatives in offsetting positions 207 207 — — 3 3 ( 3 ) ( 3 )
Total non-qualifying strategies 19,231 8,032 ( 73 ) ( 6 ) 6 5 ( 79 ) ( 11 )
Total cash flow hedges and non-qualifying strategies $ 23,449 $ 10,755 $ ( 35 ) $ 47 $ 53 $ 62 $ ( 88 ) $ ( 15 )
Balance Sheet Location
Fixed maturities, available-for-sale $ 568 $ 569 $ — $ — $ — $ — $ — $ —
Other investments 17,174 9,108 6 34 10 38 ( 4 ) ( 4 )
Other liabilities 5,707 1,078 ( 41 ) 13 43 24 ( 84 ) ( 11 )
Total derivatives $ 23,449 $ 10,755 $ ( 35 ) $ 47 $ 53 $ 62 $ ( 88 ) $ ( 15 )
[1] As of June 30, 2023, notional amount includes $ 700 of OTC-cleared cash flow hedge interest rate swaps and $ 6.5 billion of OTC-cleared non-qualifying interest rate swaps as part of the CME cleared swap conversion process due to reference rate reform. These swaps are expected to mature by September 30, 2023.
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the offsetting amounts, and net position of derivative instruments eligible for offset in the Company's Condensed Consolidated Balance Sheets. Offsetting amounts include fair value amounts, income accruals and related cash collateral receivables and
payables associated with derivative instruments that are traded under a common master netting agreement, as described in the preceding discussion. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Offsetting Derivative Assets and Liabilities
(i) (ii) (iii) = (i) - (ii) (iv) (v) = (iii) - (iv)
Net Amounts Presented in the Statement of Financial Position Collateral Disallowed for Offset in the Statement of Financial Position
Gross Amounts of Recognized Assets (Liabilities) Gross Amounts Offset in the Statement of Financial Position Derivative Assets [1] (Liabilities) [2] Accrued Interest and Cash Collateral (Received) [3] Pledged [2] Financial Collateral (Received) Pledged [4] Net Amount
As of June 30, 2023
Other investments $ 53 $ 51 $ 6 $ ( 4 ) $ — $ 2
Other liabilities $ ( 88 ) $ ( 73 ) $ ( 41 ) $ 26 $ ( 12 ) $ ( 3 )
As of December 31, 2022
Other investments $ 62 $ 60 $ 34 $ ( 32 ) $ — $ 2
Other liabilities $ ( 15 ) $ ( 7 ) $ 13 $ ( 21 ) $ ( 7 ) $ ( 1 )
[1] Included in other investments in the Company's Condensed Consolidated Balance Sheets.
[2] Included in other liabilities in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty.
[3] Included in other investments in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty.
[4] Excludes collateral associated with exchange-traded derivative instruments.
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the
same period or periods during which the hedged transaction affects earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Gains (Losses) Recognized in OCI
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Interest rate swaps $ ( 14 ) $ ( 3 ) $ ( 4 ) $ ( 5 )
Foreign currency swaps ( 7 ) 41 ( 10 ) 50
Total $ ( 21 ) $ 38 $ ( 14 ) $ 45
Gains (Losses) Reclassified from AOCI into Income
Three months ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Net Investment Income Interest Expense Net Investment Income Interest Expense Net Investment Income Interest Expense Net Investment Income Interest Expense
Interest rate swaps $ ( 7 ) $ 4 $ 5 $ ( 1 ) $ ( 15 ) $ 7 $ 14 $ ( 4 )
Foreign currency swaps 3 — 2 — 5 — 4 —
Total $ ( 4 ) $ 4 $ 7 $ ( 1 ) $ ( 10 ) $ 7 $ 18 $ ( 4 )
Total amounts presented on the Condensed Consolidated Statement of Operations $ 540 $ 50 $ 541 $ 51 $ 1,055 $ 100 $ 1,050 $ 113
As of June 30, 2023, the before tax deferred net losses on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $ 4 . This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities and long-term debt that will occur over the next twelve months. At that time, the Company will recognize the deferred net gains (losses) as an adjustment to net investment income or interest expense,
as applicable, over the term of the hedged instrument cash flows.
During the three and six months ended June 30, 2023 and 2022, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Non-qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and
accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized gains (losses).
Non-Qualifying Strategies Recognized within Net Realized Gains (Losses)
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Foreign exchange contracts
Foreign currency forwards $ — $ 4 $ — $ 5
Interest rate contracts
Interest rate swaps, swaptions, and futures ( 3 ) 5 18 37
Credit contracts
Credit derivatives that purchase credit protection ( 36 ) 5 ( 52 ) 5
Commodity contracts
Commodity options — — — 14
Total [1] $ ( 39 ) $ 14 $ ( 34 ) $ 61
[1]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 4 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that are permissible under the Company's investment policies. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be
equal to the notional value of the swap contract less the value of the referenced security issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk reference baskets of standard diversified portfolios of CMBS issuers.
Credit Risk Assumed Derivatives by Type
Underlying Referenced Credit
Obligation(s) [1]
Notional
Amount
[2]
Fair
Value
Weighted
Average
Years to
Maturity
Type Average
Credit
Rating
Offsetting
Notional
Amount [3]
Offsetting
Fair
Value [3]
As of June 30, 2023
Basket credit default swaps [4]
Investment grade risk exposure $ 100 $ ( 1 ) 5 years CMBS Credit AAA $ 100 $ 1
Below investment grade risk exposure 3 ( 2 ) Less than 1 year CMBS Credit CCC+ 3 2
Total [5] $ 103 $ ( 3 ) $ 103 $ 3
As of December 31, 2022
Basket credit default swaps [4]
Investment grade risk exposure $ 100 $ ( 1 ) 6 years CMBS Credit AAA $ 100 $ 1
Below investment grade risk exposure 3 ( 2 ) Less than 1 year CMBS Credit B- 3 2
Total [5] $ 103 $ ( 3 ) $ 103 $ 3
[1] The average credit ratings are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.
[2] Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and applicable law, which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
[3] The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.
[4] Comprised of swaps of standard market indices of diversified portfolios of CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
[5] Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 4 - Fair Value Measurements of Notes to Condensed Consolidated Financial Statements.
.
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Note 6 - Derivatives
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Derivative Collateral Arrangements
The Company enters into various collateral arrangements in connection with its derivative instruments, which require both the pledging and accepting of collateral. As of June 30, 2023 and December 31, 2022, the Company ha s pl edged cash collateral associated with derivative instruments of $ 65 and less than $ 1 , respectively . In general, collateral receivable is recorded in other assets or other liabilities on the Company's Condensed Consolidated Balance Sheets as determined by the Company's election to offset on the balance sheet. As of June 30, 2023 and December 31, 2022, the Company pledged securities collateral associated with derivative instruments with a fair value of $ 6 and $ 8 , respectively, which have been included in fixed maturities on the Company's Condensed Consolidated Balance Sheets. The counterparties generally have the right to sell or re-pledge these securities.
