filings.toolsItem 15. Exhibits, Financial Statement Schedules
507K characters. Original on sec.gov · Markdown
Item 15. Exhibits, Financial Statement Schedules
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, the “Company”) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. 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 audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
February 22, 2019
We have served as the Company’s auditor since 2002.
F-2
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Operations
| For the years ended December 31, | |||||||||
| (In millions, except for per share data) | 2018 | 2017 | 2016 | ||||||
| Revenues | |||||||||
| Earned premiums | $ | 15,869 | $ | 14,141 | $ | 13,697 | |||
| Fee income | 1,313 | 1,168 | 1,041 | ||||||
| Net investment income | 1,780 | 1,603 | 1,577 | ||||||
| Net realized capital gains (losses): | |||||||||
| Total other-than-temporary impairment (“OTTI”) losses | (7 | ) | (15 | ) | (35 | ) | |||
| OTTI losses recognized in other comprehensive income | 6 | 7 | 8 | ||||||
| Net OTTI losses recognized in earnings | (1 | ) | (8 | ) | (27 | ) | |||
| Other net realized capital gains (losses) | (111 | ) | 173 | (83 | ) | ||||
| Total net realized capital gains (losses) | (112 | ) | 165 | (110 | ) | ||||
| Other revenues | 105 | 85 | 86 | ||||||
| Total revenues | 18,955 | 17,162 | 16,291 | ||||||
| Benefits, losses and expenses | |||||||||
| Benefits, losses and loss adjustment expenses | 11,165 | 10,174 | 9,961 | ||||||
| Amortization of deferred policy acquisition costs ("DAC") | 1,384 | 1,372 | 1,377 | ||||||
| Insurance operating costs and other expenses | 4,281 | 4,563 | 3,525 | ||||||
| Loss on extinguishment of debt | 6 | — | — | ||||||
| Loss on reinsurance transaction | — | — | 650 | ||||||
| Interest expense | 298 | 316 | 327 | ||||||
| Amortization of other intangible assets | 68 | 14 | 4 | ||||||
| Total benefits, losses and expenses | 17,202 | 16,439 | 15,844 | ||||||
| Income from continuing operations before income taxes | 1,753 | 723 | 447 | ||||||
| Income tax expense (benefit) | 268 | 985 | (166 | ) | |||||
| Income (loss) from continuing operations, net of tax | 1,485 | (262 | ) | 613 | |||||
| Income (loss) from discontinued operations, net of tax | 322 | (2,869 | ) | 283 | |||||
| Net income (loss) | 1,807 | $ | (3,131 | ) | $ | 896 | |||
| Preferred stock dividends | 6 | — | — | ||||||
| Net income (loss) available to common stockholders | $ | 1,801 | $ | (3,131 | ) | $ | 896 | ||
| Income (loss) from continuing operations, net of tax, available to common stockholders per common share | |||||||||
| Basic | $ | 4.13 | $ | (0.72 | ) | $ | 1.58 | ||
| Diluted | $ | 4.06 | $ | (0.72 | ) | $ | 1.55 | ||
| Net income (loss) available to common stockholders per common share | |||||||||
| Basic | $ | 5.03 | $ | (8.61 | ) | $ | 2.31 | ||
| Diluted | $ | 4.95 | $ | (8.61 | ) | $ | 2.27 |
See Notes to Consolidated Financial Statements.
F-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Comprehensive Income (Loss)
| For the years ended December 31, | |||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||
| Net income (loss) | $ | 1,807 | $ | (3,131 | ) | $ | 896 | ||
| Other comprehensive income (loss): | |||||||||
| Changes in net unrealized gain on securities | (2,180 | ) | 655 | (3 | ) | ||||
| Changes in OTTI losses recognized in other comprehensive income | (1 | ) | — | 4 | |||||
| Changes in net gain on cash flow hedging instruments | (25 | ) | (58 | ) | (54 | ) | |||
| Changes in foreign currency translation adjustments | (8 | ) | 28 | 61 | |||||
| Changes in pension and other postretirement plan adjustments | (23 | ) | 375 | (16 | ) | ||||
| OCI, net of tax | (2,237 | ) | 1,000 | (8 | ) | ||||
| Comprehensive income (loss) | $ | (430 | ) | $ | (2,131 | ) | $ | 888 |
See Notes to Consolidated Financial Statements.
F-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
| As of December 31, | ||||||
| (In millions, except for share and per share data) | 2018 | 2017 | ||||
| Assets | ||||||
| Investments: | ||||||
| Fixed maturities, available-for-sale, at fair value (amortized cost of $35,603 and $35,612) | $ | 35,652 | $ | 36,964 | ||
| Fixed maturities, at fair value using the fair value option | 22 | 41 | ||||
| Equity securities, at fair value | 1,214 | — | ||||
| Equity securities, available-for-sale, at fair value (cost of $0 and $907) | — | 1,012 | ||||
| Mortgage loans (net of allowances for loan losses of $1 and $1) | 3,704 | 3,175 | ||||
| Limited partnerships and other alternative investments | 1,723 | 1,588 | ||||
| Other investments | 192 | 96 | ||||
| Short-term investments | 4,283 | 2,270 | ||||
| Total investments | 46,790 | 45,146 | ||||
| Cash | 121 | 180 | ||||
| Premiums receivable and agents’ balances, net | 3,995 | 3,910 | ||||
| Reinsurance recoverables, net | 4,357 | 4,061 | ||||
| Deferred policy acquisition costs | 670 | 650 | ||||
| Deferred income taxes, net | 1,248 | 1,164 | ||||
| Goodwill | 1,290 | 1,290 | ||||
| Property and equipment, net | 1,006 | 1,034 | ||||
| Other intangible assets, net | 657 | 659 | ||||
| Other assets | 2,173 | 2,230 | ||||
| Assets held for sale | — | 164,936 | ||||
| Total assets | $ | 62,307 | $ | 225,260 | ||
| Liabilities | ||||||
| Unpaid losses and loss adjustment expenses | $ | 33,029 | $ | 32,287 | ||
| Reserve for future policy benefits | 642 | 713 | ||||
| Other policyholder funds and benefits payable | 767 | 816 | ||||
| Unearned premiums | 5,282 | 5,322 | ||||
| Short-term debt | 413 | 320 | ||||
| Long-term debt | 4,265 | 4,678 | ||||
| Other liabilities | 4,808 | 5,188 | ||||
| Liabilities held for sale | — | 162,442 | ||||
| Total liabilities | 49,206 | 211,766 | ||||
| Commitments and Contingencies (Note 14) | ||||||
| Stockholders’ Equity | ||||||
| Preferred stock, $0.01 par value — 50,000,000 shares authorized, 13,800 shares issued as of December 31, 2018, aggregate liquidation preference of $345 | 334 | — | ||||
| Common stock, $0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at December 31, 2018 and December 31, 2017 | 4 | 4 | ||||
| Additional paid-in capital | 4,378 | 4,379 | ||||
| Retained earnings | 11,055 | 9,642 | ||||
| Treasury stock, at cost — 25,772,238 and 28,088,186 shares | (1,091 | ) | (1,194 | ) | ||
| Accumulated other comprehensive income (loss), net of tax | (1,579 | ) | 663 | |||
| Total stockholders' equity | 13,101 | 13,494 | ||||
| Total liabilities and stockholders’ equity | $ | 62,307 | $ | 225,260 |
See Notes to Consolidated Financial Statements.
F-5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
| For the years ended December 31, | |||||||||
| (In millions, except for share data) | 2018 | 2017 | 2016 | ||||||
| Preferred Stock | |||||||||
| Preferred Stock, beginning of period | $ | — | $ | — | $ | — | |||
| Issuance of preferred stock | 334 | — | — | ||||||
| Preferred Stock, end of period | 334 | — | — | ||||||
| Common Stock | 4 | 4 | 4 | ||||||
| Additional Paid-in Capital | |||||||||
| Additional Paid-in Capital, beginning of period | 4,379 | 5,247 | 8,973 | ||||||
| Issuance of shares under incentive and stock compensation plans | (110 | ) | (76 | ) | (143 | ) | |||
| Stock-based compensation plans expense | 123 | 104 | 74 | ||||||
| Tax benefit on employee stock options and share-based awards | — | — | 5 | ||||||
| Issuance of shares for warrant exercise | (14 | ) | (67 | ) | (16 | ) | |||
| Treasury stock retired | — | (829 | ) | (3,646 | ) | ||||
| Additional Paid-in Capital, end of period | 4,378 | 4,379 | 5,247 | ||||||
| Retained Earnings | |||||||||
| Retained Earnings, beginning of period | 9,642 | 13,114 | 12,550 | ||||||
| Cumulative effect of accounting changes, net of tax | 5 | — | — | ||||||
| Adjusted balance beginning of period | 9,647 | 13,114 | 12,550 | ||||||
| Net income (loss) | 1,807 | (3,131 | ) | 896 | |||||
| Dividends declared on preferred stock | (6 | ) | — | — | |||||
| Dividends declared on common stock | (393 | ) | (341 | ) | (332 | ) | |||
| Retained Earnings, end of period | 11,055 | 9,642 | 13,114 | ||||||
| Treasury Stock, at cost | |||||||||
| Treasury Stock, at cost, beginning of period | (1,194 | ) | (1,125 | ) | (3,557 | ) | |||
| Treasury stock acquired | — | (1,028 | ) | (1,330 | ) | ||||
| Treasury stock retired | — | 829 | 3,647 | ||||||
| Issuance of shares under incentive and stock compensation plans | 132 | 100 | 153 | ||||||
| Net shares acquired related to employee incentive and stock compensation plans | (43 | ) | (37 | ) | (54 | ) | |||
| Issuance of shares for warrant exercise | 14 | 67 | 16 | ||||||
| Treasury Stock, at cost, end of period | (1,091 | ) | (1,194 | ) | (1,125 | ) | |||
| Accumulated Other Comprehensive Income (Loss), net of tax | |||||||||
| Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period | 663 | (337 | ) | (329 | ) | ||||
| Cumulative effect of accounting changes, net of tax | (5 | ) | — | — | |||||
| Adjusted balance beginning of period | 658 | (337 | ) | (329 | ) | ||||
| Total other comprehensive income (loss) | (2,237 | ) | 1,000 | (8 | ) | ||||
| Accumulated Other Comprehensive (Loss) Income, net of tax, end of period | (1,579 | ) | 663 | (337 | ) | ||||
| Total Stockholders’ Equity | $ | 13,101 | $ | 13,494 | $ | 16,903 | |||
| Preferred Shares Outstanding | |||||||||
| Preferred Shares Outstanding, beginning of period | — | — | — | ||||||
| Issuance of preferred shares | 13,800 | — | — | ||||||
| Preferred Shares Outstanding, end of period | 13,800 | — | — | ||||||
| Common Shares Outstanding | |||||||||
| Common Shares Outstanding, beginning of period (in thousands) | 356,835 | 373,949 | 401,821 | ||||||
| Treasury stock acquired | — | (20,218 | ) | (30,782 | ) | ||||
| Issuance of shares under incentive and stock compensation plans | 2,856 | 2,301 | 3,766 | ||||||
| Return of shares under incentive and stock compensation plans to treasury stock | (849 | ) | (747 | ) | (1,243 | ) | |||
| Issuance of shares for warrant exercise | 309 | 1,550 | 387 | ||||||
| Common Shares Outstanding, end of period | 359,151 | 356,835 | 373,949 | ||||||
| Cash dividends declared per common share | $ | 1.10 | $ | 0.94 | $ | 0.86 |
See Notes to Consolidated Financial Statements.
F-6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
| For the years ended December 31, | |||||||||
| (In millions) | 2018 | 2017 | 2016 | ||||||
| Operating Activities | |||||||||
| Net income (loss) | $ | 1,807 | $ | (3,131 | ) | $ | 896 | ||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities | |||||||||
| Net realized capital losses (gains) | 165 | (111 | ) | 187 | |||||
| Amortization of deferred policy acquisition costs | 1,442 | 1,417 | 1,523 | ||||||
| Additions to deferred policy acquisition costs | (1,404 | ) | (1,383 | ) | (1,390 | ) | |||
| Depreciation and amortization | 467 | 399 | 398 | ||||||
| Pension settlement expense | — | 747 | — | ||||||
| Loss on extinguishment of debt | 6 | — | — | ||||||
| Loss (gain) on sale of business | (202 | ) | 3,257 | 81 | |||||
| Other operating activities, net | 408 | 408 | 178 | ||||||
| Change in assets and liabilities: | |||||||||
| Decrease (increase) in reinsurance recoverables | (323 | ) | (935 | ) | 272 | ||||
| Increase (decrease) in accrued and deferred income taxes | (103 | ) | 170 | (250 | ) | ||||
| Impact of tax reform on accrued and deferred income taxes | — | 877 | — | ||||||
| Increase (decrease) in insurance liabilities | 493 | 1,648 | 322 | ||||||
| Net change in other assets and other liabilities | 87 | (1,177 | ) | (151 | ) | ||||
| Net cash provided by operating activities | 2,843 | 2,186 | 2,066 | ||||||
| Investing Activities | |||||||||
| Proceeds from the sale/maturity/prepayment of: | |||||||||
| Fixed maturities, available-for-sale | 24,700 | 31,646 | 24,486 | ||||||
| Fixed maturities, fair value option | 23 | 148 | 238 | ||||||
| Equity securities at fair value | 1,230 | — | — | ||||||
| Equity securities, available-for-sale | — | 810 | 709 | ||||||
| Mortgage loans | 483 | 734 | 647 | ||||||
| Partnerships | 433 | 274 | 779 | ||||||
| Payments for the purchase of: | |||||||||
| Fixed maturities, available-for-sale | (23,173 | ) | (30,923 | ) | (21,844 | ) | |||
| Fixed maturities, fair value option | — | — | (94 | ) | |||||
| Equity securities at fair value | (1,500 | ) | — | — | |||||
| Equity securities, available-for-sale | — | (638 | ) | (662 | ) | ||||
| Mortgage loans | (983 | ) | (1,096 | ) | (717 | ) | |||
| Partnerships | (481 | ) | (509 | ) | (441 | ) | |||
| Net payments for derivatives | (224 | ) | (314 | ) | (247 | ) | |||
| Net additions to property and equipment | (122 | ) | (250 | ) | (224 | ) | |||
| Net (payments for) short-term investments | (3,460 | ) | (144 | ) | (1,377 | ) | |||
| Other investing activities, net | (3 | ) | 21 | (129 | ) | ||||
| Proceeds from businesses sold, net of cash transferred | 1,115 | 222 | — | ||||||
| Amounts paid for business acquired, net of cash acquired | — | (1,423 | ) | (175 | ) | ||||
| Net cash provided by (used for) investing activities | (1,962 | ) | (1,442 | ) | 949 | ||||
| Financing Activities | |||||||||
| Deposits and other additions to investment and universal life-type contracts | 1,814 | 4,602 | 4,186 | ||||||
| Withdrawals and other deductions from investment and universal life-type contracts | (9,210 | ) | (13,562 | ) | (14,790 | ) | |||
| Net transfers from separate accounts related to investment and universal life-type contracts | 6,949 | 7,969 | 9,822 | ||||||
| Repayments at maturity or settlement of consumer notes | (2 | ) | (13 | ) | (17 | ) | |||
| Net increase (decrease) in securities loaned or sold under agreements to repurchase | (621 | ) | 1,320 | 188 | |||||
| Repayment of debt | (826 | ) | (416 | ) | (275 | ) | |||
| Proceeds from the issuance of debt | 490 | 500 | — | ||||||
| Preferred stock issued, net of issuance costs | 334 | — | — | ||||||
| Net issuance (return) of shares under incentive and stock compensation plans | (16 | ) | (10 | ) | 9 | ||||
| Treasury stock acquired | — | (1,028 | ) | (1,330 | ) | ||||
| Dividends paid on common stock | (379 | ) | (341 | ) | (334 | ) | |||
| Net cash used for financing activities | (1,467 | ) | (979 | ) | (2,541 | ) | |||
| Foreign exchange rate effect on cash | (10 | ) | 70 | (40 | ) | ||||
| Net increase (decrease) in cash, including cash classified as assets held for sale | (596 | ) | (165 | ) | 434 | ||||
| Less: Net increase (decrease) in cash classified as assets held for sale | (537 | ) | (17 | ) | 249 | ||||
| Net increase (decrease) in cash | (59 | ) | (148 | ) | 185 | ||||
| Cash — beginning of period | 180 | 328 | 143 | ||||||
| Cash — end of period | $ | 121 | $ | 180 | $ | 328 | |||
| Supplemental Disclosure of Cash Flow Information | |||||||||
| Income tax received (paid) | $ | 9 | $ | 6 | $ | (130 | ) | ||
| Interest paid | $ | 292 | $ | 322 | $ | 336 |
See Notes to Consolidated Financial Statements.
F-7
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
1**.** BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide property and casualty insurance, group life and disability products and mutual funds and exchange-traded products to individual and business customers in the United States (collectively, “The Hartford”, the “Company”, “we” or “our”).
On August 22, 2018, the Company announced it entered into a definitive agreement to acquire all outstanding common shares of The Navigators Group, Inc. ("Navigators Group"), a global specialty underwriter, for $70 a share, or $2.1 billion in cash. The transaction is expected to close in late March or April 2019, subject to customary closing conditions, including receipt of regulatory approvals.
On May 31, 2018, Hartford Holdings, Inc., a wholly owned subsidiary of the Company, completed the sale of the issued and outstanding equity of Hartford Life, Inc. (“HLI”), a holding company, for its life and annuity operating subsidiaries.
On November 1, 2017, Hartford Life and Accident Insurance Company ("HLA"), a wholly owned subsidiary of the Company, completed the acquisition of Aetna's U.S. group life and disability business through a reinsurance transaction.
On May 10, 2017, the Company completed the sale of its United Kingdom ("U.K.") property and casualty run-off subsidiaries.
On July 29, 2016, the Company completed the acquisition of Northern Homelands Company, the holding company of Maxum Specialty Insurance Group (collectively "Maxum"). On July 29, 2016, the Company completed the acquisition of Lattice Strategies LLC ("Lattice").
For further discussion of these transactions, see Note 2 - Business Acquisitions and Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements.
The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) which differ materially from the accounting practices prescribed by various insurance regulatory authorities.
Consolidation
The 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. All intercompany transactions and balances between The Hartford and its subsidiaries and affiliates that are not held for sale have been eliminated.
Discontinued Operations
The results of operations of a component of the Company are reported in discontinued operations when certain criteria are met as of the date of disposal, or earlier if classified as held-for-sale. When a component is identified for discontinued operations reporting, amounts for prior periods are retrospectively reclassified as discontinued operations. Components are identified as discontinued operations if they are a major part of an entity's operations and financial results such as a separate major line of business or a separate major geographical area of operations.
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; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters.
Reclassifications
Certain reclassifications have been made to prior year financial information to conform to the current year presentation. In particular:
| • | Distribution costs within the Hartford Funds segment that were previously netted against fee income are presented gross in insurance operating costs and other expenses. Refer to the "Revenue Recognition" passage within the "Adoption of New Accounting Standards" section below for further information. |
Adoption of New Accounting Standards
Stock Compensation
On January 1, 2017 the Company adopted new stock compensation guidance issued by the Financial Accounting Standards Board ("FASB") on a prospective basis. The updated guidance requires the excess tax benefit or tax deficiency on vesting or settlement of stock-based awards to be recognized in earnings as an income tax benefit or expense, respectively, instead of as an adjustment to additional paid-in capital. The new guidance also requires the related cash flows to be presented in operating activities instead of in financing activities. The amount of excess tax benefit or tax deficiency realized on vesting or
F-8
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
settlement of awards depends upon the difference between the market value of awards at vesting or settlement and the grant date fair value recognized through compensation expense. The excess tax benefit or tax deficiency is a discrete item in the reporting period in which it occurs and is not considered in determining the annual estimated effective tax rate for interim reporting. The excess tax benefit recognized in earnings for the year ended December 31, 2018 and 2017 was $5 and $15, respectively, and the excess tax benefit recognized in additional paid-in capital for the year ended December 31, 2016 was $5.
Reclassification of Effect of Tax Rate Change from AOCI to Retained Earnings
On January 1, 2018, the Company adopted the FASB's new guidance for the effect on deferred tax assets and liabilities related to items recorded in accumulated other comprehensive income ("AOCI") resulting from the Tax Cuts and Jobs Act of 2017 ("Tax Reform") enacted on December 22, 2017. Tax Reform reduced the federal tax rate applied to the Company’s deferred tax balances from 35% to 21% on enactment. Under U.S. GAAP, the Company recorded the total effect of the change in enacted tax rates on deferred tax balances as a charge to income tax expense within net income during the fourth quarter of 2017, including the change in deferred tax balances related to components of AOCI. The new accounting guidance permitted the Company to reclassify the “stranded” tax effects out of AOCI and into retained earnings that resulted from recording the tax effects of unrealized investment gains, unrecognized actuarial losses on pension and other postretirement benefit plans, and cumulative translation adjustments at a 35% tax rate because the 14 point reduction in tax rate was recognized in net income instead of other comprehensive income. On adoption, the Company recorded a reclassification of $88 from AOCI to retained earnings. As a result of the reclassification, in the first quarter of 2018, the Company reduced the estimated loss on sale recorded in income from discontinued operations by $193, net of tax, for the increase in AOCI related to the assets held for sale. The reduction in the loss on sale resulted in a corresponding increase in assets held for sale and AOCI as of January 1, 2018 and the AOCI associated with assets held for sale was removed from the balance sheet when the sale closed on May 31, 2018. Additionally, as of January 1, 2018, the Company reclassified $105 of stranded tax effects related to continuing operations which reduced AOCI and increased retained earnings.
Financial Instruments- Recognition and Measurement
On January 1, 2018, the Company adopted updated guidance issued by the FASB for the recognition and measurement of
financial instruments through a cumulative effect adjustment to the opening balances of retained earnings and AOCI. The new guidance requires investments in equity securities to be measured at fair value with any changes in valuation reported in net income except for investments that are consolidated or are accounted for under the equity method of accounting. The new guidance also requires a deferred tax asset resulting from net unrealized losses on fixed maturities, available-for-sale that are recognized in AOCI to be evaluated for recoverability in combination with the Company’s other deferred tax assets. Under prior guidance, the Company reported equity securities, available-for-sale ("AFS"), at fair value with changes in fair value reported in other comprehensive income. As of January 1, 2018, the Company reclassified from AOCI to retained earnings net unrealized gains of $83, after tax, related to equity securities having a fair value of $1.0 billion. In addition, $10 of net unrealized gains net of shadow DAC related to discontinued operations were reclassified from AOCI to retained earnings of the life and annuity business held for sale, which increased the estimated loss on sale in 2018 by the same amount. Beginning in 2018, the Company reports equity securities at fair value with changes in fair value reported in net realized capital gains and losses.
Revenue Recognition
On January 1, 2018, the Company adopted the FASB’s updated guidance for recognizing revenue from contracts with customers, which excludes insurance contracts and financial instruments. Revenue subject to the guidance is recognized when, or as, goods or services are transferred to customers in an amount that reflects the consideration that an entity is expected to receive in exchange for those goods or services. For all but certain revenues associated with our Hartford Funds business, the updated guidance is consistent with previous guidance for the Company’s transactions and did not have an effect on the Company’s financial position, cash flows or net income. The updated guidance also updated criteria for determining when the Company acts as a principal or an agent. The Company determined that it is the principal for some of its mutual fund distribution service contracts and, upon adoption, reclassified distribution costs of $188 and $184 for the years ended December 31, 2017, and 2016, respectively, that were previously netted against fee income to insurance operating costs and other expenses.
Information about the nature, amount, timing of recognition and cash flows for the Company’s revenues subject to the updated guidance follows.
F-9
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue from Non-Insurance Contracts with Customers
| Year ended December 31, | ||||||||||
| Revenue Line Item | 2018 | 2017 | 2016 | |||||||
| Commercial Lines | ||||||||||
| Installment billing fees | Fee income | $ | 34 | $ | 37 | $ | 39 | |||
| Personal Lines | ||||||||||
| Installment billing fees | Fee income | 40 | 44 | 39 | ||||||
| Insurance servicing revenues | Other revenues | 84 | 85 | 86 | ||||||
| Group Benefits | ||||||||||
| Administrative services | Fee income | 175 | 91 | 75 | ||||||
| Hartford Funds | ||||||||||
| Advisor, distribution and other management fees | Fee income | 947 | 897 | 797 | ||||||
| Other fees | Fee income | 85 | 95 | 88 | ||||||
| Corporate | ||||||||||
| Investment management and other fees | Fee income | 32 | 4 | 3 | ||||||
| Transition service revenues | Other revenues | 21 | — | — | ||||||
| Total revenues subject to updated guidance | $ | 1,418 | $ | 1,253 | $ | 1,127 |
Installment fees are charged on property and casualty insurance contracts for billing the insurance customer in installments over the policy term. These fees are recognized in fee income as earned on collection.
Insurance servicing revenues within Personal Lines consist of up-front commissions earned for collecting premiums and processing claims on insurance policies for which The Hartford does not assume underwriting risk, predominantly related to the National Flood Insurance Plan program. These insurance servicing revenues are recognized over the period of the flood program's policy terms.
Group Benefits products earn fee income from employers for the administration of underwriting, implementation and claims processing for employer self-funded plans and for leave management services. Fees are recognized as services are provided and collected monthly.
Hartford Funds provides investment management, administrative and distribution services to mutual funds and exchange-traded products. The Company assesses investment advisory, distribution and other asset management fees primarily based on the average daily net asset values from mutual funds and exchange-traded products, which are recorded in the period in which the services are provided and collected monthly. Fluctuations in domestic and international markets and related investment performance, volume and mix of sales and redemptions of mutual funds or exchange-traded products, and other changes to the composition of assets under management are all factors that ultimately have a direct effect on fee income earned.
Hartford Funds other fees primarily include transfer agent fees, generally assessed as a charge per account, and are recognized as fee income in the period in which the services are provided with payments collected monthly.
Corporate investment management and other fees are primarily for managing third party invested assets, including management of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries ("Talcott Resolution"). Talcott Resolution is the new
holding company of the life and annuity business the Company sold in May 2018. These fees, calculated based on the average quarterly net asset values, are recorded in the period in which the services are provided and are collected quarterly. Fluctuations in markets and interest rates and other changes to the composition of assets under management are all factors that ultimately have a direct effect on fee income earned.
Corporate transition service revenues consist of operational services provided to The Hartford’s former life and annuity business that will be provided for a period up to twenty-four months from the May 31, 2018 sale date. The transition service revenues are recognized as other revenues in the period in which the services are provided with payments collected monthly.
Future Adoption of New Accounting Standards
Hedging Activities
The FASB issued updated guidance on hedge accounting. The updates allow hedge accounting for new types of interest rate hedges of financial instruments and simplify documentation requirements to qualify for hedge accounting. In addition, any gain or loss from hedge ineffectiveness will be reported in the same income statement line with the effective hedge results and the hedged transaction. For cash flow hedges, the ineffectiveness will be recognized in earnings only when the hedged transaction affects earnings; otherwise, the ineffectiveness gains or losses will remain in AOCI. Under current accounting, total hedge ineffectiveness is reported separately in realized gains and losses apart from the hedged transaction. The Company will adopt the guidance effective January 1, 2019 through a cumulative effect adjustment of less than $1 to reclassify cumulative ineffectiveness on open cash flow hedges from retained earnings to AOCI. The adoption will not affect the Company’s financial position or cash flows or have a material effect on net income.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Goodwill
The FASB issued updated guidance on testing goodwill for impairment. The updated guidance requires recognition and measurement of goodwill impairment based on the excess of the carrying value of the reporting unit compared to its estimated fair value, with the amount of the impairment not to exceed the carrying value of the reporting unit’s goodwill. Under existing guidance, if the reporting unit’s carrying value exceeds its estimated fair value, the Company allocates the fair value of the reporting unit to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. An impairment loss is then recognized for the excess, if any, of the carrying value of the reporting unit’s goodwill compared to the implied goodwill value. The Company expects to adopt the updated guidance January 1, 2020 on a prospective basis as required, although earlier adoption is permitted. While the Company would not have recognized a goodwill impairment loss for the years presented, the impact of the adoption will depend on the estimated fair value of the Company’s reporting units compared to the carrying value at adoption.
Financial Instruments - Credit Losses
The FASB issued updated guidance for recognition and measurement of credit losses on financial instruments. The new guidance will replace the “incurred loss” approach with an “expected loss” model for recognizing credit losses for financial instruments carried at other than fair value, which will initially result in the recognition of greater allowances for losses. The allowance will be an estimate of credit losses expected over the life of financial instruments carried at other than fair value, such as mortgage loans, reinsurance recoverables and receivables. Credit losses on fixed maturities AFS carried at fair value will continue to be measured like other-than-temporary impairments ("OTTI"); however, the losses will be recognized through an allowance and no longer as an adjustment to the cost basis. Recoveries of impairments on fixed maturities AFS will be recognized as reversals of valuation allowances and no longer accreted as investment income through an adjustment to the investment yield. The allowance on fixed maturities AFS cannot cause the net carrying value to be below fair value and, therefore, it is possible that future increases in fair value due to decreases in market interest rates could cause the reversal of a valuation allowance and increase net income. The new guidance also requires purchased financial assets with a more-than-insignificant amount of credit deterioration since original issuance to be recorded based on contractual amounts due and an initial allowance recorded at the date of purchase. The Company will adopt the guidance effective January 1, 2020, through a cumulative-effect adjustment to retained earnings for the change in the allowance for credit losses for financial instruments carried at other than fair value. No allowance will be recognized at adoption for fixed maturities AFS; rather, their cost basis will be evaluated for an allowance for credit losses prospectively. The Company has not yet determined the effect on the Company’s consolidated financial statements and the ultimate impact of the adoption will depend on the composition of the financial instruments and market conditions at the adoption date. Significant implementation matters yet to be addressed include estimating lifetime expected losses on financial instruments carried at other than fair value, determining the impact of valuation allowances on net investment income from fixed maturities AFS, and updating our investment accounting system functionality to maintain
adjustable valuation allowances on fixed maturities AFS, subject to a fair value floor.
Leases
The FASB issued updated guidance on lease accounting. Under the new guidance, effective January 1, 2019, lessees with operating leases are required to recognize a liability for the present value of future minimum lease payments with a corresponding asset for the right of use of the property. Under guidance effective through December 31, 2018, future minimum lease payments on operating leases are commitments that are not recognized as liabilities on the balance sheet. Under the new guidance, leases will be classified as financing or operating leases. Where the lease is economically similar to a purchase because The Hartford obtains control of the underlying asset, the lease will be a financing lease and the Company will recognize amortization of the right of use asset and interest expense on the liability. Where the lease provides The Hartford with only the right to control the use of the underlying asset over the lease term and the lease term is greater than one year, the lease will be an operating lease and the lease costs will be recognized as rental expense over the lease term on a straight-line basis. Leases with a term of one year or less will also be expensed over the lease term but will not be recognized on the balance sheet. The Company will adopt the guidance as of the January 1, 2019, effective date with no change to comparative periods and record a lease payment obligation of approximately $160 for outstanding leases and a right of use asset of approximately $150, which is net of $10 in lease incentives received. The Hartford will elect to apply the package of practical expedients and not reassess expired or existing contracts that are or contain leases; all operating leases will remain classified as operating leases on adoption; and initial direct costs on existing leases will not be reassessed to determine if deferred costs should be written-off or recorded on adoption. The adoption will not impact net income or cash flows.
Reserve for Future Policy Benefits
The FASB issued new guidance on accounting for long-duration insurance contracts. The Company’s long-duration insurance contracts include paid-up life insurance and whole-life insurance policies resulting from conversion from group life policies and run-off structured settlement and terminal funding agreement liabilities with total future policy benefit reserves of $642 as of December 31, 2018. Under existing guidance, a reserve for future policy benefits is calculated as the present value of future benefits and related expenses less the present value of any future premiums using assumptions “locked in” at the time the policies were issued, including discount rate, lapse rate, mortality, and expense assumptions. Under existing guidance, assumptions are only updated if there is an expected premium deficiency. The new guidance will require that underlying cash flow assumptions (such as for lapse rate, mortality and expenses) be reviewed and updated at least annually in the same quarter each year. The new guidance also requires that the discount rate assumption be updated each quarter and be based on an upper-medium grade (low-credit-risk) fixed-income investment yield. The change in the reserve estimate as a result of updating cash flow assumptions will be recognized in net income. The change in the reserve estimate as a result of updating the discount rate assumption will be recognized in other comprehensive income. Because reserves will be based on updated assumptions and no longer locked in at contract inception, there will no longer be a test for premium deficiency. The new guidance will be effective January 1, 2021,
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and will be applied to balances in place as of the earliest period presented. Early adoption is permitted. The Company has not yet determined the method or timing for adoption or estimated the effect on the Company’s financial statements.
Significant Accounting Policies
The Company’s significant accounting policies are as follows:
Revenue Recognition
Property and casualty insurance premiums are earned on a pro rata basis over the policy period and include accruals for ultimate premium revenue anticipated under auditable and retrospectively rated policies. Unearned premiums represent the premiums applicable to the unexpired terms of policies in force. An estimated allowance for doubtful accounts is recorded on the basis of periodic evaluations of balances due from insureds, management’s experience and current economic conditions. The Company charges off any balances that are determined to be uncollectible. The allowance for doubtful accounts included in premiums receivable and agents’ balances in the Consolidated Balance Sheets was $135 and $132 as of December 31, 2018 and 2017, respectively.
Group life, disability and accident premiums are generally due from policyholders and recognized as revenue on a pro rata basis over the period of the contracts.
Revenue from non-insurance contracts with customers is discussed above in "Adoption of New Accounting Standards, Revenue Recognition."
Dividends to Policyholders
Policyholder dividends are paid to certain property and casualty policyholders. Policies that receive dividends are referred to as participating policies. Participating dividends to policyholders are accrued and reported in insurance operating costs and other expenses and other liabilities using an estimate of the amount to be paid based on underlying contractual obligations under policies and applicable state laws.
Net written premiums for participating property and casualty insurance policies represented 10%, 10% and 9% of total net written premiums for the years ended December 31, 2018, 2017 and 2016, respectively. Participating dividends to property and casualty policyholders were $23, $35 and $15 for the years ended December 31, 2018, 2017 and 2016, respectively.
There were no additional amounts of income allocated to participating policyholders.
Investments
Overview
The Company’s investments in fixed maturities include bonds, structured securities, redeemable preferred stock and commercial paper. Most of these investments are classified as available-for-sale ("AFS") and are carried at fair value. The after tax difference between fair value and cost or amortized cost is reflected in stockholders’ equity as a component of AOCI. Effective January 1, 2018, equity securities are measured at fair value with any changes in valuation reported in net income. For further information, see Financial Instruments - Recognition and Measurement discussion above. Fixed maturities for which the Company elected the fair value option are classified as FVO, generally certain securities that contain embedded credit
derivatives, and are carried at fair value with changes in value recorded in realized capital gains and losses. Mortgage loans are recorded at the outstanding principal balance adjusted for amortization of premiums or discounts and net of valuation allowances. Short-term investments are carried at amortized cost, which approximates fair value. Limited partnerships and other alternative investments are reported at their carrying value and are primarily accounted for under the equity method with the Company’s share of earnings included in net investment income. Recognition of income related to limited partnerships and other alternative investments is delayed due to the availability of the related financial information, as private equity and other funds are generally on a three-month delay and hedge funds on a one-month delay. Accordingly, income for the years ended December 31, 2018, 2017, and 2016 may not include the full impact of current year changes in valuation of the underlying assets and liabilities of the funds, which are generally obtained from the limited partnerships. Other investments primarily consist of investments of consolidated investment funds and derivative instruments which are carried at fair value. The Company has provided seed money for investment funds and reports the underlying investments at fair value with changes in the fair value recognized in income consistent with accounting requirements for investment companies.
Net Realized Capital Gains and Losses
Net realized capital gains and losses from investment sales are reported as a component of revenues and are determined on a specific identification basis. Net realized capital gains and losses also result from fair value changes in fixed maturities, FVO, equity securities, and derivatives contracts that do not qualify, or are not designated, as a hedge for accounting purposes as well as ineffectiveness on derivatives that qualify for hedge accounting treatment. Impairments and mortgage loan valuation allowances are recognized as net realized capital losses in accordance with the Company’s impairment and mortgage loan valuation allowance policies as discussed in Note 6 - Investments of Notes to Consolidated Financial Statements. Foreign currency transaction remeasurements are also included in net realized capital gains and losses.
Net Investment Income
Interest income from fixed maturities and mortgage loans is recognized when earned on the constant effective yield method based on estimated timing of cash flows. Most premiums and discounts on fixed maturities are amortized to the maturity date. Premiums on callable bonds may be amortized to call dates based on call prices. For securitized financial assets subject to prepayment risk, yields are recalculated and adjusted periodically to reflect historical and/or estimated future prepayments using the retrospective method; however, if these investments are impaired and for certain other asset-backed securities, any yield adjustments are made using the prospective method. Prepayment fees and make-whole payments on fixed maturities and mortgage loans are recorded in net investment income when earned. For equity securities, dividends are recognized as investment income on the ex-dividend date. Limited partnerships and other alternative investments primarily use the equity method of accounting to recognize the Company’s share of earnings. For impaired debt securities, the Company accretes the new cost basis to the estimated future cash flows over the expected remaining life of the security by prospectively adjusting the security’s yield, if necessary. The Company’s non-income
F-12
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
producing investments were not material for the years ended December 31, 2018, 2017 and 2016.
Derivative Instruments
Overview
The Company utilizes a variety of over-the-counter ("OTC") derivatives, derivatives cleared through central clearing houses ("OTC-cleared") and exchange traded derivative instruments as part of its overall risk management strategy as well as to enter into replication transactions. The types of instruments may include swaps, caps, floors, forwards, futures and options to achieve one of four Company-approved objectives:
| • | to hedge risk arising from interest rate, equity market, commodity market, credit spread and issuer default, price or currency exchange rate risk or volatility; |
| • | to manage liquidity; |
| • | to control transaction costs; |
| • | to enter into synthetic replication transactions. |
Interest rate and credit default swaps involve the periodic exchange of cash flows with other parties, at specified intervals, calculated using agreed upon rates or other financial variables and notional principal amounts. Generally, little to no cash or principal payments are exchanged at the inception of the contract. Typically, at the time a swap is entered into, the cash flow streams exchanged by the counterparties are equal in value.
The Company clears certain interest rate swap and credit default swap derivative transactions through central clearing houses. OTC-cleared derivatives require initial collateral at the inception of the trade in the form of cash or highly liquid securities, such as U.S. Treasuries and government agency investments. Central clearing houses also require additional cash as variation margin based on daily market value movements. For information on collateral, see the derivative collateral arrangements section in Note 7 - Derivatives of Notes to Consolidated Financial Statements. In addition, OTC-cleared transactions include price alignment amounts either received or paid on the variation margin, which are reflected in realized capital gains and losses or, if characterized as interest, in net investment income.