In addition, as of June 30, 2023 and December 31, 2022, the Company has pledged initial margin of cash related to OTC-cleared and exchange traded derivatives with a fair value of $ 16 for both periods, which is recorded in other investments or other assets on the Company's Condensed Consolidated Balance
Sheets. As of June 30, 2023 and December 31, 2022, the Company has pledged initial margin of securities related to OTC-cleared and exchange traded derivatives with a fair value of $ 196 and $ 57 , respectively, which are included within fixed maturities on the Company's Condensed Consolidated Balance Sheets.
As of June 30, 2023 and December 31, 2022, the Company accepted cash collateral associated with derivative instruments of $ 45 and $ 56 , respectively, which was invested and recorded in the Company's Condensed Consolidated Balance Sheets in fixed maturities and short-term investments with corresponding amounts recorded in other investments or other liabilities as determined by the Company's election to offset on the balance sheet. The Company also accepted securities collateral as of June 30, 2023 and December 31, 2022, with a fair value of $ 0 and $ 1 , respectively, which the Company has the right to repledge or sell. As of June 30, 2023 and December 31, 2022, the Company had no repledged securities. In addition, as of June 30, 2023 and December 31, 2022, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Condensed Consolidated Balance Sheets .
7. PREMIUMS RECEIVABLE AND AGENTS' BALANCES
Premiums Receivable and Agents' Balances
As of June 30, 2023 As of December 31, 2022
Premiums receivable, excluding receivables for losses within a deductible and retrospectively-rated policy premiums ("loss sensitive business") $ 5,328 $ 4,698
Receivables for loss sensitive business, by credit quality:
AA 103 106
A 44 38
BBB 124 119
BB 58 56
Below BB 40 41
Total receivables for loss sensitive business 369 360
Total Premiums Receivable and Agents' Balances, Gross
5,697 5,058
ACL ( 119 ) ( 109 )
Total Premiums Receivable and Agents' Balances, Net of ACL
$ 5,578 $ 4,949
ACL on Premiums Receivable and Agents' Balances
Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods. Premiums receivable and agents' balances, excluding receivables for loss sensitive business, are primarily comprised of premiums due from policyholders, which are typically collectible within one year or less. For these balances, the ACL
is estimated based on an aging of receivables and recent historical credit loss and collection experience, adjusted for current economic conditions and reasonable and supportable forecasts, when appropriate.
A portion of the Company's Commercial Lines business is written with large deductibles or under retrospectively-rated plans (referred to as "loss sensitive business"). Under some commercial insurance contracts with a large deductible, the Company is obligated to pay the claimant the full amount of the claim and the Company is subsequently reimbursed by the policyholder for the deductible amount. As such, the Company is subject to credit risk until reimbursement is made. Retrospectively-rated policies are utilized primarily for workers' compensation coverage, whereby the ultimate premium is adjusted based on actual losses incurred. Although the premium adjustment feature of a retrospectively-rated policy substantially reduces insurance risk for the Company, it presents credit risk to the Company. The Company’s results of operations could be adversely affected if a significant portion of such policyholders failed to reimburse the Company for the deductible amount or the amount of additional premium owed under retrospectively-rated policies. The Company manages these credit risks through credit analysis, collateral requirements, and oversight.
The ACL for receivables for loss sensitive business is estimated as the amount of the receivable exposed to loss multiplied by estimated factors for probability of default and the amount of loss given a default. The probability of default is assigned based on each policyholder's credit rating, or a rating is estimated if no external rating is available. Credit ratings are reviewed and updated at least annually. The exposure amount is estimated net of collateral and other credit enhancement, considering the nature of the collateral, potential future changes in collateral values, and historical loss information for the type of collateral obtained. The probability of default factors are historical corporate defaults for receivables with similar durations estimated through multiple economic cycles. Credit ratings are
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Note 7 - Premiums Receivable and Agents' Balances
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors through multiple economic cycles. The Company's evaluation of the required ACL for receivables for loss sensitive business considers the current economic environment as well as the probability-weighted macroeconomic scenarios similar to the approach used for estimating the ACL for mortgage loans. See Note 5 - Investments.
The increase in the ACL in the three and six months ended June 30, 2023 reflected the provision required on increased premiums written in the quarter and recoveries, partially offset by write-offs.
Rollforward of ACL on Premiums Receivable and Agents' Balances for the Three Months Ended
June 30, 2023 June 30, 2022
Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total
Beginning ACL $ 86 $ 25 $ 111 $ 84 $ 22 $ 106
Current period provision (release) 19 — 19 10 1 11
Current period write-offs ( 13 ) — ( 13 ) ( 13 ) — ( 13 )
Current period recoveries 2 — 2 3 — 3
Ending ACL $ 94 $ 25 $ 119 $ 84 $ 23 $ 107
Rollforward of ACL on Premiums Receivable and Agents' Balances for the Six Months Ended
June 30, 2023 June 30, 2022
Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total Premiums Receivable and Agents' Balances, Excluding Receivables for Loss Sensitive Business Receivables for Loss Sensitive Business Total
Beginning ACL
$ 85 $ 24 $ 109 $ 83 $ 22 $ 105
Current period provision (release) 31 1 32 23 1 24
Current period write-offs ( 27 ) — ( 27 ) ( 28 ) — ( 28 )
Current period recoveries 5 — 5 6 — 6
Ending ACL
$ 94 $ 25 $ 119 $ 84 $ 23 $ 107
8. REINSURANCE
The Company cedes insurance risk to reinsurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company's procedures include carefully selecting its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers.
Reinsurance Recoverables
Reinsurance recoverables include balances due from reinsurance companies and are presented net of an allowance for uncollectible reinsurance. Reinsurance recoverables include an estimate of the amount of gross losses and loss adjustment
expense reserves that may be ceded under the terms of the reinsurance agreements, including incurred but not reported (" IBNR ") unpaid losses. The Company’s estimate of losses and loss adjustment expense reserves ceded to reinsurers is based on assumptions that are consistent with those used in establishing the gross reserves for amounts the Company owes to its claimants. The Company estimates its ceded reinsurance recoverables based on the terms of any applicable facultative and treaty reinsurance, including an estimate of how incurred but not reported losses will ultimately be ceded under reinsurance agreements. Accordingly, the Company’s estimate of reinsurance recoverables is subject to similar risks and uncertainties as the estimate of the gross reserve for unpaid losses and loss adjustment expenses.
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Note 8 - Reinsurance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Reinsurance Recoverables by Credit Quality Indicator
As of June 30, 2023 As of December 31, 2022
P&C
Group Benefits
Corporate Total P&C
Group Benefits
Corporate Total
A.M. Best Financial Strength Rating
A++ $ 2,173 $ — $ — $ 2,173 $ 2,094 $ — $ — $ 2,094
A+ 2,049 238 247 2,534 2,169 239 259 2,667
A 893 — — 893 763 1 — 764
A- 70 6 — 76 79 6 — 85
B++ 601 — 3 604 616 — 2 618
Below B++ 20 — — 20 20 — — 20
Total Rated by A.M. Best
5,806 244 250 6,300 5,741 246 261 6,248
Mandatory (Assigned) and Voluntary Risk Pools 207 — — 207 218 — — 218
Captives 304 — — 304 319 — — 319
Other not rated companies 205 6 — 211 279 5 — 284
Gross Reinsurance Recoverables
6,522 250 250 7,022 6,557 251 261 7,069
Allowance for uncollectible reinsurance
( 107 ) ( 1 ) ( 2 ) ( 110 ) ( 102 ) ( 1 ) ( 2 ) ( 105 )
Net Reinsurance Recoverables
$ 6,415 $ 249 $ 248 $ 6,912 $ 6,455 $ 250 $ 259 $ 6,964
Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods, generally 30, 60 or 90 days. To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational quality of each potential reinsurer. In placing reinsurance, the Company considers the nature of the risk reinsured, including the expected liability payout duration, and establishes limits tiered by reinsurer credit rating.
Where its contracts permit, the Company secures future claim obligations with various forms of collateral or other credit enhancement, including irrevocable letters of credit, secured trusts, funds held accounts and group wide offsets. As part of its reinsurance recoverable review, the Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers and the overall credit quality of the Company’s reinsurers.
Due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables become due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarter or annual period.
The allowance for uncollectible reinsurance comprises an ACL and an allowance for disputed balances. The ACL is estimated as the amount of reinsurance recoverables exposed to loss multiplied by estimated factors for the probability of default and the amount of loss given a default. The probability of default is assigned based on each reinsurer's credit rating, or a rating is estimated if no external rating is available. Credit ratings are
reviewed on a quarterly basis and any significant changes are reflected in an updated estimate. The probability of default factors are historical insurer and reinsurer defaults for liabilities with similar durations to the reinsured liabilities as estimated through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors of corporations through multiple economic cycles or, in the case of purchased annuities funding structured settlements accounted for as reinsurance, historical recovery rates for annuity contract holders.
As shown in the table above, a portion of the total gross reinsurance recoverable balance relates to the Company’s participation in various mandatory (assigned) and voluntary risk pools. Reinsurance recoverables due from pools are backed by the financial position of all insurance companies participating in the pools and the credit backing the reinsurance recoverable is not limited to the financial strength of each pool. The mandatory pools generally are funded through policy assessments or surcharges and if any participant in the pool defaults, remaining liabilities are apportioned among the other members.
The Company's evaluation of the required ACL for reinsurance recoverables considers the current economic environment as well as macroeconomic scenarios similar to the approach used to estimate the ACL for mortgage loans. See Note 5 - Investments. Insurance companies, including reinsurers, are regulated and hold risk-based capital (" RBC ") to mitigate the risk of loss due to economic factors and other risks. Non-U.S. reinsurers are either subject to a capital regime substantively equivalent to domestic insurers or we hold collateral to support collection of reinsurance recoverables. As a result, there is limited history of losses from insurer defaults.
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Note 8 - Reinsurance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Allowance for Uncollectible Reinsurance for the Three and Six Months Ended
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
P&C beginning allowance for uncollectible reinsurance $ 102 $ 96 $ 102 $ 96
Beginning allowance for disputed amounts 58 56 60 54
P&C beginning ACL 44 40 42 42
Current period provision (release) 1 1 3 ( 1 )
P&C ending ACL 45 41 45 41
Ending allowance for disputed amounts 62 61 62 61
P&C ending allowance for uncollectible reinsurance $ 107 $ 102 $ 107 $ 102
Group Benefits allowance for uncollectible reinsurance $ 1 $ 1 $ 1 $ 1
Corporate allowance for uncollectible reinsurance $ 2 $ 2 $ 2 $ 2
Total allowance for uncollectible reinsurance $ 110 $ 105 $ 110 $ 105
9. RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
| PROPERTY & CASUALTY INSURANCE PRODUCT RESERVES, NET OF REINSURANCE
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the six months ended June 30,
2023 2022
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
$ 33,083 $ 31,449
Reinsurance and other recoverables 6,465 6,081
Beginning liabilities for unpaid losses and loss adjustment expenses, net
26,618 25,368
Provision for unpaid losses and loss adjustment expenses
Current accident year 4,712 3,998
Prior accident year development ( 39 ) ( 94 )
Total provision for unpaid losses and loss adjustment expenses
4,673 3,904
Payments
Current accident year ( 997 ) ( 840 )
Prior accident years ( 3,731 ) ( 2,680 )
Total payments
( 4,728 ) ( 3,520 )
Foreign currency adjustment 18 ( 29 )
Ending liabilities for unpaid losses and loss adjustment expenses, net
26,581 25,723
Reinsurance and other recoverables 6,448 6,212
Ending liabilities for unpaid losses and loss adjustment expenses, gross
$ 33,029 $ 31,935
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Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unfavorable (Favorable) Prior Accident Year Development
For the six months ended June 30,
2023 2022
Workers’ compensation $ ( 113 ) $ ( 85 )
Workers’ compensation discount accretion 22 18
General liability 28 33
Marine ( 1 ) ( 3 )
Package business ( 8 ) ( 24 )
Commercial property — ( 21 )
Professional liability ( 3 ) ( 9 )
Bond 12 ( 4 )
Assumed reinsurance 17 12
Automobile liability - Commercial Lines 6 12
Automobile liability - Personal Lines — ( 5 )
Homeowners 1 —
Net asbestos and environmental ("A&E") reserves — —
Catastrophes ( 44 ) ( 30 )
Uncollectible reinsurance 12 6
Other reserve re-estimates, net 32 6
Total prior accident year development $ ( 39 ) $ ( 94 )
Re-estimates of prior accident year reserves for the six months ended June 30, 2023
Workers’ compensation reserves were decreased within the 2014 to 2019 accident years primarily in small commercial, driven by lower than previously estimated claim severity. In addition, the 2020 accident year reflects a $ 20 reduction of COVID-19 related reserves.
General liability reserves were increased driven by higher frequency and estimated cost to settle large individual claims for the 2016 to 2019 accident years, partially offset by a decrease in reserves for the 2020 accident year due to favorable experience. In addition, reserves for sexual molestation and sexual abuse claims were increased for older accident years. Also included was a decrease in reserves for extra contractual liability claims and other miscellaneous run-off lines.
Package business reserves decreased primarily due to lower than previously estimated property severity for accident year 2021. Package liability is flat overall with improvement in accident year 2020 due to favorable claim count emergence offset by reserve increases in accident years 2019 and prior related to higher severity.