Forward contracts are customized commitments that specify a rate of interest or currency exchange rate to be paid or received on an obligation beginning on a future start date and are typically settled in cash.
Financial futures are standardized commitments to either purchase or sell designated financial instruments, at a future date, for a specified price and may be settled in cash or through delivery of the underlying instrument. Futures contracts trade on organized exchanges. Margin requirements for futures are met by pledging securities or cash, and changes in the futures’ contract values are settled daily in cash.
Option contracts grant the purchaser, for a premium payment, the right to either purchase from or sell to the issuer a financial instrument at a specified price, within a specified period or on a stated date. The contracts may reference commodities, which grant the purchaser the right to either purchase from or sell to the issuer commodities at a specified price, within a specified period or on a stated date. Option contracts are typically settled in cash.
Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed upon exchange rate. There may also be a periodic exchange of payments at specified intervals calculated using the agreed upon rates and exchanged principal amounts.
The Company’s derivative transactions conducted in insurance company subsidiaries are used in strategies permitted under the derivative use plans required by the State of Connecticut, the State of Illinois and the State of New York insurance departments.
Accounting and Financial Statement Presentation of Derivative Instruments and Hedging Activities
Derivative instruments are recognized on the Consolidated Balance Sheets at fair value and are reported in Other Investments and Other Liabilities. For balance sheet presentation purposes, the Company has elected to offset 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 or under a master netting agreement, which provides the Company with the legal right of offset.
On the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability (“fair value” hedge), (2) a hedge of the variability in cash flows of a forecasted transaction or of amounts to be received or paid related to a recognized asset or liability (“cash flow” hedge), (3) a hedge of a net investment in a foreign operation (“net investment” hedge) or (4) held for other investment and/or risk management purposes, which primarily involve managing asset or liability related risks and do not qualify for hedge accounting. The Company currently does not designate any derivatives as fair value or net investment hedges.
Cash Flow Hedges - Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge, including foreign-currency cash flow hedges, are recorded in AOCI and are reclassified into earnings when the variability of the cash flow of the hedged item impacts earnings. Gains and losses on derivative contracts that are reclassified from AOCI to current period earnings are included in the line item in the Consolidated Statements of Operations in which the cash flows of the hedged item are recorded. Any hedge ineffectiveness is recorded immediately in current period earnings as net realized capital gains and losses. Periodic derivative net coupon settlements are recorded in the line item of the Consolidated Statements of Operations in which the cash flows of the hedged item are recorded. Cash flows from cash flow hedges are presented in the same category as the cash flows from the items being hedged in the Consolidated Statement of Cash Flows.
Other Investment and/or Risk Management Activities - The Company’s other investment and/or risk management activities primarily relate to strategies used to reduce economic risk or replicate permitted investments and do not receive hedge accounting treatment. Changes in the fair value, including periodic derivative net coupon settlements, of derivative instruments held for other investment and/or risk management purposes are reported in current period earnings as net realized capital gains and losses.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hedge Documentation and Effectiveness Testing
To qualify for hedge accounting treatment, a derivative must be highly effective in mitigating the designated changes in fair value or cash flow of the hedged item. At hedge inception, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking each hedge transaction. The documentation process includes linking derivatives that are designated as fair value, cash flow, or net investment hedges to specific assets or liabilities on the balance sheet or to specific forecasted transactions and defining the effectiveness and ineffectiveness testing methods to be used. The Company also formally assesses both at the hedge’s inception and ongoing on a quarterly basis, whether the derivatives that are used in hedging transactions have been and are expected to continue to be highly effective in offsetting changes in fair values, cash flows or net investment in foreign operations of hedged items. Hedge effectiveness is assessed primarily using quantitative methods as well as using qualitative methods. Quantitative methods include regression or other statistical analysis of changes in fair value or cash flows associated with the hedge relationship. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Hedge ineffectiveness of the hedge relationships are measured each reporting period using the “Change in Variable Cash Flows Method”, the “Change in Fair Value Method”, the “Hypothetical Derivative Method”, or the “Dollar Offset Method”.
Discontinuance of Hedge Accounting
The Company discontinues hedge accounting prospectively when (1) it is determined that the qualifying criteria are no longer met; (2) the derivative is no longer designated as a hedging instrument; or (3) the derivative expires or is sold, terminated or exercised.
When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair value hedge, the derivative continues to be carried at fair value on the balance sheet with changes in its fair value recognized in current period earnings. Changes in the fair value of the hedged item attributable to the hedged risk is no longer adjusted through current period earnings and the existing basis adjustment is amortized to earnings over the remaining life of the hedged item through the applicable earnings component associated with the hedged item.
When cash flow hedge accounting is discontinued because the Company becomes aware that it is not probable that the forecasted transaction will occur, the derivative continues to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in AOCI are recognized immediately in earnings.
In other situations in which hedge accounting is discontinued, including those where the derivative is sold, terminated or exercised, amounts previously deferred in AOCI are reclassified into earnings when earnings are impacted by the hedged item.
Embedded Derivatives
The Company purchases investments that contain embedded derivative instruments. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded
derivative is bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument in the Consolidated Balance Sheets, is carried at fair value with changes in fair value reported in net realized capital gains and losses.
Credit Risk of Derivative Instruments
Credit risk is defined as the risk of financial loss due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with agreed upon terms. Credit exposures are measured using the market value of the derivatives, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties. The Company generally requires that OTC derivative contracts, other than certain forward contracts, be governed by International Swaps and Derivatives Association ("ISDA") agreements which are structured by legal entity and by counterparty, and permit right of offset. Some agreements require daily collateral settlement based upon agreed upon thresholds. For purposes of daily derivative collateral maintenance, credit exposures are generally quantified based on the prior business day’s market value and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of the derivatives is greater than zero, subject to minimum transfer thresholds. The Company also minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management. OTC-cleared derivatives are governed by clearing house rules. Transactions cleared through a central clearing house reduce risk due to their ability to require daily variation margin and act as an independent valuation source. In addition, the Company monitors counterparty credit exposure on a monthly basis to ensure compliance with Company policies and statutory limitations.
Cash
Cash represents cash on hand and demand deposits with banks or other financial institutions.
Reinsurance
The Company cedes insurance to affiliated and unaffiliated insurers in order to limit its maximum losses and to diversify its exposures and provide statutory surplus relief. 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 also assumes reinsurance from other insurers and is a member of and participates in reinsurance pools and associations. Assumed reinsurance refers to the Company’s acceptance of certain insurance risks that other insurance companies or pools have underwritten.
Reinsurance accounting is followed for ceded and assumed transactions that provide indemnification against loss or liability relating to insurance risk (i.e. risk transfer). To meet risk transfer requirements, a reinsurance agreement must include insurance risk, consisting of underwriting and timing risk, and a reasonable possibility of a significant loss to the reinsurer. If the ceded and assumed transactions do not meet risk transfer requirements, the Company accounts for these transactions as financing transactions.
Premiums, benefits, losses and loss adjustment expenses reflect the net effects of ceded and assumed reinsurance transactions.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Included in other assets are prepaid reinsurance premiums, which represent the portion of premiums ceded to reinsurers applicable to the unexpired terms of the reinsurance contracts. Reinsurance recoverables are balances due from reinsurance companies for paid and unpaid losses and loss adjustment expenses and are presented net of an allowance for uncollectible reinsurance. Changes in the allowance for uncollectible reinsurance are reported in benefits, losses and loss adjustment expenses in the Company's Consolidated Statements of Operations.
The Company evaluates the financial condition of its reinsurers and concentrations of credit risk. Reinsurance is placed with reinsurers that meet strict financial criteria established by the Company.
Deferred Policy Acquisition Costs
Deferred policy acquisition costs ("DAC") represent costs that are directly related to the acquisition of new and renewal insurance contracts and incremental direct costs of contract acquisition that are incurred in transactions with independent third parties or in compensation to employees. Such costs primarily include commissions, premium taxes, costs of policy issuance and underwriting, and certain other expenses that are directly related to successfully issued contracts.
For property and casualty insurance products and group life, disability and accident contracts, costs are deferred and amortized ratably over the period the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Anticipated investment income is considered in the determination of the recoverability of DAC.
Income Taxes
The Company recognizes taxes payable or refundable for the current year and deferred taxes for the tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. A deferred tax provision is recorded for the tax effects of differences between the Company's current taxable income and its income before tax under generally accepted accounting principles in the Consolidated Statements of Operations. For deferred tax assets, the Company records a valuation allowance that is adequate to reduce the total deferred tax asset to an amount that will more likely than not be realized.
Goodwill
Goodwill represents the excess of the cost to acquire a business over the fair value of net assets acquired. Goodwill is not amortized but is reviewed for impairment at least annually or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. The goodwill impairment test follows a two-step process. In the first step, the fair value of a reporting unit is compared to its carrying value. A reporting unit is defined as an operating segment or one level below an operating segment. The Company’s reporting units, for which goodwill has been allocated include small commercial within the Commercial Lines segment, Group Benefits, Personal Lines and Hartford Funds. If the carrying value of a reporting unit exceeds its fair value, the second step of the impairment test is performed for purposes of measuring the impairment. In the second step, the fair value of
the reporting unit is allocated to all of the assets and liabilities of the reporting unit to determine an implied goodwill value. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill value, an impairment loss is recognized in an amount equal to that excess.
Management’s determination of the fair value of each reporting unit incorporates multiple inputs into discounted cash flow calculations, including assumptions that market participants would make in valuing the reporting unit. Assumptions include levels of economic capital required to support the business, future business growth, earnings projections and, for the Hartford Funds segment, assets under management and the weighted average cost of capital used for purposes of discounting. Decreases in business growth, decreases in earnings projections and increases in the weighted average cost of capital will all cause a reporting unit’s fair value to decrease, increasing the possibility of impairments.
Intangible Assets
Acquired intangible assets on the Consolidated Balance Sheets include purchased customer relationship and agency or other distribution rights and licenses measured at fair value at acquisition. The Company amortizes finite-lived other intangible assets over their useful lives generally on a straight-line basis over the period of expected benefit, ranging from 1 to 15 years. Management revises amortization periods if it believes there has been a change in the length of time that an intangible asset will continue to have value. Indefinite-lived intangible assets are not subject to amortization. Intangible assets are assessed for impairment generally when events or circumstances indicate a potential impairment and at least annually for indefinite-lived intangibles. If the carrying amount is not recoverable from undiscounted cash flows, the impairment is measured as the difference between the carrying amount and fair value.
Property and Equipment
Property and equipment, which includes capitalized software, is carried at cost net of accumulated depreciation. Depreciation is based on the estimated useful lives of the various classes of property and equipment and is determined principally on the straight-line method. Accumulated depreciation was $1.6 billion and $2.6 billion as of December 31, 2018 and 2017, respectively, with the decrease due to the removal of fully depreciated assets in 2018. Depreciation expense was $232, $197, and $186 for the years ended December 31, 2018, 2017 and 2016, respectively.
Unpaid Losses and Loss Adjustment Expenses
For property and casualty and group life and disability insurance products, the Company establishes reserves for unpaid losses and loss adjustment expenses to provide for the estimated costs of paying claims under insurance policies written by the Company. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported ("IBNR"), and include estimates of all losses and loss adjustment expenses associated with processing and settling these claims. Estimating the ultimate cost of future losses and loss adjustment expenses is an uncertain and complex process. This estimation process is based significantly on the assumption that past developments are an appropriate predictor of future events, and involves a variety of actuarial techniques that analyze experience, trends and other relevant factors. The effects of inflation are
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
implicitly considered in the reserving process. A number of complex factors influence the uncertainties involved with the reserving process including social and economic trends and changes in the concepts of legal liability and damage awards. Accordingly, final claim settlements may vary from the present estimates, particularly when those payments may not occur until well into the future. The Company regularly reviews the adequacy of its estimated losses and loss adjustment expense reserves by reserve line within the various reporting segments. Adjustments to previously established reserves are reflected in the operating results of the period in which the adjustment is determined to be necessary. Such adjustments could possibly be significant, reflecting any variety of new and adverse or favorable trends.
Most of the Company’s property and casualty insurance products reserves are not discounted. However, the Company has discounted to present value certain reserves for indemnity payments that are due to permanently disabled claimants under workers’ compensation policies because the payment pattern and the ultimate costs are reasonably fixed and determinable on an individual claim basis. The discount rate is based on the risk free rate for the expected claim duration as determined in the year the claims were incurred. The Company also has discounted liabilities for run-off structured settlement agreements that provide fixed periodic payments to claimants. These structured settlements include annuities purchased to fund unpaid losses for permanently disabled claimants. These structured settlement liabilities are discounted to present value using the rate implicit in the purchased annuities and the purchased annuities are accounted for within reinsurance recoverables.
Group life and disability contracts with long-tail claim liabilities are discounted because the payment pattern and the ultimate costs are reasonably fixed and determinable on an individual claim basis. The discount rates are estimated based on investment yields expected to be earned on the cash flows net of investment expenses and expected credit losses. The Company establishes discount rates for these reserves in the year the claims are incurred (the incurral year) which is when the estimated settlement pattern is determined. The discount rate for life and disability reserves acquired from Aetna's U.S. group life and disability business were based on interest rates in effect at the acquisition date of November 1, 2017.
For further information about how unpaid losses and loss adjustment expenses are established, see Note 11 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
Foreign Currency
Foreign currency translation gains and losses are reflected in stockholders’ equity as a component of AOCI. The Company’s foreign subsidiaries’ balance sheet accounts are translated at the exchange rates in effect at each year end and income statement accounts are translated at the average rates of exchange prevailing during the year. The national currencies of the international operations are generally their functional currencies. Gains and losses resulting from the remeasurement of foreign currency transactions are reflected in earnings in realized capital gains (losses) in the period in which they occur.
2**.** BUSINESS ACQUISITIONS
Aetna Group Insurance
On November 1, 2017, The Hartford acquired Aetna's U.S. group life and disability business through a reinsurance transaction for total consideration of $1.452 billion, comprised of cash of $1.450 billion and share-based awards of $2, and recorded provisional estimates of the fair value of the assets acquired and liabilities assumed. The acquisition enables the Company to increase its market share in the group life and disability industry. In 2018, The Hartford and Aetna agreed on the final assets acquired and liabilities assumed as of the acquisition date and The Hartford
finalized its provisional estimates with a final cash settlement within the one year measurement period allowed under U.S. GAAP ("GAAP"). As a result, in the third quarter of 2018, The Hartford recorded additional assets and liabilities at fair value of $80 and $80, respectively, with no change in goodwill. The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date, the measurement period adjustments recorded, and the final purchase price allocation.
F-16
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
| Preliminary Value as of November 1, 2017 (as previously reported as of December 31, 2017) | Measurement Period Adjustments | As Adjusted Value as of November 1, 2017 | |||||||
| Assets | |||||||||
| Cash and invested assets | $ | 3,360 | $ | 45 | $ | 3,405 | |||
| Premiums receivable | 96 | 7 | 103 | ||||||
| Deferred income taxes, net | 56 | 13 | 69 | ||||||
| Other intangible assets | 629 | — | 629 | ||||||
| Property and equipment | 68 | — | 68 | ||||||
| Reinsurance recoverables | — | 31 | 31 | ||||||
| Other assets | 16 | (16 | ) | — | |||||
| Total Assets Acquired | 4,225 | 80 | 4,305 | ||||||
| Liabilities | |||||||||
| Unpaid losses and loss adjustment expenses | 2,833 | 71 | 2,904 | ||||||
| Reserve for future policy benefits payable | 346 | 1 | 347 | ||||||
| Other policyholder funds and benefits payable | 245 | 1 | 246 | ||||||
| Unearned premiums | 3 | 1 | 4 | ||||||
| Other liabilities | 69 | 6 | 75 | ||||||
| Total Liabilities Assumed | 3,496 | 80 | 3,576 | ||||||
| Net identifiable assets acquired | 729 | — | 729 | ||||||
| Goodwill [1] | 723 | — | 723 | ||||||
| Net Assets Acquired | $ | 1,452 | $ | — | $ | 1,452 |
| [1] | *Approximately $*610 is deductible for income tax purposes. |
The effect of measurement period adjustments on the Consolidated Statements of Operations for the year ended December 31, 2018 was immaterial and was determined as if the accounting had been completed as of the acquisition date.
Intangible Assets Recorded in Connection with the Acquisition
| Asset | Amount | Estimated Useful Life | ||
| Value of in-force contracts | $ | 23 | 1 year | |
| Customer relationships | 590 | 15 years | ||
| Marketing agreement with Aetna | 16 | 15 years | ||
| Total | $ | 629 |
The value of in-force contracts represents the estimated profits relating to the unexpired contracts in force at the acquisition date through expiry of the contracts. The value of customer relationships was estimated using net cash flows expected to come from the renewals of in-force contracts acquired less costs to service the related policies. The value of the marketing agreement with Aetna was estimated using net cash flows expected to come from incremental new business written during the three-year duration of the agreement, less costs to service the related contracts. The value for each of the identifiable intangible assets was estimated using a discounted cash flow method. Significant inputs to the valuation models include estimates of expected premiums, persistency rates, investment returns, claim costs, expenses and discount rates based on a weighted average cost of capital.
Property and equipment represents an internally developed integrated absence management software acquired that was valued based on estimated replacement cost. The software is amortized over 5 years on a straight-line basis.
Unpaid losses and loss adjustment expenses acquired were recorded at estimated fair value equal to the present value of expected future unpaid loss and loss adjustment expense payments discounted using the net investment yield estimated as of the acquisition date plus a risk margin. The fair value adjustment for the risk margin is amortized over 12 years based on the payout pattern of losses and loss expenses as estimated as of the acquisition date.
The revenues and earnings of the business acquired are included in the Company's Consolidated Statements of Operations in the Group Benefits reporting segment and were $370 and $(37) in the year of acquisition, respectively.
The $723 of goodwill recognized is largely attributable to the acquired employee workforce, expected expense synergies, economies of scale, and tax benefits not included within the value of identifiable intangibles. Goodwill is allocated to the Company's Group Benefits reporting segment.
The Company recognized $17 of acquisition related costs in the year of acquisition. These costs are included in insurance operating costs and other expenses in the Consolidated Statement of Operations.
The following table presents supplemental pro forma amounts of revenue and net income for the Company in 2016 and 2017 as though the business was acquired on January 1, 2016.
F-17
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Pro Forma Results (Unaudited)
| Twelve months ended December 31, 2017 [1] | Twelve months ended December 31, 2016 [1] | |||||
| Total Revenue | $ | 18,899 | $ | 18,348 | ||
| Net Income | $ | (3,077 | ) | $ | 953 |
[1]Pro forma adjustments include the revenue and earnings of the Aetna U.S. group life and disability business as well as amortization of identifiable intangible assets acquired and the fair value adjustment to acquired insurance reserves. Pro forma adjustments do not include retrospective adjustments to defer and amortize acquisition costs as would be recorded under the Company’s accounting policy.
Maxum
On July 29, 2016, the Company acquired 100% of the outstanding shares of Northern Homelands Company, the holding company of Maxum Specialty Insurance Group headquartered in Alpharetta, Georgia in a cash transaction for approximately $169. The acquisition adds excess and surplus lines capability to the Company's small commercial line of business. Maxum is maintaining its brand and limited wholesale distribution model. Maxum's revenues and earnings since the acquisition date are included in the Company's Consolidated Statements of Operations in the Commercial Lines reporting segment.
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
| As of July 29, 2016 | |||
| Assets | |||
| Cash and investments (including cash of $12) | $ | 274 | |
| Reinsurance recoverables | 113 | ||
| Intangible assets [1] | 11 | ||
| Other assets | 79 | ||
| Total assets acquired | 477 | ||
| Liabilities | |||
| Unpaid losses | 235 | ||
| Unearned premiums | 77 | ||
| Other liabilities | 34 | ||
| Total liabilities assumed | 346 | ||
| Net identifiable assets acquired | 131 | ||
| Goodwill [2] | 38 | ||
| Net assets acquired | $ | 169 |
| [1] | *Comprised of indefinite lived intangibles of $*4 *related to state insurance licenses acquired and other intangibles of $*7 related to agency distribution relationships of Maxum which are amortized over 10 years. |
| [2] | Non-deductible for income tax purposes. |
The goodwill recognized is attributable to expected growth from the opportunity to sell both existing products and excess and surplus lines coverage to a broader customer base and has been allocated to the small commercial reporting unit within the Commercial Lines reporting segment.
The Company recognized $1 of acquisition related costs for the year ended December 31, 2016. These costs are included in insurance operating costs and other expenses in the Consolidated Statement of Operations.
Lattice
On July 29, 2016, an indirect wholly-owned subsidiary of the Company acquired 100% of the membership interests outstanding of Lattice Strategies LLC, an investment management firm and provider of strategic beta exchange-traded products ("ETP") with approximately $200 of assets under management ("AUM") at the acquisition date.
Fair Value of the Consideration Transferred at the Acquisition Date
| Cash | $ | 19 | |
| Contingent consideration | 23 | ||
| Total | $ | 42 |
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
| As of July 29, 2016 | |||
| Assets | |||
| Intangible assets [1] | $ | 11 | |
| Cash | 1 | ||
| Total assets acquired | 12 | ||
| Liabilities | |||
| Total liabilities assumed | 1 | ||
| Net identifiable assets acquired | 11 | ||
| Goodwill [2] | 31 | ||
| Net assets acquired | $ | 42 |
| [1] | *Comprised of indefinite lived intangibles of $*10 *related to customer relationships and $*1 of other intangibles, which are amortized over 5 to 8 years. |
| [2] | Deductible for federal income tax purposes. |
Lattice's revenues and earnings since the acquisition date are included in the Company's Consolidated Statements of Operations in the Hartford Funds reporting segment.
In addition to the initial cash consideration, the Company is required to make future payments to the former owners of Lattice of up to $60 based upon growth in ETP AUM over four years beginning on the date of acquisition. The contingent consideration was measured at fair value at the acquisition date by projecting future ETP AUM and discounting expected payments back to the valuation date. The projected ETP AUM and risk-adjusted discount rate are significant unobservable inputs to fair value.
The goodwill recognized is attributable to the fact that the acquisition of Lattice enables the Company to offer ETPs which are expected to be a significant source of future revenue and earnings growth. Goodwill is allocated to the Hartford Funds reporting segment.
The Company recognized $1 of acquisition related costs for the year ended December 31, 2016. These costs are included in insurance operating costs and other expenses in the Consolidated Statement of Operations.
F-18
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3**.** EARNINGS (LOSS) PER COMMON SHARE
Computation of Basic and Diluted Earnings per Common Share
| For the years ended December 31, | |||||||||
| (In millions, except for per share data) | 2018 | 2017 | 2016 | ||||||
| Earnings | |||||||||
| Income (loss) from continuing operations, net of tax | $ | 1,485 | $ | (262 | ) | $ | 613 | ||
| Less: Preferred stock dividends | 6 | — | — | ||||||
| Income (loss) from continuing operations, net of tax, available to common stockholders | 1,479 | (262 | ) | 613 | |||||
| Income (loss) from discontinued operations, net of tax, available to common stockholders | 322 | (2,869 | ) | 283 | |||||
| Net income (loss) available to common stockholders | 1,801 | (3,131 | ) | 896 | |||||
| Shares | |||||||||
| Weighted average common shares outstanding, basic | 358.4 | 363.7 | 387.7 | ||||||
| Dilutive effect of warrants | 1.9 | — | 3.6 | ||||||
| Dilutive effect of stock-based awards under compensation plans | 3.8 | — | 3.5 | ||||||
| Weighted average common shares outstanding and dilutive potential common shares [1] | 364.1 | 363.7 | 394.8 | ||||||
| Earnings per common share | |||||||||
| Basic | |||||||||
| Income (loss) from continuing operations, net of tax, available to common stockholders | $ | 4.13 | $ | (0.72 | ) | $ | 1.58 | ||
| Income (loss) from discontinued operations, net of tax, available to common stockholders | 0.90 | (7.89 | ) | 0.73 | |||||
| Net income (loss) available to common stockholders | $ | 5.03 | $ | (8.61 | ) | $ | 2.31 | ||
| Diluted | |||||||||
| Income (loss) from continuing operations, net of tax, available to common stockholders | $ | 4.06 | $ | (0.72 | ) | $ | 1.55 | ||
| Income (loss) from discontinued operations, net of tax, available to common stockholders | 0.89 | (7.89 | ) | 0.72 | |||||
| Net income (loss) available to common stockholders | $ | 4.95 | $ | (8.61 | ) | $ | 2.27 |
| [1] | For additional information, see Note 15 - Equity and Note 19 - Stock Compensation Plans of Notes to Consolidated Financial Statements. |
Basic earnings per common share is computed based on the weighted average number of common shares outstanding during the year. Diluted earnings per common share includes the dilutive effect of assumed exercise or issuance of warrants and stock-based awards under compensation plans.
In periods where a loss from continuing operations available to common stockholders or net loss available to common stockholders is recognized, inclusion of incremental dilutive shares would be antidilutive. Due to the antidilutive impact, such shares are excluded from the diluted earnings per share calculation of income (loss) from continuing operations, net of tax, available to common stockholders and net income (loss) available to common stockholders in such periods. As a result, for the year
ended December 31, 2017, the Company was required to use basic weighted average common shares outstanding in the diluted calculations, since the inclusion of 4.3 million shares for stock compensation plans and 2.5 million shares for warrants would have been antidilutive to the calculations.
Under the treasury stock method, for warrants and stock-based awards, shares are assumed to be issued and then reduced for the number of shares repurchaseable with theoretical proceeds at the average market price for the period. Contingently issuable shares are included for the number of shares issuable assuming the end of the reporting period was the end of the contingency period, if dilutive.
4**.** 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 (previously referred to as "Mutual Funds"), as well as a Corporate category. The Company includes in the Corporate category discontinued operations related to the life and annuity business sold in May 2018, reserves for run-off structured settlement and terminal funding agreement liabilities, capital raising activities (including debt financing and related interest expense), purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting
segments. Corporate also includes investment management fees and expenses related to managing third party business, including management of the invested assets of Talcott Resolution Life. In addition, Corporate includes a 9.7% ownership interest in the legal entity that acquired the life and annuity business sold. For further discussion of continued involvement in the life and annuity business sold in May 2018, see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements.
The Company’s reporting segments, as well as the Corporate category, are as follows:
F-19
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Lines
Commercial Lines provides workers’ compensation, property, automobile, marine, livestock, liability and umbrella coverages primarily throughout the U.S., along with a variety of customized insurance products and risk management services including professional liability, bond, surety, and specialty casualty coverages.
Personal Lines
Personal Lines provides standard automobile, homeowners and personal umbrella coverages to individuals across the U.S., including a special program designed exclusively for members of AARP.
Property & Casualty Other Operations
Property & Casualty Other Operations includes certain property and casualty operations, managed by the Company, that have discontinued writing new business and includes substantially all of the Company’s asbestos and environmental exposures.
Group Benefits
Group Benefits provides employers, associations and financial institutions with group life, accident and disability coverage, along with other products and services, including voluntary benefits, and group retiree health.
Hartford Funds
Hartford Funds offers investment products for retail and retirement accounts as well as ETPs and provides investment management and administrative services such as product design, implementation and oversight. This business also manages a portion of the mutual funds which support the variable annuity products within the life and annuity business sold in May 2018.
Corporate
The Company includes in the Corporate category investment management fees and expenses related to managing third party business, including management of the invested assets of Talcott Resolution, discontinued operations related to the life and annuity business sold in May 2018, reserves for run-off structured settlement and terminal funding agreement liabilities, capital raising activities (including debt financing and related interest expense), purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments. In addition, Corporate includes a 9.7% ownership interest in the legal entity that acquired the life and annuity business sold in May 2018.
Financial Measures and Other Segment Information
Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided, investment transfers and capital contributions. In addition, certain inter-segment transactions occur that relate to interest income on allocated surplus. Consolidated net investment income is unaffected by such transactions.
Revenues
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Earned premiums and fee income: | |||||||||
| Commercial Lines | |||||||||
| Workers’ compensation | $ | 3,341 | $ | 3,287 | $ | 3,187 | |||
| Liability | 653 | 604 | 585 | ||||||
| Package business | 1,364 | 1,301 | 1,249 | ||||||
| Property | 618 | 604 | 577 | ||||||
| Professional liability | 254 | 246 | 231 | ||||||
| Bond | 241 | 230 | 218 | ||||||
| Automobile | 610 | 630 | 643 | ||||||
| Total Commercial Lines | 7,081 | 6,902 | 6,690 | ||||||
| Personal Lines | |||||||||
| Automobile | 2,398 | 2,617 | 2,749 | ||||||
| Homeowners | 1,041 | 1,117 | 1,188 | ||||||
| Total Personal Lines [1] | 3,439 | 3,734 | 3,937 | ||||||
| Property & Casualty Other Operations | — | — | — | ||||||
| Group Benefits | |||||||||
| Group disability | 2,746 | 1,718 | 1,506 | ||||||
| Group life | 2,611 | 1,745 | 1,512 | ||||||
| Other | 241 | 214 | 205 | ||||||
| Total Group Benefits | 5,598 | 3,677 | 3,223 | ||||||
| Hartford Funds | |||||||||
| Mutual fund and Exchange-Traded Products ("ETP") | 932 | 888 | 779 | ||||||
| Talcott Resolution life and annuity separate accounts [3] | 100 | 104 | 106 | ||||||
| Total Hartford Funds [2] | 1,032 | 992 | 885 | ||||||
| Corporate | 32 | 4 | 3 | ||||||
| Total earned premiums and fee income | 17,182 | 15,309 | 14,738 | ||||||
| Total net investment income | 1,780 | 1,603 | 1,577 | ||||||
| Net realized capital gains (losses) | (112 | ) | 165 | (110 | ) | ||||
| Other revenues | 105 | 85 | 86 | ||||||
| Total revenues | $ | 18,955 | $ | 17,162 | $ | 16,291 |
| [1] | For 2018*,* 2017 and 2016*, AARP members accounted for earned premiums of* $3.0 billion*,* $3.2 billion and $3.3 billion*, respectively.* |
| [2] | Excludes distribution costs of $188 and $184 for the years ended December 31, 2017*, and* 2016*, respectively, that were previously netted against fee income and are now presented gross in insurance operating costs and other expenses.* |
| [3] | Represents revenues earned on the life and annuity separate account AUM sold in May 2018 that is still managed by the Company's Hartford Funds segment. |
F-20
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Income (Loss)
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Commercial Lines | $ | 1,212 | $ | 865 | $ | 994 | |||
| Personal Lines | (32 | ) | (9 | ) | (9 | ) | |||
| Property & Casualty Other Operations | 15 | 69 | (529 | ) | |||||
| Group Benefits | 340 | 294 | 230 | ||||||
| Hartford Funds | 148 | 106 | 78 | ||||||
| Corporate | 124 | (4,456 | ) | 132 | |||||
| Net income (loss) | $ | 1,807 | $ | (3,131 | ) | $ | 896 | ||
| Preferred stock dividends | 6 | — | — | ||||||
| Net income (loss) available to common stockholders | $ | 1,801 | $ | (3,131 | ) | $ | 896 |
Net Investment Income
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Commercial Lines | $ | 997 | $ | 949 | $ | 917 | |||
| Personal Lines | 155 | 141 | 135 | ||||||
| Property & Casualty Other Operations | 90 | 106 | 127 | ||||||
| Group Benefits | 474 | 381 | 366 | ||||||
| Hartford Funds | 5 | 3 | 1 | ||||||
| Corporate | 59 | 23 | 31 | ||||||
| Net investment income | $ | 1,780 | $ | 1,603 | $ | 1,577 |
Amortization of Deferred Policy Acquisition Costs
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Commercial Lines | $ | 1,048 | $ | 1,009 | $ | 973 | |||
| Personal Lines | 275 | 309 | 348 | ||||||
| Group Benefits | 45 | 33 | 31 | ||||||
| Hartford Funds | 16 | 21 | 24 | ||||||
| Corporate | — | — | 1 | ||||||
| Total amortization of deferred policy acquisition costs | $ | 1,384 | $ | 1,372 | $ | 1,377 |
Amortization of Other Intangible Assets
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Commercial Lines | $ | 4 | $ | 1 | $ | — | |||
| Personal Lines | 4 | 4 | 4 | ||||||
| Group Benefits | 60 | 9 | — | ||||||
| Total amortization of other intangible assets | $ | 68 | $ | 14 | $ | 4 |
Income Tax Expense (Benefit)
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Commercial Lines | $ | 267 | 377 | 415 | |||||
| Personal Lines | (19 | ) | 26 | (23 | ) | ||||
| Property & Casualty Other Operations | (7 | ) | 24 | (355 | ) | ||||
| Group Benefits | 84 | 38 | 83 | ||||||
| Hartford Funds | 38 | 63 | 43 | ||||||
| Corporate | (95 | ) | 457 | (329 | ) | ||||
| Total income tax expense (benefit) | $ | 268 | $ | 985 | $ | (166 | ) |
Assets
| As of December 31, | ||||||
| 2018 | 2017 | |||||
| Commercial Lines | $ | 31,693 | $ | 31,281 | ||
| Personal Lines | 6,180 | 6,251 | ||||
| Property & Casualty Other Operations | 3,351 | 3,568 | ||||
| Group Benefits | 14,114 | 14,478 | ||||
| Hartford Funds | 583 | 547 | ||||
| Corporate | 6,386 | 169,135 | ||||
| Total assets | $ | 62,307 | $ | 225,260 |
5**.** 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 inclu
des 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:
F-21
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 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.
| Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2018 | ||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||
| Assets accounted for at fair value on a recurring basis | ||||||||||||
| Fixed maturities, AFS | ||||||||||||
| Asset backed securities ("ABS") | $ | 1,276 | $ | — | $ | 1,266 | $ | 10 | ||||
| Collateralized loan obligations ("CLOs") | 1,437 | — | 1,337 | 100 | ||||||||
| Commercial mortgage-backed securities ("CMBS") | 3,552 | — | 3,540 | 12 | ||||||||
| Corporate | 13,398 | — | 12,878 | 520 | ||||||||
| Foreign government/government agencies | 847 | — | 844 | 3 | ||||||||
| Municipal | 10,346 | — | 10,346 | — | ||||||||
| Residential mortgage-backed securities ("RMBS") | 3,279 | — | 2,359 | 920 | ||||||||
| U.S. Treasuries | 1,517 | 330 | 1,187 | — | ||||||||
| Total fixed maturities | 35,652 | 330 | 33,757 | 1,565 | ||||||||
| Fixed maturities, FVO | 22 | — | 22 | — | ||||||||
| Equity securities, at fair value | 1,214 | 1,093 | 44 | 77 | ||||||||
| Derivative assets | ||||||||||||
| Credit derivatives | 5 | — | 5 | — | ||||||||
| Equity derivatives | 3 | — | — | 3 | ||||||||
| Foreign exchange derivatives | (2 | ) | — | (2 | ) | — | ||||||
| Interest rate derivatives | 1 | — | 1 | — | ||||||||
| Total derivative assets [1] | 7 | — | 4 | 3 | ||||||||
| Short-term investments | 4,283 | 1,039 | 3,244 | — | ||||||||
| Total assets accounted for at fair value on a recurring basis | $ | 41,178 | $ | 2,462 | $ | 37,071 | $ | 1,645 | ||||
| Liabilities accounted for at fair value on a recurring basis | ||||||||||||
| Derivative liabilities | ||||||||||||
| Credit derivatives | (2 | ) | — | (2 | ) | — | ||||||
| Equity derivatives | 1 | — | 1 | — | ||||||||
| Foreign exchange derivatives | (5 | ) | — | (5 | ) | — | ||||||
| Interest rate derivatives | (62 | ) | — | (63 | ) | 1 | ||||||
| Total derivative liabilities [2] | (68 | ) | — | (69 | ) | 1 | ||||||
| Contingent consideration [3] | (35 | ) | — | — | (35 | ) | ||||||
| Total liabilities accounted for at fair value on a recurring basis | $ | (103 | ) | $ | — | $ | (69 | ) | $ | (34 | ) |
| [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. |
| [3] | For additional information see the Contingent Consideration section below. |
F-22
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2017 | ||||||||||||
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||
| Assets accounted for at fair value on a recurring basis | ||||||||||||
| Fixed maturities, AFS | ||||||||||||
| Asset-backed-securities ("ABS") | $ | 1,126 | $ | — | $ | 1,107 | $ | 19 | ||||
| Collateralized loan obligations ("CLOs") | 1,260 | — | 1,165 | 95 | ||||||||
| Commercial mortgage-backed securities ("CMBS") | 3,336 | — | 3,267 | 69 | ||||||||
| Corporate | 12,804 | — | 12,284 | 520 | ||||||||
| Foreign government/government agencies | 1,110 | — | 1,108 | 2 | ||||||||
| Municipal | 12,485 | — | 12,468 | 17 | ||||||||
| Residential mortgage-backed securities ("RMBS") | 3,044 | — | 1,814 | 1,230 | ||||||||
| U.S. Treasuries | 1,799 | 333 | 1,466 | — | ||||||||
| Total fixed maturities | 36,964 | 333 | 34,679 | 1,952 | ||||||||
| Fixed maturities, FVO | 41 | — | 41 | — | ||||||||
| Equity securities, AFS | 1,012 | 887 | 49 | 76 | ||||||||
| Derivative assets | ||||||||||||
| Credit derivatives | 9 | — | 9 | — | ||||||||
| Foreign exchange derivatives | (1 | ) | — | (1 | ) | — | ||||||
| Equity derivatives | 1 | — | — | 1 | ||||||||
| Interest rate derivatives | 1 | — | 1 | — | ||||||||
| Total derivative assets [1] | 10 | — | 9 | 1 | ||||||||
| Short-term investments | 2,270 | 1,098 | 1,172 | — | ||||||||
| Total assets accounted for at fair value on a recurring basis | $ | 40,297 | $ | 2,318 | $ | 35,950 | $ | 2,029 | ||||
| Liabilities accounted for at fair value on a recurring basis | ||||||||||||
| Derivative liabilities | ||||||||||||
| Credit derivatives | (3 | ) | — | (3 | ) | — | ||||||
| Foreign exchange derivatives | (13 | ) | — | (13 | ) | — | ||||||
| Interest rate derivatives | (84 | ) | — | (85 | ) | 1 | ||||||
| Total derivative liabilities [2] | (100 | ) | — | (101 | ) | 1 | ||||||
| Contingent consideration [3] | (29 | ) | — | — | (29 | ) | ||||||
| Total liabilities accounted for at fair value on a recurring basis | $ | (129 | ) | $ | — | $ | (101 | ) | $ | (28 | ) |
| [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. |
| [3] | For additional information see the Contingent Consideration section below. |
Fixed Maturities, Equity Securities, Short-term Investments, and Derivatives
Valuation Techniques
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach comprised of the following pricing sources and techniques, which are listed in priority order:
| • | Quoted prices, unadjusted, for identical assets or liabilities in active markets, which are classified as Level 1. |
| • | Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs available through the reporting date. If there are no recently reported trades, they may use a discounted cash flow technique to develop a price using expected cash flows based upon the anticipated future performance of the underlying collateral discounted at an estimated market rate. Both techniques develop prices that consider the time value of future cash flows and provide a margin for risk, including liquidity and credit risk. Most prices provided by third-party pricing services are classified as Level 2 because the inputs used in pricing the securities are observable. However, some |
F-23
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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, which 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 financial strength and term to maturity, using an independent public security index and trade information, 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 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 incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded and 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 fair value process for investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The purpose of the committee is to oversee the pricing policy and procedures, as well as to approve changes to valuation methodologies and pricing sources. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews.