Commercial property reserves were flat primarily due to unfavorable development for accident year 2022 in middle & large commercial, offset by favorable development in global specialty.
Bond reserves were increased primarily due to unfavorable development for 2013 and prior accident years related to customs bonds.
Assumed reinsurance reserves were increased due to higher reserve estimates in the specialty casualty, Latin America casualty and surety business.
Automobile liability reserves - Commercial Lines increased primarily due to adverse loss development within accident years 2017 to 2019.
Automobile liability reserves - Personal Lines were flat as increases for accident year 2022 from higher estimated severity and increasing attorney representation rates were fully offset by decreases, primarily within accident years 2019 to 2021, due to lower estimated severity.
Catastrophes reserves were decreased primarily within Commercial Lines driven by a reduction in reserves in accident year 2022 for Hurricane Ian and accident year 2021 for Hurricane Ida.
Uncollectible reinsurance was increased primarily in Commercial Lines related to a captive reinsurer and, to a lesser extent, an increase in reserves for potential collection disputes and credit concerns.
Other reserve re-estimates, net, were increased primarily due to an increase in accident year 2022 Personal Lines automobile physical damage severity.
Re-estimates of prior accident year reserves for the six months ended June 30, 2022
Workers’ compensation reserves were decreased for the 2014 through 2018 accident years, predominately within small commercial, driven by lower than previously estimated claim severity.
General liability reserves were increased, driven by an increase in the estimated cost to settle large individual claims in middle & large commercial for the 2016 to 2019 accident years, an increase in excess casualty for the 2019 accident year, and increases in primary construction on older accident years, partially offset by a decrease in reserves for other mass torts.
Package business reserves decreased due to lower estimated loss adjustment expenses for accident years 2015 to 2018 and a reduction in property reserves for the 2020 and 2021 accident years.
Commercial property reserves were decreased primarily due to favorable development for the 2020 accident year in middle & large commercial related to COVID-19 claims and a reduction in property reserves for the 2021 accident year.
Professional liability reserves were decreased primarily due to favorable development on directors’ and officers’ claims for the 2018 to 2020 accident years and on errors and omissions claims for the 2013 to 2017 accident years, partially offset by large losses related to 2018 and prior accident years for primary and excess directors’ and officers’ claims.
Assumed reinsurance reserves were increased primarily due to higher reserve estimates for syndicate property claims, including higher expected COVID-19 property losses in the 2020 accident year and increased reserves for international agriculture related to drought claims.
Automobile liability reserves were decreased in Personal Lines principally due to lower estimated severity on AARP Direct claims, primarily within accident years 2016 to 2020 and were increased in Commercial Lines principally due to a higher number of large claims in accident years 2017 to 2019.
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Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Catastrophe reserves were decreased in both Commercial and Personal Lines with the largest reduction related to 2019 and 2020 wind and hail events.
Other reserve re-estimates, net, were increased primarily due to an increase in automobile physical damage severity and unfavorable development from participation in involuntary market pools.
Settlement Agreement with Boy Scouts of America
On February 14, 2022, the Company executed a final settlement agreement (the “Settlement”) with the Boy Scouts of America (“BSA”), the Local Councils, and the attorneys representing a majority of the alleged victims, pursuant to which The Hartford
agreed to pay $ 787 for sexual molestation and sexual abuse claims associated with liability policies issued by various Hartford Writing Companies in the 1970s and early 1980s. In exchange for its payment, the Company receives a complete release of its policies issued to BSA and the Local Councils, as well as an injunction against further abuse claims involving BSA. All conditions precedent to the Settlement have been satisfied, including approval by the bankruptcy court and the district court, and on April 20, 2023, The Hartford paid the Settlement amount of $ 787 . Certain objecting parties have appealed the district court’s ruling and that appeal is pending before the Third Circuit. If the court approvals for the BSA’s plan of reorganization are not affirmed on appeal, it is possible that adverse outcomes, if any, could have a material adverse effect on the Company’s operating results.
| GROUP LIFE, DISABILITY AND ACCIDENT PRODUCTS
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
For the six months ended June 30,
2023 2022
Beginning liabilities for unpaid losses and loss adjustment expenses, gross $ 8,160 $ 8,210
Reinsurance recoverables 245 245
Beginning liabilities for unpaid losses and loss adjustment expenses, net 7,915 7,965
Provision for unpaid losses and loss adjustment expenses
Current incurral year 2,622 2,497
Prior year's discount accretion 103 107
Prior incurral year development [1] ( 265 ) ( 242 )
Total provision for unpaid losses and loss adjustment expenses [2] 2,460 2,362
Payments
Current incurral year ( 1,012 ) ( 984 )
Prior incurral years ( 1,416 ) ( 1,500 )
Total payments ( 2,428 ) ( 2,484 )
Ending liabilities for unpaid losses and loss adjustment expenses, net 7,947 7,843
Reinsurance recoverables 243 254
Ending liabilities for unpaid losses and loss adjustment expenses, gross $ 8,190 $ 8,097
[1] Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
[2] Includes unallocated loss adjustment expenses ("ULAE") of $ 91 and $ 92 for the six months ended June 30, 2023 and 2022, respectively, that are recorded in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations .
Re-estimates of prior incurral years reserves for the six months ended June 30, 2023
Group disability- Prior period reserve estimates decreased by approximately $ 236 largely driven by group long-term disability claim incidence lower than prior assumptions and strong recoveries on prior incurral year claims.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $ 19 largely driven by continued low incidence in group life premium waiver.
Supplemental accident and health- Prior period reserve estimates decreased by approximately $ 10 driven by lower than previously expected claim incidence.
Re-estimates of prior incurral years reserves for the six months ended June 30, 2022
Group disability- Prior period reserve estimates decreased by approximately $ 195 largely driven by group long-term disability claim incidence lower than prior assumptions together with strong recoveries on prior incurral year claims.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $ 40 largely driven by continued low incidence in group life premium waiver as well as a reduction in estimated mortality group term life losses incurred in fourth quarter 2021.
Supplemental Accident & Health- Prior period reserve estimates decreased by approximately $ 10 driven by lower than previously expected claim incidence.
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Note 10 - Reserve for Future Policy Benefits
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
10 . RESERVE FOR FUTURE POLICY BENEFITS
Rollforward of Reserve for Future Policy Benefits
For the six months ended June 30,
2023 2022
Payout Annuities Life Conversions Paid-up Life Payout Annuities Life Conversions Paid-up Life
Present Value of Expected Net Premiums
Balance, beginning of the period $ 47 $ 58
Balance, ending of the period $ 44 $ 49
Present Value of Expected Future Policy Benefits
Beginning balance at single-A rate $ 140 $ 112 $ 192 $ 188 $ 152 $ 262
Beginning adjustment for changes in single-A rate 4 ( 14 ) ( 39 ) 47 19 14
Beginning balance at original discount rate 136 126 231 141 133 248
Effect of actual variances from expected experience 1 3 ( 1 ) — 3 —
Adjusted beginning balance 137 129 230 141 136 248
Interest accrual 4 9 3 4 8 4
Benefit Payments ( 6 ) ( 14 ) ( 9 ) ( 6 ) ( 15 ) ( 13 )
Ending balance at original discount rate 135 124 224 139 129 239
Ending adjustment for changes in single-A rate 4 ( 15 ) ( 38 ) 13 ( 7 ) ( 27 )
Ending balance at single-A rate $ 139 $ 109 $ 186 $ 152 $ 122 $ 212
Net reserve for future policy benefits $ 139 $ 65 $ 186 $ 152 $ 73 $ 212
Weighted-average duration of the reserve for future policy benefits (years) 9.1 12.2 6.3 9.2 13.0 6.9
Net Reserve for Future Policy Benefits
As of June 30,
2023 2022
Payout Annuities $ 139 $ 152
Life Conversions 65 73
Paid-up Life 186 212
DPL 19 20
Other 80 93
Total $ 489 $ 550
Undiscounted Expected Future Gross Premiums and Benefit Payments
As of June 30,
2023 2022
Payout Annuities [1]
Expected future benefit payments $ 267 $ 277
Life Conversions
Expected future gross premiums $ 117 $ 126
Expected future benefit payments $ 208 $ 218
Paid-up Life [1]
Expected future benefit payments $ 290 $ 312
[1]Payout Annuities and Paid-up Life have no expected future gross premiums.
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Note 10 - Reserve for Future Policy Benefits
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Weighted-Average Interest Rates
For the six months ended June 30,
2023 2022
Payout Annuities
Interest accretion rate 5.6 % 5.6 %
Current discount rate 5.2 % 4.6 %
Life Conversions
Interest accretion rate 4.2 % 4.1 %
Current discount rate 5.2 % 4.7 %
Paid-up Life
Interest accretion rate 2.9 % 2.9 %
Current discount rate 5.3 % 4.3 %
Gross premiums and interest accretion recognized on long-duration insurance policies for the six months ended June 30, 2023 and 2022 were immaterial.
11. OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE
Other policyholder funds and benefits payable of $ 647 and $ 664 as of June 30, 2023 and 2022 respectively, included universal life long-duration contacts of $ 228 and $ 242 as well as policyholder balances related to short-duration contracts of $ 419 and $ 422 . The universal life long-duration contacts presented in the table below were economically ceded to Prudential as part of the sale of the Company's former individual life business, which closed in 2013.
Universal Life Long Duration Contracts Rollforward
For the six months ended June 30,
2023 2022
Balance, beginning of the period $ 232 $ 253
Premiums Received 6 7
Policy Charges ( 10 ) ( 12 )
Surrenders and Withdrawals ( 2 ) ( 2 )
Benefit Payments ( 3 ) ( 10 )
Interest Credited 5 6
Balance, end of the period $ 228 $ 242
Weighted-average crediting rate 4.2 % 4.2 %
Net Amount at Risk [1] $ 950 $ 1,032
Cash Surrender Value $ 226 $ 239
[1]Net amount at risk is defined as the current death benefit in excess of the current account value as of the balance sheet date.
As of June 30, 2023 and 2022, universal life contracts of $ 227 and $ 240 , respectively, had crediting rates at their guaranteed minimums ranging from 4 %- 5 % .
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Note 12 - Income Taxes
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12. INCOME TAXES
Income Tax Expense
Income Tax Rate Reconciliation
Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022
Tax provision at U.S. federal statutory rate $ 141 $ 116 $ 278 $ 230
Nontaxable investment income ( 9 ) ( 5 ) ( 20 ) ( 14 )
Other ( 7 ) ( 1 ) ( 15 ) ( 8 )
Provision for income taxes $ 125 $ 110 $ 243 $ 208
Uncertain Tax Positions
Rollforward of Unrecognized Tax Benefits
Three Months Ended June 30,
Six Months Ended June 30,
2023 2022 2023 2022
Balance, beginning of period $ 23 $ 17 $ 22 $ 16
Gross increases - tax positions in current period 1 1 2 2
Lapse of statute of limitations ( 1 ) — ( 1 ) —
Balance, end of period $ 23 $ 18 $ 23 $ 18
The entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate in the period of the release.
Other Tax Matters
As of June 30, 2023, the Company has a deferred tax asset for foreign net operating losses of $ 40 partially offset by a valuation allowance of $ 21 . While the foreign net operating losses (" NOLs ") do not expire, this assessment reflects uncertainty in the Company's ability to generate sufficient taxable income in the near term in those specific jurisdictions.
Management has assessed the need for a valuation allowance against its deferred tax assets based on tax character and jurisdiction. In making the assessment, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryovers, taxable income in open carry back years and other tax planning strategies which management views as prudent and feasible.
The federal income tax audits for the Company have been completed through 2013. The acquired Navigators Group is currently under IRS audit for the pre-acquisition 2019 tax period. The statute of limitations is closed through the 2019 tax year with the exception of NOL carryforwards utilized in open tax years and the Navigators pre-acquisition 2019 tax period. Management believes that adequate provision has been made in the Company's Condensed Consolidated Financial Statements for any potential adjustments that may result from tax examinations and other tax-related matters for all open tax years.
13. DEBT
Junior Subordinated Debentures
The U.K. Financial Conduct Authority ("FCA") announced that publication of U.S. dollar London Inter Bank Offered Rate (“LIBOR”) on a representative basis will cease immediately after June 30, 2023. LIBOR is used as a benchmark or reference rate for certain investments and derivatives the Company owns, and floating rate debt the Company has issued. Uncertainties and risks relating to the transition from LIBOR have been reduced by the federal Adjustable Interest Rate (LIBOR) Act, which addresses replacement of LIBOR in certain contracts governed by U.S. law (including the law of any U.S. state), including 3-Month LIBOR, which was the original reference rate on the Company's $ 500 junior subordinated debentures due 2067. Prior to July 1, 2023, the Company's $ 500 junior subordinated debentures due 2067 paid interest at a rate of LIBOR plus 2.125 %. Effective July 1, 2023, the interest rate on the $ 500 junior subordinated debentures due 2067 is determined based on a reference rate of 3-month CME term Secured Overnight Financing Rate (“SOFR”) plus a spread adjustment of 0.26161 % plus 2.125 %.
The Company's interest rate swap agreements that converted the LIBOR variable interest payments on the $ 500 junior subordinated debentures to fixed interest payments were terminated and new interest rate swap agreements were entered into that reference SOFR so that interest rate swaps continue to effectively convert the variable interest payments to fixed interest payments of approximately 4.39 %.
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Note 14 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
14. COMMITMENTS AND CONTINGENCIES
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes liabilities for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated liability at the low end of the range of losses.