There are also two working groups under the Valuation Committee: a Securities Fair Value Working Group (“Securities Working Group”) and a Derivatives Fair Value Working Group ("Derivatives Working Group"). The working groups, which include various investment, operations, accounting and risk
management professionals, meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes.
The Securities Working Group reviews prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The group considers trading volume, new issuance activity, market trends, new regulatory rulings and other factors to determine whether the market activity is significantly different than normal activity in an active market. A dedicated pricing unit follows up with trading and investment sector professionals and challenges prices of third-party pricing services when the estimated assumptions used differ from what the unit believes a market participant would use. If the available evidence indicates that pricing from third-party pricing services or broker quotes is based upon transactions that are stale or not from trades made in an orderly market, the Company places little, if any, weight on the third party service’s transaction price and will estimate fair value using an internal process, such as a pricing matrix.
The Derivatives Working Group reviews the inputs, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. A dedicated pricing team works directly with investment sector professionals to investigate the impacts of changes in the market environment on prices or valuations of derivatives. New models and any changes to current models are required to have detailed documentation and are validated to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval.
The Company conducts other monitoring controls around securities and derivatives pricing including, but not limited to, the following:
| • | Review of daily price changes over specific thresholds and new trade comparison to third-party pricing services. |
| • | Daily comparison of OTC derivative market valuations to counterparty valuations. |
| • | Review of weekly price changes compared to published bond prices of a corporate bond index. |
| • | Monthly reviews of price changes over thresholds, stale prices, missing prices, and zero prices. |
| • | Monthly validation of prices to a second source for securities in most sectors and for certain derivatives. |
In addition, the Company’s enterprise-wide Operational Risk Management function, led by the Chief Risk Officer, is responsible for model risk management and provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and consist of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, certain short-term investments, and exchange traded futures and option contracts.
F-24
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
| Level 2 Primary Observable Inputs | Level 3 Primary Unobservable Inputs | |
| Fixed Maturity Investments | ||
| Structured securities (includes ABS, CLOs CMBS and RMBS) | ||
| • Benchmark yields and spreads • Monthly payment information • Collateral performance, which varies by vintage year and includes delinquency rates, loss severity rates and refinancing assumptions • Credit default swap indices Other inputs for ABS 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: • Independent broker quotes • 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 | Not applicable | |
| Derivatives | ||
| Credit derivatives | ||
| • Swap yield curve • Credit default swap curves | Not applicable | |
| Equity derivatives | ||
| • Equity index levels • Swap yield curve | • Independent broker quotes • Equity volatility | |
| Foreign exchange derivatives | ||
| • Swap yield curve • Currency spot and forward rates • Cross currency basis curves | Not applicable | |
| Interest rate derivatives | ||
| • Swap yield curve | • Independent broker quotes • Interest rate volatility |
F-25
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 December 31, 2018 | ||||||||||||
| CMBS [3] | $ | 2 | Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 9 bps | 1,040 bps | 182 bps | Decrease | ||||
| Corporate [4] | 274 | Discounted cash flows | Spread | 145 bps | 1,175 bps | 263 bps | Decrease | |||||
| RMBS [3] | 815 | Discounted cash flows | Spread [6] | 12 bps | 215 bps | 86 bps | Decrease | |||||
| Constant prepayment rate [6] | 1% | 15% | 6% | Decrease [5] | ||||||||
| Constant default rate [6] | 1% | 8% | 3% | Decrease | ||||||||
| Loss severity [6] | —% | 100% | 61% | Decrease | ||||||||
| As of December 31, 2017 | ||||||||||||
| CMBS [3] | $ | 56 | Discounted cash flows | Spread (encompasses prepayment, default risk and loss severity) | 9 | bps | 1,040 | bps | 400 | bps | Decrease | |
| Corporate [4] | 251 | Discounted cash flows | Spread | 103 | bps | 1,000 | bps | 242 | bps | Decrease | ||
| Municipal | 17 | Discounted cash flows | Spread | 192 | bps | 250 | bps | 219 | bps | Decrease | ||
| RMBS [3] | 1,215 | Discounted cash flows | Spread [6] | 24 | bps | 351 | bps | 74 | bps | Decrease | ||
| Constant prepayment rate [6] | 1% | 25% | 6% | Decrease [5] | ||||||||
| Constant default rate [6] | —% | 9% | 4% | Decrease | ||||||||
| Loss severity [6] | —% | 100% | 66% | 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. |
Significant Unobservable Inputs for Level 3 - Derivatives
| Fair Value | Predominant Valuation Technique | Significant Unobservable Input | Minimum | Maximum | Weighted Average [1] | Impact of Increase in Input on Fair Value [2] | |||||
| As of December 31, 2018 | |||||||||||
| Interest rate swaptions [3] | 1 | Option model | Interest rate volatility | 3 | % | 3 | % | 3 | % | Increase | |
| Equity options | 3 | Option model | Equity volatility | 19 | % | 21 | % | 20 | % | Increase | |
| As of December 31, 2017 | |||||||||||
| Interest rate swaptions [3] | 1 | Option model | Interest rate volatility | 2 | % | 2 | % | 2 | % | Increase | |
| Equity options | 1 | Option model | Equity volatility | 18 | % | 22 | % | 20 | % | Increase |
| [1] | The weighted average is determined based on the fair value of the derivatives. |
| [2] | Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions. |
| [3] | The swaptions presented are purchased options that have the right to enter into a pay-fixed swap. |
F-26
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The tables above exclude 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. For the year ended December 31, 2018, no significant adjustments were made by the Company to broker prices received.
Contingent Consideration
The acquisition of Lattice Strategies LLC ("Lattice") on July 29, 2016 requires the Company to make payments to former owners of Lattice of up to $60 contingent upon growth in exchange-traded products ("ETP") AUM over a period of four years beginning on the date of acquisition. The contingent consideration is measured at fair value on a quarterly basis by projecting future eligible ETP AUM over the contingency period to estimate the amount of expected payout. The future expected payout is discounted back to the valuation date using a risk-adjusted discount rate of 16.6%. The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value.
The contingency period for ETP AUM growth ends July 29, 2020 and management adjusts the fair value of the contingent consideration when it revises its projection of ETP AUM for the acquired business. Before discounting to fair value, the Company has accrued consideration payable of $40 assuming ETP AUM for the acquired business grows to approximately $4 billion over the contingency period. This contingent consideration payable included $10 payable in the first quarter of 2019 given that ETP AUM reached $1 billion in the fourth quarter of 2018.
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 with the same fair value hierarchy level as the associated asset or liability. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 rollforward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
F-27
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended December 31, 2018
| Total realized/unrealized gains (losses) | ||||||||||||||||||||||||||||
| Fair value as of January 1, 2018 | 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 December 31, 2018 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||
| Fixed Maturities, AFS | ||||||||||||||||||||||||||||
| ABS | $ | 19 | $ | — | $ | — | $ | 90 | $ | (5 | ) | $ | (4 | ) | $ | 12 | $ | (102 | ) | $ | 10 | |||||||
| CLOs | 95 | — | — | 330 | — | (13 | ) | — | (312 | ) | 100 | |||||||||||||||||
| CMBS | 69 | (1 | ) | — | 25 | (14 | ) | (8 | ) | — | (59 | ) | 12 | |||||||||||||||
| Corporate | 520 | 1 | (18 | ) | 197 | (36 | ) | (52 | ) | 31 | (123 | ) | 520 | |||||||||||||||
| Foreign Govt./Govt. Agencies | 2 | — | — | 1 | — | — | — | — | 3 | |||||||||||||||||||
| Municipal | 17 | — | (1 | ) | — | — | (1 | ) | — | (15 | ) | — | ||||||||||||||||
| RMBS | 1,230 | — | (16 | ) | 273 | (319 | ) | (52 | ) | 4 | (200 | ) | 920 | |||||||||||||||
| Total Fixed Maturities, AFS | 1,952 | — | (35 | ) | 916 | (374 | ) | (130 | ) | 47 | (811 | ) | 1,565 | |||||||||||||||
| Equity Securities, at fair value | 76 | 29 | — | 12 | — | (40 | ) | — | — | 77 | ||||||||||||||||||
| Derivatives, net [4] | ||||||||||||||||||||||||||||
| Equity | 1 | 3 | — | 1 | — | (2 | ) | — | — | 3 | ||||||||||||||||||
| Interest rate | 1 | — | — | — | — | — | — | — | 1 | |||||||||||||||||||
| Total Derivatives, net [4] | 2 | 3 | — | 1 | — | (2 | ) | — | — | 4 | ||||||||||||||||||
| Total Assets | 2,030 | 32 | (35 | ) | 929 | (374 | ) | (172 | ) | 47 | (811 | ) | 1,646 | |||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||
| Contingent Consideration [5] | (29 | ) | (6 | ) | — | — | — | — | — | — | (35 | ) | ||||||||||||||||
| Total Liabilities | $ | (29 | ) | $ | (6 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (35 | ) |
| [1] | Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes. |
| [2] | All amounts are before income taxes. |
| [3] | Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs. |
| [4] | Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other liabilities. |
| [5] | For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses). |
F-28
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Year Ended December 31, 2017
| Total realized/unrealized gains (losses) | ||||||||||||||||||||||||||||
| Fair value as of January 1, 2017 | 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 December 31, 2017 | ||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||||
| Fixed Maturities, AFS | ||||||||||||||||||||||||||||
| ABS | $ | 45 | $ | — | $ | — | $ | 56 | $ | (6 | ) | $ | (6 | ) | $ | 27 | $ | (97 | ) | $ | 19 | |||||||
| CLOs | 154 | 18 | (13 | ) | 214 | (101 | ) | (24 | ) | — | (153 | ) | 95 | |||||||||||||||
| CMBS | 59 | (2 | ) | — | 76 | (9 | ) | (10 | ) | — | (45 | ) | 69 | |||||||||||||||
| Corporate | 514 | 1 | 19 | 232 | (76 | ) | (157 | ) | 71 | (84 | ) | 520 | ||||||||||||||||
| Foreign Govt./Govt. Agencies | 47 | — | 3 | 12 | (1 | ) | (2 | ) | — | (57 | ) | 2 | ||||||||||||||||
| Municipal | 46 | 4 | 1 | 1 | — | (35 | ) | — | — | 17 | ||||||||||||||||||
| RMBS | 1,261 | — | 36 | 209 | (268 | ) | (7 | ) | — | (1 | ) | 1,230 | ||||||||||||||||
| Total Fixed Maturities, AFS | 2,126 | 21 | 46 | 800 | (461 | ) | (241 | ) | 98 | (437 | ) | 1,952 | ||||||||||||||||
| Fixed Maturities, FVO | 11 | — | — | 4 | (2 | ) | (13 | ) | — | — | — | |||||||||||||||||
| Equity Securities, AFS | 55 | — | (3 | ) | 24 | — | — | — | — | 76 | ||||||||||||||||||
| Derivatives, net [4] | ||||||||||||||||||||||||||||
| Equity | — | (4 | ) | — | 5 | — | — | — | — | 1 | ||||||||||||||||||
| Interest rate | 9 | (8 | ) | — | — | — | — | — | — | 1 | ||||||||||||||||||
| Other contracts | 1 | (1 | ) | — | — | — | — | — | — | — | ||||||||||||||||||
| Total Derivatives, net [4] | 10 | (13 | ) | — | 5 | — | — | — | — | 2 | ||||||||||||||||||
| Total Assets | 2,202 | 8 | 43 | 833 | (463 | ) | (254 | ) | 98 | (437 | ) | 2,030 | ||||||||||||||||
| Liabilities | ||||||||||||||||||||||||||||
| Contingent Considerations [5] | (25 | ) | (4 | ) | — | — | — | — | — | — | (29 | ) | ||||||||||||||||
| Total Liabilities | $ | (25 | ) | $ | (4 | ) | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | (29 | ) |
| [1] | Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes. |
| [2] | All amounts are before income taxes. |
| [3] | Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs. |
| [4] | Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Consolidated Balance Sheets in other investments and other liabilities. |
| [5] | For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statement for discussion of the contingent consideration in connection with the acquisition of Lattice. Includes both market and non-market impacts in deriving realized and unrealized gains (losses). |
F-29
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as Level 3 Still Held at Year End
| December 31, | ||||||||||
| 2018 | 2017 | |||||||||
| Changes in Unrealized Gain/(Loss) included in Net Income [1] [2] | Changes in Unrealized Gain/(Loss) included in OCI [3] | Changes in Unrealized Gain/(Loss) included in Net Income [1] [2] | ||||||||
| Assets | ||||||||||
| Fixed Maturities, AFS | ||||||||||
| ABS | $ | — | $ | 1 | $ | — | ||||
| CMBS | (1 | ) | 28 | (2 | ) | |||||
| Corporate | — | (42 | ) | — | ||||||
| Municipal | — | 24 | — | |||||||
| RMBS | — | 17 | — | |||||||
| Total Fixed Maturities, AFS | (1 | ) | 28 | (2 | ) | |||||
| Derivatives, net | ||||||||||
| Equity | 1 | (5 | ) | |||||||
| Interest rate | — | — | (7 | ) | ||||||
| Total Derivatives, net | 1 | — | (12 | ) | ||||||
| Total Assets | — | 28 | (14 | ) | ||||||
| Liabilities | ||||||||||
| Contingent Consideration [4] | (6 | ) | (4 | ) | ||||||
| Total Liabilities | $ | (6 | ) | $ | — | $ | (4 | ) |
| [1] | All amounts in these rows are reported in net realized capital gains (losses). All amounts are before income taxes. |
| [2] | Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein. |
| [3] | Changes in unrealized gain/(loss) on fixed maturities, AFS are reported in changes in net unrealized gain on securities in the Consolidated Statements of Comprehensive Income. Changes in interest rate derivatives are reported in changes in net gain on cash flow hedging instruments in the Consolidated Statements of Comprehensive Income. |
| [4] | For additional information, see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements for discussion of the contingent consideration in connection with the acquisition of Lattice. |
Fair Value Option
The Company has elected the fair value option for certain securities that contain embedded credit derivatives with underlying credit risk primarily related to residential real estate, and these securities are included within fixed maturities, FVO on the Consolidated Balance Sheets. The Company reports changes in the fair value of these securities in net realized capital gains and losses.
As of December 31, 2018 and December 31, 2017, the fair value of assets and liabilities using the fair value option was $22 and $41, respectively, within the residential real estate sector.
The Company also previously elected the fair value option for certain equity securities in order to align the accounting with total return swap contracts that hedged the risk associated with the investments. The swaps did not qualify for hedge accounting and the change in value of both the equity securities and the total
return swaps were recorded in net realized capital gains and losses. These equity securities were classified within equity securities, AFS on the Consolidated Balance Sheets. Income earned from FVO securities was recorded in net investment income and changes in fair value were recorded in net realized capital gains and losses.
For the year-ended December 31, 2018, the realized capital gains (losses) related to the fair value of assets using the fair value option were $(1) within the residential real estate sector. For the year-ended December 31, 2017, the income earned from FVO and the changes recorded in net realized capital gains (losses) were driven by corporate bond and equity securities of $(1) and $1, respectively. For the year-ended December 31, 2016 the realized capital gains (losses) related to the fair value of assets using the fair value option were $5 and $(1) within the residential real estate and foreign government sectors.
F-30
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial Instruments Not Carried at Fair Value
Financial Assets and Liabilities Not Carried at Fair Value
| December 31, 2018 | December 31, 2017 | ||||||||||||||
| Fair Value Hierarchy Level | Carrying Amount | Fair Value | Fair Value Hierarchy Level | Carrying Amount | Fair Value | ||||||||||
| Assets | |||||||||||||||
| Mortgage loans | Level 3 | $ | 3,704 | $ | 3,746 | Level 3 | $ | 3,175 | $ | 3,220 | |||||
| Liabilities | |||||||||||||||
| Other policyholder funds and benefits payable | Level 3 | $ | 774 | $ | 775 | Level 3 | $ | 825 | $ | 827 | |||||
| Senior notes [1] | Level 2 | $ | 3,589 | $ | 3,887 | Level 2 | $ | 3,415 | $ | 4,054 | |||||
| Junior subordinated debentures [1] | Level 2 | $ | 1,089 | $ | 1,052 | Level 2 | $ | 1,583 | $ | 1,699 |
[1]Included in long-term debt in the Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
6**.** INVESTMENTS
Net Investment Income
| For the years ended December 31, | |||||||||
| (Before tax) | 2018 | 2017 | 2016 | ||||||
| Fixed maturities [1] | $ | 1,459 | $ | 1,303 | $ | 1,319 | |||
| Equity securities | 32 | 24 | 22 | ||||||
| Mortgage loans | 141 | 124 | 116 | ||||||
| Limited partnerships and other alternative investments | 205 | 174 | 128 | ||||||
| Other investments [2] | 20 | 49 | 51 | ||||||
| Investment expenses | (77 | ) | (71 | ) | (59 | ) | |||
| Total net investment income | $ | 1,780 | $ | 1,603 | $ | 1,577 |
| [1] | Includes net investment income on short-term investments. |
| [2] | Includes income from derivatives that hedge fixed maturities and qualify for hedge accounting. |
Net Realized Capital Gains (Losses)
| For the years ended December 31, | |||||||||
| (Before tax) | 2018 | 2017 | 2016 | ||||||
| Gross gains on sales | $ | 114 | $ | 275 | $ | 222 | |||
| Gross losses on sales | (172 | ) | (113 | ) | (159 | ) | |||
| Equity securities [1] | (48 | ) | — | — | |||||
| Net OTTI losses recognized in earnings | (1 | ) | (8 | ) | (27 | ) | |||
| Valuation allowances on mortgage loans | — | (1 | ) | — | |||||
| Transactional foreign currency revaluation | 1 | 14 | (78 | ) | |||||
| Non-qualifying foreign currency derivatives | 3 | (14 | ) | 83 | |||||
| Other, net [2] | (9 | ) | 12 | (151 | ) | ||||
| Net realized capital gains (losses) | $ | (112 | ) | $ | 165 | $ | (110 | ) |
| [1] | Effective January 1, 2018, with adoption of new accounting guidance for equity securities at fair value, includes all changes in fair value and trading gains and losses for equity securities. |
| [2] | Includes gains (losses) on non-qualifying derivatives, excluding foreign currency derivatives, of $(15)**, $8*, and* $(9)**, respectively for 2018*,* 2017 and 2016*. Also included for the year ended December 31, 2016, is a loss related to the write-down of investments in solar energy partnerships, which generated tax benefits, and a loss related to the sale of the Company's U.K. property and casualty run-off subsidiaries.* |
Net realized capital gains (losses) from investment sales are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains (losses) on sales and impairments previously reported as unrealized gains or losses in AOCI were $(80), $152, and $36 for the years ended December 31, 2018, 2017, and 2016, respectively. Effective January 1, 2018, with adoption of new accounting guidance for equity securities, the proceeds from sales of AFS securities no longer includes equity securities.
The net unrealized gain (loss) on equity securities included in net realized capital gains (losses) related to equity securities still held as of December 31, 2018, was $(80) for the year-ended
F-31
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2018. Prior to January 1, 2018, changes in net unrealized gains (losses) on equity securities were included in AOCI.
Sales of AFS Securities
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Fixed maturities, AFS | |||||||||
| Sale proceeds | $ | 21,327 | $ | 17,614 | $ | 9,984 | |||
| Gross gains | 90 | 204 | 196 | ||||||
| Gross losses | (169 | ) | (90 | ) | (138 | ) | |||
| Equity securities, AFS | |||||||||
| Sale proceeds | $ | 607 | $ | 359 | |||||
| Gross gains | 69 | 26 | |||||||
| Gross losses | (23 | ) | (20 | ) |
Sales of AFS securities in 2018 were primarily a result of duration and liquidity management as well as tactical changes to the portfolio as a result of changing market conditions.
Recognition and Presentation of Other-Than-Temporary Impairments
The Company will record an other-than-temporary impairment (“OTTI”) for fixed maturities if the Company intends to sell or it is more likely than not that the Company will be required to sell the security before a recovery in value. A corresponding charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security.
The Company will also record an OTTI for those fixed maturities for which the Company does not expect to recover the entire amortized cost basis. For these securities, the excess of the amortized cost basis over its fair value is separated into the portion representing a credit OTTI, which is recorded in net realized capital losses, and the remaining non-credit amount, which is recorded in OCI. The credit OTTI amount is the excess of its amortized cost basis over the Company’s best estimate of discounted expected future cash flows. The non-credit amount is the excess of the best estimate of the discounted expected future cash flows over the fair value. The Company’s best estimate of discounted expected future cash flows becomes the new cost basis and accretes prospectively into net investment income over the estimated remaining life of the security.
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 the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, security-specific developments, industry earnings
multiples and the issuer’s ability to restructure 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.
Prior to January 1, 2018, the Company recorded an OTTI for certain equity securities with debt-like characteristics if the Company intended to sell or it was more likely than not that the Company was required to sell the security before a recovery in value as well as for those equity securities for which the Company did not expect to recover the entire amortized cost basis. The Company also recorded an OTTI for equity securities where the decline in the fair value was deemed to be other-than-temporary.
Impairments in Earnings by Type
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Credit impairments | $ | 1 | $ | 2 | $ | 21 | |||
| Impairments on equity securities | 6 | 4 | |||||||
| Intent-to-sell impairments | — | — | 2 | ||||||
| Total impairments | $ | 1 | $ | 8 | $ | 27 |
Cumulative Credit Impairments
| For the years ended December 31, | |||||||||
| (Before tax) | 2018 | 2017 | 2016 | ||||||
| Balance as of beginning of period | $ | (25 | ) | $ | (110 | ) | $ | (113 | ) |
| Additions for credit impairments recognized on [1]: | |||||||||
| Securities not previously impaired | — | (1 | ) | (16 | ) | ||||
| Securities previously impaired | (1 | ) | (1 | ) | (5 | ) | |||
| Reductions for credit impairments previously recognized on: | |||||||||
| Securities that matured or were sold during the period | 7 | 76 | 15 | ||||||
| Securities due to an increase in expected cash flows | — | 11 | 9 | ||||||
| Balance as of end of period | $ | (19 | ) | $ | (25 | ) | $ | (110 | ) |
| [1] | These additions are included in the net OTTI losses recognized in earnings in the Consolidated Statements of Operations. |
F-32
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Available-for-Sale Securities
AFS Securities by Type
| December 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||
| Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non- Credit OTTI [1] | Cost or Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | Non- Credit OTTI [1] | ||||||||||||||||||||||
| ABS | $ | 1,272 | $ | 5 | $ | (1 | ) | $ | 1,276 | $ | — | $ | 1,119 | $ | 9 | $ | (2 | ) | $ | 1,126 | $ | — | |||||||||
| CLOs | 1,455 | 2 | (20 | ) | 1,437 | — | 1,257 | 3 | — | 1,260 | — | ||||||||||||||||||||
| CMBS | 3,581 | 35 | (64 | ) | 3,552 | (5 | ) | 3,304 | 58 | (26 | ) | 3,336 | (5 | ) | |||||||||||||||||
| Corporate | 13,696 | 148 | (446 | ) | 13,398 | — | 12,370 | 490 | (56 | ) | 12,804 | — | |||||||||||||||||||
| Foreign govt./govt. agencies | 866 | 7 | (26 | ) | 847 | — | 1,071 | 43 | (4 | ) | 1,110 | — | |||||||||||||||||||
| Municipal | 9,972 | 421 | (47 | ) | 10,346 | — | 11,743 | 754 | (12 | ) | 12,485 | — | |||||||||||||||||||
| RMBS | 3,270 | 44 | (35 | ) | 3,279 | — | 2,985 | 63 | (4 | ) | 3,044 | — | |||||||||||||||||||
| U.S. Treasuries | 1,491 | 41 | (15 | ) | 1,517 | — | 1,763 | 46 | (10 | ) | 1,799 | — | |||||||||||||||||||
| Total fixed maturities, AFS | 35,603 | 703 | (654 | ) | 35,652 | (5 | ) | 35,612 | 1,466 | (114 | ) | 36,964 | (5 | ) | |||||||||||||||||
| Equity securities, AFS [2] | 907 | 121 | (16 | ) | 1,012 | — | |||||||||||||||||||||||||
| Total AFS securities | $ | 35,603 | $ | 703 | $ | (654 | ) | $ | 35,652 | $ | (5 | ) | $ | 36,519 | $ | 1,587 | $ | (130 | ) | $ | 37,976 | $ | (5 | ) |
| [1] | Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of December 31, 2018 and 2017*.* |
| [2] | Effective January 1, 2018, with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value and are excluded from the table above as of December 31, 2018*.* |
Fixed maturities, AFS, by Contractual Maturity Year
| December 31, 2018 | December 31, 2017 | ||||||||||||
| Amortized Cost | Fair Value | Amortized Cost | Fair Value | ||||||||||
| One year or less | $ | 999 | $ | 1,002 | $ | 1,507 | $ | 1,513 | |||||
| Over one year through five years | 5,786 | 5,791 | 5,007 | 5,119 | |||||||||
| Over five years through ten years | 6,611 | 6,495 | 6,505 | 6,700 | |||||||||
| Over ten years | 12,629 | 12,820 | 13,928 | 14,866 | |||||||||
| Subtotal | 26,025 | 26,108 | 26,947 | 28,198 | |||||||||
| Mortgage-backed and asset-backed securities | 9,578 | 9,544 | 8,665 | 8,766 | |||||||||
| Total fixed maturities, AFS | $ | 35,603 | $ | 35,652 | $ | 35,612 | $ | 36,964 |
Estimated maturities may differ from contractual maturities due to security 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, other than the U.S. government and certain U.S. government agencies as of December 31, 2018 or December 31, 2017. As of December 31, 2018, other than U.S. government and certain U.S. government
agencies, the Company’s three largest exposures by issuer were the New York State Dormitory Authority, Commonwealth of Massachusetts and the New York City Transitional Finance Authority which each comprised less than 1% of total invested assets. As of December 31, 2017, other than U.S. government and certain U.S. government agencies, the Company’s three largest exposures by issuer were New York City Transitional Finance Authority, New York State Dormitory Authority and the Commonwealth of Massachusetts which each comprised less than 1% of total invested assets. The Company’s three largest exposures by sector as of December 31, 2018 were the municipal securities, CMBS and the financial services sector which comprised approximately 22%, 8% and 7%, respectively, of total invested assets. The Company’s three largest exposures by sector as of December 31, 2017 were municipal securities, CMBS and RMBS which comprised approximately 28%, 7% and 7%, respectively, of total invested assets.
F-33
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrealized Losses on AFS Securities
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2018
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
| Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses | |||||||||||||||||||||
| ABS | $ | 566 | $ | 566 | $ | — | $ | 113 | $ | 112 | $ | (1 | ) | $ | 679 | $ | 678 | $ | (1 | ) | |||||||||
| CLOs | 1,358 | 1,338 | (20 | ) | 7 | 7 | — | 1,365 | 1,345 | (20 | ) | ||||||||||||||||||
| CMBS | 896 | 882 | (14 | ) | 1,129 | 1,079 | (50 | ) | 2,025 | 1,961 | (64 | ) | |||||||||||||||||
| Corporate | 7,174 | 6,903 | (271 | ) | 2,541 | 2,366 | (175 | ) | 9,715 | 9,269 | (446 | ) | |||||||||||||||||
| Foreign govt./govt. agencies | 407 | 391 | (16 | ) | 203 | 193 | (10 | ) | 610 | 584 | (26 | ) | |||||||||||||||||
| Municipal | 1,643 | 1,613 | (30 | ) | 292 | 275 | (17 | ) | 1,935 | 1,888 | (47 | ) | |||||||||||||||||
| RMBS | 1,344 | 1,329 | (15 | ) | 648 | 628 | (20 | ) | 1,992 | 1,957 | (35 | ) | |||||||||||||||||
| U.S. Treasuries | 497 | 492 | (5 | ) | 339 | 329 | (10 | ) | 836 | 821 | (15 | ) | |||||||||||||||||
| Total fixed maturities, AFS in an unrealized loss position | $ | 13,885 | $ | 13,514 | $ | (371 | ) | $ | 5,272 | $ | 4,989 | $ | (283 | ) | $ | 19,157 | $ | 18,503 | $ | (654 | ) |
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2017
| Less Than 12 Months | 12 Months or More | Total | |||||||||||||||||||||||||||
| Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses | Amortized Cost | Fair Value | Unrealized Losses | |||||||||||||||||||||
| ABS | $ | 461 | $ | 460 | $ | (1 | ) | $ | 30 | $ | 29 | $ | (1 | ) | $ | 491 | $ | 489 | $ | (2 | ) | ||||||||
| CLOs | 359 | 359 | — | 1 | 1 | — | 360 | 360 | — | ||||||||||||||||||||
| CMBS | 1,178 | 1,167 | (11 | ) | 243 | 228 | (15 | ) | 1,421 | 1,395 | (26 | ) | |||||||||||||||||
| Corporate | 2,322 | 2,302 | (20 | ) | 1,064 | 1,028 | (36 | ) | 3,386 | 3,330 | (56 | ) | |||||||||||||||||
| Foreign govt./govt. agencies | 244 | 242 | (2 | ) | 51 | 49 | (2 | ) | 295 | 291 | (4 | ) | |||||||||||||||||
| Municipal | 511 | 507 | (4 | ) | 236 | 228 | (8 | ) | 747 | 735 | (12 | ) | |||||||||||||||||
| RMBS | 889 | 887 | (2 | ) | 137 | 135 | (2 | ) | 1,026 | 1,022 | (4 | ) | |||||||||||||||||
| U.S. Treasuries | 658 | 652 | (6 | ) | 254 | 250 | (4 | ) | 912 | 902 | (10 | ) | |||||||||||||||||
| Total fixed maturities, AFS in an unrealized loss position | 6,622 | 6,576 | (46 | ) | 2,016 | 1,948 | (68 | ) | 8,638 | 8,524 | (114 | ) | |||||||||||||||||
| Equity securities, AFS [1] | 176 | 163 | (13 | ) | 24 | 21 | (3 | ) | 200 | 184 | (16 | ) | |||||||||||||||||
| Total securities in an unrealized loss position | $ | 6,798 | $ | 6,739 | $ | (59 | ) | $ | 2,040 | $ | 1,969 | $ | (71 | ) | $ | 8,838 | $ | 8,708 | $ | (130 | ) |
| [1] | Effective January 1, 2018 , with the adoption of new accounting standards for financial instruments, equity securities, AFS were reclassified to equity securities at fair value and are excluded from the table above as of December 31, 2018*.* |
As of December 31, 2018, AFS securities in an unrealized loss position consisted of 2,960 securities, primarily in the corporate and commercial real estate sectors, which were depressed primarily due to widening of credit spreads and an increase in interest rates since the securities were purchased. As of December 31, 2018, 98% of these securities were depressed less than 20% of cost or amortized cost. The increase in unrealized losses during 2018 was primarily attributable to widening of credit spreads and higher interest rates.
Most of the securities depressed for twelve months or more relate to corporate securities and structured securities with exposure to commercial real estate. Corporate securities and commercial real estate securities were primarily depressed because current market spreads are wider and interest rates are higher than at the securities' respective purchase dates. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined in the preceding discussion.
Mortgage Loans
Mortgage Loan Valuation Allowances
Mortgage loans are considered to be impaired when management estimates that, based upon current information and events, it is probable that the Company will be unable to collect amounts due according to the contractual terms of the loan agreement. The Company reviews mortgage loans on a quarterly basis to identify potential credit losses. Among other factors, management reviews current and projected macroeconomic trends, such as unemployment rates and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historical, current and projected delinquency rates and property values. Estimates of collectibility 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.
F-34
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and estimated fair value. The mortgage loan's estimated fair value is most frequently the Company's share of the fair value of the collateral but may also be the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate or (b) the loan’s observable market price. A valuation allowance may be recorded for an individual loan or for a group of loans that have an LTV ratio of 90% or greater, a low DSCR or have other lower credit quality characteristics. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the borrowers continue to make payments under the original or restructured loan terms. The Company stops accruing interest income on loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement. The Company resumes accruing interest income when it determines that sufficient collateral exists to satisfy the full amount of the loan principal and interest payments and when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.
As of December 31, 2018 and December 31, 2017 mortgage loans had an amortized cost and carrying value of $3.7 billion and $3.2 billion, respectively, with a valuation allowance of $1 for both periods.
As of December 31, 2018 the carrying value of mortgage loans that had a valuation allowance was $23. There were no mortgage loans held-for-sale as of both December 31, 2018 and December 31, 2017. As of December 31, 2018, the Company had no mortgage loans that have had extensions or restructurings other than what is allowable under the original terms of the contract.
The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.
Valuation Allowance Activity
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Balance as of January 1 | $ | (1 | ) | $ | — | $ | (4 | ) | |
| Reversals/(Additions) | — | (1 | ) | — | |||||
| Deductions | — | — | 4 | ||||||
| Balance as of December 31 | $ | (1 | ) | $ | (1 | ) | $ | — |
The weighted-average LTV ratio of the Company’s mortgage loan portfolio was 52% as of December 31, 2018, while the weighted-average LTV ratio at origination of these loans was 61%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan collateral values are updated no less than annually through reviews of the underlying properties. 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. As of December 31, 2018 and December 31, 2017, the
Company held no delinquent commercial mortgages loan past due by 90 days or more.
Mortgage Loans Credit Quality
| December 31, 2018 | December 31, 2017 | ||||||||
| Loan-to-value | Carrying Value | Avg. Debt-Service Coverage Ratio | Carrying Value | Avg. Debt-Service Coverage Ratio | |||||
| Greater than 80% | $ | — | 0.00x | $ | 18 | 1.27x | |||
| 65% - 80% | 386 | 1.60x | 265 | 1.95x | |||||
| Less than 65% | 3,318 | 2.59x | 2,892 | 2.76x | |||||
| Total mortgage loans | $ | 3,704 | 2.49x | $ | 3,175 | 2.69x |
Mortgage Loans by Region
| December 31, 2018 | December 31, 2017 | ||||||||||
| Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||
| East North Central | $ | 250 | 6.8 | % | $ | 251 | 7.9 | % | |||
| Middle Atlantic | 270 | 7.3 | % | 272 | 8.6 | % | |||||
| Mountain | 30 | 0.8 | % | 31 | 1.0 | % | |||||
| New England | 330 | 8.9 | % | 293 | 9.2 | % | |||||
| Pacific | 917 | 24.8 | % | 760 | 23.9 | % | |||||
| South Atlantic | 712 | 19.2 | % | 710 | 22.4 | % | |||||
| West North Central | 148 | 4.0 | % | 149 | 4.7 | % | |||||
| West South Central | 420 | 11.3 | % | 278 | 8.7 | % | |||||
| Other [1] | 627 | 16.9 | % | 431 | 13.6 | % | |||||
| Total mortgage loans | $ | 3,704 | 100.0 | % | $ | 3,175 | 100.0 | % |
| [1] | Primarily represents loans collateralized by multiple properties in various regions. |
Mortgage Loans by Property Type
| December 31, 2018 | December 31, 2017 | ||||||||||
| Carrying Value | Percent of Total | Carrying Value | Percent of Total | ||||||||
| Commercial | |||||||||||
| Industrial | 1,108 | 29.9 | % | 817 | 25.7 | % | |||||
| Multifamily | 1,138 | 30.7 | % | 1,006 | 31.7 | % | |||||
| Office | 708 | 19.1 | % | 751 | 23.7 | % | |||||
| Retail | 392 | 10.6 | % | 367 | 11.5 | % | |||||
| Single Family | 82 | 2.2 | % | — | — | % | |||||
| Other | 276 | 7.5 | % | 234 | 7.4 | % | |||||
| Total mortgage loans | $ | 3,704 | 100.0 | % | $ | 3,175 | 100.0 | % |
Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fees income over the period that services are performed. As of December 31, 2018, under this program, the Company serviced
F-35
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
mortgage loans with a total outstanding principal of $6.0 billion, of which $3.6 billion was serviced on behalf of third parties and $2.4 billion was retained and reported in total investments on the Company's Consolidated Balance Sheets. As of December 31, 2017, the Company serviced mortgage loans with a total outstanding principal balance of $1.3 billion, of which $402 was serviced on behalf of third parties, $566 was retained and reported in total investments and $356 was reported in assets held for sale on the Company's Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or fair value and were zero as of December 31, 2018 and 2017, because servicing fees were market-level fees at origination and remain adequate to compensate the Company for servicing the loans.
Variable Interest Entities
The Company is engaged with various special purpose entities and other entities that are deemed to be VIEs primarily as an investor through normal investment activities but also as an investment manager.
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Consolidated Financial Statements.
Consolidated VIEs
As of December 31, 2018 and December 31, 2017, the Company did not 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 December 31, 2018 and 2017 is limited to the total carrying value of $1 billion and $920, respectively, which are included in limited partnerships and other alternative investments in the Company's Consolidated Balance Sheets. As of December 31, 2018 and 2017, the Company has outstanding commitments totaling $718 and $787, respectively, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. These investments are generally of a passive nature in that the Company does not take an active role in management.
In addition, the Company makes passive investments in structured securities issued by VIEs for which the Company is not the manager. These investments are included in ABS, CLOs, CMBS and RMBS in the Available-for-Sale Securities table and
fixed maturities, FVO, in the Company’s 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 level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
Securities Lending, Repurchase Agreements and Other Collateral Transactions
The Company enters into securities financing transactions as a way to earn additional income or manage liquidity, primarily through securities lending and repurchase agreements.
Securities Lending
Under a securities lending program, the Company lends certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities to qualifying third-party borrowers in return for collateral in the form of cash or securities. For domestic and non-domestic loaned securities, respectively, borrowers provide collateral of 102% and 105% of the fair value of the securities lent at the time of the loan. Borrowers will return the securities to the Company for cash or securities collateral at maturity dates generally of 90 days or less. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, except in the event of default by the counterparty, and is not reflected on the Company’s Consolidated Balance Sheets. Additional collateral is obtained if the fair value of the collateral falls below 100% of the fair value of the loaned securities. The agreements are continuous and do not have stated maturity dates and provide the counterparty the right to sell or re-pledge the securities loaned. If cash, rather than securities, is received as collateral, the cash is typically invested in short-term investments or fixed maturities and is reported as an asset on the Company's Consolidated Balance Sheets. Income associated with securities lending transactions is reported as a component of net investment income in the Company’s Consolidated Statements of Operations.