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties related to sexual molestation and sexual abuse claims discussed in Note 9 - Reserve for Unpaid Losses and Loss Adjustment Expenses of this Form 10-Q and in Note 11 - Reserve for Unpaid Losses and Loss Adjustment Expenses, of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, and in the following discussion under the caption “COVID-19 Pandemic Business Income Insurance Litigation” and under the caption “Run-off Asbestos and Environmental Claims,” management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. In addition to the matter described below, these actions include putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper sales or underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile and property. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
COVID-19 Pandemic Business Income Insurance Litigation
Like many others in the property and casualty insurance industry, beginning in April 2020, various direct and indirect subsidiaries of the Company (collectively the "Hartford Writing
Companies”), and in some instances the Company itself, have been served as defendants in lawsuits seeking insurance coverage under commercial insurance policies issued by the Hartford Writing Companies for alleged losses resulting from the shutdown or suspension of their businesses due to the spread of COVID-19. More than 300 such lawsuits have been filed, of which more than 60 purport to be filed on behalf of broad nationwide or statewide classes of policyholders. These lawsuits have been filed in state and federal courts in roughly 35 states. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts, interest, and attorneys' fees. Many of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. Some of the lawsuits also allege that the Hartford Writing Companies engaged in unfair business practices by collecting or retaining excess premium.
The Company and its subsidiaries deny the allegations and continue to vigorously defend these suits. The Hartford Writing Companies maintain that they have no coverage obligations with respect to these suits for business income allegedly lost by the plaintiffs due to the COVID-19 pandemic based on the clear terms of the applicable insurance policies. Although the policy terms vary depending, among other things, upon the size, nature, and location of the policyholder’s business, in general, the claims at issue in these lawsuits were denied because the claimant identified no direct physical damage or loss to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical damage or loss in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. In addition, the vast majority of the policies at issue expressly exclude from coverage any loss caused directly or indirectly by the presence, growth, proliferation, spread or activity of a virus, subject to a narrow set of exceptions not applicable in connection with this pandemic, and contain a pollution and contamination exclusion that, among other things, expressly excludes from coverage any loss caused by material that threatens human health or welfare.
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present numerous uncertainties and contingencies that are not yet fully known, including how many additional claims or lawsuits could be filed, the extent to which any state or nationwide classes will be certified, and the size and scope of any such classes. The legal theories advocated by plaintiffs vary significantly by case as do the state laws that govern the policy interpretation. These lawsuits are at various stages of litigation: some are in the earliest stages of litigation, some complaints may be amended, some have been dismissed voluntarily and may be refiled, while many have been dismissed through rulings in favor of the Hartford Writing Companies. Discovery is underway in certain single plaintiff cases. Moreover, dozens of policyholders have appealed dismissals in favor of the Hartford Writing Companies. The Hartford Writing Companies have received numerous favorable rulings on appeal, with only two adverse appellate rulings to date. The remainder of the Hartford Writing Companies' appeals are at various stages of the appellate process and have not yet been ruled upon. In addition,
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Note 14 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, almost none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the large number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate, could have a material adverse effect on the Company’s consolidated operating results or liquidity.
Run-off Asbestos and Environmental Claims
The Company continues to receive asbestos and environmental ("A&E") claims. Asbestos claims relate primarily to bodily injuries asserted by people who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs.
The vast majority of the Company's exposure to A&E relates to accident years prior to 1986 that are reported in Property & Casualty Other Operations ("Run-off A&E"). In addition, since 1986, the Company has written asbestos and environmental exposures under general liability policies and pollution liability under homeowners policies, which are reported in the Commercial Lines and Personal Lines segments, respectively.
Prior to 1986, the Company wrote several different categories of insurance contracts that may cover A&E claims. First, the Company wrote primary policies providing the first layer of coverage in an insured’s liability program. Second, the Company wrote excess and umbrella policies providing higher layers of coverage for losses that exhaust the limits of underlying coverage. Third, the Company acted as a reinsurer assuming a portion of those risks assumed by other insurers writing primary, excess, umbrella and reinsurance coverages.
Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid gross losses and expenses related to environmental and asbestos claims. The degree of variability of gross reserve estimates for these exposures is significantly greater than for other more traditional exposures.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation, and inconsistent and emerging legal doctrines with respect to the underlying claims and with respect to the Company's coverage obligations. Furthermore, over time, insurers, including the Company, have experienced significant changes in the rate at which asbestos claims are brought, the claims experience of particular insureds, and the value of claims, making predictions of future exposure from past experience uncertain. Plaintiffs and insureds also have sought to use bankruptcy proceedings, including “pre-packaged” bankruptcies, to accelerate and increase loss payments by insurers. In addition, some policyholders have asserted new classes of claims for coverages to which an aggregate limit of liability may not apply. Further uncertainties include insolvencies of other carriers, insolvencies of insureds and unanticipated developments pertaining to the Company’s
ability to recover reinsurance for A&E claims. Management believes these issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include expanding theories of liability and damages against insureds, emerging risks such as per-and polyfluoroalkyl substances ("PFAS"), the risks inherent in major litigation, inconsistent and emerging legal doctrines concerning the existence and scope of coverage for environmental claims, and the scope and level of complexity of the remediation required by regulators.
The reporting pattern for assumed reinsurance claims, including those related to A&E claims, is much longer than for direct claims. In many instances, it takes months or years to determine that the policyholder’s own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves.
It is also not possible to predict changes in the legal and legislative environment and their effect on the future development of A&E claims.
Given the factors described above, the Company believes the actuarial tools and other techniques it employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure are less precise in estimating reserves for A&E exposures. For this reason, the Company principally relies on exposure-based analysis to estimate the ultimate costs of these claims, both gross and net of reinsurance, and regularly evaluates new account information in assessing its potential A&E exposures. The Company supplements this exposure-based analysis with evaluations of the Company’s historical direct net loss and expense paid and reported experience, and net loss and expense paid and reported experience by calendar and/or report year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and reported activity.
While the Company believes that its current A&E reserves are appropriate, significant uncertainties limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not estimable now, could be material to The Hartford’s consolidated operating results or liquidity.
For its Run-off A&E claims, as of June 30, 2023, the Company reported $ 327 of net asbestos and environmental reserves, including the benefit of losses ceded to an A&E adverse development cover ("ADC") with National Indemnity Company, a subsidiary of Berkshire Hathaway ("NICO") (collectively the "A&E ADC"). In addition, the Company has recorded a $ 594 deferred gain within other liabilities for losses economically ceded to NICO but for which the benefit is not recognized in earnings until later periods. While the Company believes that its current Run-off A&E reserves are appropriate, significant uncertainties limit our ability to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not reasonably estimable now, could be material to The Hartford's consolidated operating results or liquidity.