Repurchase Agreements
From time to time, the Company enters into repurchase agreements to manage liquidity or to earn incremental income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. These transactions have a remaining maturity of ninety days or less. Repurchase agreements include master netting provisions that provide both counterparties the right to offset claims and apply securities held by them with respect to their obligations in the event of a default. Although the Company has the contractual right to offset claims, the Company's current positions do not meet the specific conditions for net presentation.
F-36
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Under repurchase agreements, the Company transfers collateral of U.S. government and government agency securities and receives cash. For repurchase agreements, the Company obtains cash in an amount equal to at least 95% of the fair value of the securities transferred. The agreements require additional collateral to be transferred when necessary and provide the counterparty the right to sell or re-pledge the securities transferred. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities and is reported as an asset on the Company's Consolidated Balance Sheets. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed maturities, AFS with the obligation to repurchase those securities recorded in other liabilities on the Company's Consolidated Balance Sheets.
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 agreements require additional collateral to be transferred to the Company when necessary and the Company has the right to sell or re-pledge the securities received. The Company accounts for reverse repurchase agreements as collateralized financing. The receivable for reverse repurchase agreements is included within short-term investments in the Company's Consolidated Balance Sheets.
| Securities Lending and Repurchase Agreements | ||||||
| December 31, 2018 | December 31, 2017 | |||||
| Fair Value | Fair Value | |||||
| Securities Lending Transactions: | ||||||
| Gross amount of securities on loan | $ | 820 | $ | 922 | ||
| Gross amount of associated liability for collateral received [1] | $ | 840 | $ | 945 | ||
| Repurchase agreements: | ||||||
| Gross amount of recognized liabilities for repurchase agreements | $ | 72 | $ | 174 | ||
| Gross amount of collateral pledged related to repurchase agreements [2] | $ | 73 | $ | 176 | ||
| Gross amount of recognized receivables for reverse repurchase agreements | $ | 64 | $ | — |
| [1] | *Cash collateral received is reinvested in fixed maturities, AFS and short term investments which are included in the Consolidated Balance Sheets. Amount includes additional securities collateral received of $*3 and $0 million which are excluded from the Company's Consolidated Balance Sheets as of December 31, 2018 and December 31, 2017, respectively. |
| [2] | Collateral pledged is included within fixed maturities, AFS and short term investments in the Company's Consolidated Balance Sheets. |
Other Collateral Transactions
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. As of December 31, 2018 and December 31, 2017, the fair value of securities on deposit was $2.2 billion and $2.5 billion, respectively.
As of December 31, 2018 and December 31, 2017, the Company pledged collateral of $47 and $104, respectively, of U.S. government securities and government agency securities or cash primarily related to certain bank loan participations committed to through a limited partnership agreement. These amounts also include collateral related to letters of credit.
For disclosure of collateral in support of derivative transactions, refer to the Derivative Collateral Arrangements section in Note 7 - Derivatives of Notes to Consolidated Financial Statements.
Equity Method Investments
The majority of the Company's investments in limited partnerships and other alternative investments, including hedge funds, real estate funds, and private equity funds (collectively, “limited partnerships”), are accounted for under the equity method of accounting. The remainder of investments in limited partnerships and other alternative investments consists of investments in insurer-owned life insurance accounted for at cash surrender value. The Company's investment in Hopmeadow Holdings LP is reported in other assets on the Company's Consolidated Balance Sheets and is accounted for under the equity method of accounting. For further discussion on Hopmeadow Holdings LP, refer to Sale of Life and Annuity Business within Note 20 - Business Dispositions and Discontinued Operations of Notes to the Consolidated Financial Statements. The Company recognized total equity method income of $214, $168, and $137 for the periods ended December 31, 2018, 2017 and 2016, respectively. Equity method income is reported in net investment income except amounts related to strategic investments classified in other assets are reported in other revenues. For investments accounted for under the equity method, the Company’s maximum exposure to loss as of December 31, 2018 is limited to the total carrying value of $1.5 billion. In addition, the Company has outstanding commitments totaling $741 to fund limited partnership investments as of December 31, 2018. The Company’s investments accounted for under the equity method are generally of a passive nature in that the Company does not take an active role in the management. In 2018, aggregate investment income from investments accounted for under the equity method exceeded 10% of the Company’s pre-tax consolidated net income (loss). Accordingly, the Company is disclosing aggregated summarized financial data for the Company’s investments accounted for under the equity method. This aggregated summarized financial data does not represent the Company’s proportionate share of investees' assets or earnings. Aggregate total assets of the investees totaled $311 billion and $165.9 billion as of December 31, 2018 and 2017, respectively. Aggregate total liabilities of the investees totaled $187.7 billion and $47.8 billion as of December 31, 2018 and 2017, respectively. Aggregate net investment income of the investees totaled $773, $1.9 billion, and $844 for the periods ended December 31, 2018, 2017 and 2016, respectively. Aggregate net income excluding net investment income of the investees totaled $12.3 billion, $9.8 billion and $7.7 billion for the periods ended December 31, 2018, 2017 and 2016, respectively. As of, and for the period ended, December 31, 2018, the aggregated summarized financial data reflects the latest available financial information.
F-37
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7**.** 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. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk 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. 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. The hedge strategies by hedge accounting designation include:
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 floating-rate fixed maturity securities to fixed rates. The Company has also entered into interest rate swaps to convert the variable interest payments on 3 month Libor + 2.125% junior subordinated debt to fixed interest payments. For further information, see the Junior Subordinated Debentures section within Note 13 - Debt of Notes to Consolidated Financial Statements.
Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts and liability payments to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
The Company also previously entered into forward starting swap agreements to hedge the interest rate exposure related to the future purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain group benefits liabilities.
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate, foreign currency and equity risk of certain fixed maturities and equities 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 should the referenced security issuers experience a credit event, as defined in the contract. In addition, the Company enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Interest Rate Swaps, Swaptions and Futures
The Company uses interest rate swaps, swaptions and futures to manage interest rate duration between assets and liabilities in certain investment portfolios. 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 December 31, 2018 and 2017, the notional amount of interest rate swaps in offsetting relationships was $7.1 billion and $7.3 billion, respectively.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars. The Company may at times enter into foreign currency forwards to hedge non-U.S. dollar denominated cash and, previously, equity securities. The Company previously entered into foreign currency forwards to hedge currency impacts on changes in equity of the U.K. property and casualty run-off subsidiaries that were sold in May 2017. For further information on the disposition, see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements.
Equity Index Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. The Company also enters into call options on equity securities to generate additional return. The Company previously entered into total return swaps to hedge equity risk of specific common stock investments which were accounted for using fair value option in order to align the accounting treatment within net realized capital gains (losses). The Company has not held these total return swaps since January 2016.
Contingent Capital Facility Put Option
The Company previously entered into a put option agreement that provided the Company the right to require a third-party trust to purchase, at any time, The Hartford’s junior subordinated notes in a maximum aggregate principal amount of $500. On February 8, 2017, The Hartford exercised the put option resulting in the issuance of $500 in junior subordinated notes with proceeds received on February 15, 2017. Under the put option agreement, The Hartford had been paying premiums on a periodic basis and had agreed to reimburse the trust for certain fees and ordinary expenses.
F-38
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Balance Sheet Classification
For reporting purposes, the Company has elected to offset within assets or liabilities based upon the net of the fair value amounts, income accruals, and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The following fair value amounts do not include income
accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.
Derivative Balance Sheet Presentation
| Net Derivatives | Asset Derivatives [1] | Liability Derivatives [1] | ||||||||||||||||||||||
| Notional Amount | Fair Value | Fair Value | Fair Value | |||||||||||||||||||||
| Hedge Designation/ Derivative Type | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | Dec 31, 2018 | Dec 31, 2017 | ||||||||||||||||
| Cash flow hedges | ||||||||||||||||||||||||
| Interest rate swaps | $ | 2,040 | $ | 2,190 | $ | 1 | $ | — | $ | 2 | $ | 1 | $ | (1 | ) | $ | (1 | ) | ||||||
| Foreign currency swaps | 153 | 153 | (6 | ) | (13 | ) | 2 | — | (8 | ) | (13 | ) | ||||||||||||
| Total cash flow hedges | 2,193 | 2,343 | (5 | ) | (13 | ) | 4 | 1 | (9 | ) | (14 | ) | ||||||||||||
| Non-qualifying strategies | ||||||||||||||||||||||||
| Interest rate contracts | ||||||||||||||||||||||||
| Interest rate swaps and futures | 8,451 | 7,986 | (62 | ) | (83 | ) | 8 | 7 | (70 | ) | (90 | ) | ||||||||||||
| Foreign exchange contracts | ||||||||||||||||||||||||
| Foreign currency swaps and forwards | 287 | 213 | (1 | ) | (1 | ) | — | — | (1 | ) | (1 | ) | ||||||||||||
| Credit contracts | ||||||||||||||||||||||||
| Credit derivatives that purchase credit protection | 6 | 61 | — | 1 | — | 2 | — | (1 | ) | |||||||||||||||
| Credit derivatives that assume credit risk [2] | 1,102 | 823 | 3 | 3 | 8 | 3 | (5 | ) | — | |||||||||||||||
| Credit derivatives in offsetting positions | 41 | 1,046 | — | 2 | 6 | 11 | (6 | ) | (9 | ) | ||||||||||||||
| Equity contracts | ||||||||||||||||||||||||
| Equity index swaps and options | 211 | 258 | 4 | 1 | 5 | 1 | (1 | ) | — | |||||||||||||||
| Total non-qualifying strategies | 10,098 | 10,387 | (56 | ) | (77 | ) | 27 | 24 | (83 | ) | (101 | ) | ||||||||||||
| Total cash flow hedges and non-qualifying strategies | $ | 12,291 | $ | 12,730 | $ | (61 | ) | $ | (90 | ) | $ | 31 | $ | 25 | $ | (92 | ) | $ | (115 | ) | ||||
| Balance Sheet Location | ||||||||||||||||||||||||
| Fixed maturities, available-for-sale | $ | 153 | $ | 153 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||
| Other investments | 9,864 | 9,957 | 7 | 10 | 23 | 16 | (16 | ) | (6 | ) | ||||||||||||||
| Other liabilities | 2,274 | 2,620 | (68 | ) | (100 | ) | 8 | 9 | (76 | ) | (109 | ) | ||||||||||||
| Total derivatives | $ | 12,291 | $ | 12,730 | $ | (61 | ) | $ | (90 | ) | $ | 31 | $ | 25 | $ | (92 | ) | $ | (115 | ) |
| [1] | Certain prior year amounts have been restated to conform to the current year presentation for OTC-cleared derivatives. |
| [2] | The derivative instruments related to this strategy are held for other investment purposes. |
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Consolidated Balance Sheets. Amounts offset include fair value amounts, income accruals and related cash collateral receivables and payables associated with
derivative instruments that are traded under a common master netting agreement, as described in the preceding discussion. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
F-39
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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) [1] | Gross Amounts Offset in the Statement of Financial Position | Derivative Assets [2] (Liabilities) [3] | Accrued Interest and Cash Collateral (Received) [4] Pledged [3] | Financial Collateral (Received) Pledged [5] | Net Amount | |||||||||||||
| As of December 31, 2018 | ||||||||||||||||||
| Other investments | $ | 31 | $ | 26 | $ | 7 | $ | (2 | ) | $ | 2 | $ | 3 | |||||
| Other liabilities | $ | (92 | ) | $ | (20 | ) | $ | (68 | ) | $ | (4 | ) | $ | (65 | ) | $ | (7 | ) |
| As of December 31, 2017 | ||||||||||||||||||
| Other investments | $ | 25 | $ | 22 | $ | 10 | $ | (7 | ) | $ | 1 | $ | 2 | |||||
| Other liabilities | $ | (115 | ) | $ | (10 | ) | $ | (100 | ) | $ | (5 | ) | $ | (96 | ) | $ | (9 | ) |
| [1] | For amounts shown as of December 31, 2017, certain amounts have been restated to conform to the current year presentation for OTC-cleared derivatives. |
| [2] | Included in other investments in the Company's Consolidated Balance Sheets. |
| [3] | Included in other liabilities in the Company's Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty. |
| [4] | Included in other investments in the Company's Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty. |
| [5] | Excludes collateral associated with exchange-traded derivative instruments. |
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of 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. Gains and losses on the derivative representing hedge ineffectiveness are recognized in current period earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
Derivatives in Cash Flow Hedging Relationships
| Gain (Loss) Recognized in OCI on Derivative (Effective Portion) | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Interest rate swaps | $ | 5 | $ | 8 | $ | — | |||
| Foreign currency swaps | 7 | (14 | ) | 1 | |||||
| Total | $ | 12 | $ | (6 | ) | $ | 1 | ||
| Gain Reclassified from AOCI into Income (Effective Portion) | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Interest rate swaps | |||||||||
| Net realized capital gain/(loss) | $ | 6 | $ | 5 | $ | 10 | |||
| Net investment income | 30 | 37 | 37 | ||||||
| Total | $ | 36 | $ | 42 | $ | 47 |
During the years ended December 31, 2018, 2017, and 2016 the Company had no ineffectiveness recognized in income within net realized capital gains (losses).
As of December 31, 2018, the before tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $23. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to net investment income over the term of the investment cash flows.
During the years ended December 31, 2018, 2017, and 2016, the Company had no net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
Non-Qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized capital gains (losses).
F-40
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Non-Qualifying Strategies Recognized within Net Realized Capital Gains (Losses)
| For the Year Ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Foreign exchange contracts | |||||||||
| Foreign currency swaps and forwards | $ | 3 | $ | (14 | ) | $ | 83 | ||
| Other non-qualifying derivatives | |||||||||
| Interest rate contracts | |||||||||
| Interest rate swaps, swaptions and futures | (3 | ) | (5 | ) | 1 | ||||
| Credit contracts | |||||||||
| Credit derivatives that purchase credit protection | — | 28 | (17 | ) | |||||
| Credit derivatives that assume credit risk | (14 | ) | (7 | ) | 28 | ||||
| Equity contracts | |||||||||
| Equity options | 2 | (7 | ) | (15 | ) | ||||
| Other | |||||||||
| Contingent capital facility put option | — | (1 | ) | (6 | ) | ||||
| Total other non-qualifying derivatives | (15 | ) | 8 | (9 | ) | ||||
| Total [1] | $ | (12 | ) | $ | (6 | ) | $ | 74 |
| [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 5 - Fair Value Measurements of Notes to Consolidated Financial Statements. |
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that are permissible under the Company's investment policies. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security
issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard diversified portfolios of corporate and CMBS issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
F-41
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 December 31, 2018 | ||||||||||||||||
| Single name credit default swaps | ||||||||||||||||
| Investment grade risk exposure | $ | 169 | $ | 2 | 4 years | Corporate Credit/ Foreign Gov. | A | $ | — | $ | — | |||||
| Basket credit default swaps [4] | ||||||||||||||||
| Investment grade risk exposure | 799 | (1 | ) | 6 years | Corporate Credit | BBB+ | — | — | ||||||||
| Below investment grade risk exposure | 125 | 2 | 5 years | Corporate Credit | B+ | — | — | |||||||||
| Investment grade risk exposure | 11 | — | 5 years | CMBS Credit | A- | 2 | — | |||||||||
| Below investment grade risk exposure | 19 | (6 | ) | Less than 1 year | CMBS Credit | CCC | 19 | 6 | ||||||||
| Total [5] | $ | 1,123 | $ | (3 | ) | $ | 21 | $ | 6 | |||||||
| As of December 31, 2017 | ||||||||||||||||
| Single name credit default swaps | ||||||||||||||||
| Investment grade risk exposure | $ | 130 | $ | 3 | 5 years | Corporate Credit/ Foreign Gov. | A- | $ | — | $ | — | |||||
| Below investment grade risk exposure | 9 | — | Less than 1 year | Corporate Credit | B | 9 | — | |||||||||
| Basket credit default swaps [4] | ||||||||||||||||
| Investment grade risk exposure | 1,137 | 2 | 3 years | Corporate Credit | BBB+ | 454 | (2 | ) | ||||||||
| Below investment grade risk exposure | 27 | 2 | 3 years | Corporate Credit | B+ | 27 | — | |||||||||
| Investment grade risk exposure | 13 | (1 | ) | 5 years | CMBS Credit | A | 3 | — | ||||||||
| Below investment grade risk exposure | 30 | (6 | ) | Less than 1 year | CMBS Credit | CCC | 30 | 7 | ||||||||
| Total [5] | $ | 1,346 | $ | — | $ | 523 | $ | 5 |
| [1] | The average credit ratings are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used. |
| [2] | Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and applicable law which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses. |
| [3] | The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap. |
| [4] | Comprised of swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index. |
| [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 5 - Fair Value Measurements*. of Notes to 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 December 31, 2018 and 2017, the Company pledged cash collateral with a fair value of $4 and $1 associated with derivative instruments. The collateral receivable has been recorded in other assets or other liabilities on the Company's Consolidated Balance Sheets as determined by the Company's election to offset on the balance sheet. As of December 31, 2018 and 2017, the Company also pledged securities collateral associated with derivative instruments with a fair value of $67 and $101, respectively, which
have been included in fixed maturities on the Consolidated Balance Sheets. In addition, as of December 31, 2018 and 2017 , the Company has also pledged initial margin of securities related to OTC-cleared and exchange traded derivatives with a fair value of $89 and $96, respectively, which are included within fixed maturities on the Company's Consolidated Balance Sheets. The counterparties generally have the right to sell or re-pledge these securities.
As of December 31, 2018 and 2017, the Company accepted cash collateral associated with derivative instruments of $9 and $11, respectively, which was invested and recorded in the 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
F-42
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accepted securities collateral as of December 31, 2018 and 2017 with a fair value of $5 and $2, respectively, none of which the Company has the ability to sell or repledge. As of December 31, 2018 and 2017, the Company had no repledged securities and did not sell any securities held as collateral. In addition, as of
December 31, 2018 and 2017, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets.
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.
On December 31, 2016, the Company entered into an asbestos and environmental adverse development cover (“ADC”) reinsurance agreement with National Indemnity Company (“NICO”), a subsidiary of Berkshire Hathaway Inc. (“Berkshire”), to reduce uncertainty about potential adverse development of asbestos and environmental reserves. Under the ADC, the Company paid a reinsurance premium of $650 for NICO to assume adverse net loss reserve development up to $1.5 billion above the Company’s existing net asbestos and environmental (“A&E”) reserves as of December 31, 2016 of approximately $1.7 billion. The $650 reinsurance premium was placed into a collateral trust account as security for NICO’s claim payment obligations to the Company. As of December 31, 2016, other liabilities included $650 for the accrued reinsurance premium paid in January, 2017. The Company has retained the risk of collection on amounts due from other third-party reinsurers and continues to be responsible for claims handling and other administrative services, subject to certain conditions. The ADC covers substantially all the Company’s A&E reserve development up to the reinsurance limit.
The ADC has been accounted for as retroactive reinsurance and the Company reported the $650 cost as a loss on reinsurance transaction in 2016 in the Consolidated Statements of Operations. For segment reporting, the loss on reinsurance was reported in Property and Casualty Other Operations. Under retroactive reinsurance accounting, net adverse A&E reserve development after December 31, 2016 will result in an offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative
ceded losses up to the $650 reinsurance premium paid are recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the $650 reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and environmental claims after December 31, 2016 in excess of $650 may result in significant charges against earnings. As of December 31, 2018, the Company has incurred $523 in cumulative adverse development on asbestos and environmental reserves that have been ceded under the ADC treaty with NICO.
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 unpaid losses. The Company’s estimate of losses and loss adjustment expense reserves ceded to reinsurers is based on assumptions that are consistent with those used in establishing the gross reserves for amounts the Company owes to its claimants. The Company estimates its ceded reinsurance recoverables based on the terms of any applicable facultative and treaty reinsurance, including an estimate of how incurred but not reported losses will ultimately be ceded under reinsurance agreements. Accordingly, the Company’s estimate of reinsurance recoverables is subject to similar risks and uncertainties as the estimate of the gross reserve for unpaid losses and loss adjustment expenses.
Reinsurance Recoverables
| As of | ||||||
| December 31, 2018 | December 31, 2017 | |||||
| Property and Casualty Insurance Products | ||||||
| Paid loss and loss adjustment expenses | $ | 127 | $ | 84 | ||
| Unpaid loss and loss adjustment expenses | 3,773 | 3,496 | ||||
| Gross reinsurance recoverables | 3,900 | 3,580 | ||||
| Allowance for uncollectible reinsurance | (126 | ) | (104 | ) | ||
| Net P&C reinsurance recoverables | 3,774 | 3,476 | ||||
| Group Benefits net reinsurance recoverables [1] | 251 | 236 | ||||
| Recoverable related to reserves in Corporate | 332 | 349 | ||||
| Reinsurance recoverables, net | $ | 4,357 | $ | 4,061 |
| [1] | No allowance for uncollectible reinsurance was required as of December 31, 2018 and 2017*.* |
F-43
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The allowance for uncollectible reinsurance reflects management’s best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’ unwillingness or inability to pay. The Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between reinsurers and cedants and the overall credit quality of the Company’s reinsurers. Based on this analysis, the Company may adjust the allowance for uncollectible reinsurance or charge off reinsurer balances that are determined to be uncollectible. Where its contracts permit, the Company secures future claim obligations with various forms of collateral, including irrevocable letters of credit, secured trusts, funds held accounts and group-wide offsets.
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.
Insurance Revenues
The effect of reinsurance on insurance revenues is as follows:
Property and Casualty Insurance Revenue
| For the years ended December 31, | |||||||||
| Premiums Written | 2018 | 2017 | 2016 | ||||||
| Direct | $ | 10,784 | $ | 10,865 | $ | 10,906 | |||
| Assumed | 217 | 223 | 253 | ||||||
| Ceded | (593 | ) | (571 | ) | (591 | ) | |||
| Net | $ | 10,408 | $ | 10,517 | $ | 10,568 | |||
| Premiums Earned | |||||||||
| Direct | $ | 10,824 | $ | 10,923 | $ | 10,871 | |||
| Assumed | 221 | 232 | 261 | ||||||
| Ceded | (599 | ) | (600 | ) | (583 | ) | |||
| Net | $ | 10,446 | $ | 10,555 | $ | 10,549 |
Ceded losses, which reduce losses and loss adjustment expenses incurred, were $661, $901 and $388 for the years ended December 31, 2018, 2017 and 2016, respectively.
Group Benefits Revenue
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Gross earned premiums, fees and other considerations | $ | 3,615 | $ | 3,281 | $ | 3,160 | |||
| Reinsurance assumed | 2,044 | 446 | 107 | ||||||
| Reinsurance ceded | (61 | ) | (50 | ) | (44 | ) | |||
| Net earned premiums, fees and other considerations | $ | 5,598 | $ | 3,677 | $ | 3,223 |
For its group benefits products, the Company reinsures certain of its risks to other reinsurers under yearly renewable term and coinsurance arrangements and variations thereto. Yearly renewable term and coinsurance arrangements result in passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate amount of the premiums less an
allowance for commissions and expenses and is liable for a corresponding proportionate amount of all benefit payments. The increase in premiums assumed in 2018 and 2017 was primarily due to premiums related to Aetna's U.S. group life and disability business acquired by the Company effective November 1, 2017 whereby Aetna is fronting the business for a period of time.
F-44
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
9**.** DEFERRED POLICY ACQUISITION COSTS
Changes in the DAC Balance
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Balance, beginning of period | $ | 650 | $ | 645 | $ | 636 | |||
| Deferred costs | 1,404 | 1,377 | 1,378 | ||||||
| Amortization — DAC | (1,384 | ) | (1,372 | ) | (1,377 | ) | |||
| Add: Maxum acquisition | — | — | 8 | ||||||
| Balance, end of period | $ | 670 | $ | 650 | $ | 645 |
10**.** GOODWILL & OTHER INTANGIBLE ASSETS
Goodwill Carrying Value as of December 31, 2018
| Commercial Lines | Personal Lines | Hartford Funds | Group Benefits | Corporate [1] | Total | |||||||||||||
| Balance at December 31, 2016 | $ | 38 | $ | 119 | $ | 180 | $ | — | $ | 230 | $ | 567 | ||||||
| Goodwill related to acquisitions [2] | — | — | — | 723 | — | 723 | ||||||||||||
| Balance at December 31, 2017 | $ | 38 | $ | 119 | $ | 180 | $ | 723 | $ | 230 | $ | 1,290 | ||||||
| Goodwill related to acquisitions | — | — | — | — | — | — | ||||||||||||
| Balance at December 31, 2018 | $ | 38 | $ | 119 | $ | 180 | $ | 723 | $ | 230 | $ | 1,290 |
| [1] | The Corporate category includes goodwill that was acquired at a holding company level and not pushed down to a subsidiary within a reportable segment. Carrying value of goodwill within Corporate as of December 31, 2018, 2017, and 2016 includes $138 and $92 for the Group Benefits and Hartford Funds reporting units, respectively. |
| [2] | For further discussion on goodwill related to the acquisition of Aetna's U.S. group life and disability business, refer to Note 2 - Business Acquisitions to Consolidated Financial Statements. |
The annual goodwill assessment for The Hartford's reporting units was completed as of October 31, 2018, 2017, and 2016, which resulted in no write-downs of goodwill in the respective
years then ended. In 2018, all reporting units passed the first step of their annual impairment test with a significant margin.
Other Intangible Assets
| As of December 31, 2018 | As of December 31, 2017 | ||||||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted Average Expected Life | |||||||||||||||
| Amortized Intangible Assets: | |||||||||||||||||||||
| Value of in-force contracts | $ | 23 | $ | (23 | ) | $ | — | $ | 23 | $ | (3 | ) | $ | 20 | 1 | ||||||
| Customer relationships [1] | 636 | (49 | ) | 587 | 590 | (6 | ) | 584 | 15 | ||||||||||||
| Marketing agreement with Aetna | 16 | (1 | ) | 15 | 16 | — | 16 | 15 | |||||||||||||
| Distribution Agreement | 79 | (56 | ) | 23 | 70 | (52 | ) | 18 | 15 | ||||||||||||
| Agency relationships & Other [2] | 21 | (3 | ) | 18 | 9 | (2 | ) | 7 | 13 | ||||||||||||
| Total Finite Life Intangibles | 775 | (132 | ) | 643 | 708 | (63 | ) | 645 | 14 | ||||||||||||
| Total Indefinite Life Intangible Assets | 14 | — | 14 | 14 | — | 14 | |||||||||||||||
| Total Other Intangible Assets | $ | 789 | $ | (132 | ) | $ | 657 | $ | 722 | $ | (63 | ) | $ | 659 |
| [1] | On February 16, 2018, The Company entered into a renewal rights agreement with Farmers Exchanges of the Farmers Group of Companies to acquire its Foremost-branded small commercial business sold through independent agents. In connection with the renewal rights agreement, the Company recorded a customer relationships intangible asset of $46 which will be amortized over 10 years. |
| [2] | On December 1, 2018, the Company acquired Y-Risk LLC and recorded an agency relationships intangible asset of $12 which will be amortized over 15 years. |
F-45
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Expected Pre-tax Amortization Expense
| For the years ended December 31, | |||
| 2019 | $ | 53 | |
| 2020 | $ | 53 | |
| 2021 | $ | 53 | |
| 2022 | $ | 52 | |
| 2023 | $ | 47 |
11**.** RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Property and Casualty Insurance Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, gross | $ | 23,775 | $ | 22,545 | $ | 22,568 | |||
| Reinsurance and other recoverables | 3,957 | 3,488 | 3,625 | ||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, net | 19,818 | 19,057 | 18,943 | ||||||
| Add: Maxum acquisition | — | — | 122 | ||||||
| Provision for unpaid losses and loss adjustment expenses | |||||||||
| Current accident year | 7,107 | 7,381 | 6,990 | ||||||
| Prior accident year development | (167 | ) | (41 | ) | 457 | ||||
| Total provision for unpaid losses and loss adjustment expenses | 6,940 | 7,340 | 7,447 | ||||||
| Less: payments | |||||||||
| Current accident year | 2,452 | 2,751 | 2,749 | ||||||
| Prior accident years | 3,954 | 3,828 | 4,219 | ||||||
| Total payments | 6,406 | 6,579 | 6,968 | ||||||
| Less: net reserves transferred to liabilities held for sale | — | — | 487 | ||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, net | 20,352 | 19,818 | 19,057 | ||||||
| Reinsurance and other recoverables | 4,232 | 3,957 | 3,488 | ||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, gross | $ | 24,584 | $ | 23,775 | $ | 22,545 |
Property and Casualty Insurance Products Reserves, Net of Reinsurance, that are Discounted
| For the years ended December 31, | ||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||
| Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts | $ | 1,331 | $ | 1,387 | $ | 1,504 | ||||||||||||
| Less: amount of discount | 388 | 410 | 483 | |||||||||||||||
| Carrying value of liability for unpaid losses and loss adjustment expenses | $ | 943 | $ | 977 | $ | 1,021 | ||||||||||||
| Discount accretion included in losses and loss adjustment expenses | $ | 40 | $ | 30 | $ | 29 | ||||||||||||
| Weighted average discount rate | 2.98 | % | 3.06 | % | 3.11 | % | ||||||||||||
| Range of discount rates | 1.77 | % | - | 14.15 | % | 1.77 | % | - | 14.15 | % | 1.77 | % | - | 14.15 | % |
The current accident year benefit from discounting property and casualty insurance product reserves was $12 in 2018, $15 in 2017 and $27 in 2016. Reserves are discounted at rates in effect
at the time claims were incurred, ranging from 1.77% for accident year 2012 to 14.15% for accident year 1981.
The reserves recorded for the Company’s property and casualty insurance products at December 31, 2018 represent the
F-46
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Company’s best estimate of its ultimate liability for losses and loss adjustment expenses related to losses covered by policies written by the Company. However, because of the significant uncertainties surrounding reserves it is possible that management’s estimate of the ultimate liabilities for these claims may change and that the required adjustment to recorded reserves could exceed the currently recorded reserves by an amount that could be material to the Company’s results of operations or cash flows.
Losses and loss adjustment expenses are also impacted by trends including frequency and severity as well as changes in the legislative and regulatory environment. In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty in the ultimate settlement of the liabilities gross of reinsurance include inadequate loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation, and inconsistent emerging legal doctrines. In the case of the reserves for environmental exposures before reinsurance, factors contributing to the high degree of uncertainty in gross reserves include expanding theories of liabilities and damages, the risks inherent in major litigation, inconsistent decisions concerning the existence and scope of coverage for environmental claims, and uncertainty as to the monetary amount being sought by the claimant from the insured.
(Favorable) Unfavorable Prior Accident Year Development
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Workers’ compensation | $ | (164 | ) | $ | (79 | ) | $ | (119 | ) |
| Workers’ compensation discount accretion | 40 | 28 | 28 | ||||||
| General liability | 52 | 11 | 65 | ||||||
| Package business | (26 | ) | (25 | ) | 65 | ||||
| Commercial property | (12 | ) | (8 | ) | 1 | ||||
| Professional liability | (12 | ) | 1 | (37 | ) | ||||
| Bond | 2 | 32 | (8 | ) | |||||
| Automobile liability - Commercial Lines | (15 | ) | 17 | 57 | |||||
| Automobile liability - Personal Lines | (18 | ) | — | 160 | |||||
| Homeowners | (25 | ) | (14 | ) | (10 | ) | |||
| Net asbestos reserves | — | — | 197 | ||||||
| Net environmental reserves | — | — | 71 | ||||||
| Catastrophes | (49 | ) | (16 | ) | (7 | ) | |||
| Uncollectible reinsurance | 22 | (15 | ) | (30 | ) | ||||
| Other reserve re-estimates, net | 38 | 27 | 24 | ||||||
| Total prior accident year development | $ | (167 | ) | $ | (41 | ) | $ | 457 |
2018 re-estimates of prior accident year reserves
| • | Workers’ compensation reserves were reduced in small commercial and middle market, primarily for accident years 2014 and 2015, as claim severity has emerged favorably compared to previous reserve estimates. Also |
contributing was a reduction in estimated reserves for unallocated loss adjustment expense ("ULAE").
| • | General liability reserves were increased, primarily due to an increase in reserves for higher hazard general liability exposures in middle market for accident years 2009 to 2017, partially offset by a decrease in reserves for other lines within middle market, including premises and operations, umbrella and products liability, principally for accident years 2015 and prior. Contributing to the increase in reserves for higher hazard general liability exposures was an increase in average claim severity, including from large losses and, in more recent accident years, an increase in claim frequency. Contributing to the reduction in reserves for other middle market lines were more favorable outcomes due to initiatives to reduce legal expenses. In addition, reserve increases for claims with lead paint exposure were offset by reserve decreases for other mass torts and extra-contractual liability claims. |
| • | Package business reserves were reduced, primarily due to lower reserve estimates for both liability and property for accident years 2010 and prior, including a recovery of loss adjustment expenses for the 2005 accident year. |
| • | Commercial property reserves were reduced, driven by an increase in estimated reinsurance recoverables on middle market property losses from the 2017 accident year. |
| • | Professional liability reserves were reduced, principally for accident years 2014 and prior, for directors and officers liability claims principally due to a number of older claims closing with limited or no payment. |
| • | Automobile liability reserves were reduced, primarily driven by reduced estimates of loss adjustment expenses in small commercial for recent accident years and favorable development in personal automobile liability for accident years 2014 to 2017, principally due to lower severity, including with uninsured and underinsured motorist claims. |
| • | Homeowners reserves were reduced, primarily in accident years 2013 to 2017, driven by lower than expected severity across multiple perils. |
| • | Asbestos and environmental reserves were unchanged as $238 of adverse development arising from the fourth quarter 2018 comprehensive annual review was offset by a $238 recoverable from NICO. For additional information related to the adverse development cover with NICO, see Note 8 - Reinsurance and Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements. |
| • | Catastrophe reserves were reduced, primarily as a result of lower estimated net losses from 2017 catastrophes, principally related to hurricanes Harvey and Irma. Before reinsurance, estimated losses for 2017 catastrophe events decreased by $133, resulting in a decrease in reinsurance recoverables of $90 as the Company no longer expects to recover under the 2017 Property Aggregate reinsurance |
F-47
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
treaty as aggregate ultimate losses for 2017 catastrophe events are now projected to be less than $850.
| • | Uncollectible reinsurance reserves were increased due to lower anticipated recoveries related to older accident years. |
| • | Other reserve re-estimates, net, primarily represents an increase in ULAE reserves in Property & Casualty Other Operations that was principally driven by an increase in expected claim handling costs associated with asbestos and environmental and mass tort claims. |
2017 re-estimates of prior accident year reserves
| • | Workers’ compensation reserves were reduced in small commercial and middle market, given the continued emergence of favorable frequency, primarily for accident years 2013 to 2015, as well as a reduction in estimated reserves for unallocated loss adjustment expenses, partially offset by strengthening reserves for captive programs within specialty commercial. |
| • | General liability reserves were increased for the 2013 to 2016 accident years on a class of business that insures service and maintenance contractors. This increase was partially offset by a decrease in recent accident year reserves for other middle market general liability reserves. |
| • | Package business reserves were reduced for accident years 2013 and prior largely due to reducing the Company’s estimate of allocated loss adjustment expenses incurred to settle the claims. |
| • | Bond business reserves increased for customs bonds written between 2000 and 2010 which was partly offset by a reduction in reserves for recent accident years as reported losses for commercial and contract surety have emerged favorably. |
| • | Automobile liability reserves within Commercial Lines were increased in small commercial and large national accounts for the 2013 to 2016 accident years, driven by higher frequency of more severe accidents, including litigated claims |
| • | Asbestos and environmental reserves were unchanged as $285 of adverse development arising from the fourth quarter 2017 comprehensive annual review was offset by a $285 recoverable from NICO. For additional information related to the adverse development cover with NICO, see Note 8 - Reinsurance and Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements. |
| • | Catastrophes reserves were reduced primarily due to lower estimates of 2016 wind and hail event losses and a decrease in losses on a 2015 wildfire. |
| • | Uncollectible reinsurance reserves decreased as a result of giving greater weight to favorable collectibility |
experience in recent calendar periods in estimating future collections.
2016 re-estimates of prior accident year reserves
| • | Workers' compensation reserves consider favorable emergence on reported losses for recent accident years as well as a partially offsetting adverse impact related to two recent Florida Supreme Court rulings that have increased the Company’s exposure to workers’ compensation claims in that state. The favorable emergence has been driven by lower frequency and, to a lesser extent, lower medical severity and management has placed additional weight on this favorable experience as it becomes more credible. |
| • | General liability reserves increased for accident years 2012 - 2015 primarily due to higher severity losses incurred on a class of business that insures service and maintenance contractors and increased for accident years 2008 and 2010 primarily due to indemnity losses and legal costs associated with a litigated claim. |
| • | Package business reserves increased due to higher than expected severity on liability claims, principally for accident years 2013 - 2015. Severity for these accident years has developed unfavorably and management has placed more weight on emerged experience. |
| • | Professional liability reserves decreased for claims made years 2008 - 2013, primarily for large accounts, including on non-securities class action cases. Claim costs have emerged favorably as these years have matured and management has placed more weight on the emerged experience. |
| • | Automobile liability reserves increased due to increases in both commercial lines automobile and personal lines automobile. Commercial automobile liability reserves increased, predominately for the 2015 accident year, primarily due to increased frequency of large claims. Personal automobile liability reserves increased, primarily related to increased bodily injury frequency and severity for the 2015 accident year, including for uninsured and under-insured motorist claims, and increased bodily injury severity for the 2014 accident year. Increases in automobile liability loss costs were across both the direct and agency distribution channels. |
| • | Asbestos and environmental reserves were increased during the period as a result of the second quarter 2016 comprehensive annual review. |
| • | Uncollectible reinsurance reserves decreased as a result of giving greater weight to favorable collectibility experience in recent calendar periods in estimating future collections. |
F-48
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reconciliation of Loss Development to Liability for Unpaid Losses and Loss Adjustment Expenses As of December 31, 2018
| Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance | Subtotal | |||||||||||||||||||||||
| Reserve Line | Cumulative Incurred for Accident Years Displayed in Triangles | Cumulative Paid for Accident Years Displayed in Triangles | Unpaid for Accident Years not Displayed in Triangles [1] | Unpaid Unallocated Loss Adjustment Expenses, Net of Reinsurance | Discount | Unpaid Losses and Loss Adjustment Expenses, Net of Reinsurance | Reinsurance and Other Recoverables | Liability for Unpaid Losses and Loss Adjustment Expenses | ||||||||||||||||
| Workers' compensation | $ | 18,685 | $ | (10,965 | ) | $ | 2,316 | $ | 341 | $ | (372 | ) | $ | 10,005 | $ | 2,160 | $ | 12,165 | ||||||
| General liability | 3,605 | (1,840 | ) | 417 | 94 | — | 2,276 | 234 | 2,510 | |||||||||||||||
| Package business | 6,600 | (5,128 | ) | 43 | 94 | — | 1,609 | 44 | 1,653 | |||||||||||||||
| Commercial property | 3,124 | (2,763 | ) | 14 | 9 | — | 384 | 41 | 425 | |||||||||||||||
| Commercial automobile liability | 3,442 | (2,604 | ) | 17 | 23 | — | 878 | 43 | 921 | |||||||||||||||
| Commercial automobile physical damage | 221 | (210 | ) | 2 | — | — | 13 | — | 13 | |||||||||||||||
| Professional liability | 1,491 | (973 | ) | 41 | 19 | — | 578 | 306 | 884 | |||||||||||||||
| Bond | 598 | (356 | ) | 28 | 20 | — | 290 | 12 | 302 | |||||||||||||||
| Personal automobile liability | 12,262 | (10,703 | ) | 21 | 72 | — | 1,652 | 25 | 1,677 | |||||||||||||||
| Personal automobile physical damage | 1,752 | (1,716 | ) | 1 | 3 | — | 40 | — | 40 | |||||||||||||||
| Homeowners | 7,714 | (7,110 | ) | 2 | 36 | — | 642 | 83 | 725 | |||||||||||||||
| Other ongoing business | 197 | (1 | ) | (16 | ) | 180 | 297 | 477 | ||||||||||||||||
| Asbestos and environmental [2] | 1,254 | — | — | 1,254 | 1,032 | 2,286 | ||||||||||||||||||
| Other operations [2] | 413 | 138 | — | 551 | (45 | ) | 506 | |||||||||||||||||
| Total P&C | $ | 59,494 | $ | (44,368 | ) | $ | 4,766 | $ | 848 | $ | (388 | ) | $ | 20,352 | $ | 4,232 | $ | 24,584 |
| [1] | Amounts represent reserves for claims that were incurred more than ten years ago for long-tail lines and more than three years ago for short-tail lines. |
| [2] | Asbestos and environmental and other operations include asbestos, environmental and other latent exposures not foreseen when coverages were written, including, but not limited to, potential liability for pharmaceutical products, silica, talcum powder, head injuries, lead paint, construction defects, molestation and other long-tail liabilities. These reserve lines do not have significant paid or incurred loss development for the most recent ten accident years and therefore do not have loss development displayed in triangles. |
The reserve lines in the above table and the loss triangles that follow represent the significant lines of business for which the Company regularly reviews the appropriateness of reserve levels. These reserve lines differ from the reserve lines reported on a statutory basis, as prescribed by the National Association of Insurance Commissioners ("NAIC").
The following loss triangles present historical loss development for incurred and paid claims by accident year. Triangles are limited
to the number of years for which claims incurred typically remain outstanding, not exceeding ten years. Short-tail lines, which represent claims generally expected to be paid within a few years, have three years of claim development displayed. IBNR reserves shown in loss triangles include reserve for incurred but not reported claims as well as reserves for expected development on reported claims.
F-49
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Workers' Compensation
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 1,462 | $ | 1,455 | $ | 1,478 | $ | 1,493 | $ | 1,504 | $ | 1,504 | $ | 1,519 | $ | 1,529 | $ | 1,522 | $ | 1,534 | $ | 168 | 135,804 | ||||||||||||
| 2010 | 1,560 | 1,775 | 1,814 | 1,858 | 1,857 | 1,882 | 1,881 | 1,878 | 1,892 | 236 | 156,747 | ||||||||||||||||||||||||
| 2011 | 2,013 | 2,099 | 2,204 | 2,206 | 2,221 | 2,224 | 2,232 | 2,242 | 342 | 177,819 | |||||||||||||||||||||||||
| 2012 | 2,185 | 2,207 | 2,207 | 2,181 | 2,168 | 2,169 | 2,154 | 385 | 171,219 | ||||||||||||||||||||||||||
| 2013 | 2,020 | 1,981 | 1,920 | 1,883 | 1,861 | 1,861 | 451 | 151,153 | |||||||||||||||||||||||||||
| 2014 | 1,869 | 1,838 | 1,789 | 1,761 | 1,713 | 532 | 125,840 | ||||||||||||||||||||||||||||
| 2015 | 1,873 | 1,835 | 1,801 | 1,724 | 613 | 113,493 | |||||||||||||||||||||||||||||
| 2016 | 1,772 | 1,772 | 1,780 | 787 | 111,190 | ||||||||||||||||||||||||||||||
| 2017 | 1,862 | 1,869 | 1,061 | 109,982 | |||||||||||||||||||||||||||||||
| 2018 | 1,916 | 1,363 | 109,842 | ||||||||||||||||||||||||||||||||
| Total | $ | 18,685 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 265 | $ | 587 | $ | 792 | $ | 937 | $ | 1,042 | $ | 1,115 | $ | 1,170 | $ | 1,208 | $ | 1,242 | $ | 1,263 | ||||||||||
| 2010 | 316 | 709 | 970 | 1,154 | 1,287 | 1,374 | 1,439 | 1,489 | 1,522 | |||||||||||||||||||||
| 2011 | 371 | 841 | 1,156 | 1,368 | 1,518 | 1,622 | 1,690 | 1,746 | ||||||||||||||||||||||
| 2012 | 359 | 809 | 1,106 | 1,313 | 1,436 | 1,529 | 1,587 | |||||||||||||||||||||||
| 2013 | 304 | 675 | 917 | 1,071 | 1,175 | 1,260 | ||||||||||||||||||||||||
| 2014 | 275 | 598 | 811 | 960 | 1,041 | |||||||||||||||||||||||||
| 2015 | 261 | 576 | 778 | 909 | ||||||||||||||||||||||||||
| 2016 | 255 | 579 | 779 | |||||||||||||||||||||||||||
| 2017 | 261 | 575 | ||||||||||||||||||||||||||||
| 2018 | 283 | |||||||||||||||||||||||||||||
| Total | $ | 10,965 |
F-50
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
General Liability
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 382 | $ | 398 | $ | 394 | $ | 382 | $ | 359 | $ | 348 | $ | 347 | $ | 346 | $ | 341 | $ | 351 | $ | 39 | 20,714 | ||||||||||||
| 2010 | 355 | 362 | 352 | 355 | 343 | 345 | 376 | 377 | 393 | 46 | 18,949 | ||||||||||||||||||||||||
| 2011 | 353 | 343 | 323 | 316 | 315 | 320 | 318 | 326 | 52 | 16,854 | |||||||||||||||||||||||||
| 2012 | 321 | 315 | 310 | 295 | 304 | 298 | 304 | 69 | 11,761 | ||||||||||||||||||||||||||
| 2013 | 318 | 321 | 332 | 352 | 344 | 352 | 80 | 9,906 | |||||||||||||||||||||||||||
| 2014 | 317 | 318 | 336 | 342 | 351 | 112 | 10,358 | ||||||||||||||||||||||||||||
| 2015 | 316 | 346 | 345 | 364 | 164 | 10,805 | |||||||||||||||||||||||||||||
| 2016 | 352 | 351 | 380 | 241 | 11,960 | ||||||||||||||||||||||||||||||
| 2017 | 363 | 385 | 289 | 10,965 | |||||||||||||||||||||||||||||||
| 2018 | 399 | 352 | 10,023 | ||||||||||||||||||||||||||||||||
| Total | $ | 3,605 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 22 | $ | 63 | $ | 124 | $ | 181 | $ | 227 | $ | 256 | $ | 277 | $ | 287 | $ | 297 | $ | 304 | ||||||||||
| 2010 | 14 | 51 | 115 | 181 | 224 | 259 | 314 | 331 | 337 | |||||||||||||||||||||
| 2011 | 11 | 47 | 93 | 154 | 198 | 234 | 252 | 264 | ||||||||||||||||||||||
| 2012 | 8 | 39 | 75 | 124 | 167 | 198 | 215 | |||||||||||||||||||||||
| 2013 | 7 | 35 | 95 | 152 | 207 | 242 | ||||||||||||||||||||||||
| 2014 | 11 | 31 | 88 | 142 | 195 | |||||||||||||||||||||||||
| 2015 | 7 | 32 | 80 | 139 | ||||||||||||||||||||||||||
| 2016 | 8 | 32 | 79 | |||||||||||||||||||||||||||
| 2017 | 12 | 48 | ||||||||||||||||||||||||||||
| 2018 | 17 | |||||||||||||||||||||||||||||
| Total | $ | 1,840 |
F-51
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Package Business
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 587 | $ | 584 | $ | 584 | $ | 572 | $ | 578 | $ | 577 | $ | 576 | $ | 576 | $ | 574 | $ | 569 | $ | 15 | 50,413 | ||||||||||||
| 2010 | 657 | 662 | 654 | 652 | 652 | 651 | 653 | 651 | 649 | 19 | 52,410 | ||||||||||||||||||||||||
| 2011 | 810 | 792 | 790 | 800 | 808 | 814 | 813 | 812 | 31 | 60,967 | |||||||||||||||||||||||||
| 2012 | 736 | 725 | 728 | 731 | 736 | 735 | 739 | 39 | 59,715 | ||||||||||||||||||||||||||
| 2013 | 579 | 565 | 573 | 585 | 586 | 592 | 46 | 43,415 | |||||||||||||||||||||||||||
| 2014 | 566 | 578 | 601 | 602 | 603 | 70 | 42,928 | ||||||||||||||||||||||||||||
| 2015 | 582 | 588 | 585 | 583 | 94 | 41,678 | |||||||||||||||||||||||||||||
| 2016 | 655 | 638 | 632 | 170 | 43,129 | ||||||||||||||||||||||||||||||
| 2017 | 695 | 702 | 257 | 44,709 | |||||||||||||||||||||||||||||||
| 2018 | 719 | 335 | 38,034 | ||||||||||||||||||||||||||||||||
| Total | $ | 6,600 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 227 | $ | 351 | $ | 411 | $ | 463 | $ | 503 | $ | 527 | $ | 539 | $ | 547 | $ | 550 | $ | 551 | ||||||||||
| 2010 | 270 | 414 | 487 | 539 | 570 | 601 | 613 | 618 | 625 | |||||||||||||||||||||
| 2011 | 377 | 555 | 621 | 684 | 727 | 748 | 762 | 772 | ||||||||||||||||||||||
| 2012 | 286 | 486 | 560 | 616 | 652 | 673 | 687 | |||||||||||||||||||||||
| 2013 | 225 | 339 | 414 | 467 | 504 | 522 | ||||||||||||||||||||||||
| 2014 | 226 | 345 | 416 | 468 | 507 | |||||||||||||||||||||||||
| 2015 | 212 | 332 | 383 | 445 | ||||||||||||||||||||||||||
| 2016 | 225 | 353 | 410 | |||||||||||||||||||||||||||
| 2017 | 235 | 372 | ||||||||||||||||||||||||||||
| 2018 | 237 | |||||||||||||||||||||||||||||
| Total | $ | 5,128 |
F-52
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Property
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 267 | $ | 264 | $ | 259 | $ | 258 | $ | 251 | $ | 257 | $ | 257 | $ | 257 | $ | 257 | $ | 258 | $ | — | 28,286 | ||||||||||||
| 2010 | 286 | 283 | 279 | 282 | 284 | 284 | 284 | 284 | 284 | — | 28,515 | ||||||||||||||||||||||||
| 2011 | 357 | 356 | 356 | 362 | 361 | 360 | 359 | 359 | — | 29,110 | |||||||||||||||||||||||||
| 2012 | 329 | 301 | 301 | 305 | 306 | 305 | 305 | 1 | 25,789 | ||||||||||||||||||||||||||
| 2013 | 234 | 218 | 219 | 220 | 216 | 215 | — | 20,289 | |||||||||||||||||||||||||||
| 2014 | 268 | 260 | 262 | 264 | 263 | — | 19,758 | ||||||||||||||||||||||||||||
| 2015 | 264 | 264 | 268 | 270 | — | 19,061 | |||||||||||||||||||||||||||||
| 2016 | 328 | 331 | 327 | 5 | 19,945 | ||||||||||||||||||||||||||||||
| 2017 | 515 | 440 | 62 | 20,703 | |||||||||||||||||||||||||||||||
| 2018 | 403 | 86 | 17,839 | ||||||||||||||||||||||||||||||||
| Total | $ | 3,124 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 179 | $ | 247 | $ | 252 | $ | 256 | $ | 256 | $ | 257 | $ | 257 | $ | 257 | $ | 257 | $ | 257 | ||||||||||
| 2010 | 198 | 266 | 276 | 281 | 283 | 284 | 284 | 284 | 284 | |||||||||||||||||||||
| 2011 | 231 | 332 | 350 | 355 | 358 | 359 | 360 | 360 | ||||||||||||||||||||||
| 2012 | 171 | 279 | 294 | 300 | 304 | 303 | 303 | |||||||||||||||||||||||
| 2013 | 157 | 208 | 216 | 218 | 215 | 215 | ||||||||||||||||||||||||
| 2014 | 168 | 243 | 258 | 264 | 262 | |||||||||||||||||||||||||
| 2015 | 172 | 239 | 255 | 265 | ||||||||||||||||||||||||||
| 2016 | 188 | 285 | 310 | |||||||||||||||||||||||||||
| 2017 | 210 | 334 | ||||||||||||||||||||||||||||
| 2018 | 173 | |||||||||||||||||||||||||||||
| Total | $ | 2,763 |
F-53
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Automobile Liability
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 306 | $ | 292 | $ | 287 | $ | 287 | $ | 297 | $ | 301 | $ | 302 | $ | 302 | $ | 302 | $ | 302 | $ | — | 38,703 | ||||||||||||
| 2010 | 277 | 280 | 296 | 319 | 323 | 328 | 327 | 324 | 322 | 4 | 38,153 | ||||||||||||||||||||||||
| 2011 | 272 | 310 | 356 | 356 | 366 | 365 | 362 | 362 | 4 | 39,293 | |||||||||||||||||||||||||
| 2012 | 311 | 376 | 390 | 401 | 394 | 390 | 387 | 6 | 35,999 | ||||||||||||||||||||||||||
| 2013 | 309 | 314 | 329 | 336 | 335 | 333 | 18 | 31,918 | |||||||||||||||||||||||||||
| 2014 | 306 | 314 | 328 | 333 | 337 | 23 | 29,260 | ||||||||||||||||||||||||||||
| 2015 | 302 | 353 | 368 | 351 | 43 | 28,079 | |||||||||||||||||||||||||||||
| 2016 | 372 | 380 | 376 | 90 | 28,154 | ||||||||||||||||||||||||||||||
| 2017 | 346 | 358 | 165 | 24,587 | |||||||||||||||||||||||||||||||
| 2018 | 314 | 205 | 20,675 | ||||||||||||||||||||||||||||||||
| Total | $ | 3,442 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expense, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31 | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 56 | $ | 115 | $ | 175 | $ | 237 | $ | 274 | $ | 291 | $ | 298 | $ | 300 | $ | 301 | $ | 301 | ||||||||||
| 2010 | 55 | 125 | 188 | 252 | 289 | 300 | 308 | 313 | 316 | |||||||||||||||||||||
| 2011 | 62 | 133 | 211 | 273 | 315 | 339 | 348 | 352 | ||||||||||||||||||||||
| 2012 | 65 | 142 | 233 | 306 | 345 | 358 | 371 | |||||||||||||||||||||||
| 2013 | 61 | 128 | 199 | 255 | 289 | 306 | ||||||||||||||||||||||||
| 2014 | 58 | 129 | 195 | 249 | 295 | |||||||||||||||||||||||||
| 2015 | 61 | 141 | 204 | 264 | ||||||||||||||||||||||||||
| 2016 | 62 | 140 | 222 | |||||||||||||||||||||||||||
| 2017 | 55 | 123 | ||||||||||||||||||||||||||||
| 2018 | 54 | |||||||||||||||||||||||||||||
| Total | $ | 2,604 |
F-54
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Commercial Automobile Physical Damage
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||
| For the years ended December 31, | ||||||||||||||
| (Unaudited) | ||||||||||||||
| Accident Year | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||
| 2016 | $ | 79 | $ | 78 | $ | 78 | $ | — | 26,367 | |||||
| 2017 | 85 | 81 | 3 | 24,275 | ||||||||||
| 2018 | 62 | 2 | 19,167 | |||||||||||
| Total | $ | 221 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||
| For the years ended December 31, | |||||||||
| (Unaudited) | |||||||||
| Accident Year | 2016 | 2017 | 2018 | ||||||
| 2016 | $ | 71 | $ | 78 | $ | 77 | |||
| 2017 | 74 | 79 | |||||||
| 2018 | 54 | ||||||||
| Total | $ | 210 |
F-55
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Professional Liability
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Claims Made Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 254 | $ | 251 | $ | 244 | $ | 266 | $ | 257 | $ | 263 | $ | 255 | $ | 257 | $ | 257 | $ | 259 | $ | 20 | 5,115 | ||||||||||||
| 2010 | 202 | 211 | 212 | 205 | 201 | 200 | 195 | 199 | 192 | 22 | 4,894 | ||||||||||||||||||||||||
| 2011 | 226 | 228 | 232 | 226 | 219 | 219 | 220 | 215 | 38 | 4,708 | |||||||||||||||||||||||||
| 2012 | 174 | 172 | 168 | 149 | 146 | 144 | 139 | 18 | 3,734 | ||||||||||||||||||||||||||
| 2013 | 136 | 136 | 123 | 110 | 103 | 99 | 27 | 2,791 | |||||||||||||||||||||||||||
| 2014 | 116 | 123 | 118 | 114 | 109 | 33 | 2,891 | ||||||||||||||||||||||||||||
| 2015 | 104 | 113 | 113 | 114 | 32 | 2,957 | |||||||||||||||||||||||||||||
| 2016 | 106 | 106 | 125 | 71 | 3,133 | ||||||||||||||||||||||||||||||
| 2017 | 107 | 113 | 75 | 3,111 | |||||||||||||||||||||||||||||||
| 2018 | 126 | 107 | 2,971 | ||||||||||||||||||||||||||||||||
| Total | $ | 1,491 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Claims Made Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 17 | $ | 69 | $ | 127 | $ | 177 | $ | 194 | $ | 226 | $ | 225 | $ | 226 | $ | 235 | $ | 238 | ||||||||||
| 2010 | 22 | 62 | 103 | 137 | 148 | 157 | 162 | 166 | 169 | |||||||||||||||||||||
| 2011 | 11 | 57 | 100 | 128 | 163 | 170 | 173 | 176 | ||||||||||||||||||||||
| 2012 | 11 | 41 | 60 | 89 | 97 | 107 | 109 | |||||||||||||||||||||||
| 2013 | 4 | 19 | 31 | 39 | 55 | 66 | ||||||||||||||||||||||||
| 2014 | 4 | 21 | 40 | 64 | 72 | |||||||||||||||||||||||||
| 2015 | 4 | 23 | 49 | 63 | ||||||||||||||||||||||||||
| 2016 | 4 | 25 | 46 | |||||||||||||||||||||||||||
| 2017 | 6 | 26 | ||||||||||||||||||||||||||||
| 2018 | 8 | |||||||||||||||||||||||||||||
| Total | $ | 973 |
F-56
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Bond
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 71 | $ | 71 | $ | 69 | $ | 58 | $ | 57 | $ | 51 | $ | 49 | $ | 49 | $ | 49 | $ | 49 | $ | 5 | 3,321 | ||||||||||||
| 2010 | 71 | 75 | 80 | 79 | 73 | 69 | 70 | 90 | 71 | 3 | 2,674 | ||||||||||||||||||||||||
| 2011 | 72 | 76 | 76 | 75 | 70 | 70 | 69 | 69 | 9 | 2,134 | |||||||||||||||||||||||||
| 2012 | 69 | 69 | 60 | 53 | 48 | 48 | 43 | 9 | 1,720 | ||||||||||||||||||||||||||
| 2013 | 63 | 58 | 54 | 48 | 48 | 38 | 18 | 1,456 | |||||||||||||||||||||||||||
| 2014 | 69 | 65 | 65 | 66 | 58 | 13 | 1,373 | ||||||||||||||||||||||||||||
| 2015 | 65 | 65 | 62 | 59 | 23 | 1,368 | |||||||||||||||||||||||||||||
| 2016 | 59 | 59 | 58 | 37 | 1,272 | ||||||||||||||||||||||||||||||
| 2017 | 61 | 88 | 38 | 1,204 | |||||||||||||||||||||||||||||||
| 2018 | 65 | 59 | 1,040 | ||||||||||||||||||||||||||||||||
| Total | $ | 598 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 9 | $ | 32 | $ | 45 | $ | 46 | $ | 44 | $ | 43 | $ | 44 | $ | 44 | $ | 44 | $ | 43 | ||||||||||
| 2010 | 13 | 46 | 59 | 58 | 59 | 63 | 66 | 66 | 67 | |||||||||||||||||||||
| 2011 | 12 | 39 | 51 | 56 | 57 | 59 | 59 | 59 | ||||||||||||||||||||||
| 2012 | 12 | 25 | 26 | 24 | 25 | 25 | 33 | |||||||||||||||||||||||
| 2013 | 3 | 9 | 17 | 18 | 18 | 18 | ||||||||||||||||||||||||
| 2014 | 18 | 31 | 40 | 43 | 42 | |||||||||||||||||||||||||
| 2015 | 9 | 19 | 23 | 31 | ||||||||||||||||||||||||||
| 2016 | 2 | 11 | 13 | |||||||||||||||||||||||||||
| 2017 | 5 | 45 | ||||||||||||||||||||||||||||
| 2018 | 5 | |||||||||||||||||||||||||||||
| Total | $ | 356 |
F-57
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Personal Automobile Liability
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 1,351 | $ | 1,305 | $ | 1,280 | $ | 1,255 | $ | 1,256 | $ | 1,260 | $ | 1,259 | $ | 1,257 | $ | 1,257 | $ | 1,257 | $ | 3 | 254,555 | ||||||||||||
| 2010 | 1,346 | 1,321 | 1,293 | 1,287 | 1,282 | 1,275 | 1,265 | 1,265 | 1,264 | 3 | 248,944 | ||||||||||||||||||||||||
| 2011 | 1,181 | 1,170 | 1,180 | 1,173 | 1,166 | 1,154 | 1,154 | 1,153 | 5 | 221,886 | |||||||||||||||||||||||||
| 2012 | 1,141 | 1,149 | 1,146 | 1,142 | 1,133 | 1,130 | 1,130 | 7 | 210,750 | ||||||||||||||||||||||||||
| 2013 | 1,131 | 1,145 | 1,144 | 1,153 | 1,152 | 1,153 | 8 | 205,462 | |||||||||||||||||||||||||||
| 2014 | 1,146 | 1,153 | 1,198 | 1,200 | 1,199 | 15 | 208,942 | ||||||||||||||||||||||||||||
| 2015 | 1,195 | 1,340 | 1,338 | 1,330 | 38 | 216,707 | |||||||||||||||||||||||||||||
| 2016 | 1,407 | 1,402 | 1,393 | 103 | 215,126 | ||||||||||||||||||||||||||||||
| 2017 | 1,277 | 1,275 | 276 | 185,716 | |||||||||||||||||||||||||||||||
| 2018 | 1,108 | 510 | 146,845 | ||||||||||||||||||||||||||||||||
| Total | $ | 12,262 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 492 | $ | 888 | $ | 1,083 | $ | 1,171 | $ | 1,223 | $ | 1,240 | $ | 1,246 | $ | 1,250 | $ | 1,251 | $ | 1,251 | ||||||||||
| 2010 | 496 | 915 | 1,108 | 1,202 | 1,239 | 1,251 | 1,256 | 1,258 | 1,260 | |||||||||||||||||||||
| 2011 | 447 | 826 | 1,006 | 1,088 | 1,126 | 1,140 | 1,145 | 1,146 | ||||||||||||||||||||||
| 2012 | 441 | 818 | 986 | 1,067 | 1,104 | 1,114 | 1,120 | |||||||||||||||||||||||
| 2013 | 442 | 816 | 1,002 | 1,091 | 1,121 | 1,135 | ||||||||||||||||||||||||
| 2014 | 430 | 843 | 1,032 | 1,125 | 1,165 | |||||||||||||||||||||||||
| 2015 | 475 | 935 | 1,142 | 1,243 | ||||||||||||||||||||||||||
| 2016 | 505 | 968 | 1,188 | |||||||||||||||||||||||||||
| 2017 | 441 | 836 | ||||||||||||||||||||||||||||
| 2018 | 359 | |||||||||||||||||||||||||||||
| Total | $ | 10,703 |
F-58
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Personal Automobile Physical Damage
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||
| For the years ended December 31, | ||||||||||||||
| (Unaudited) | ||||||||||||||
| Accident Year | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||
| 2016 | $ | 665 | $ | 656 | $ | 655 | $ | 3 | 406,588 | |||||
| 2017 | 598 | 588 | (3 | ) | 361,857 | |||||||||
| 2018 | 509 | 3 | 288,993 | |||||||||||
| Total | $ | 1,752 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||
| For the years ended December 31, | |||||||||
| (Unaudited) | |||||||||
| Accident Year | 2016 | 2017 | 2018 | ||||||
| 2016 | $ | 634 | $ | 653 | $ | 651 | |||
| 2017 | 574 | 591 | |||||||
| 2018 | 474 | ||||||||
| Total | $ | 1,716 |
F-59
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Homeowners
| Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||||||||||||||
| 2009 | $ | 757 | $ | 777 | $ | 776 | $ | 772 | $ | 772 | $ | 772 | $ | 772 | $ | 769 | $ | 768 | $ | 768 | $ | — | 149,799 | ||||||||||||
| 2010 | 838 | 850 | 838 | 840 | 840 | 840 | 836 | 834 | 834 | — | 161,590 | ||||||||||||||||||||||||
| 2011 | 955 | 920 | 919 | 916 | 914 | 911 | 908 | 907 | — | 179,389 | |||||||||||||||||||||||||
| 2012 | 774 | 741 | 741 | 741 | 739 | 738 | 738 | 1 | 142,828 | ||||||||||||||||||||||||||
| 2013 | 673 | 638 | 637 | 634 | 632 | 630 | 1 | 113,518 | |||||||||||||||||||||||||||
| 2014 | 710 | 707 | 702 | 700 | 698 | 1 | 121,863 | ||||||||||||||||||||||||||||
| 2015 | 690 | 703 | 690 | 684 | 3 | 119,888 | |||||||||||||||||||||||||||||
| 2016 | 669 | 673 | 663 | 7 | 119,441 | ||||||||||||||||||||||||||||||
| 2017 | 866 | 889 | 45 | 123,426 | |||||||||||||||||||||||||||||||
| 2018 | 903 | 89 | 94,946 | ||||||||||||||||||||||||||||||||
| Total | $ | 7,714 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||||||||||||
| Accident Year | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||||||||||
| 2009 | $ | 559 | $ | 727 | $ | 749 | $ | 759 | $ | 763 | $ | 765 | $ | 766 | $ | 766 | $ | 767 | $ | 767 | ||||||||||
| 2010 | 599 | 789 | 815 | 825 | 829 | 832 | 833 | 833 | 834 | |||||||||||||||||||||
| 2011 | 709 | 871 | 891 | 899 | 903 | 905 | 908 | 907 | ||||||||||||||||||||||
| 2012 | 547 | 696 | 719 | 727 | 731 | 734 | 735 | |||||||||||||||||||||||
| 2013 | 467 | 590 | 611 | 622 | 626 | 627 | ||||||||||||||||||||||||
| 2014 | 526 | 663 | 684 | 691 | 695 | |||||||||||||||||||||||||
| 2015 | 487 | 645 | 665 | 674 | ||||||||||||||||||||||||||
| 2016 | 481 | 621 | 640 | |||||||||||||||||||||||||||
| 2017 | 538 | 747 | ||||||||||||||||||||||||||||
| 2018 | 484 | |||||||||||||||||||||||||||||
| Total | $ | 7,110 |
Property and casualty reserves, including IBNR reserves
The Company estimates ultimate losses and allocated loss adjustment expenses by accident year. IBNR represents the excess of estimated ultimate loss reserves over case reserves. The process to estimate ultimate losses and loss adjustment expenses is an integral part of the Company's reserve setting. Reserves for allocated and unallocated loss adjustment expenses are generally established separate from the reserves for losses.
Reserves for losses are set by line of business within the reporting segments. Case reserves are established by a claims handler on each individual claim and are adjusted as new information becomes known during the course of handling the claim. Lines of business for which reported losses emerge over a long period of time are referred to as long-tail lines of business. Lines of business for which reported losses emerge more quickly are
referred to as short-tail lines of business. The Company’s shortest tail lines of business are homeowners, commercial property and automobile physical damage. The longest tail lines of business include workers’ compensation, general liability and professional liability. For short-tail lines of business, emergence of paid loss and case reserves is credible and likely indicative of ultimate losses. For long-tail lines of business, emergence of paid losses and case reserves is less credible in the early periods after a given accident year and, accordingly, may not be indicative of ultimate losses.
The Company’s reserving actuaries regularly review reserves for both current and prior accident years using the most current claim data. A variety of actuarial methods and judgments are used for most lines of business to arrive at selections of estimated ultimate losses and loss adjustment expenses. While actuarial methods used and judgments change depending on the age of the
F-60
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accident year, in 2018, there were no new methods or types of judgments introduced or changes in how those methods and judgments were applied. The reserve selections incorporate input, as appropriate, from claims personnel, pricing actuaries and operating management about reported loss cost trends and other factors that could affect the reserve estimates.
For both short-tail and long-tail lines of business, an expected loss ratio is used to record initial reserves. This expected loss ratio is determined by starting with the average loss ratio of recent prior accident years and adjusting that ratio for the effect of expected changes to earned pricing, loss frequency and severity, mix of business, ceded reinsurance and other factors. For short-tail lines, IBNR for the current accident year is initially recorded as the product of the expected loss ratio for the period, earned premium for the period and the proportion of losses expected to be reported in future calendar periods for the current accident period. For long-tailed lines, IBNR reserves for the current accident year are initially recorded as the product of the expected loss ratio for the period and the earned premium for the period, less reported losses for the period. For certain short-tailed lines of business, IBNR amounts in the above loss development triangles are negative due to anticipated salvage and subrogation recoveries on paid losses.
As losses for a given accident year emerge or develop in subsequent periods, reserving actuaries use other methods to estimate ultimate unpaid losses in addition to the expected loss ratio method. These primarily include paid and reported loss development methods, frequency/severity techniques and the Bornhuetter-Ferguson method (a combination of the expected loss ratio and paid development or reported development method). Within any one line of business, the methods that are given more weight vary based primarily on the maturity of the accident year, the mix of business and the particular internal and external influences impacting the claims experience or the methods. The output of the reserve reviews are reserve estimates that are referred to as the “actuarial indication”.
Paid development and reported development techniques are used for most lines of business though more weight is given to the
reported development method for some of the long-tailed lines like general liability. In addition, for long-tailed lines of business, the Company relies on the expected loss ratio method for immature accident years. Frequency/severity techniques are used predominantly for professional liability and are also used for automobile liability. For most lines, reserves for allocated loss adjustment expenses ("ALAE", or those expenses related to specific claims) are analyzed using paid development techniques and an analysis of the relationship between ALAE and loss payments. Reserves for unallocated loss adjustment expenses ("ULAE") are determined using the expected cost per claim year and the anticipated claim closure pattern as well as the ratio of paid ULAE to paid losses.
In the final step of the reserve review process, senior reserving actuaries and senior management apply their judgment to determine the appropriate level of reserves considering the actuarial indications and other factors not contemplated in the actuarial indications. Those factors include, but are not limited to, the assessed reliability of key loss trends and assumptions used in the current actuarial indications, the maturity of the accident year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, and the improvement or deterioration of actuarial indications.
Cumulative number of reported claims
For property and casualty, claim counts represent the number of claim features on a reported claim where a claim feature is each separate coverage for each claimant affected by the claim event. For example, one car accident that results in two bodily injury claims and one automobile damage liability claim would be counted as three claims within the personal automobile liability triangle. Similarly, a fire that impacts one commercial building may result in multiple claim features due to the potential for claims related to business interruption, structural damage, and loss of the physical contents of the building. Claim features that result in no paid losses are included in the reported claim counts.
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | ||||||||||||||||||||
| (Unaudited) | ||||||||||||||||||||
| Reserve Line | 1st Year | 2nd Year | 3rd Year | 4th Year | 5th Year | 6th Year | 7th Year | 8th Year | 9th Year | 10th Year | ||||||||||
| Workers' compensation | 15.8 | % | 19.5 | % | 12.9 | % | 9.0 | % | 6.1 | % | 4.6 | % | 3.2 | % | 2.5 | % | 2.0 | % | 1.4 | % |
| General liability | 3.3 | % | 8.7 | % | 14.9 | % | 16.5 | % | 13.7 | % | 9.7 | % | 7.8 | % | 3.6 | % | 2.1 | % | 2.1 | % |
| Package business | 38.1 | % | 21.3 | % | 10.3 | % | 8.7 | % | 5.8 | % | 3.5 | % | 1.9 | % | 1.1 | % | 0.7 | % | 0.3 | % |
| Commercial property | 60.8 | % | 27.6 | % | 4.9 | % | 1.9 | % | 0.3 | % | 0.1 | % | 0.1 | % | — | % | — | % | — | % |
| Commercial automobile liability | 17.2 | % | 20.5 | % | 20.7 | % | 18.1 | % | 11.6 | % | 4.8 | % | 2.7 | % | 1.1 | % | 0.6 | % | 0.1 | % |
| Commercial automobile physical damage | 90.0 | % | 7.1 | % | (0.5 | %) | ||||||||||||||
| Professional liability | 5.7 | % | 18.6 | % | 18.1 | % | 16.2 | % | 9.8 | % | 7.6 | % | 1.3 | % | 1.4 | % | 2.5 | % | 1.1 | % |
| Bond | 15.4 | % | 30.8 | % | 13.9 | % | 3.3 | % | 0.3 | % | 1.5 | % | 6.1 | % | (0.1 | %) | 1.0 | % | (1.9 | %) |
| Personal automobile liability | 36.9 | % | 33.0 | % | 15.6 | % | 7.4 | % | 3.3 | % | 1.1 | % | 0.5 | % | 0.2 | % | 0.1 | % | — | % |
| Personal automobile physical damage | 95.9 | % | 2.8 | % | (0.3 | %) | ||||||||||||||
| Homeowners | 70.4 | % | 21.1 | % | 3.0 | % | 1.2 | % | 0.5 | % | 0.3 | % | 0.1 | % | 0.1 | % | — | % | — | % |
F-61
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Life, Disability and Accident Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, gross | $ | 8,512 | $ | 5,772 | $ | 5,889 | |||
| Reinsurance recoverables | 209 | 208 | 218 | ||||||
| Beginning liabilities for unpaid losses and loss adjustment expenses, net | 8,303 | 5,564 | 5,671 | ||||||
| Add: Aetna U.S. group life and disability business acquisition [1] | 42 | 2,833 | — | ||||||
| Provision for unpaid losses and loss adjustment expenses | |||||||||
| Current incurral year | 4,470 | 2,868 | 2,562 | ||||||
| Prior year's discount accretion | 227 | 202 | 202 | ||||||
| Prior incurral year development [2] | (324 | ) | (185 | ) | (162 | ) | |||
| Total provision for unpaid losses and loss adjustment expenses [3] | 4,373 | 2,885 | 2,602 | ||||||
| Less: payments | |||||||||
| Current incurral year | 2,377 | 1,528 | 1,327 | ||||||
| Prior incurral years | 2,135 | 1,451 | 1,382 | ||||||
| Total payments | 4,512 | 2,979 | 2,709 | ||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, net | 8,206 | 8,303 | 5,564 | ||||||
| Reinsurance recoverables | 239 | 209 | 208 | ||||||
| Ending liabilities for unpaid losses and loss adjustment expenses, gross | $ | 8,445 | $ | 8,512 | $ | 5,772 |
| [1] | Amount recognized in 2018 represents an adjustment to Aetna U.S. group life and disability business reserves, net of reinsurance as of the acquisition date, upon finalization of the opening balance sheet. |
| [2] | Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis. |
| [3] | Includes unallocated loss adjustment expenses of $194, $111 and $100 for the years ended December 31, 2018, 2017 and 2016, respectively, that are recorded in insurance operating costs and other expenses in the Consolidated Statements of Operations. |
Group Life, Disability and Accident Products Reserves, Net of Reinsurance, that are Discounted
| For the years ended December 31, | ||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||
| Liability for unpaid losses and loss adjustment expenses, at undiscounted amounts | $ | 8,957 | $ | 9,071 | $ | 6,382 | ||||||||||||
| Less: amount of discount | 1,505 | 1,536 | 1,303 | |||||||||||||||
| Carrying value of liability for unpaid losses and loss adjustment expenses | $ | 7,452 | $ | 7,535 | $ | 5,079 | ||||||||||||
| Weighted average discount rate | 3.4 | % | 3.5 | % | 4.3 | % | ||||||||||||
| Range of discount rate | 2.1 | % | - | 8.0 | % | 2.1 | % | - | 8.0 | % | 3.0 | % | - | 8.0 | % |
Reserves are discounted at rates in effect at the time claims were incurred, ranging from 2.1% for life and disability reserves acquired from Aetna based on interest rates in effect at the acquisition date of November 1, 2017, to 8.0% for the Company’s pre-acquisition reserves for incurral year 1990, and vary by product. Prior year's discount accretion has been calculated as the average reserve balance for the year times the weighted average discount rate. The decrease in the weighted average discount rate from 2016 to 2017 was primarily due to the fact that reserves for the Aetna U.S. group life and disability business are discounted at market rates in effect as of the acquisition date.
Re-estimates of prior incurral years reserves in 2018 was driven by the following:
| • | Group disability- Prior period reserve estimates decreased by approximately $230 largely driven by group long-term disability claim recoveries higher than prior reserve assumptions and, primarily for the 2017 incurral year, claim incidence lower than prior assumptions. Short-term disability also experienced favorable claim recoveries. |
| • | Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $90 largely driven by lower-than-previously expected claim incidence inclusive of group life, group life premium waiver, and group accidental |
F-62
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
death & dismemberment, principally for the 2017 incurral year.