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Note 14 - Commitments and Contingencies
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Company’s A&E ADC reinsurance agreement reinsures substantially all A&E reserve development for 2016 and prior accident years, including Run-off A&E and A&E reserves included in Commercial Lines and Personal Lines. The A&E ADC has a coverage limit of $ 1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $ 1.7 billion. As of June 30, 2023 , the Company has incurred $ 1,244 in cumulative adverse development on A&E reserves that have been ceded under the A&E ADC treaty, leaving $ 256 of coverage available for future adverse net reserve development, if any. Cumulative adverse development of A&E claims for accident years 2016 and prior could ultimately exceed the $ 1.5 billion treaty limit in which case any adverse development in excess of the treaty limit would be absorbed as a charge to earnings by the Company. In these scenarios, the effect of these charges could be material to the Company’s consolidated operating results or liquidity. For more information on the A&E ADC, refer to Note 11, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements included in the Company's 2022 Form 10-K Annual Report.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical agencies, of the individual legal
entity that entered into the derivative agreement. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could, in certain instances, terminate the agreements and demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement.
The settlement amount is determined by netting the derivative positions transacted under each agreement. If the termination rights were to be exercised by the counterparties, it could impact the legal entity’s ability to conduct hedging activities by increasing the associated costs and decreasing the willingness of counterparties to transact with the legal entity. The aggregate fair value of all derivative instruments with credit-risk-related contingent features that are in a net liability position as of June 30, 2023 was $ 78 for which the legal entities have posted collateral of $ 69 in the normal course of business. Based on derivative contractual terms as of June 30, 2023, a downgrade of the current financial strength ratings by either Moody's or S&P would no t require additional assets to be posted as collateral. This requirement could change as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the additional collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
15. EQUITY
Equity Repurchase Program
During the six months ended June 30, 2023 and 2022, the Company repurchased $ 700 ( 9.7 million shares) and $ 850 ( 12.0 million shares), respectively, of common stock under Board authorized share repurchase programs covering the applicable periods. As of June 30, 2023, the Company has $ 2.0 billion remaining for equity repurchases under the current $ 3.0 billion share repurchase program, which is effective until December 31, 2024. During the period July 1, 2023 through July 26, 2023,
the Company repurchased $ 101 ( 1.4 million shares) under this repurchase program.
The timing of any repurchases is dependent on several factors, including the market price of the Company's securities, the Company's capital position, consideration of the effect of any repurchases on the Company's financial strength or credit ratings, the Company's blackout periods, and other considerations .
16. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in AOCI, Net of Tax for the Three Months Ended June 30, 2023
Changes in
Net Unrealized Gain (Loss) on Fixed Maturities, AFS Unrealized Loss on Fixed Maturities with ACL Net Gain on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Liability for Future Policy Benefits Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ ( 2,008 ) $ ( 13 ) $ 48 $ 33 $ 27 $ ( 1,341 ) $ ( 3,254 )
OCI before reclassifications ( 362 ) 2 ( 21 ) 4 6 ( 1 ) ( 372 )
Amounts reclassified from AOCI 21 2 — — — 7 30
OCI, before tax ( 341 ) 4 ( 21 ) 4 6 6 ( 342 )
Income tax benefit (expense) 72 ( 1 ) 4 ( 1 ) ( 1 ) ( 1 ) 72
OCI, net of tax ( 269 ) 3 ( 17 ) 3 5 5 ( 270 )
Ending balance $ ( 2,277 ) $ ( 10 ) $ 31 $ 36 $ 32 $ ( 1,336 ) $ ( 3,524 )
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Note 16 - Accumulated Other Comprehensive Income (Loss)
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in AOCI, Net of Tax for the Six Months Ended June 30, 2023
Changes in
Net Unrealized Gain (Loss) on Fixed Maturities, AFS Unrealized Losses on Fixed Maturities with ACL Net Gain (Loss) on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Liability for Future Policy Benefits Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ ( 2,594 ) $ ( 7 ) $ 40 $ 31 $ 35 $ ( 1,346 ) $ ( 3,841 )
OCI before reclassifications 353 ( 6 ) ( 14 ) 6 ( 4 ) — 335
Amounts reclassified from AOCI 48 2 3 — — 13 66
OCI, before tax 401 ( 4 ) ( 11 ) 6 ( 4 ) 13 401
Income tax benefit (expense) ( 84 ) 1 2 ( 1 ) 1 ( 3 ) ( 84 )
OCI, net of tax 317 ( 3 ) ( 9 ) 5 ( 3 ) 10 317
Ending balance $ ( 2,277 ) $ ( 10 ) $ 31 $ 36 $ 32 $ ( 1,336 ) $ ( 3,524 )
Reclassifications from AOCI
Three Months Ended June 30, 2023 Six Months Ended June 30, 2023 Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Gain (Loss) on Fixed Maturities, AFS
Available-for-sale fixed maturities $ ( 21 ) $ ( 48 ) Net realized gains (losses)
( 21 ) ( 48 ) Total before tax
( 4 ) ( 10 ) Income tax expense
$ ( 17 ) $ ( 38 ) Net income
Unrealized Losses on Fixed Maturities with ACL
Available-for-sale fixed maturities $ ( 2 ) $ ( 2 ) Net realized gains (losses)
( 2 ) ( 2 ) Total before tax
( 1 ) ( 1 ) Income tax expense
$ ( 1 ) $ ( 1 ) Net income
Net Gain (Loss) on Cash Flow Hedging Instruments
Interest rate swaps $ ( 7 ) $ ( 15 ) Net investment income
Interest rate swaps 4 7 Interest expense
Foreign currency swaps 3 5 Net investment income
— ( 3 ) Total before tax
— ( 1 ) Income tax expense
$ — $ ( 2 ) Net income
Pension and Other Postretirement Plan Adjustments
Amortization of prior service credit $ 1 $ 3 Insurance operating costs and other expenses
Amortization of actuarial loss ( 8 ) ( 16 ) Insurance operating costs and other expenses
( 7 ) ( 13 ) Total before tax
( 1 ) ( 3 ) Income tax expense
$ ( 6 ) $ ( 10 ) Net income
Total amounts reclassified from AOCI $ ( 24 ) $ ( 51 ) Net income
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Note 16 - Accumulated Other Comprehensive Income (Loss)
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Changes in AOCI, Net of Tax for the Three Months Ended June 30, 2022