Re-estimates of prior incurral years reserves in 2017 was driven by the following:
| • | Group disability- Prior period estimates decreased by approximately $125 driven by group long-term disability favorable claim incidence for incurral year 2016 and claim recoveries higher than prior reserve assumptions. |
| • | Group life and accident (including group life premium waiver)- Contributing to an approximately $60 decrease in prior period reserve estimates was favorable claim incidence on group life premium waiver for incurral year 2016 |
Re-estimates of prior incurral years reserves in 2016 was driven by the following:
| • | Group disability- Prior period estimates decreased by approximately $90 largely driven by group long-term disability claim recoveries higher than prior reserve assumptions, particularly in the older incurral years. This favorability was partially offset by lower Social Security Disability approvals driven by lower approval rates and backlogs in the Social Security Administration. |
| • | **Group life and accident (including group life premium waiver-**Contributing to an approximately $75 decrease in prior period reserve estimates was favorable claim incidence on group life premium waiver for incurral year 2015. |
Reconciliation of Loss Development to Liability for Unpaid Losses and Loss Adjustment Expenses as of December 31, 2018
| Losses and Allocated Loss Adjustment Expenses, Net of Reinsurance | Subtotal | |||||||||||||||||||||||
| Reserve Line | Cumulative Incurred for Incurral Years Displayed in Triangles | Cumulative Paid for Incurral Years Displayed in Triangles | Unpaid for Incurral Years not Displayed in Triangles | Unpaid Unallocated Loss Adjustment Expenses, Net of Reinsurance | Discount | Unpaid Losses and Loss Adjustment Expenses, Net of Reinsurance | Reinsurance and Other Recoverables | Liability for Unpaid Losses and Loss Adjustment Expenses | ||||||||||||||||
| Group long-term disability | $ | 11,934 | $ | (6,217 | ) | $ | 2,243 | $ | 171 | $ | (1,364 | ) | $ | 6,767 | $ | 235 | $ | 7,002 | ||||||
| Group life and accident, excluding premium waiver | 5,820 | (5,367 | ) | 139 | 2 | (19 | ) | 575 | 2 | 577 | ||||||||||||||
| Group short-term disability | 113 | 5 | — | 118 | — | 118 | ||||||||||||||||||
| Group life premium waiver | 818 | 7 | (122 | ) | 703 | 2 | 705 | |||||||||||||||||
| Group supplemental health | 43 | — | — | 43 | — | 43 | ||||||||||||||||||
| Total Group Benefits | $ | 17,754 | $ | (11,584 | ) | $ | 3,356 | $ | 185 | $ | (1,505 | ) | $ | 8,206 | $ | 239 | $ | 8,445 |
The following loss triangles present historical loss development for incurred and paid claims by the year the insured claim occurred, referred to as the incurral year. Triangles are limited to the number of years for which claims incurred typically remain outstanding. For group long-term disability, the Company has
provided seven incurral years of claims data as data for earlier periods was not available with respect to the U.S. group life and disability business acquired from Aetna. Short-tail lines, which represent claims generally expected to be paid within a few years, have three years of claim development displayed.
F-63
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Long-Term Disability
| Undiscounted Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||||||
| For the years ended December 31, | |||||||||||||||||||||
| (Unaudited) | |||||||||||||||||||||
| Incurral Year | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||||
| 2011 | 1,917 | 1,761 | 1,660 | 1,659 | 1,669 | 1,660 | 1,649 | 1,638 | 1 | 39,097 | |||||||||||
| 2012 | 1,829 | 1,605 | 1,539 | 1,532 | 1,530 | 1,515 | 1,504 | 1 | 37,343 | ||||||||||||
| 2013 | 1,660 | 1,479 | 1,429 | 1,429 | 1,416 | 1,413 | 1 | 31,755 | |||||||||||||
| 2014 | 1,636 | 1,473 | 1,430 | 1,431 | 1,431 | 3 | 32,970 | ||||||||||||||
| 2015 | 1,595 | 1,442 | 1,422 | 1,420 | 5 | 33,541 | |||||||||||||||
| 2016 | 1,651 | 1,481 | 1,468 | 12 | 34,259 | ||||||||||||||||
| 2017 | 1,597 | 1,413 | 36 | 31,135 | |||||||||||||||||
| 2018 | 1,647 | 810 | 19,386 | ||||||||||||||||||
| Total | $ | 11,934 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||||||||||
| For the years ended December 31, | |||||||||||||||||
| (Unaudited) | |||||||||||||||||
| Incurral Year | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | |||||||||
| 2011 | 118 | 508 | 743 | 886 | 996 | 1,087 | 1,167 | 1,231 | |||||||||
| 2012 | 108 | 483 | 708 | 835 | 933 | 1,014 | 1,080 | ||||||||||
| 2013 | 102 | 443 | 664 | 791 | 881 | 954 | |||||||||||
| 2014 | 103 | 448 | 675 | 801 | 884 | ||||||||||||
| 2015 | 108 | 460 | 687 | 806 | |||||||||||||
| 2016 | 112 | 479 | 705 | ||||||||||||||
| 2017 | 109 | 452 | |||||||||||||||
| 2018 | 105 | ||||||||||||||||
| Total | $ | 6,217 |
F-64
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Group Life and Accident, excluding Premium Waiver
| Undiscounted Incurred Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | ||||||||||||||
| For the years ended December 31, | ||||||||||||||
| (Unaudited) | ||||||||||||||
| Incurral Year | 2016 | 2017 | 2018 | IBNR Reserves | Claims Reported | |||||||||
| 2016 | $ | 1,974 | $ | 1,919 | $ | 1,915 | $ | 5 | 45,206 | |||||
| 2017 | 1,999 | 1,953 | 20 | 44,539 | ||||||||||
| 2018 | 1,952 | 376 | 41,876 | |||||||||||
| Total | $ | 5,820 |
| Cumulative Paid Losses & Allocated Loss Adjustment Expenses, Net of Reinsurance | |||||||||
| For the years ended December 31, | |||||||||
| (Unaudited) | |||||||||
| Incurral Year | 2016 | 2017 | 2018 | ||||||
| 2016 | $ | 1,529 | $ | 1,888 | $ | 1,906 | |||
| 2017 | 1,551 | 1,929 | |||||||
| 2018 | 1,532 | ||||||||
| Total | $ | 5,367 |
Group life, disability and accident reserves, including IBNR
The majority of Group Benefits’ reserves are for long-term disability ("LTD") claimants who are known to be disabled and are currently receiving benefits. A Disabled Life Reserve ("DLR") is calculated for each LTD claim. The DLR for each claim is the expected present value of all estimated future benefit payments and includes estimates of claim recovery, investment yield, and offsets from other income, including offsets from Social Security benefits and workers’ compensation. Estimated future benefit payments represent the monthly income benefit that is paid until recovery, death or expiration of benefits. Claim recoveries are estimated based on claim characteristics such as age and diagnosis and represent an estimate of benefits that will terminate, generally as a result of the claimant returning to work or being deemed able to return to work. The DLR also includes a liability for payments to claimants who have not yet been approved for LTD either because they have not yet satisfied the waiting (or elimination) period or because the approval or denial decision has not yet been made. In these cases, the present value of future benefits is reduced for the likelihood of claim denial based on Company experience. For claims recently closed due to
recovery, a portion of the DLR is retained for the possibility that the claim reopens upon further evidence of disability. In addition, a reserve for estimated unpaid claim expenses is included in the DLR.
For incurral years with IBNR claims, estimates of ultimate losses are made by applying completion factors to the dollar amount of claims reported or expected depending on the market segment. IBNR represents estimated ultimate losses less both DLR and cumulative paid amounts for all reported claims. Completion factors are derived using standard actuarial techniques using triangles that display historical claim count emergence by incurral month. These estimates are reviewed for reasonableness and are adjusted for current trends and other factors expected to cause a change in claim emergence. The IBNR includes an estimate of unpaid claim expenses, including a provision for the cost of initial set-up of the claim once reported.
For all products, including LTD, there is a period generally ranging from two to twelve months, depending on the product and market segment, where emerged claim information for an incurral year is not yet credible enough to be a basis for an IBNR projection. In these cases, the ultimate losses and allocated loss adjustment expenses are estimated using earned premium multiplied by an expected loss ratio.
The Company also records reserves for future death benefits under group term life policies that provide for premiums to be waived in the event the insured is unable to work due to disability and has satisfied an elimination period, which is typically nine months ("premium waiver reserves"). The death benefit reserve for these group life premium waiver claims is estimated for a known disabled claimant equal to the present value of expected future cash outflows (typically a lump sum face amount payable at death plus claim expenses) with separate estimates for claimant recovery (when no death benefit is payable) and for death before recovery or benefit expiry (when death benefit is payable). The IBNR for premium waiver death benefits is estimated with standard actuarial development methods.
In addition, the Company also records reserves for group term life, accidental death & dismemberment, short term disability, and other group products that have short claim payout periods. For these products, reserves are determined using paid or reported actuarial development methods. The resulting claim triangles produce a completion pattern and estimate of ultimate loss. IBNR for these lines of business equals the estimated ultimate losses and loss adjustment expenses less the amount of paid or reported claims depending on whether the paid or reported development method was used. Estimates are reviewed for reasonableness and are adjusted for current trends or other factors that affect the development pattern.
Cumulative number of reported claims
For group life, disability and accident coverages, claim counts include claims that are approved, pending approval and terminated and exclude denied claims. Due to the nature of the claims, one claimant represents one event.
F-65
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | ||||||||||||||||
| (Unaudited) | ||||||||||||||||
| 1st Year | 2nd Year | 3rd Year | 4th Year | 5th Year | 6th Year | 7th Year | 8th Year | |||||||||
| Group long-term disability | 7.3 | % | 24.4 | % | 15.4 | % | 8.7 | % | 6.3 | % | 5.4 | % | 4.6 | % | 3.9 | % |
| Group life and accident, excluding premium waiver | 79.3 | % | 19.0 | % | 0.9 | % |
12**.** RESERVE FOR FUTURE POLICY BENEFITS
| Changes in Reserves for Future Policy Benefits [1] | |||
| Liability Balance, as of January 1, 2018 | $ | 713 | |
| Incurred | 72 | ||
| Paid | (101 | ) | |
| Change in unrealized investment gains and losses | (42 | ) | |
| Liability Balance, as of December 31, 2018 | $ | 642 | |
| Reinsurance recoverable asset, as of January 1, 2018 | $ | 26 | |
| Incurred | 1 | ||
| Paid | — | ||
| Reinsurance recoverable asset, as of December 31, 2018 | $ | 27 |
| Liability Balance, as of January 1, 2017 | $ | 322 | |
| Acquired [2] | 346 | ||
| Incurred | 86 | ||
| Paid | (50 | ) | |
| Change in unrealized investment gains and losses | 9 | ||
| Liability Balance, as of December 31, 2017 | $ | 713 | |
| Reinsurance recoverable asset, as of January 1, 2017 | $ | 28 | |
| Incurred | (1 | ) | |
| Paid | (1 | ) | |
| Reinsurance recoverable asset, as of December 31, 2017 | $ | 26 |
| [1] | Reserves for future policy benefits includes paid-up life insurance and whole-life policies resulting from conversion from group life policies included within the Group Benefits segment and reserves for run-off structured settlement and terminal funding agreement liabilities which are in the Corporate category. |
| [2] | Represents reserves, net, related to the U.S. group life and disability business acquired from Aetna, as of the acquisition date. For additional information. see Note 2 - Business Acquisitions of Notes to Consolidated Financial Statements. |
13**.** DEBT
The Company’s long-term debt securities are issued by HFSG Holding Company, and are unsecured obligations of HFSG Holding Company, and rank on a parity with all other unsecured and unsubordinated indebtedness of HFSG Holding Company.
Debt is carried net of discount and issuance cost.
Interest expense on debt is included in the corporate category for segment reporting.
F-66
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Short-term and Long-term Debt by Issuance
| As of December 31, | ||||||
| 2018 | 2017 | |||||
| Revolving Credit Facilities | $ | — | $ | — | ||
| Senior Notes and Debentures | ||||||
| 6.3% Notes, due 2018 | — | 320 | ||||
| 6.0% Notes, due 2019 | 413 | 413 | ||||
| 5.5% Notes, due 2020 | 500 | 500 | ||||
| 5.125% Notes, due 2022 | 800 | 800 | ||||
| 5.95% Notes, due 2036 | 300 | 300 | ||||
| 6.625% Notes, due 2040 | 295 | 295 | ||||
| 6.1% Notes, due 2041 | 409 | 409 | ||||
| 6.625% Notes, due 2042 | 178 | 178 | ||||
| 4.4% Notes, due 2048 | 500 | — | ||||
| 4.3% Notes, due 2043 | 300 | 300 | ||||
| Junior Subordinated Debentures | ||||||
| 7.875% Notes, due 2042 | 600 | 600 | ||||
| 3 month Libor + 2.125% Notes, due 2067 [1] | 500 | 500 | ||||
| 8.125% Notes, due 2068 | — | 500 | ||||
| Total Notes and Debentures | 4,795 | 5,115 | ||||
| Unamortized discount and debt issuance cost [2] | (117 | ) | (117 | ) | ||
| Total Debt | 4,678 | 4,998 | ||||
| Less: Current maturities | 413 | 320 | ||||
| Long-Term Debt | $ | 4,265 | $ | 4,678 |
| [1] | In April 2017, the Company entered into an interest rate swap agreement expiring February 15, 2027 to effectively convert the variable interest payments for this debenture into fixed interest payments of approximately 4.39%**. |
| [2] | The amount primarily consists of $78 and $79 as of December 31, 2018 and 2017*, respectively, on the* 6.1% Notes, due 2041. |
The effective interest rate on the 6.1% senior notes due 2041 is 7.9%. The effective interest rate on the remaining notes does not differ materially from the stated rate. The Company incurred interest expense of $298, $316 and $327 on debt for the years ended December 31, 2018, 2017 and 2016, respectively.
Senior Notes
On March 15, 2018, The Hartford issued $500 of 4.4% senior notes ("4.4% Notes") due March 15, 2048 for net proceeds of approximately $490, after deducting underwriting discounts and expenses from the offering. Interest is payable semi-annually in arrears on March 15 and September 15, commencing September 15, 2018. The Hartford, at its option, can redeem the 4.4% Notes at any time, in whole or in part, at a redemption price equal to the greater of 100% of the principal amount being redeemed or a make-whole amount based on a comparable maturity US Treasury plus 25 basis points, plus any accrued and unpaid interest, except the option of a make-whole payment is not applicable within the final six months before maturity.
On March 15, 2018, The Hartford repaid at maturity the $320 principal amount of its 6.3% senior notes.
Junior Subordinated Debentures
Junior Subordinated Debentures by Issuance
| Issue | 7.875% Debentures | 3 Month Libor + 2.125% | |||||||
| Face Value | $ | 600 | $ | 500 | |||||
| Interest Rate [1] | 7.875 | % | [2] | N/A | [3] | ||||
| Call Date | April 15, 2022 | February 15, 2022 | [4] | ||||||
| Interest Rate Subsequent to Call Date [2] | 3 Month Libor + 5.596% | 3 Month Libor + 2.125% | [5] | ||||||
| Final Maturity | April 15, 2042 | February 12, 2067 |
| [1] | Interest rate in effect until call date. |
| [2] | Payable quarterly in arrears. |
| [3] | Debentures were issued on call date. |
| [4] | The original call date was February 15, 2017. Replacement Capital Covenant associated with the debenture prohibits the Company from redeeming all or any portion of the notes on or prior to February 15, 2022. |
| [5] | In April, 2017 the company entered into an interest rate swap agreement expiring February 15, 2027 to effectively convert the interest payments for the 3 month Libor + 2.125% debenture into fixed interest payments of approximately 4.39%**. |
The debentures are unsecured, subordinated and junior in right of payment and upon liquidation to all of the Company’s existing and future senior indebtedness. In addition, the debentures are effectively subordinated to all of the Company’s subsidiaries’ existing and future indebtedness and other liabilities, including obligations to policyholders. The debentures do not limit the Company’s or the Company’s subsidiaries’ ability to incur additional debt, including debt that ranks senior in right of payment and upon liquidation to the debentures.
The Company has the right to defer interest payments for up to a consecutive ten years without giving rise to an event of default. Deferred interest will continue to accrue and will accrue additional interest at the then applicable interest rate. If the Company defers interest payments, the Company generally may not make payments on or redeem or purchase any shares of its capital stock or any of its debt securities or guarantees that rank upon liquidation, dissolution or winding up equally with or junior to the debentures, subject to certain limited exceptions.
On June 15, 2018, The Hartford redeemed $500 aggregate principal amount of its 8.125% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068. During the initial offering of the 8.125% debentures, the Company entered into a replacement capital covenant ("RCC"), and under the terms of the RCC, if the Company redeemed the 8.125% debentures at any time prior to June 15, 2048 it could only do so with the proceeds from the sale of certain qualifying replacement securities. The 3 month Libor plus 2.125% debentures issued February 15, 2017 are qualifying replacement securities within the definition of RCC. In connection with this redemption, the Company recognized a $6 loss on extinguishment of debt for unamortized deferred debt issuance costs.
The 7.875% and 3 month Libor plus 2.125% debentures may be redeemed in whole prior to the call date upon certain tax or rating agency events, at a price equal to the greater of 100% of the principal amount being redeemed and the applicable make-whole
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amount plus any accrued and unpaid interest. The Company may elect to redeem the 7.875% and 3 month Libor plus 2.125% debentures in whole or in part on or after the call date for the principal amount being redeemed plus accrued and unpaid interest to the date of redemption.
In connection with the offering of the three month LIBOR plus 2.125% debenture, the Company entered into a RCC for the benefit of holders of one or more designated series of the Company's indebtedness, initially the Company's 4.3% notes due 2043. Under the terms of the RCC, if the Company redeems the debenture any time prior to February 12, 2047 (or such earlier date on which the RCC terminates by its terms) it can only do so with the proceeds from the sale of certain qualifying replacement securities. The RCC also prohibits the Company from redeeming all or any portion of the notes on or prior to February 15, 2022.
In April, 2017 the company entered into an interest rate swap agreement expiring February 15, 2027 to effectively convert the variable interest payments for the 3 month Libor plus 2.125% debenture into fixed interest payments of approximately 4.39%.
Long-Term Debt
Long-term Debt Maturities (at par value) as of December 31, 2018
| 2019 - Current maturities | $ | 413 | |
| 2020 | $ | 500 | |
| 2021 | $ | — | |
| 2022 | $ | 800 | |
| 2023 | $ | — | |
| Thereafter | $ | 3,082 |
Shelf Registrations
On July 29, 2016, the Company filed with the Securities and Exchange Commission (the “SEC”) an automatic shelf registration statement (Registration No. 333-212778) for the potential offering and sale of debt and equity securities. The registration statement allows for the following types of securities to be offered: debt securities, junior subordinated debt securities, preferred stock, common stock, depositary shares, warrants, stock purchase contracts, and stock purchase units. In that The Hartford is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act of 1933, the registration statement went effective immediately upon filing and The Hartford may offer and sell an unlimited amount of securities under the registration statement during the three-year life of the registration statement.
Revolving Credit Facilities
On March 29, 2018, the Company entered into an amendment (the "Amendment") to its Five-Year Credit Agreement dated October 31, 2014. The Amendment reset the level of the Company's minimum consolidated net worth financial covenant to $9 billion, excluding AOCI, from its former $13.5 billion (where net worth was defined as stockholders' equity excluding AOCI and including junior subordinated debt), among other updates. Among other changes, under an amended and restated credit agreement that became effective in June 2018 after the closing of the sale of the Company's life and annuity business, the aggregate
amount of principal of the credit facility decreased from $1 billion to $750, including a reduction to the amount available for letters of credit from $250 to $100, the maturity date was extended to March 29, 2023, and the liens covenant and certain other covenants were modified.
Revolving loans from the Credit Facility may be in multiple currencies. U.S. dollar loans will bear interest at a floating rate equivalent to an indexed rate depending on the type of borrowing and a basis point spread based on The Hartford's credit rating and will mature no later than March 29, 2023. Letters of credit issued from the Credit Facility bear a fee based on The Hartford's credit rating and expire no later than March 29, 2024. The Credit Facility requires the Company to maintain a minimum consolidated net worth, excluding AOCI, of $9 billion, limit the ratio of senior debt to capitalization, excluding AOCI, at 35% and meet other customary covenants. The Credit Facility is for general corporate purposes.
As of December 31, 2018, no borrowings were outstanding, $3 in letters of credit were issued under the Credit Facility and the Company was in compliance with all financial covenants
Commercial Paper
As of December 31, 2018, the Hartford's maximum borrowings available under its commercial paper program was $750 and there was no commercial paper outstanding. The Company is dependent upon market conditions to access short-term financing through the issuance of commercial paper to investors. On July 19, 2018, the Board of Directors revised the Company's commercial paper issuance authorization from $1 billion to $750 to align the program with the Company's $750 five year revolving credit facility which became effective on June 11, 2018.
Collateralized Advances with Federal Home Loan Bank of Boston
In August 2018, the Company’s subsidiaries, Hartford Fire Insurance Company (“Hartford Fire”) and Hartford Life and Accident Insurance Company (“HLA”), became members of the Federal Home Loan Bank of Boston (“FHLBB”). Membership allows these subsidiaries access to collateralized advances, which may be short- or long-term with fixed or variable rates. FHLBB membership required the purchase of member stock and requires additional member stock ownership of 3% or 4% of any amount borrowed. Acceptable forms of collateral include real estate backed fixed maturities and mortgage loans and the amount of advances that can be taken is limited to a percentage of the fair value of the assets that ranges from a high of 97% for US government-backed fixed maturities maturing within 3 years to a low of 40% for A-rated commercial mortgage-backed fixed maturities maturing in 5 years or more. In its consolidated balance sheets, The Hartford would present the liability for advances taken based on use of the funds with advances for general corporate purposes presented in short- or long-term debt and advances to earn incremental investment income presented in other liabilities, consistent with other collateralized financing transactions such as securities lending and repurchase agreements. The Connecticut Department of Insurance (“CTDOI”) permits Hartford Fire and HLA to pledge up to $1.1 billion and $0.6 billion in qualifying assets, respectively, without prior approval, to secure FHLBB advances in 2019. The pledge
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limit is determined annually based on statutory admitted assets and capital and surplus of Hartford Fire and HLA, respectively. As of December 31, 2018, there were no advances outstanding under the FHLBB facility.
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 in the following discussion under the caption “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. These actions include, among others, and in addition to the matters in the following discussion, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company's results of operations or cash flows in particular quarterly or annual periods.
Asbestos and Environmental Claims
The Company continues to receive asbestos and environmental 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 Company wrote several different categories of insurance contracts that may cover asbestos and environmental 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. Fourth, subsidiaries of the Company participated in the London Market, writing both direct insurance and assumed reinsurance business.
Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid gross losses and expenses related to environmental and particularly asbestos claims. The degree of variability of gross reserve estimates for these exposures is significantly greater than for other more traditional exposures.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation, and inconsistent emerging legal doctrines. Furthermore, over time, insurers, including the Company, have experienced significant changes in the rate at which asbestos claims are brought, the claims experience of particular insureds, and the value of claims, making predictions of future exposure from past experience uncertain. Plaintiffs and insureds also have sought to use bankruptcy proceedings, including “pre-packaged” bankruptcies, to accelerate and increase loss payments by insurers. In addition, some policyholders have asserted new classes of claims for coverages to which an aggregate limit of liability may not apply. Further uncertainties include insolvencies of other carriers and unanticipated developments pertaining to the Company’s ability to recover reinsurance for asbestos and environmental claims. Management believes these issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include expanding theories of liability and damages, the risks inherent in major litigation, inconsistent decisions concerning the existence and scope of coverage for environmental claims, and uncertainty as to the monetary amount being sought by the claimant from the insured.
The reporting pattern for assumed reinsurance claims, including those related to asbestos and environmental 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.
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It is also not possible to predict changes in the legal and legislative environment and their effect on the future development of asbestos and environmental 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 asbestos and environmental 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 asbestos and environmental 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 asbestos and environmental reserves are appropriate, significant uncertainties limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not estimable now, could be material to The Hartford's consolidated operating results and liquidity.
As of December 31, 2018, the Company reported $1.1 billion of net asbestos reserves and $203 of net environmental reserves. While the Company believes that its current A&E reserves are appropriate, significant uncertainties limit our ability to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not reasonably estimable now, could be material to The Hartford's consolidated operating results and liquidity.
Effective December 31, 2016, the Company entered into an A&E ADC reinsurance agreement with NICO, a subsidiary of Berkshire Hathaway Inc., to reduce uncertainty about potential adverse development of asbestos and environmental reserves. Under the ADC, the Company paid a reinsurance premium of $650 for NICO to assume adverse net loss and allocated loss adjustment expense reserve development up to $1.5 billion above the Company’s existing net asbestos and environmental reserves as of December 31, 2016 of approximately $1.7 billion. The $650 reinsurance premium was placed into a collateral trust account as security for NICO’s claim payment obligations to the Company. Under retroactive reinsurance accounting, net adverse asbestos and environmental reserve development after December 31, 2016 will result in an offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative ceded losses up to the $650 reinsurance premium paid are recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the $650 reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and environmental claims after December 31, 2016 in excess of $650 may result in significant charges against earnings. Furthermore, cumulative adverse
development of asbestos and environmental claims could ultimately exceed the $1.5 billion treaty limit in which case any adverse development in excess of the treaty limit would be absorbed as a charge to earnings by the Company. In these scenarios, the effect of these charges could be material to the Company’s consolidated operating results and liquidity. As of December 31, 2018, the Company has incurred cumulative $523 in adverse development on asbestos and environmental reserves that have been ceded under the ADC treaty with NICO, leaving approximately $977 of coverage available for future adverse reserve development, if any.
Lease Commitments
The total rental expense on operating leases was $56, $57, and $53 in 2018, 2017, and 2016, respectively, which excludes sublease rental income of $4, $3, and $2 in 2018, 2017 and 2016, respectively.
Future minimum lease commitments as of December 31, 2018
| Operating Leases | |||
| 2019 | $ | 44 | |
| 2020 | 36 | ||
| 2021 | 25 | ||
| 2022 | 18 | ||
| 2023 | 16 | ||
| Thereafter | 34 | ||
| Total minimum lease payments [1] | $ | 173 |
| [1] | Excludes expected future minimum sublease income of approximately $2*,* $1*,* $1*,* $0*,* $0 and $0 in 2019*,* 2020*,* 2021*,* 2022*,* 2023 and thereafter respectively. |
The Company’s lease commitments consist primarily of lease agreements for office space, automobiles, and office equipment that expire at various dates.
Unfunded Commitments
As of December 31, 2018, the Company has outstanding commitments totaling $954, of which $707 is committed to fund limited partnership and other alternative investments, which may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. Additionally, $163 of the outstanding commitments relate to various funding obligations associated with private debt and equity securities. The remaining outstanding commitments of $84 relate to mortgage loans. Of the $954 in total outstanding commitments, $48 are related to mortgage loan commitments which the Company can cancel unconditionally.
Guaranty Funds and Other Insurance-Related Assessments
In all states, insurers licensed to transact certain classes of insurance are required to become members of a guaranty fund. In most states, in the event of the insolvency of an insurer writing any such class of insurance in the state, the guaranty funds may assess its members to pay covered claims of the insolvent insurers. Assessments are based on each member's proportionat
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e share of written premiums in the state for the classes of insurance in which the insolvent insurer was engaged. Assessments are generally limited for any year to one or two percent of the premiums written per year depending on the state. Some states permit member insurers to recover assessments paid through surcharges on policyholders or through full or partial premium tax offsets, while other states permit recovery of assessments through the rate filing process.
Liabilities for guaranty fund and other insurance-related assessments are accrued when an assessment is probable, when it can be reasonably estimated, and when the event obligating the Company to pay an imposed or probable assessment has occurred. Liabilities for guaranty funds and other insurance-related assessments are not discounted and are included as part of other liabilities in the Consolidated Balance Sheets. As of December 31, 2018 and 2017 the liability balance was $97 and $113, respectively. As of December 31, 2018 and 2017 amounts related to premium tax offsets of $2 and $6, respectively, were included in other assets.
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 demand immediate and ongoing full collateralization and in certain instances enable the counterparties to 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 December 31, 2018 was $76, of which the legal entities have
posted collateral of $71 in the normal course of business. Based on derivative market values as of December 31, 2018, a downgrade of one level below the current financial strength rates by either Moody’s or S&P would not require additional assets to be posted as collateral. Based on derivative market values as of December 31, 2018, a downgrade of two levels below the current financial strength ratings by either Moody’s or S&P would require an additional $7 of assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we post, if required, is primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
Guarantees
In the ordinary course of selling businesses or entities to third parties, the Company has agreed to indemnify purchasers for losses arising subsequent to the closing due to breaches of representations and warranties with respect to the business or entity being sold or with respect to covenants and obligations of the Company and/or its subsidiaries. These obligations are typically subject to various time limitations, defined by the contract or by operation of law, such as statutes of limitation. In some cases, the maximum potential obligation is subject to contractual limitations, while in other cases such limitations are not specified or applicable. The Company does not expect to make any payments on these guarantees and is not carrying any liabilities associated with these guarantees.
The Hartford has guaranteed the obligations of certain life, accident and health and annuity contracts of the life and annuity business written by Hartford Life Insurance Company between 1990 and 1997 and written by Hartford Life and Annuity Insurance Company between 1993 and 2009. After the sale of this business in May 2018, the purchaser indemnified the Company for any liability arising under the guarantees. The guarantees have no limitation as to maximum potential future payments. The Hartford has not recorded a liability and the likelihood for any payments under these guarantees is remote.
15**.** EQUITY
Capital Purchase Program ("CPP") Warrants
As of December 31, 2018 and 2017, respectively, the Company has 1.9 million and 2.2 million CPP warrants outstanding and exercisable. The CPP warrants were issued in 2009 as part of a program established by the U.S. Department of the Treasury under the Emergency Economic Stabilization Act of 2008. The CPP warrants expire in June 2019.
CPP warrant exercises were 0.3 million, 1.8 million and 0.4 million during the years ended December 31, 2018, 2017 and 2016, respectively.
The declaration of common stock dividends by the Company in excess of a threshold triggers a provision in the Company's warrant agreement with The Bank of New York Mellon resulting in adjustments to the CPP warrant exercise price and the number of shares deliverable for each warrant exercised (the “Warrant
Share Number”). Accordingly, the CPP warrant exercise price was $8.836, $8.999 and $9.126 and the Warrant Share Number was 1.1, 1.0 and 1.0 as of December 31, 2018, 2017 and 2016, respectively. The exercise price will be settled by the Company withholding the number of common shares issuable upon exercise of the warrants equal to the value of the aggregate exercise price of the warrants so exercised determined by reference to the closing price of the Company's common stock on the trading day on which the warrants are exercised and notice is delivered to the warrant agent.
Equity Repurchase Program
During the year ended December 31, 2018, the Company did not repurchase any common shares. In February, 2019, the Company announced a 1.0 billion share repurchase authorization by the Board of Directors which is effective through December 31, 2020. Based on projected holding company resources, the Company expects to use a portion of the authorization in 2019
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but anticipates using the majority of the program in 2020. Any repurchase of shares under the equity repurchase program is dependent on market conditions and other factors.
Preferred Stock
On November 6, 2018, the Company issued 13.8 million depositary shares each representing 1/1000th interest in a share of the Company’s 6.0% Series G non-cumulative perpetual preferred stock (the “Preferred Stock”) with a liquidation preference of $25,000 per share (equivalent to $25.00 per depositary share), for net cash proceeds of $334. The Preferred Stock is perpetual and has no maturity date. Dividends will be payable, if declared, quarterly in arrears on the 15th day of February, May, August and November of each year, commencing on February 15, 2019. If a dividend is not declared before the dividend payment date for any dividend period, The Hartford will have no obligation to pay dividends otherwise attributable to such dividend period. If a dividend is not declared and paid or made payable on all outstanding shares of the Preferred Stock for the latest completed dividend period, no dividends may be paid or declared on The Hartford’s common stock and The Hartford may not purchase, redeem, or otherwise acquire its common stock.
The Preferred Stock is redeemable at the Company’s option in whole or in part, on or after November 15, 2023 at a redemption price of $25,000 per share, plus unpaid dividends attributable to the current dividend period. Prior to November 15, 2023, the Preferred Stock is redeemable at the Company’s option, in whole but not in part, within 90 days of the occurrence of (a) a rating agency event at a redemption price equal to $25,500 per share, plus unpaid dividends attributable to the current dividend period in circumstances where a rating agency changes its criteria used to assign equity credit to securities like the Preferred Stock; or (b) a regulatory capital event at a redemption price equal to $25,000 per share, plus unpaid dividends attributable to the current dividend period in circumstances where a capital regulator such as a state insurance regulator changes or proposes to change capital adequacy rules.
On December 13, 2018, The Hartford’s board of directors declared a dividend of $412.50 on each share of the Series G preferred stock (equivalent to $0.4125 per depository share) payable on February 15, 2019, to stockholders of record at the close of business on February 1, 2019.
Statutory Results
The domestic insurance subsidiaries of The Hartford prepare their statutory financial statements in conformity with statutory accounting practices prescribed or permitted by the applicable state insurance department which vary materially from U.S. GAAP. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners (“NAIC”), as well as state laws, regulations and general administrative rules. The differences between statutory financial statements and financial statements prepared in accordance with U.S. GAAP vary between domestic and foreign jurisdictions. The principal differences are that statutory financial statements do not reflect deferred policy acquisition costs and limit deferred income taxes, predominately use interest rate and mortality assumptions prescribed by the NAIC for life benefit reserves, generally carry bonds at amortized cost, and present reinsurance assets and liabilities net of reinsurance. For reporting purposes, statutory capital and surplus is referred to collectively
as "statutory capital". Life insurance subsidiaries include the Group Benefits insurance subsidiary and, for periods up until the sale date, the life and annuity business sold in May 2018.
Statutory Net Income (Loss)
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Group Benefits Insurance Subsidiary | $ | 390 | $ | (1,066 | ) | $ | 208 | ||
| Property and Casualty Insurance Subsidiaries | 1,114 | 950 | 304 | ||||||
| Life and annuity business sold in May, 2018 | 196 | 369 | 349 | ||||||
| Total | $ | 1,700 | $ | 253 | $ | 861 |
Statutory Capital
| As of December 31, | ||||||
| 2018 | 2017 | |||||
| Group Benefits Insurance Subsidiary | $ | 2,407 | $ | 2,029 | ||
| Property and Casualty Insurance Subsidiaries | 7,435 | 7,396 | ||||
| Total | $ | 9,842 | $ | 9,425 |
Regulatory Capital Requirements
The Company's U.S. insurance companies' states of domicile impose risk-based capital (“RBC”) requirements. The requirements provide a means of measuring the minimum amount of statutory capital appropriate for an insurance company to support its overall business operations based on its size and risk profile. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. All of the Company's operating insurance subsidiaries had RBC ratios in excess of the minimum levels required by the applicable insurance regulations.
Similar to the RBC ratios that are employed by U.S. insurance regulators, regulatory authorities in the international jurisdictions in which the Company operates generally establish minimum solvency requirements for insurance companies. All of the Company's international insurance subsidiaries have capital levels in excess of the minimum levels required by the applicable regulatory authorities.
Dividend Restrictions
Dividends to the HFSG Holding Company from its insurance subsidiaries are restricted by insurance regulation. The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the twelve-month
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period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. The insurance holding company laws of the other jurisdictions in which The Hartford’s insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances more restrictive) limitations on the payment of dividends. In addition to statutory limitations on paying dividends, the Company also takes other items into consideration when determining dividends from subsidiaries. These considerations include, but are not limited to, expected earnings and capitalization of the subsidiaries, regulatory capital requirements and liquidity requirements of the individual operating company.
Total dividends paid by P&C subsidiaries to HFSG holding company in 2018 were $3.1 billion. This includes extraordinary dividends of $3.0 billion, comprised of a $1.9 billion principal paydown on the intercompany note owed by Hartford Holdings, Inc. ("HHI") to Hartford Fire Insurance Company related to the life and annuity business sold in May 2018, $226 related to interest payments on the note and $900 to fund near-term obligations of the HFSG holding company. In addition, there was $50 of ordinary P&C dividends that were paid to HFSG holding company, and $110 of capital contributed by the HFSG holding company to a run-off P&C subsidiary. Excluding the interest payments on the intercompany note and dividends that were subsequently contributed to a P&C subsidiary, net dividends paid by P&C subsidiaries to HFSG holding company were $2.8 billion during 2018.
Total net dividends received by HFSG holding company in 2018 were $2.9 billion, including the $2.8 billion from P&C subsidiaries and $119 from Hartford Funds during the year. There were no dividends received from Hartford Life and Accident in 2018.
Under the formula described above, in 2019, the Company’s property and casualty insurance subsidiaries are permitted to pay up to a maximum of approximately $1.2 billion in dividends to HFSG Holding Company without prior approval from the applicable insurance commissioner, though only $200 of this dividend capacity could be paid before the fourth quarter of 2019. In 2019, HFSG Holding Company does not anticipate receiving net dividends from its property and casualty insurance subsidiaries, as planned 2019 dividends were received in the fourth quarter 2018. The HFSG Holding Company generally expects to receive net dividends of $850 to $900 a year from its property and casualty insurance subsidiaries subject to the profitability of those subsidiaries and their capital needs.
Hartford Life and Accident Insurance Company ("HLA") has $380 dividend capacity for 2019 and anticipates paying $250 to $300 dividends in 2019.
There are no current restrictions on the HFSG Holding Company's ability to pay dividends to its stockholders.
Restricted Net Assets
The Company's insurance subsidiaries had net assets of $10.1 billion, determined in accordance with U.S. GAAP, that were restricted from payment to the HFSG Holding Company, without prior regulatory approval at December 31, 2018.
16**.** INCOME TAXES
Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform”). Tax Reform establishes new tax laws effective January 1, 2018, including, but not limited to, (1) reduction of the U.S. federal corporate income tax rate from 35% to 21%; (2) elimination of the corporate alternative minimum tax (AMT) and changing how existing AMT credits can be realized, (3) limitations on the deductibility of certain executive compensation, (4) changes to the discounting of statutory reserves for tax purposes, and (5) limitations on net operating losses (NOLs) generated after December 31, 2017 though there is no impact to the Company’s current NOL carryforwards.
Related to Tax Reform, the Company recorded a provisional net income tax expense of $877 in the period ending December 31, 2017. This net expense consisted of an $821 reduction of the Company’s deferred tax assets primarily due to the reduction in the U.S. federal corporate income tax rate and a $56 sequestration fee payable associated with refundable AMT credits.
During 2018, the Company recorded income tax expense of $17 as measurement period adjustments related to Tax Reform due to the filing of the Company's 2017 federal income tax return and completion of the Aetna Group Benefits acquisition. In addition, the Company recorded an income tax benefit of $56, reflecting the elimination of the sequestration fee payable. In total, the
Company recorded a net income tax benefit from Tax Reform of $39 in 2018.
As of December 31, 2018, the Company had AMT carryovers of $841 which are reflected as a current income tax receivable within Other Assets in the accompanying consolidated balance sheet. AMT credits may be used to offset a regular tax liability for any taxable year beginning after December 31, 2017, and are refundable at an amount equal to 50 percent of the excess of the minimum tax credit for the taxable year over the amount of the credit allowable for the year against regular tax liability. Any remaining credits not used against regular tax liability are refundable in the 2021 tax year to be realized in 2022.
Income Tax Expense
The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction, and various state and foreign jurisdictions, as applicable. Income (loss) from continuing operations before income taxes included income from domestic operations of $1,753, $704 and $521 for the years ended December 31, 2018, 2017 and 2016, and income (losses) from foreign operations of $0, $19 and $(74) for the years ended December 31, 2018, 2017 and 2016.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Income Tax Expense (Benefit)
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Income Tax Expense (Benefit) | |||||||||
| Current - U.S. Federal | $ | (18 | ) | $ | 116 | $ | 10 | ||
| International | — | 1 | — | ||||||
| Total current | (18 | ) | 117 | 10 | |||||
| Deferred - U.S. Federal | 286 | 866 | (173 | ) | |||||
| International | — | 2 | (3 | ) | |||||
| Total deferred | 286 | 868 | (176 | ) | |||||
| Total income tax expense (benefit) | $ | 268 | $ | 985 | $ | (166 | ) |
Income Tax Rate Reconciliation
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Tax provision at U.S. federal statutory rate [1] | $ | 368 | $ | 253 | $ | 157 | |||
| Tax-exempt interest | (66 | ) | (123 | ) | (124 | ) | |||
| Decrease in deferred tax valuation allowance | — | — | (79 | ) | |||||
| Executive Compensation | 11 | — | — | ||||||
| Stock-based compensation | (5 | ) | (15 | ) | — | ||||
| Solar credits | — | — | (79 | ) | |||||
| Sale of the U.K. property & casualty run-off subsidiaries and foreign rate differential | — | 5 | (37 | ) | |||||
| Tax Reform | (39 | ) | 877 | — | |||||
| Other | (1 | ) | (12 | ) | (4 | ) | |||
| Provision (benefit) for income taxes | $ | 268 | $ | 985 | $ | (166 | ) |
[1] Due to the passage of Tax Reform on December 22, 2017, current and prior period federal statutory rates are reflected at 21% and 35% respectively.
In addition to the effect of tax-exempt interest, the Company's effective tax rate for the year ended December 31, 2018 reflects a federal income tax expense of $11 related to non-deductible executive compensation and a benefit of $5 related to a deduction for stock-based compensation that vested at a fair value per share greater than the fair value on the date of grant.
Included in 2018 is a benefit of $39 related to Tax Reform, primarily due to the elimination of the sequestration fee on AMT credits.
Included in 2017 is an expense of $877 due to the effects of Tax Reform, primarily due to the reduction in net deferred tax assets as a result of the reduction in the federal corporate income tax rate from 35% to 21%.
Included in 2016 is a benefit of $79 due to the investment in solar energy partnerships. The total tax benefit from the transaction was $113, which included the tax effects of the related financial statement realized loss from writing down the investment in partnerships.
Also included in 2016 is a tax benefit primarily due to the sale of the Company's U.K. property and casualty run-off subsidiaries. The tax benefit of $37 relates to the difference between the tax basis and book basis of the Company's investment in the subsidiaries net of additional foreign tax rate differentials. The total estimated tax benefit recognized in 2016 related to the sale of the U.K. property and casualty run-off subsidiaries was $76. For discussion of this transaction, see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements.
Deferred Taxes
Deferred tax assets and liabilities on the consolidated balance sheets represent the tax consequences of differences between the financial reporting and tax basis of assets and liabilities. The deferred tax assets and liabilities as of December 31, 2018 and 2017 shown in the table below reflect the lower corporate Federal income tax rate as a result of Tax Reform. Deferred tax balances for the year ended December 31, 2017 related to the life and annuity business sold in May 2018 are not included in the table below as they were included in assets held for sale as of December 31, 2017. In lieu of recording a benefit of the tax capital loss on the sale of the life and annuity business, the Company elected to retain tax net operating loss carryovers with an estimated benefit of $477 as of December 31, 2018.
Deferred Tax Assets (Liabilities)
| As of December 31, | ||||||
| 2018 | 2017 | |||||
| Deferred Tax Assets | ||||||
| Loss reserves and tax discount | $ | 150 | $ | 104 | ||
| Unearned premium reserve and other underwriting related reserves | 355 | 352 | ||||
| Investment-related items | 183 | 194 | ||||
| Employee benefits | 287 | 313 | ||||
| General business credit carryover | 1 | 3 | ||||
| Net operating loss carryover | 521 | 710 | ||||
| Foreign tax credit carryover | — | 26 | ||||
| Other | — | 1 | ||||
| Total Deferred Tax Assets | 1,497 | 1,703 | ||||
| Deferred Tax Liabilities | ||||||
| Deferred acquisition costs | (104 | ) | (103 | ) | ||
| Net unrealized gains on investments | (7 | ) | (306 | ) | ||
| Other depreciable and amortizable assets | (135 | ) | (130 | ) | ||
| Other | (3 | ) | — | |||
| Total Deferred Tax Liabilities | (249 | ) | (539 | ) | ||
| Net Deferred Tax Asset | $ | 1,248 | $ | 1,164 |
A deferred tax valuation allowance has not been recorded because the Company believes the deferred tax assets will more likely than not be realized. In assessing the need for a valuation allowance, 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. From time to
F-74
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
time, tax planning strategies could include holding a portion of debt securities with market value losses until recovery, altering the level of tax exempt securities held, making investments which have specific tax characteristics, and business considerations such as asset-liability matching. Management views such tax planning strategies as prudent and feasible and would implement them, if necessary, to realize the deferred tax assets.
As shown in the deferred tax assets (liabilities) table above, included in net deferred income taxes are the future tax benefits associated with U.S. net operating loss carryover and general business credit carryovers. Net operating loss carryovers, if unused, would expire between 2026 and 2036. General business credits would expire between 2026 and 2027.
U.S. NOLs reflected above arose in taxable years prior to 2017 and are still subject to prior tax law which allows for carryback and limits the period over which carryforwards may be used to offset taxable income. Utilization of the Company's loss carryovers is dependent upon the generation of sufficient future taxable income. Although the Company projects there will be sufficient future taxable income to fully recover the remainder of the loss carryover, the Company's estimate of the likely realization may change over time.
Uncertain Tax Positions
Rollforward of Unrecognized Tax Benefits
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Balance, beginning of period | $ | 9 | $ | 12 | $ | 12 | |||
| Gross increases - tax positions in prior period | 5 | 3 | — | ||||||
| Gross decreases - tax positions in prior period | — | — | — | ||||||
| Gross decreases - tax reform | — | (6 | ) | — | |||||
| Balance, end of period | $ | 14 | $ | 9 | $ | 12 |
The entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate in the period of the release.
In addition, for the year ended December 31, 2018 the Company recorded a receivable of $5 related to a tax indemnification agreement associated with the life and annuity business sold in May 2018. The receivable is separate from the tax liability and is classified as an other asset on the balance sheet.
Other Tax Matters
The federal audits have been completed through 2013, and the Company is not currently under examination for any open years. Management believes that adequate provision has been made in the consolidated financial statements for any potential adjustments that may result from tax examinations and other tax related matters for all open tax years.
The Company classifies interest and penalties (if applicable) as income tax expense in the consolidated financial statements. The Company recognized no interest expense for the years ended December 31, 2018, 2017 and 2016. The Company had no interest payable as of December 31, 2018 and 2017. The Company does not believe it would be subject to any penalties in any open tax years and, therefore, has not recorded any accrual for penalties.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17**.** CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Changes in AOCI, Net of Tax for the Year Ended December 31, 2018
| Changes in | ||||||||||||||||||
| Net Unrealized Gain on Securities | OTTI Losses in OCI | Net Gain (Loss) on Cash Flow Hedging Instruments | Foreign Currency Translation Adjustments | Pension and Other Postretirement Plan Adjustments | AOCI, net of tax | |||||||||||||
| Beginning balance | $ | 1,931 | $ | (3 | ) | $ | 18 | $ | 34 | $ | (1,317 | ) | $ | 663 | ||||
| Cumulative effect of accounting changes, net of tax [1] | 273 | — | 2 | 4 | (284 | ) | (5 | ) | ||||||||||
| Adjusted balance, beginning of period | 2,204 | (3 | ) | 20 | 38 | (1,601 | ) | 658 | ||||||||||
| OCI before reclassifications [2] | (2,245 | ) | — | 8 | (8 | ) | (61 | ) | (2,306 | ) | ||||||||
| Amounts reclassified from AOCI | 65 | (1 | ) | (33 | ) | — | 38 | 69 | ||||||||||
| OCI, net of tax | (2,180 | ) | (1 | ) | (25 | ) | (8 | ) | (23 | ) | (2,237 | ) | ||||||
| Ending balance | $ | 24 | $ | (4 | ) | $ | (5 | ) | $ | 30 | $ | (1,624 | ) | $ | (1,579 | ) |
| [1] | Includes reclassification to retained earnings of $88 of stranded tax effects and $93 of net unrealized gains, after tax, related to equity securities. Refer to Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements for further information. |
| [2] | *The reduction in AOCI included the effect of removing $*758 of AOCI from the balance sheet when the life and annuity business was sold in May 2018. |
Changes in AOCI, Net of Tax for the Year Ended December 31, 2017
| Changes in | ||||||||||||||||||
| Net Unrealized Gain on Securities | OTTI Losses in OCI | Net Gain on Cash Flow Hedging Instruments | Foreign Currency Translation Adjustments | Pension and Other Postretirement Plan Adjustments | AOCI, net of tax | |||||||||||||
| Beginning balance | $ | 1,276 | $ | (3 | ) | $ | 76 | $ | 6 | $ | (1,692 | ) | $ | (337 | ) | |||
| OCI before reclassifications | 857 | — | (8 | ) | 28 | (146 | ) | 731 | ||||||||||
| Amounts reclassified from AOCI | (202 | ) | — | (50 | ) | — | 521 | 269 | ||||||||||
| OCI, net of tax | 655 | — | (58 | ) | 28 | 375 | 1,000 | |||||||||||
| Ending balance | $ | 1,931 | $ | (3 | ) | $ | 18 | $ | 34 | $ | (1,317 | ) | $ | 663 |
Changes in AOCI, Net of Tax for the Year ended December 31, 2016
| Changes in | ||||||||||||||||||
| Net Unrealized Gain on Securities | OTTI Losses in OCI | Net Gain on Cash Flow Hedging Instruments | Foreign Currency Translation Adjustments | Pension and Other Postretirement Plan Adjustments | AOCI, net of tax | |||||||||||||
| Beginning balance | $ | 1,279 | $ | (7 | ) | $ | 130 | $ | (55 | ) | $ | (1,676 | ) | $ | (329 | ) | ||
| OCI before reclassifications | 83 | 1 | (8 | ) | (37 | ) | (52 | ) | (13 | ) | ||||||||
| Amounts reclassified from AOCI | (86 | ) | 3 | (46 | ) | 98 | 36 | 5 | ||||||||||
| OCI, net of tax | (3 | ) | 4 | (54 | ) | 61 | (16 | ) | (8 | ) | ||||||||
| Ending balance | $ | 1,276 | $ | (3 | ) | $ | 76 | $ | 6 | $ | (1,692 | ) | $ | (337 | ) |
F-76
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Reclassifications from AOCI
| AOCI | Amount Reclassified from AOCI | Affected Line Item in the Consolidated Statement of Operations | ||||||||
| For the year ended December 31, 2018 | For the year ended December 31, 2017 | For the year ended December 31, 2016 | ||||||||
| Net Unrealized Gain on Securities | ||||||||||
| Available-for-sale securities | $ | (80 | ) | $ | 152 | $ | 36 | Net realized capital gains (losses) | ||
| (80 | ) | 152 | 36 | Total before tax | ||||||
| (17 | ) | 53 | 13 | Income tax expense (benefit) | ||||||
| (2 | ) | 103 | 63 | Income (loss) from discontinued operations, net of tax | ||||||
| $ | (65 | ) | $ | 202 | $ | 86 | Net income (loss) | |||
| OTTI Losses in OCI | ||||||||||
| Other than temporary impairments | $ | — | $ | — | $ | (2 | ) | Net realized capital gains (losses) | ||
| — | — | (2 | ) | Total before tax | ||||||
| — | — | (1 | ) | Income tax expense (benefit) | ||||||
| 1 | — | (2 | ) | Income (loss) from discontinued operations, net of tax | ||||||
| 1 | — | (3 | ) | Net income (loss) | ||||||
| Net Gain on Cash Flow Hedging Instruments | ||||||||||
| Interest rate swaps | $ | 6 | $ | 5 | $ | 10 | Net realized capital gains (losses) | |||
| Interest rate swaps | 30 | 37 | 37 | Net investment income | ||||||
| 36 | 42 | 47 | Total before tax | |||||||
| 8 | 15 | 17 | Income tax expense (benefit) | |||||||
| $ | 5 | $ | 23 | $ | 16 | Income (loss) from discontinued operations, net of tax | ||||
| $ | 33 | $ | 50 | $ | 46 | Net income (loss) | ||||
| Foreign Currency Translation Adjustments | ||||||||||
| Currency translation adjustments [1] | $ | — | $ | — | $ | (118 | ) | Net realized capital gains (losses) | ||
| — | — | (118 | ) | Total before tax | ||||||
| — | — | (20 | ) | Income tax expense (benefit) | ||||||
| $ | — | $ | — | $ | (98 | ) | Net income (loss) | |||
| Pension and Other Postretirement Plan Adjustments | ||||||||||
| Amortization of prior service credit | $ | 7 | $ | 7 | $ | 6 | Insurance operating costs and other expenses | |||
| Amortization of actuarial loss | (55 | ) | (61 | ) | (61 | ) | Insurance operating costs and other expenses | |||
| Settlement loss | — | (747 | ) | — | Insurance operating costs and other expenses | |||||
| (48 | ) | (801 | ) | (55 | ) | Total before tax | ||||
| (10 | ) | (280 | ) | (19 | ) | Income tax expense (benefit) | ||||
| (38 | ) | (521 | ) | (36 | ) | Net income (loss) | ||||
| Total amounts reclassified from AOCI | $ | (69 | ) | $ | (269 | ) | $ | (5 | ) | Net income (loss) |
| [1] | Amount in 2016 relates to the sale of the U.K. property and casualty. |
18**.** EMPLOYEE BENEFIT PLANS
Investment and Savings Plan
Substantially all U.S. employees of the Company are eligible to participate in The Hartford Investment and Savings Plan under
which designated contributions may be invested in a variety of investments, including up to 10% in a fund consisting largely of common stock of The Hartford. The Company's contributions include a non-elective contribution of 2.0% of eligible
F-77
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
compensation and a dollar-for-dollar matching contribution of up to 6.0% of eligible compensation contributed by the employee each pay period. The Company also maintains a non-qualified savings plan, The Hartford Excess Savings Plan, with the dollar-for-dollar matching contributions of employee compensation in excess of the amount that can be contributed under the tax-qualified Investment and Savings Plan. An employee's eligible compensation includes overtime and bonuses but for the Investment and Savings Plan and Excess Savings Plan combined, is limited to $1 annually. The total cost to The Hartford for these plans was approximately $134, $113 and $115 for the years ended December 31, 2018, 2017 and 2016, respectively.
Additionally, The Hartford has established defined contribution pension plans for certain employees of the Company’s international subsidiaries. The cost to The Hartford for the years ended December 31, 2018, 2017 and 2016 for these plans was immaterial.
Post Retirement Benefit Plans
Defined Benefit Pension Plan- The Company maintains The Hartford Retirement Plan for U.S. Employees, a U.S. qualified defined benefit pension plan (the “Plan”) that covers substantially all U.S. employees hired prior to January 1, 2013. The Company also maintains non-qualified pension plans to provide retirement benefits previously accrued that are in excess of Internal Revenue Code limitations.
The Plan includes two benefit formulas, both of which are frozen: a final average pay formula (for which all accruals ceased as of December 31, 2008) and a cash balance formula for which benefit accruals ceased as of December 31, 2012, although interest will continue to accrue to existing cash balance formula account balances. Employees who were participants as of December 31, 2012 continue to earn vesting credit with respect to their frozen accrued benefits if they continue to work. The interest crediting rate on the cash balance plan is the greater of the average annual yield on 10-year U.S. Treasury Securities or 3.3%. The Hartford Excess Pension Plan II, the Company's non-qualified excess pension benefit plan for certain highly compensated employees, is also frozen.
Group Retiree Health Plan- The Company provides certain health care and life insurance benefits for eligible retired employees. The Company’s contribution for health care benefits will depend upon the retiree’s date of retirement and years of service. In addition, the plan has a defined dollar cap for certain retirees which limits average Company contributions. The Hartford has prefunded a portion of the health care obligations through a trust fund where such prefunding can be accomplished on a tax effective basis. Beginning January 1, 2017, for retirees 65 and older who were participating in the Retiree PPO Medical Plan, the Company funds the cost of medical and dental health care benefits through contributions to a Health Reimbursement Account and covered individuals can access a variety of insurance plans from a health care exchange. Effective January 1, 2002, Company-subsidized retiree medical, retiree dental and retiree life insurance benefits were eliminated for employees with original hire dates with the Company on or after January 1, 2002. The Company also amended its postretirement medical, dental and life insurance coverage plans to no longer provide subsidized coverage for employees who retired on or after January 1, 2014.
Assumptions
Pursuant to accounting principles related to the Company’s pension and other postretirement obligations to employees under its various benefit plans, the Company is required to make a significant number of assumptions in order to calculate the related liabilities and expenses each period. The two economic assumptions that have the most impact on pension and other postretirement expense under the defined benefit pension plan and group retiree health plan are the discount rate and the expected long-term rate of return on plan assets. The assumed discount rates and yield curve is based on high-quality fixed income investments consistent with the maturity profile of the expected liability cash flows. Based on all available market and industry information, it was determined that 4.35% and 4.23% were the appropriate discount rates as of December 31, 2018 to calculate the Company’s pension and other postretirement obligations, respectively.
The expected long-term rate of return considers the actual compound rates of return earned over various historical time periods. The Company also considers the investment volatility, duration and total returns for various time periods related to the characteristics of the pension obligation, which are influenced by the Company's workforce demographics. In addition, the Company considers long-term market return expectations for an investment mix that generally anticipates 60% fixed income securities and 40% non fixed income securities (global equities, hedge funds and private market alternatives) to derive an expected long-term rate of return. Based upon these analyses, management determined the long-term rate of return assumption to be 6.60% and 6.60% for the years ended December 31, 2018 and 2017, respectively. To determine the Company's 2019 expense, the Company is currently assuming an expected long-term rate of return on plan assets of 6.45% and 6.00% for the Company's pension and other post retirement obligations, respectively.
Weighted Average Assumptions Used in Calculating the Benefit Obligations and the Net Amount Recognized
| Pension Benefits | Other Postretirement Benefits | |||||||
| For the years ended December 31, | ||||||||
| 2018 | 2017 | 2018 | 2017 | |||||
| Discount rate | 4.35 | % | 3.73 | % | 4.23 | % | 3.55 | % |
Weighted Average Assumptions Used in Calculating the Net Periodic Benefit Cost for Pension Plans
| For the years ended December 31, | ||||||
| 2018 | 2017 | 2016 | ||||
| Discount rate | 3.73 | % | 4.22 | % | 4.25 | % |
| Expected long-term rate of return on plan assets | 6.60 | % | 6.60 | % | 6.70 | % |
F-78
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Weighted Average Assumptions Used in Calculating the Net Periodic Benefit Cost for Other Postretirement Plans
| For the years ended December 31, | ||||||
| 2018 | 2017 | 2016 | ||||
| Discount rate | 3.55 | % | 3.97 | % | 4.00 | % |
| Expected long-term rate of return on plan assets | 6.60 | % | 6.60 | % | 6.60 | % |
Assumed Health Care Cost Trend Rates
| For the years ended December 31, | ||||||
| 2018 | 2017 | 2016 | ||||
| Pre-65 health care cost trend rate | 6.50 | % | 6.75 | % | 6.90 | % |
| Post-65 health care cost trend rate | N/A | N/A | N/A | |||
| Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) | 4.50 | % | 4.50 | % | 5.00 | % |
| Year that the rate reaches the ultimate trend rate | 2028 | 2028 | 2024 |
Obligations and Funded Status
The following tables set forth a reconciliation of beginning and ending balances of the benefit obligation and fair value of plan assets, as well as the funded status of the Company's defined benefit pension and postretirement health care and life insurance benefit plans. International plans represent an immaterial percentage of total pension assets, liabilities and expense and, for reporting purposes, are combined with domestic plans.
Change in Benefit Obligation
| Pension Benefits | Other Postretirement Benefits | |||||||||||
| For the years ended December 31, | ||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||
| Benefit obligation — beginning of year | $ | 4,376 | $ | 5,650 | $ | 256 | $ | 272 | ||||
| Service cost | 4 | 4 | — | — | ||||||||
| Interest cost | 142 | 170 | 7 | 8 | ||||||||
| Plan participants’ contributions | — | — | 11 | 11 | ||||||||
| Actuarial (gain) loss | (6 | ) | 139 | — | 5 | |||||||
| Settlements | — | (1,647 | ) | — | — | |||||||
| Changes in assumptions | (329 | ) | 332 | (11 | ) | 10 | ||||||
| Benefits and expenses paid | (186 | ) | (273 | ) | (45 | ) | (51 | ) | ||||
| Retiree drug subsidy | — | — | 2 | 1 | ||||||||
| Foreign exchange adjustment | (1 | ) | 1 | — | — | |||||||
| Benefit obligation — end of year | $ | 4,000 | $ | 4,376 | $ | 220 | $ | 256 |
Changes in assumptions in 2018 primarily included a $281 decrease in the benefit obligation for pension benefits as a result of an increase in the discount rate from 3.73% as of the December 31, 2017 valuation to 4.35% as of the December 31, 2018 valuation. Changes in assumptions in 2017 included a $350 increase in the benefit obligation for pension benefits as a result of a decline in the discount rate from 4.22% as of the December 31, 2016 valuation to 3.73% as of the December 31, 2017 valuation.
The cash balance plan pension benefit obligation was $412 and $443 as of December 31, 2018 and 2017, respectively. The interest crediting rate was 3.30% in 2018, 2017, and 2016.
On June 30, 2017, the Company transferred invested assets and cash from plan assets to purchase a group annuity contract that transferred approximately $1.6 billion of the Company's outstanding pension obligations related to certain U.S. retirees, terminated vested participants and beneficiaries. As a result of this transaction, the Company recognized a pre-tax settlement charge of $750. The settlement charge was included in the corporate category for segment reporting.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Change in Plan Assets
| Pension Benefits | Other Postretirement Benefits | |||||||||||
| For the years ended December 31, | ||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||
| Fair value of plan assets — beginning of year | $ | 3,592 | $ | 4,678 | $ | 114 | $ | 138 | ||||
| Actual return on plan assets | (172 | ) | 549 | (2 | ) | 11 | ||||||
| Employer contributions | 103 | 280 | — | — | ||||||||
| Benefits paid [1] | (161 | ) | (248 | ) | (27 | ) | (35 | ) | ||||
| Expenses paid | (17 | ) | (21 | ) | — | — | ||||||
| Settlements | — | (1,647 | ) | — | — | |||||||
| Foreign exchange adjustment | (1 | ) | 1 | — | — | |||||||
| Fair value of plan assets — end of year | $ | 3,344 | $ | 3,592 | $ | 85 | $ | 114 | ||||
| Funded status — end of year | $ | (656 | ) | $ | (784 | ) | $ | (135 | ) | $ | (142 | ) |
| [1] | Other postretirement benefits paid represent non-key employee postretirement medical benefits paid from the Company's prefunded trust fund. |
The fair value of assets for pension benefits, and hence the funded status, presented in the table above excludes assets of $139 and $144 as of December 31, 2018 and 2017, respectively, held in rabbi trusts and designated for the non-qualified pension plans. The assets do not qualify as plan assets; however, the assets are available to pay benefits for certain retired, terminated and active participants. Such assets are available to the Company’s general creditors in the event of insolvency. The rabbi trust assets consist of equity and fixed income investments. To the extent the fair value of these rabbi trusts were included in the table above, pension plan assets would have been $3,483 and $3,736 as of December 31, 2018 and 2017, respectively, and the funded status of pension benefits would have been $(517)and $(640) as of December 31, 2018 and 2017, respectively.
Defined Benefit Pension Plans with an Accumulated Benefit Obligation in Excess of Plan Assets
| As of December 31, | ||||||
| 2018 | 2017 | |||||
| Projected benefit obligation | $ | 4,000 | $ | 4,376 | ||
| Accumulated benefit obligation | $ | 4,000 | $ | 4,376 | ||
| Fair value of plan assets | $ | 3,344 | $ | 3,592 |
Amounts Recognized in the Consolidated Balance Sheets
| Pension Benefits | Other Postretirement Benefits | |||||||||||
| As of December 31, | ||||||||||||
| 2018 | 2017 | 2018 | 2017 | |||||||||
| Other liabilities | $ | 656 | $ | 784 | $ | 135 | $ | 142 |
Components of Net Periodic Benefit Cost (Benefit) and Other Amounts Recognized in Other Comprehensive Income (Loss)
As a result of the pension settlement, in 2017, the Company recognized a pre-tax settlement charge of $750 ($488 after tax) and a reduction to stockholders' equity of $144.
In connection with this transaction, the Company made a contribution of $280 in September 2017 to the U.S. qualified pension plan in order to maintain the plan's pre-transaction funded status.
Beginning with the first quarter of 2017, the Company adopted the full yield curve approach in the estimation of the interest cost component of net periodic benefit costs for its qualified and non-qualified pension plans and the postretirement benefit plan. The full yield curve approach applies the specific spot rates along the yield curve that are used in its determination of the projected benefit obligation at the beginning of the year. The change has been made to provide a better estimate of the interest cost component of net periodic benefit cost by better aligning projected benefit cash flows with corresponding spot rates on the yield curve rather than using a single weighted average discount rate derived from the yield curve as had been done historically.
This change does not affect the measurement of the Company's total benefit obligations as the change in the interest cost in net income is completely offset in the actuarial (gain) loss reported for the period in other comprehensive income. The change reduced the before tax interest cost component of net periodic benefit cost by $32 for the year ended December 31, 2017. The discount rate being used to measure interest cost was 3.58% for the period from January 1, 2017 to June 30, 2017 and 3.37% for the period from July 1, 2017 to December 31, 2017 for the qualified pension plan, 3.55% for the non-qualified pension plan, and 3.13% for the postretirement benefit plan. Under the Company's historical estimation approach, the weighted average discount rate for the interest cost component would have been 4.22% for the period from January 1, 2017 to June 30, 2017 and 3.92% for the period from July 1, 2017 to December 31, 2017 for the qualified pension plan, 4.19% for the non-qualified pension plan and 3.97% for the postretirement benefit plan. The Company accounted for this change as a change in estimate, and accordingly, has recognized the effect prospectively beginning in 2017.
F-80
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Net Periodic Cost (Benefit)
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||
| Service cost | $ | 4 | $ | 4 | $ | 2 | $ | — | $ | — | $ | — | ||||||
| Interest cost | 142 | 170 | 237 | 7 | 8 | 11 | ||||||||||||
| Expected return on plan assets | (227 | ) | (267 | ) | (311 | ) | (7 | ) | (8 | ) | (10 | ) | ||||||
| Amortization of prior service credit | — | — | — | (7 | ) | (7 | ) | (6 | ) | |||||||||
| Amortization of actuarial loss | 49 | 56 | 56 | 6 | 5 | 5 | ||||||||||||
| Settlements | — | 750 | — | — | — | — | ||||||||||||
| Net periodic cost (benefit) | $ | (32 | ) | $ | 713 | $ | (16 | ) | $ | (1 | ) | $ | (2 | ) | $ | — |
Amounts Recognized in Other Comprehensive Income (Loss)
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||
| For the years ended December 31, | ||||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||
| Amortization of actuarial loss | $ | 49 | $ | 56 | $ | 56 | $ | 6 | $ | 5 | $ | 5 | ||||||
| Settlement loss | — | 750 | — | — | — | — | ||||||||||||
| Amortization of prior service credit | — | — | — | (6 | ) | (7 | ) | (6 | ) | |||||||||
| Net loss arising during the year | (91 | ) | (209 | ) | (66 | ) | 3 | (12 | ) | (4 | ) | |||||||
| Total | $ | (42 | ) | $ | 597 | $ | (10 | ) | $ | 3 | $ | (14 | ) | $ | (5 | ) |
Amounts in Accumulated Other Comprehensive Income (Loss), Before Tax, not yet Recognized as Components of Net Periodic Benefit Cost
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||
| As of December 31, | ||||||||||||||||||
| 2018 | 2017 | 2016 | 2018 | 2017 | 2016 | |||||||||||||
| Net loss | $ | (2,008 | ) | $ | (1,966 | ) | $ | (2,563 | ) | $ | (120 | ) | $ | (129 | ) | $ | (122 | ) |
| Prior service credit | — | — | — | 72 | 78 | 85 | ||||||||||||
| Total | $ | (2,008 | ) | $ | (1,966 | ) | $ | (2,563 | ) | $ | (48 | ) | $ | (51 | ) | $ | (37 | ) |
The pension settlement transaction resulted in a decrease to unrecognized net loss of $750 in 2017.
Plan Assets
Investment Strategy and Target Allocation
The overall investment strategy of the Plan is to maximize total investment returns to provide sufficient funding for present and anticipated future benefit obligations within the constraints of a prudent level of portfolio risk and diversification. With respect to asset management, the oversight responsibility of the Plan rests with The Hartford’s Pension Fund Trust and Investment Committee composed of individuals whose responsibilities include establishing overall objectives and the setting of investment policy; selecting appropriate investment options and ranges; reviewing the asset allocation mix and asset allocation targets on a regular basis; and monitoring performance to determine whether or not the rate of return objectives are being met and that policy and guidelines are being followed. The Company believes that the asset allocation decision will be the single most important factor determining the long-term performance of the Plan.
Target Asset Allocation
| Pension Plans | Other Postretirement Plans | |||||||
| Minimum | Maximum | Minimum | Maximum | |||||
| Equity securities | 5 | % | 35 | % | 15 | % | 45 | % |
| Fixed income securities | 50 | % | 70 | % | 55 | % | 85 | % |
| Alternative assets | — | % | 45 | % | — | % | — | % |
Divergent market performance among different asset classes may, from time to time, cause the asset allocation to deviate from the desired asset allocation ranges. The asset allocation mix is reviewed on a periodic basis. If it is determined that an asset allocation mix rebalancing is required, future portfolio additions and withdrawals will be used, as necessary, to bring the allocation within tactical ranges.
The Plan invests in commingled funds and partnerships managed by unaffiliated managers to gain exposure to emerging markets, equity, hedge funds and other alternative investments.
F-81
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
These portfolios encompass multiple asset classes reflecting the current needs of the Plan, the investment preferences and risk tolerance of the Plan and the desired degree of diversification. These asset classes include publicly traded equities, bonds and alternative investments and are made up of individual investments in cash and cash equivalents, equity securities, debt securities, asset-backed securities, mortgage loans and hedge funds. Hedge fund investments represent a diversified portfolio of partnership investments in a variety of strategies.
In addition, the Company uses U.S. Treasury bond futures contracts and U.S. Treasury STRIPS in a duration overlay program to adjust the duration of Plan assets to better match the duration of the benefit obligation.
Investment Valuation
Pension Plan Assets at Fair Value as of December 31, 2018
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Short-term investments: | $ | 50 | $ | 60 | $ | — | $ | 110 | ||||
| Fixed Income Securities: | ||||||||||||
| Corporate | — | 1,663 | 14 | 1,677 | ||||||||
| RMBS | — | 62 | 1 | 63 | ||||||||
| U.S. Treasuries | 10 | 120 | — | 130 | ||||||||
| Foreign government | — | 15 | 2 | 17 | ||||||||
| CMBS | — | 22 | — | 22 | ||||||||
| Other fixed income [1] | — | 52 | 1 | 53 | ||||||||
| Mortgage Loans | — | — | 133 | 133 | ||||||||
| Equity Securities: | ||||||||||||
| Domestic | 376 | 3 | — | 379 | ||||||||
| International | 303 | — | — | 303 | ||||||||
| Total pension plan assets at fair value, in the fair value hierarchy [2] | $ | 739 | $ | 1,997 | $ | 151 | $ | 2,887 | ||||
| Other Investments, at net asset value [3]: | ||||||||||||
| Private Market Alternatives | 272 | |||||||||||
| Hedge funds | 186 | |||||||||||
| Total pension plan assets at fair value. | $ | 739 | $ | 1,997 | $ | 151 | $ | 3,345 |
| [1] | Includes ABS, municipal bonds, and CDOs. |
| [2] | Excludes approximately $1 of investment payables net of investment receivables that are excluded from this disclosure requirement because they are trade receivables in the ordinary course of business where the carrying amount approximates fair value. |
| [3] | Investments that are measured at net asset value per share or an equivalent and have not been classified in the fair value hierarchy. |
Pension Plan Assets at Fair Value as of December 31, 2017
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Short-term investments: | $ | 21 | $ | 168 | $ | — | $ | 189 | ||||
| Fixed Income Securities: | ||||||||||||
| Corporate | — | 1,549 | 14 | 1,563 | ||||||||
| RMBS | — | 28 | 2 | 30 | ||||||||
| U.S. Treasuries | 3 | 74 | — | 77 | ||||||||
| Foreign government | — | 16 | 1 | 17 | ||||||||
| CMBS | — | 28 | 2 | 30 | ||||||||
| Other fixed income [1] | — | 97 | 2 | 99 | ||||||||
| Mortgage Loans | — | — | 140 | 140 | ||||||||
| Equity Securities: | ||||||||||||
| Large-cap domestic | 595 | 89 | — | 684 | ||||||||
| Mid-cap domestic | 11 | — | — | 11 | ||||||||
| International | 343 | — | — | 343 | ||||||||
| Total pension plan assets at fair value, in the fair value hierarchy [2] | $ | 973 | $ | 2,049 | $ | 161 | $ | 3,183 | ||||
| Other Investments, at net asset value [3]: | ||||||||||||
| Private Market Alternatives | 168 | |||||||||||
| Hedge funds | 212 | |||||||||||
| Total pension plan assets at fair value. | $ | 973 | $ | 2,049 | $ | 161 | $ | 3,563 |
| [1] | Includes ABS, municipal bonds, and CDOs. |
| [2] | Excludes approximately $1 of investment payables net of investment receivables that are excluded from this disclosure requirement because they are trade receivables in the ordinary course of business where the carrying amount approximates fair value. Also excludes approximately $30 of interest receivable. |
| [3] | Investments that are measured at net asset value per share or an equivalent and have not been classified in the fair value hierarchy. |
The tables below provide fair value level 3 rollforwards for the Pension Plan Assets for which significant unobservable inputs (Level 3) are used in the fair value measurement on a recurring basis. The Plan classifies the fair value of financial instruments within Level 3 if there are no observable markets for the instruments or, in the absence of active markets, if one or more of the significant inputs used to determine fair value are based on the Plan’s own assumptions. Therefore, the gains and losses in the tables below include changes in fair value due to both observable and unobservable factors.
F-82
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 2018 Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||
| Assets | Corporate | RMBS | Foreign government | Mortgage loans | Other [1] | Totals | ||||||||||||
| Fair Value as of January 1, 2018 | $ | 14 | $ | 2 | $ | 1 | $ | 140 | $ | 4 | $ | 161 | ||||||
| Realized gains,net | — | — | — | — | — | — | ||||||||||||
| Changes in unrealized gains (losses), net | (1 | ) | — | — | (1 | ) | — | (2 | ) | |||||||||
| Purchases | 5 | — | 1 | — | — | 6 | ||||||||||||
| Settlements | — | — | — | — | — | — | ||||||||||||
| Sales | (4 | ) | (1 | ) | — | (6 | ) | (3 | ) | (14 | ) | |||||||
| Transfers into Level 3 | — | — | — | — | — | — | ||||||||||||
| Transfers out of Level 3 | — | — | — | — | — | — | ||||||||||||
| Fair Value as of December 31, 2018 | $ | 14 | $ | 1 | $ | 2 | $ | 133 | $ | 1 | $ | 151 |
| [1] | "Other" includes U.S. Treasuries, Other fixed income and CMBS investments. |
During the year ended December 31, 2018, transfers into and (out) of Level 3 are primarily attributable to the appearance of or
lack thereof of market observable information and the re-evaluation of the observability of pricing inputs.
| 2017 Pension Plan Asset Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | ||||||||||||||||||
| Assets | Corporate | RMBS | Foreign government | Mortgage loans | Other [1] | Totals | ||||||||||||
| Fair Value as of January 1, 2017 | $ | 13 | $ | 10 | $ | 1 | $ | 121 | $ | 22 | $ | 167 | ||||||
| Realized gains,net | — | — | — | — | 2 | 2 | ||||||||||||
| Changes in unrealized gains, net | 2 | — | — | 2 | 2 | 6 | ||||||||||||
| Purchases | 11 | 1 | — | 17 | 7 | 36 | ||||||||||||
| Settlements | — | (5 | ) | — | — | (1 | ) | (6 | ) | |||||||||
| Sales | (12 | ) | (4 | ) | — | — | (19 | ) | (35 | ) | ||||||||
| Transfers into Level 3 | — | — | — | — | 2 | 2 | ||||||||||||
| Transfers out of Level 3 | — | — | — | — | (11 | ) | (11 | ) | ||||||||||
| Fair Value as of December 31, 2017 | $ | 14 | $ | 2 | $ | 1 | $ | 140 | $ | 4 | $ | 161 |
[1]"Other" includes U.S. Treasuries, Other fixed income and CMBS investments.
During the year ended December 31, 2017, 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.
There was less than $1 in Company common stock included in the Plan’s assets as of December 31, 2018 and 2017.
F-83
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| Other Postretirement Plan Assets at Fair Value as of December 31, 2018 | ||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Short-term investments | $ | 4 | $ | — | $ | — | $ | 4 | ||||
| Fixed Income Securities: | ||||||||||||
| Corporate | — | 19 | — | 19 | ||||||||
| RMBS | — | 15 | — | 15 | ||||||||
| U.S. Treasuries | 6 | 13 | — | 19 | ||||||||
| Foreign government | — | 1 | — | 1 | ||||||||
| CMBS | — | 2 | — | 2 | ||||||||
| Other fixed income | — | 2 | — | 2 | ||||||||
| Equity Securities: | ||||||||||||
| Large-cap | 23 | — | — | 23 | ||||||||
| Total other postretirement plan assets at fair value [1] | $ | 33 | $ | 52 | $ | — | $ | 85 |
| [1] | Excludes approximately $1 of investment receivables net of investment payables that are excluded from this disclosure requirement because they are trade receivables in the ordinary course of business where the carrying amount approximates fair value. |
| Other Postretirement Plan Assets at Fair Value as of December 31, 2017 | ||||||||||||
| Asset Category | Level 1 | Level 2 | Level 3 | Total | ||||||||
| Short-term investments | $ | 4 | $ | — | $ | — | $ | 4 | ||||
| Fixed Income Securities: | ||||||||||||
| Corporate | — | 25 | — | 25 | ||||||||
| RMBS | — | 17 | — | 17 | ||||||||
| U.S. Treasuries | 1 | 25 | — | 26 | ||||||||
| Foreign government | — | 1 | — | 1 | ||||||||
| CMBS | — | 5 | — | 5 | ||||||||
| Other fixed income | — | 4 | 1 | 5 | ||||||||
| Equity Securities: | ||||||||||||
| Large-cap | 30 | — | — | 30 | ||||||||
| Total other postretirement plan assets at fair value [1] | $ | 35 | $ | 77 | $ | 1 | $ | 113 |
| [1] | Excludes approximately $0 of investment payables net of investment receivables that are excluded from this disclosure requirement because they are trade receivables in the ordinary course of business where the carrying amount approximates fair value. Also excludes approximately $1 of interest receivable. |
For other postretirement plan assets measured using significant unobservable inputs (level 3), the fair value for other fixed income securities decreased from $1 as of December 31, 2017 to $0 as of December 31, 2018 due to $1 in sales.