Changes in
Net Unrealized Gain (Loss) on Fixed Maturities, AFS Unrealized Losses on Fixed Maturities with ACL Net Gain (Loss) on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Liability for Future Policy Benefits Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ ( 261 ) $ ( 2 ) $ 5 $ 41 $ ( 16 ) $ ( 1,477 ) $ ( 1,710 )
OCI before reclassifications ( 2,087 ) — 38 ( 10 ) 37 ( 1 ) ( 2,023 )
Amounts reclassified from AOCI 65 — ( 6 ) — — 16 75
OCI, before tax ( 2,022 ) — 32 ( 10 ) 37 15 ( 1,948 )
Income tax benefit (expense) 425 — ( 7 ) 2 ( 8 ) ( 3 ) 409
OCI, net of tax ( 1,597 ) — 25 ( 8 ) 29 12 ( 1,539 )
Ending balance $ ( 1,858 ) $ ( 2 ) $ 30 $ 33 $ 13 $ ( 1,465 ) $ ( 3,249 )
Changes in AOCI, Net of Tax for the Six Months Ended June 30, 2022
Changes in
Net Unrealized Gain (Loss) on Fixed Maturities, AFS Unrealized Losses on Fixed Maturities with ACL Net Gain (Loss) on Cash Flow Hedging Instruments Foreign Currency Translation Adjustments Liability for Future Policy Benefits Adjustments Pension and Other Postretirement Plan Adjustments AOCI,
net of tax
Beginning balance $ 1,631 $ ( 2 ) $ 6 $ 41 $ ( 59 ) $ ( 1,489 ) $ 128
OCI before reclassifications ( 4,568 ) — 45 ( 10 ) 91 ( 1 ) ( 4,443 )
Amounts reclassified from AOCI 152 — ( 14 ) — — 31 169
OCI, before tax ( 4,416 ) — 31 ( 10 ) 91 30 ( 4,274 )
Income tax benefit (expense) 927 — ( 7 ) 2 ( 19 ) ( 6 ) 897
OCI, net of tax ( 3,489 ) — 24 ( 8 ) 72 24 ( 3,377 )
Ending balance $ ( 1,858 ) $ ( 2 ) $ 30 $ 33 $ 13 $ ( 1,465 ) $ ( 3,249 )
Reclassifications from AOCI
Three Months Ended June 30, 2022 Six Months Ended June 30, 2022 Affected Line Item in the Condensed Consolidated Statement of Operations
Net Unrealized Gain (Loss) on Fixed Maturities, AFS
Available-for-sale fixed maturities $ ( 65 ) $ ( 152 ) Net realized gains (losses)
( 65 ) ( 152 ) Total before tax
( 14 ) ( 32 ) Income tax expense
$ ( 51 ) $ ( 120 ) Net income
Net Gain (Loss) on Cash Flow Hedging Instruments
Interest rate swaps $ 5 $ 14 Net investment income
Interest rate swaps ( 1 ) ( 4 ) Interest expense
Foreign currency swaps 2 4 Net investment income
6 14 Total before tax
1 3 Income tax expense
$ 5 $ 11 Net income
Pension and Other Postretirement Plan Adjustments
Amortization of prior service credit $ 1 $ 3 Insurance operating costs and other expenses
Amortization of actuarial loss ( 17 ) ( 34 ) Insurance operating costs and other expenses
( 16 ) ( 31 ) Total before tax
( 3 ) ( 7 ) Income tax expense
$ ( 13 ) $ ( 24 ) Net income
Total amounts reclassified from AOCI $ ( 59 ) $ ( 133 ) Net income
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Note 17 - Employee Benefit Plans
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
17. EMPLOYEE BENEFIT PLANS
The Company’s employee benefit plans are described in Note 18 - Employee Benefit Plans of Notes to Consolidated Financial Statements included in The Hartford’s 2022 Form 10-K Annual Report. Net periodic cost (benefit) is recognized in insurance operating costs and other expenses in the Condensed Consolidated Statement of Operations.
Based on the funded status of the U.S. qualified defined benefit pension plan, the Company does not anticipate contributing to the plan in 2023.
Net Periodic Cost (Benefit)
Pension Benefits Other Postretirement Benefits
Three Months Ended June 30, Six Months Ended June 30, Three Months Ended June 30, Six Months Ended June 30,
2023 2022 2023 2022 2023 2022 2023 2022
Service cost $ 1 $ 1 $ 2 $ 2 $ — $ — $ — $ —
Interest cost 45 28 90 56 2 1 4 2
Expected return on plan assets ( 59 ) ( 50 ) ( 118 ) ( 101 ) ( 1 ) ( 1 ) ( 1 ) ( 1 )
Amortization of prior service credit — — — — ( 1 ) ( 1 ) ( 3 ) ( 3 )
Amortization of actuarial loss 7 16 14 31 1 1 2 3
Net periodic cost (benefit) $ ( 6 ) $ ( 5 ) $ ( 12 ) $ ( 12 ) $ 1 $ — $ 2 $ 1
18. RESTRUCTURING AND OTHER COSTS
In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, on July 30, 2020 the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next. Hartford Next is intended to reduce annual insurance operating costs and other expenses through reduction of the Company's headcount, investment in information technology ("IT") to further enhance our capabilities, and other activities. The activities are expected to be substantially complete by the end of 2023.
Termination benefits related to workforce reductions and professional fees are included within restructuring and other costs in the Condensed Consolidated Statement of Operations
and unpaid restructuring costs are included in other liabilities in the June 30, 2023 and December 31, 2022 Condensed Consolidated Balance Sheets.
Subsequent to June 30, 2023, the Company expects to incur additional costs including amortization of right of use assets and other lease exit costs, other IT costs to retire applications and other expenses. Total restructuring and other costs are expected to be approximately $ 127 , before tax, and will be recognized in Corporate for segment reporting. The estimated restructuring and other costs for future periods do not include all costs associated with the real estate consolidation plan as those plans are still being finalized.
Restructuring and Other Costs, Before Tax
Incurred in the Three Months Ended June 30, Incurred in the Six Months Ended June 30, Cumulative Incurred Through June 30, 2023 Total Amount Expected to be Incurred
2023 2022 2023 2022
Severance benefits $ — $ ( 5 ) $ ( 3 ) $ ( 7 ) $ 38 $ 38
IT costs 1 3 2 5 21 24
Professional fees and other expenses 2 4 4 9 62 65
Total restructuring and other costs, before tax $ 3 $ 2 $ 3 $ 7 $ 121 $ 127
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Note 18 - Restructuring and Other Costs
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Accrued Restructuring and Other Costs
Six Months Ended June 30, 2023
Severance Benefits and Related Costs IT Costs Professional Fees and Other Total Restructuring and Other Costs Liability
Balance, beginning of period $ 7 $ — $ — $ 7
Incurred ( 3 ) 2 4 3
Payments ( 1 ) ( 2 ) ( 4 ) ( 7 )
Balance, end of period $ 3 $ — $ — $ 3
Accrued Restructuring and Other Costs
Six Months Ended June 30, 2022
Severance Benefits and Related Costs IT Costs Professional Fees and Other Total Restructuring and Other Costs Liability
Balance, beginning of period $ 18 $ — $ — $ 18
Incurred ( 7 ) 5 9 7
Payments ( 2 ) ( 5 ) ( 9 ) ( 16 )
Balance, end of period $ 9 $ — $ — $ 9
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Index to MD&A
Part I - Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.