For other postretirement plan level 3 assets, the fair value of corporate securities decreased from $1 as of December 31, 2016 to $0 as of December 31, 2017 due to $1 in purchases and $2 in sales. RMBS decreased from $1 to $0 due to $1 in settlements. Other fixed income remained at $1 from 2016 to 2017 due to $1 in purchases and $1 transfers out of level 3.
There was no Company common stock included in the other postretirement benefit plan assets as of December 31, 2018 and 2017.
Concentration of Risk
In order to minimize risk, the Plan maintains a listing of permissible and prohibited investments. In addition, the Plan has certain concentration limits and investment quality requirements imposed on permissible investment options. Permissible investments include U.S. equity, international equity, alternative asset and fixed income investments including derivative instruments. Permissible derivative instruments include futures contracts, options, swaps, currency forwards, caps or floors and may be used to control risk or enhance return but will not be used for leverage purposes.
Securities specifically prohibited from purchase include, but are not limited to: shares or fixed income instruments issued by The Hartford, short sales of any type within long-only portfolios, non-derivative securities involving the use of margin, leveraged floaters and inverse floaters, including money market obligations, natural resource real properties such as oil, gas or timber and precious metals.
Other than U.S. government and certain U.S. government agencies backed by the full faith and credit of the U.S. government, the Plan does not have any material exposure to any concentration risk of a single issuer.
Cash Flows
Company Contributions
| Employer Contributions | Pension Benefits | Other Postretirement Benefits | ||||
| 2018 | $ | 103 | $ | — | ||
| 2017 | $ | 281 | $ | — |
In 2018, the Company, at its discretion, made $101 in contributions to the U.S. qualified defined benefit pension plan. The Company does not have a 2019 required minimum funding contribution for the U.S. qualified defined benefit pension plan. The Company has not determined whether, and to what extent, contributions may be made to the U. S. qualified defined benefit pension plan in 2019. The Company will monitor the funded status of the U.S. qualified defined benefit pension plan during 2019 to make this determination.
Employer contributions in 2018 and 2017 were made in cash and did not include contributions of the Company’s common stock.
F-84
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Benefit Payments
Amounts of Benefits Expected to be Paid over the next Ten Years from Pension and other Postretirement Plans as of December 31, 2018
| Pension Benefits | Other Postretirement Benefits | |||||
| 2019 | $ | 239 | $ | 27 | ||
| 2020 | 239 | 24 | ||||
| 2021 | 246 | 22 | ||||
| 2022 | 251 | 20 | ||||
| 2023 | 250 | 18 | ||||
| 2024 - 2028 | 1,263 | 67 | ||||
| Total | $ | 2,488 | $ | 178 |
19**.** STOCK COMPENSATION PLANS
The Company's stock-based compensation plans are described below. Shares issued in satisfaction of stock-based compensation may be made available from authorized but unissued shares, shares held by the Company in treasury or from shares purchased in the open market. In 2018, 2017 and 2016, the Company issued shares from treasury in satisfaction of stock-based compensation.
Stock-based compensation expense, included in insurance operating costs and other expenses in the consolidated statement of operations, was as follows:
Stock-Based Compensation Expense
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Stock-based compensation plans expense [1] | $ | 130 | $ | 116 | $ | 81 | |||
| Income tax benefit | (27 | ) | (41 | ) | (29 | ) | |||
| Excess tax benefit on awards vested, exercised and expired | (5 | ) | (15 | ) | — | ||||
| Total stock-based compensation plans expense, after tax [2] | $ | 98 | $ | 60 | $ | 52 |
| [1] | The increase in stock-based compensation plans expense in 2018 and 2017 was largely due to a change made in 2017 to provide accelerated vesting of newly issued restricted stock unit and performance share awards to retirement eligible employees. |
| [2] | The increase in stock-based compensation plans expense, after-tax in 2018 is primarily related to the reduction of the U.S. federal corporate tax rate from 35% to 21%. |
The Company did not capitalize any cost of stock-based compensation. As of December 31, 2018, the total compensation cost related to non-vested awards not yet recognized was $64, which is expected to be recognized over a weighted average period of 1.9 years.
In the second quarter of 2018, The Hartford modified the terms of the portion of its outstanding 2016 and 2017 performance
share awards that are based on actual versus targeted return on equity over the performance period. The modification eliminated the benefit to return on equity that arose from the charge against earnings in 2017 driven by the effect of the lower corporate income tax rate on the carrying value of net deferred tax assets. This modification had no impact on compensation cost recognized over the vesting period since compensation cost based on the original performance share conditions is projected to be higher than what the cost would be based on the performance share conditions as modified.
Stock Plan
Future stock-based awards may be granted under The Hartford's 2014 Incentive Stock Plan (the "Incentive Stock Plan") other than the Subsidiary Stock Plan and the Employee Stock Purchase Plan described below. The Incentive Stock Plan provides for awards to be granted in the form of non-qualified or incentive stock options qualifying under Section 422 of the Internal Revenue Code, stock appreciation rights, performance shares, restricted stock or restricted stock units, or any other form of stock-based award. The maximum number of shares, subject to adjustments set forth in the Incentive Stock Plan, that may be issued to Company employees and third party service providers during the 10-year duration of the Incentive Stock Plan is 12,000,000 shares. If any award under an earlier incentive stock plan is forfeited, terminated, surrendered, exchanged, expires unexercised, or is settled in cash in lieu of stock (including to effect tax withholding) or for the net issuance of a lesser number of shares than the number subject to the award, the shares of stock subject to such award (or the relevant portion thereof) shall be available for awards under the Incentive Stock Plan and such shares shall be added to the maximum limit. As of December 31, 2018, there were 7,294,481 shares available for future issuance.
The fair values of awards granted under the Incentive Stock Plan are measured as of the grant date and expensed ratably over the awards’ vesting periods, generally 3 years. For stock option awards to retirement-eligible employees the Company recognizes the expense over a period shorter than the stated vesting period
F-85
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
because the employees receive accelerated vesting upon retirement and therefore the vesting period is considered non-substantive. Beginning with awards granted in 2017, employees with restricted stock units and performance shares receive accelerated vesting upon meeting certain retirement eligibility criteria.
Stock Option Awards
Under the Incentive Stock Plan, options granted have an exercise price at least equal to the market price of the Company’s common stock on the date of grant, and an option’s maximum term is not to exceed 10 years. Options generally become exercisable over a period of three years commencing one year from the date of grant. Certain other options become exercisable at the later of three years from the date of grant or upon specified market appreciation of the Company's common shares.
The Company uses a hybrid lattice/Monte-Carlo based option valuation model (the “valuation model”) that incorporates the possibility of early exercise of options into the valuation. The valuation model also incorporates the Company’s historical
termination and exercise experience to determine the option value.
The valuation model incorporates ranges of assumptions for inputs, and those ranges are disclosed below. The term structure of volatility is generally constructed utilizing implied volatilities from exchange-traded options, CPP warrants related to the Company’s stock, historical volatility of the Company’s stock and other factors. The Company uses historical data to estimate option exercise and employee termination within the valuation model, and accommodates variations in employee preference and risk-tolerance by segregating the grantee pool into a series of behavioral cohorts and conducting a fair valuation for each cohort individually. The expected term of options granted is derived from the output of the option valuation model and represents, in a mathematical sense, the period of time that options are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Constant Maturity Treasury yield curve in effect at the time of grant.
Stock Options Valuation Assumptions
| For the years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Expected dividend yield | 1.8% | 1.9% | 2.0% | |||||||||
| Expected annualized spot volatility | 20.8 | % | - | 36.5% | 21.8 | % | - | 37.9% | 27.3 | % | - | 41.3% |
| Weighted average annualized volatility | 29.0% | 29.5% | 34.1% | |||||||||
| Risk-free spot rate | 1.5 | % | - | 2.9% | 0.4 | % | - | 2.4% | 0.3 | % | - | 1.8% |
| Expected term | 5.7 years | 5.0 years | 5.0 years |
Non-qualified Stock Option Activity Under the Incentive Stock Plan
| Number of Options (in thousands) | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||
| For the year ended December 31, 2018 | |||||||||
| Outstanding at beginning of year | 5,212 | $ | 37.25 | ||||||
| Granted | 876 | $ | 53.81 | ||||||
| Exercised | (571 | ) | $ | 26.43 | |||||
| Forfeited | — | $ | — | ||||||
| Expired | (27 | ) | $ | 74.88 | |||||
| Outstanding at end of year | 5,490 | $ | 40.84 | 6.1 years | $ | 32 | |||
| Outstanding, fully vested and expected to vest | 5,240 | $ | 42.79 | 6.1 years | $ | 30 | |||
| Exercisable at end of year | 3,737 | $ | 36.30 | 4.9 years | $ | 32 |
Aggregate intrinsic value represents the value of the Company's closing stock price on the last trading day of the period in excess of the exercise price multiplied by the number of options outstanding or exercisable. The aggregate intrinsic value excludes the effect of stock options that have a zero or negative intrinsic value. The weighted average grant-date fair value per share of options granted during the years ended December 31, 2018, 2017, and 2016 was $14.04, $12.38 and $12.14, respectively. The total intrinsic value of options exercised during the years ended December 31, 2018, 2017 and 2016 was $14, $8, and $1, respectively.
Share Awards
Share awards granted under the Incentive Stock Plan and outstanding include restricted stock units and performance shares.
Restricted Stock and Restricted Stock Units
Restricted stock units are share equivalents that are credited with dividend equivalents. Dividend equivalents are accumulated and paid in incremental shares when the underlying units vest.
F-86
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Restricted stock are shares of The Hartford's common stock with restrictions as to transferability until vested. Restricted stock units and restricted stock awards are valued equal to the market price of the Company’s common stock on the date of grant. Generally, restricted stock units vest at the end of or over three years; certain restricted stock units vest at the end of five years. Beginning in 2017, restricted stock units vest at the earlier of employees retirement eligibility date or three years. Equity awards granted to non-employee directors generally vest in one year and were made in the form of restricted stock units in 2018, 2017 and 2016.
Performance Shares
Performance shares become payable within a range of 0% to 200% of the number of shares initially granted based upon the attainment of specific performance goals achieved at the end of or over three years. While most performance shares vest at the end of or over three years, certain performance shares vest at the end of five years. Beginning in 2017, performance shares vest at the earlier of employees retirement eligibility date or three years.
Performance share awards that are not dependent on market conditions are valued equal to the market price of the Company's
common stock on the date of grant less a discount for the absence of dividends. Stock-compensation expense for these performance share awards without market conditions is based on a current estimate of the number of awards expected to vest based on the performance level achieved and, therefore, may change during the performance period as new estimates of performance are available.
Other performance share awards or portions thereof have a market condition based upon the Company's total stockholder return relative to a group of peer companies within a period of three years from the date of grant. Stock compensation expense for these performance share awards is based on the number of awards expected to vest as estimated at the grant date and, therefore, does not change for changes in estimated performance. The Company uses a risk neutral Monte-Carlo valuation model that incorporates time to maturity, implied volatilities of the Company and the peer companies, and correlations between the Company and the peer companies and interest rates.
Assumptions for Total Shareholder Return Performance Shares
| For the years ended December 31, | ||||||||||||
| 2018 | 2017 | 2016 | ||||||||||
| Volatility of common stock | 20.8% | 20.3% | 22.2% | |||||||||
| Average volatility of peer companies | 17.0 | % | - | 25.0% | 15.0 | % | - | 25.0% | 15.0 | % | - | 26.0% |
| Average correlation coefficient of peer companies | 54.0% | 60.0% | 56.0% | |||||||||
| Risk-free spot rate | 2.4% | 1.5% | 1.0% | |||||||||
| Term | 3.0 years | 3.0 years | 3.0 years |
Total Share Awards
Non-vested Share Award Activity Under the Incentive Stock Plan
| Restricted Stock and Restricted Stock Units | Performance Shares | |||||||||
| Number of Shares (in thousands) | Weighted-Average Grant-Date Fair Value | Number of Shares (in thousands) | Weighted-Average Grant date Fair Value | |||||||
| Non-vested shares | For the year ended December 31, 2018 | |||||||||
| Non-vested at beginning of year | 4,444 | $ | 43.94 | 795 | $ | 45.16 | ||||
| Granted | 1,359 | $ | 53.11 | 372 | $ | 50.26 | ||||
| Performance based adjustment | 188 | $ | 43.59 | |||||||
| Vested | (1,721 | ) | $ | 41.52 | (539 | ) | $ | 43.59 | ||
| Forfeited | (636 | ) | $ | 46.07 | (81 | ) | $ | 44.45 | ||
| Non-vested at end of year | 3,446 | $ | 48.43 | 735 | $ | 49.56 |
The weighted average grant-date fair value per share of restricted stock units and restricted stock granted during the years ended December 31, 2018, 2017, and 2016 was $53.11, $48.90 and $42.87, respectively. The weighted average grant-date fair value per share of performance shares granted during the years ended December 31, 2018, 2017, and 2016 was $50.26, $48.89 and $41.50, respectively.
The total fair value of shares vested during the years ended December 31, 2018, 2017 and 2016 was $114, $94 and $128,
respectively, based on actual or estimated performance factors. The Company did not make cash payments in settlement of stock compensation during the years ended December 31, 2018, 2017 and 2016.
Subsidiary Stock Plan
In 2013 the Company established a subsidiary stock-based compensation plan similar to The Hartford Incentive Stock Plan except that it awards non-public subsidiary stock as
F-87
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
compensation. The Company recognized stock-based compensation plan expense of $9, $9 and $7 in the years ended December 31, 2018, 2017 and 2016, respectively, for the subsidiary stock plan. Upon employee vesting of subsidiary stock, the Company recognizes a noncontrolling equity interest. Employees are restricted from selling vested subsidiary stock to anyone other than the Company and the Company has discretion on the amount of stock to repurchase. Therefore, the subsidiary stock is classified as equity because it is not mandatorily redeemable. For the year ended December 31, 2018, the Company repurchased $4 in subsidiary stock.
Employee Stock Purchase Plan
The Company sponsors The Hartford Employee Stock Purchase Plan (“ESPP”). Under this plan, eligible employees of The Hartford purchase common stock of the Company at a discount rate of 5%
of the market price per share on the last trading day of the offering period. Accordingly, the plan is a non-compensatory plan. Employees purchase a variable number of shares of stock through payroll deductions elected as of the beginning of the offering period. The Company may sell up to 15,400,000 shares of stock to eligible employees under the ESPP. As of December 31, 2018, there were 4,297,972 shares available for future issuance. During the years ended December 31, 2018, 2017 and 2016, 219,661 shares, 204,533 shares, and 222,113 shares were sold, respectively. The weighted average per share fair value of the discount under the ESPP was $2.56, $2.63 and $2.26 during the years ended December 31, 2018, 2017 and 2016, respectively. The fair value is estimated based on the 5% discount off the market price per share on the last trading day of the offering period.
20**.** BUSINESS DISPOSITIONS AND DISCONTINUED OPERATIONS
Sale of U.K. business
On May 10, 2017, the Company completed the sale of its U.K. property and casualty run-off subsidiaries, Hartford Financial Products International Limited and Downlands Liability Management Limited, in a cash transaction to Catalina Holdings U.K. Limited ("buyer"), for approximately $272, net of transaction costs. The Company's U.K. property and casualty run-off subsidiaries are included in the P&C Other Operations reporting segment. Revenues and earnings are not material to the Company's consolidated results of operations for the years ended December 31, 2017 and 2016.
The sale resulted in an after tax capital loss from the transaction of $5 on the sale for the year ended December 31, 2016.
Major Classes of Assets and Liabilities Transferred by the Company to the Buyer in Connection with the Sale
| Carrying Value as of | ||||||
| Closing | December 31, 2016 [2] | |||||
| Assets | ||||||
| Cash and investments | $ | 669 | $ | 657 | ||
| Reinsurance recoverables and other [1] | 268 | 213 | ||||
| Total assets held for sale | 937 | 870 | ||||
| Liabilities | ||||||
| Reserve for future policy benefits and unpaid loss and loss adjustment expenses | 653 | 600 | ||||
| Other liabilities | 12 | 11 | ||||
| Total liabilities held for sale | $ | 665 | $ | 611 |
| [1] | *Includes intercompany reinsurance recoverables of $*71 as of December 31, 2016, settled in cash at closing. |
| [2] | Classified as assets and liabilities held for sale. |
Sale of life and annuity business
On May 31, 2018, the Company’s wholly-owned subsidiary, Hartford Holdings, Inc. (HHI), completed the sale of its life and annuity business to a group of investors led by Cornell Capital LLC, Atlas Merchant Capital LLC, TRB Advisors LP, Global Atlantic Financial Group, Pine Brook and J. Safra Group. Under the terms of the sale agreement signed December 3, 2017, the investor group formed a limited partnership, Hopmeadow Holdings LP, that acquired Hartford Life, Inc. (HLI), and its life and annuity operating subsidiaries, for cash of approximately $1.4 billion after a pre-closing dividend to The Hartford of $300. The Hartford received a 9.7% ownership interest in the limited partnership, valued at a cost of $164 as of the sale date. In addition, as part of the terms of the sale agreement, The Hartford reduced its long-term debt by $142 because the debt, which was issued by HLI, was included as part of the sale. Including cash proceeds and the retained equity interest and net of transaction costs, net proceeds for the sale were approximately $1.5 billion. The life and annuity operations met the criteria for reporting as discontinued operations and are reported in the Corporate category through the date of sale.
The Company recognized a loss on sale within discontinued operations of approximately $3.3 billion in 2017 and a reduction in loss on sale of $202 in 2018. The reduction in loss on sale in 2018 primarily resulted from the reclassification to retained earnings of $193 of tax effects stranded in AOCI due to the accounting for Tax Reform and a $141 increase in estimated retained tax benefits, primarily net operating loss carryovers, partially offset by $104 of operating income from discontinued operations during the period up until the closing date and a reclassification of $10 of net unrealized capital gains from AOCI to retained earnings. See Note 1 - Adoption of New Accounting Standards within Basis of Presentation and Significant Accounting Policies, for additional information about the reclassifications from AOCI to retained earnings. The estimated amount of retained net operating loss carryovers depends on the estimated tax basis of the business sold which increased
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
subsequent to the date the Company entered into the sale agreement. At closing, stockholders’ equity was further reduced for the amount of AOCI of the life and annuity business, which was approximately $758, largely consisting of net unrealized gains on investments, net of shadow DAC. The AOCI balance was $1 billion as of December 31, 2017.
Cash inflows and outflows from and to the life and annuity business after closing were immaterial to the overall inflows and outflows of the Company. Additionally, the revenues and expenses presented in continuing operations related to pre-disposal operations were immaterial.
The Company will continue to manage invested assets of the life and annuity business sold in May 2018 for an initial term of five years and provide transition services for up to 24 months.
The Hartford reported its 9.7% ownership interest in Hopmeadow Holdings LP, which is accounted for under the equity method, in other assets in the Consolidated Balance Sheet. The Hartford recognizes its share of income in other revenues in the Consolidated Statement of Operations on a three month delay, when financial information from the investee becomes available. The Company recognized $8 of income for 2018.
Major Classes of Assets and Liabilities Transferred to the Buyer in Connection with the Sale
| Carrying Value as of | ||||||
| Closing | December 31, 2017 [2] | |||||
| Assets | ||||||
| Cash and investments | $ | 27,058 | $ | 30,135 | ||
| Reinsurance recoverables | 20,718 | 20,785 | ||||
| Loss accrual [1] | (3,044 | ) | (3,257 | ) | ||
| Other assets | 2,907 | 1,439 | ||||
| Separate account assets | 110,773 | 115,834 | ||||
| Total assets held for sale | $ | 158,412 | $ | 164,936 | ||
| Liabilities | ||||||
| Reserve for future policy benefits and unpaid loss and loss adjustment expenses | $ | 14,308 | $ | 14,482 | ||
| Other policyholder funds and benefits payable | 28,680 | 29,228 | ||||
| Long-term debt | 142 | 142 | ||||
| Other liabilities | 2,222 | 2,756 | ||||
| Separate account liabilities | 110,773 | 115,834 | ||||
| Total liabilities held for sale | $ | 156,125 | $ | 162,442 |
| [1] | Represents the estimated accrued loss on sale of the Company's life and annuity business. |
| [2] | Classified as assets and liabilities held for sale. |
Reconciliation of the Major Line Items Constituting Pretax Profit (Loss) of Discontinued Operations
| For the years ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Revenues | |||||||||
| Earned premiums | $ | 39 | $ | 106 | $ | 114 | |||
| Fee income and other | 382 | 912 | 931 | ||||||
| Net investment income | 519 | 1,289 | 1,384 | ||||||
| Net realized capital losses | (68 | ) | (53 | ) | (158 | ) | |||
| Total revenues | 872 | 2,254 | 2,271 | ||||||
| Benefits, losses and expenses | |||||||||
| Benefits, losses and loss adjustment expenses | 535 | 1,416 | 1,390 | ||||||
| Amortization of DAC | 58 | 45 | 146 | ||||||
| Insurance operating costs and other expenses [1] | 157 | 368 | 378 | ||||||
| Total benefits, losses and expenses | 750 | 1,829 | 1,914 | ||||||
| Income before income taxes | 122 | 425 | 357 | ||||||
| Income tax expense (benefit) | 2 | 37 | 74 | ||||||
| Income from operations of discontinued operations, net of tax | 120 | 388 | 283 | ||||||
| Net realized capital gain (loss) on disposal, net of tax | 202 | (3,257 | ) | — | |||||
| Income (loss) from discontinued operations, net of tax | $ | 322 | $ | (2,869 | ) | $ | 283 |
[1]Corporate allocated overhead has been included in continuing operations.
Cash Flows from Discontinued Operations included in the Consolidated Statement of Cash Flows
| Year Ended December 31, | |||||||||
| 2018 | 2017 | 2016 | |||||||
| Net cash provided by operating activities from discontinued operations | $ | 603 | $ | 797 | $ | 784 | |||
| Net cash provided by investing activities from discontinued operations | $ | 463 | $ | 1,466 | $ | 864 | |||
| Net cash used in financing activities from discontinued operations [1] | $ | (737 | ) | $ | (884 | ) | $ | (647 | ) |
| Cash paid for interest | $ | — | $ | 11 | $ | 11 |
| [1] | Excludes return of capital to parent of $619*,* $1,396*, and* $752 for 2018*,* 2017 and 2016*, respectively.* |
F-89
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21**.** QUARTERLY RESULTS (UNAUDITED)
Current and Historical Quarterly Results of the Company
| Three months ended | |||||||||||||||||||||||||||
| March 31, | June 30, | September 30, | December 31, | ||||||||||||||||||||||||
| 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | 2018 | 2017 | ||||||||||||||||||||
| Revenues | $ | 4,691 | $ | 4,169 | $ | 4,789 | $ | 4,214 | $ | 4,842 | $ | 4,192 | $ | 4,633 | $ | 4,587 | |||||||||||
| Benefits, losses and expenses | 4,172 | 3,768 | 4,252 | 4,495 | 4,312 | 4,011 | 4,466 | 4,165 | |||||||||||||||||||
| Income (loss) from continuing operations, net of tax | 428 | 303 | 434 | (152 | ) | 427 | 145 | 196 | (558 | ) | |||||||||||||||||
| Income (loss) from discontinued operations, net of tax | 169 | 75 | 148 | 112 | 5 | 89 | — | (3,145 | ) | ||||||||||||||||||
| Net income (loss) | $ | 597 | $ | 378 | $ | 582 | $ | (40 | ) | $ | 432 | $ | 234 | $ | 196 | $ | (3,703 | ) | |||||||||
| Less: Preferred stock dividends | — | — | — | — | — | — | 6 | — | |||||||||||||||||||
| Net income (loss) available to common stockholders | $ | 597 | $ | 378 | $ | 582 | $ | (40 | ) | $ | 432 | $ | 234 | $ | 190 | $ | (3,703 | ) | |||||||||
| Basic | |||||||||||||||||||||||||||
| Income (loss) from continuing operations, net of tax, available to common stockholders per share | $ | 1.20 | $ | 0.82 | $ | 1.21 | $ | (0.42 | ) | $ | 1.19 | $ | 0.40 | $ | 0.53 | $ | (1.56 | ) | |||||||||
| Income (loss) from discontinued operations, net of tax per share | $ | 0.47 | $ | 0.20 | $ | 0.41 | $ | 0.31 | $ | 0.01 | $ | 0.25 | $ | — | $ | (8.81 | ) | ||||||||||
| Net income (loss) per common share available to common stockholders | $ | 1.67 | $ | 1.02 | $ | 1.62 | $ | (0.11 | ) | $ | 1.20 | $ | 0.65 | $ | 0.53 | $ | (10.37 | ) | |||||||||
| Diluted | |||||||||||||||||||||||||||
| Income (loss) from continuing operations, net of tax, available to common stockholders per share | $ | 1.18 | $ | 0.80 | $ | 1.19 | $ | (0.42 | ) | $ | 1.17 | $ | 0.40 | $ | 0.52 | $ | (1.56 | ) | |||||||||
| Income (loss) from discontinued operations, net of tax per share | $ | 0.46 | $ | 0.20 | $ | 0.41 | $ | 0.31 | $ | 0.02 | $ | 0.24 | $ | — | $ | (8.81 | ) | ||||||||||
| Net income (loss) per common share available to common stockholders | $ | 1.64 | $ | 1.00 | $ | 1.60 | $ | (0.11 | ) | $ | 1.19 | $ | 0.64 | $ | 0.52 | $ | (10.37 | ) | |||||||||
| Weighted average common shares outstanding, basic | 357.5 | 371.4 | 358.3 | 366.0 | 358.6 | 360.2 | 359.1 | 357.0 | |||||||||||||||||||
| Weighted average shares outstanding and dilutive potential common shares [1] | 363.9 | 378.6 | 364.2 | 366.0 | 364.1 | 367.0 | 364.0 | 357.0 |
| [1] | In periods where a loss from continuing operations, net of tax, available to common stockholders or net loss available to common stockholders is recognized, inclusion of incremental dilutive shares would be antidilutive. Due to the antidilutive impact, such shares are excluded from the diluted earnings per share calculation of income (loss) from continuing operations, net of tax, available to common stockholders and net income (loss) available to common stockholders in such periods. |
F-90
Part IV - Schedule I. Summary of Investments - Other Investments in Affiliates
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN AFFILIATES
(in millions)
| As of December 31, 2018 | |||||||||
| Type of Investment | Cost | Fair Value | Amount at which shown on Balance Sheet | ||||||
| Fixed Maturities | |||||||||
| Bonds and notes | |||||||||
| U.S. government and government agencies and authorities (guaranteed and sponsored) | $ | 4,446 | $ | 4,430 | $ | 4,430 | |||
| States, municipalities and political subdivisions | 9,972 | 10,346 | 10,346 | ||||||
| Foreign governments | 866 | 847 | 847 | ||||||
| Public utilities | 2,017 | 1,991 | 1,991 | ||||||
| All other corporate bonds | 11,679 | 11,407 | 11,407 | ||||||
| All other mortgage-backed and asset-backed securities | 6,623 | 6,631 | 6,631 | ||||||
| Total fixed maturities, available-for-sale | 35,603 | 35,652 | 35,652 | ||||||
| Fixed maturities, at fair value using fair value option | 21 | 22 | 22 | ||||||
| Total fixed maturities | 35,624 | 35,674 | 35,674 | ||||||
| Equity Securities | |||||||||
| Common stocks | |||||||||
| Industrial, miscellaneous and all other | 1,170 | 1,170 | 1,170 | ||||||
| Non-redeemable preferred stocks | 44 | 44 | 44 | ||||||
| Total equity securities, at fair value | 1,214 | 1,214 | 1,214 | ||||||
| Mortgage loans | 3,704 | 3,746 | 3,704 | ||||||
| Futures, options and miscellaneous | 254 | 192 | 192 | ||||||
| Short-term investments | 4,282 | 4,283 | 4,283 | ||||||
| Investments in partnerships and trusts | 1,723 | 1,723 | |||||||
| Total investments | $ | 46,802 | $ | 46,790 |
S-1
Part IV - Schedule II. Condensed Financial Information of the Hartford Financial Services, Inc.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Registrant)
(In millions)
| As of December 31, | ||||||
| Condensed Balance Sheets | 2018 | 2017 | ||||
| Assets | ||||||
| Fixed maturities, available-for-sale, at fair value | $ | 785 | $ | 637 | ||
| Equity securities, at fair value | 30 | — | ||||
| Other investments | 103 | (1 | ) | |||
| Short-term investments | 2,603 | 442 | ||||
| Cash | 3 | 2 | ||||
| Investment in affiliates [1] | 15,074 | 19,023 | ||||
| Deferred income taxes | 992 | 693 | ||||
| Unamortized issue costs | 3 | 1 | ||||
| Other assets | 78 | 11 | ||||
| Total assets | $ | 19,671 | $ | 20,808 | ||
| Liabilities and Stockholders’ Equity | ||||||
| Net payable to affiliates | $ | 1,530 | $ | 1,598 | ||
| Short-term debt (includes current maturities of long-term debt) | 413 | 320 | ||||
| Long-term debt | 4,265 | 4,678 | ||||
| Other liabilities | 362 | 718 | ||||
| Total liabilities | 6,570 | 7,314 | ||||
| Total stockholders’ equity | 13,101 | 13,494 | ||||
| Total liabilities and stockholders’ equity | $ | 19,671 | $ | 20,808 |
[1]2017 includes amounts for the life and annuity business accounted for as held for sale and operating results for that business included in discontinued operations in the Consolidated Financial Statements. See Note 20 – Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements.
S-2
Part IV - Schedule II. Condensed Financial Information of the Hartford Financial Services, Inc.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions)
| For the years ended December 31, | |||||||||
| Condensed Statements of Operations and Comprehensive Income | 2018 | 2017 | 2016 | ||||||
| Net investment income | $ | 41 | $ | 15 | $ | 21 | |||
| Net realized capital gains (losses) | 37 | (1 | ) | (6 | ) | ||||
| Total revenues | 78 | 14 | 15 | ||||||
| Interest expense | 298 | 316 | 328 | ||||||
| Loss on extinguishment of debt | 6 | — | — | ||||||
| Pension settlement | — | 750 | — | ||||||
| Other expense (income) | (6 | ) | 1 | 9 | |||||
| Total expenses | 298 | 1,067 | 337 | ||||||
| Loss before income taxes and earnings of subsidiaries | (220 | ) | (1,053 | ) | (322 | ) | |||
| Income tax expense (benefit) | (630 | ) | 106 | (117 | ) | ||||
| Income (loss) before earnings of subsidiaries | 410 | (1,159 | ) | (205 | ) | ||||
| Earnings (losses) of subsidiaries [1] | 1,397 | (1,972 | ) | 1,101 | |||||
| Net income (loss) | 1,807 | (3,131 | ) | 896 | |||||
| Other comprehensive income (loss) - parent company: | |||||||||
| Change in net gain/loss on cash-flow hedging instruments | 8 | 2 | — | ||||||
| Change in net unrealized gain/loss on securities | (271 | ) | 280 | 1 | |||||
| Change in pension and other postretirement plan adjustments | (26 | ) | 107 | (6 | ) | ||||
| Other comprehensive income (loss), net of taxes before other comprehensive income of subsidiaries | (289 | ) | 389 | (5 | ) | ||||
| Other comprehensive income (loss) of subsidiaries | (1,948 | ) | 611 | (3 | ) | ||||
| Total other comprehensive income (loss) | (2,237 | ) | 1,000 | (8 | ) | ||||
| Total comprehensive income (loss) | $ | (430 | ) | $ | (2,131 | ) | $ | 888 |
[1]2017 and 2016 include amounts for the life and annuity business accounted for as held for sale and operating results for that business included in discontinued operations in the Consolidated Financial Statements. See Note 20 – Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements.
S-3
Part IV - Schedule II. Condensed Financial Information of the Hartford Financial Services, Inc.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued)
(Registrant)
(In millions)
| For the years ended December 31, | |||||||||
| Condensed Statements of Cash Flows | 2018 | 2017 | 2016 | ||||||
| Operating Activities | |||||||||
| Net income (loss) | $ | 1,807 | $ | (3,131 | ) | $ | 896 | ||
| Loss on extinguishment of debt | 6 | — | — | ||||||
| Equity in net loss (income) of subsidiaries | (1,397 | ) | 1,972 | (1,101 | ) | ||||
| Change in operating assets and liabilities | 2,362 | 3,220 | 1,634 | ||||||
| Cash provided by operating activities | 2,778 | 2,061 | 1,429 | ||||||
| Investing Activities | |||||||||
| Net proceeds from (payments for) short-term investments | (2,161 | ) | (121 | ) | 30 | ||||
| Net additions to property and equipment | (69 | ) | — | — | |||||
| Capital returned from (contributions to) subsidiaries | (148 | ) | (633 | ) | 491 | ||||
| Cash provided by (used for) investing activities | (2,378 | ) | (754 | ) | 521 | ||||
| Financing Activities | |||||||||
| Proceeds from issuance of debt | 490 | 500 | — | ||||||
| Repayments of debt | (826 | ) | (416 | ) | (275 | ) | |||
| Preferred stock issued, net of issuance costs | 334 | — | — | ||||||
| Treasury stock acquired | — | (1,028 | ) | (1,330 | ) | ||||
| Net issuance (return of) shares under incentive and stock compensation plans | (18 | ) | (20 | ) | (11 | ) | |||
| Dividends paid on common shares | (379 | ) | (341 | ) | (334 | ) | |||
| Cash used for financing activities | (399 | ) | (1,305 | ) | (1,950 | ) | |||
| Net increase in cash | 1 | 2 | — | ||||||
| Cash — beginning of period | 2 | — | — | ||||||
| Cash — end of period | $ | 3 | $ | 2 | $ | — | |||
| Supplemental Disclosure of Cash Flow Information | |||||||||
| Interest Paid | $ | 290 | $ | 312 | $ | 326 | |||
| Dividends Received from Subsidiaries | $ | 3,115 | $ | 2,142 | $ | 1,320 |
S-4
Part IV - Schedule III. Supplementary Insurance Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(In millions)
| Segment | Deferred Policy Acquisition Costs | Unpaid Losses and Loss Adjustment Expenses | Reserve for Future Policy Benefits | Unearned Premiums | Other Policyholder Funds and Benefits Payable | |||||||||||
| As of December 31, 2018 | ||||||||||||||||
| Commercial Lines | $ | 495 | $ | 19,455 | $ | — | $ | 3,589 | $ | — | ||||||
| Personal Lines | 117 | 2,456 | — | 1,643 | — | |||||||||||
| Property & Casualty Other Operations | — | 2,673 | — | 7 | — | |||||||||||
| Group Benefits | 52 | 8,445 | 427 | 43 | 455 | |||||||||||
| Hartford Funds | 6 | — | — | — | — | |||||||||||
| Corporate | — | — | 215 | — | 312 | |||||||||||
| Consolidated | $ | 670 | $ | 33,029 | $ | 642 | $ | 5,282 | $ | 767 | ||||||
| As of December 31, 2017 | ||||||||||||||||
| Commercial Lines | $ | 467 | $ | 18,893 | $ | — | $ | 3,504 | $ | — | ||||||
| Personal Lines | 127 | 2,294 | — | 1,768 | — | |||||||||||
| Property & Casualty Other Operations | — | 2,588 | — | 10 | — | |||||||||||
| Group Benefits | 47 | 8,512 | 441 | 40 | 492 | |||||||||||
| Hartford Funds | 9 | — | — | — | — | |||||||||||
| Corporate | — | — | 272 | — | 324 | |||||||||||
| Consolidated | $ | 650 | $ | 32,287 | $ | 713 | $ | 5,322 | $ | 816 |
S-5
Part IV - Schedule III. Supplementary Insurance Information
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
(In millions)
| Segment | Earned Premiums, Fee Income and Other | Net Investment Income | Benefits, Losses and Loss Adjustment Expenses | Amortization of Deferred Policy Acquisition Costs | Insurance Operating Costs and Other Expenses [1] | Net Written Premiums [2] | ||||||||||||
| For the year December 31, 2018 | ||||||||||||||||||
| Commercial Lines | $ | 7,081 | $ | 997 | $ | 4,112 | $ | 1,048 | $ | 1,396 | $ | 7,136 | ||||||
| Personal Lines | 3,523 | 155 | 2,763 | 275 | 684 | 3,276 | ||||||||||||
| Property & Casualty Other Operations | — | 90 | 65 | — | 13 | (4 | ) | |||||||||||
| Group Benefits | 5,598 | 474 | 4,214 | 45 | 1,342 | — | ||||||||||||
| Hartford Funds | 1,032 | 5 | — | 16 | 831 | — | ||||||||||||
| Corporate | 53 | 59 | 11 | — | 387 | — | ||||||||||||
| Consolidated | $ | 17,287 | $ | 1,780 | $ | 11,165 | $ | 1,384 | $ | 4,653 | $ | 10,408 | ||||||
| For the year December 31, 2017 | ||||||||||||||||||
| Commercial Lines | $ | 6,902 | $ | 949 | $ | 4,322 | $ | 1,009 | $ | 1,381 | $ | 6,956 | ||||||
| Personal Lines | 3,819 | 141 | 3,000 | 309 | 649 | 3,561 | ||||||||||||
| Property & Casualty Other Operations | — | 106 | 18 | — | 9 | — | ||||||||||||
| Group Benefits | 3,677 | 381 | 2,803 | 33 | 924 | — | ||||||||||||
| Hartford Funds | 992 | 3 | — | 21 | 805 | — | ||||||||||||
| Corporate | 4 | 23 | 31 | — | 1,125 | — | ||||||||||||
| Consolidated | $ | 15,394 | $ | 1,603 | $ | 10,174 | $ | 1,372 | $ | 4,893 | $ | 10,517 | ||||||
| For the year December 31, 2016 | ||||||||||||||||||
| Commercial Lines | $ | 6,690 | $ | 917 | $ | 3,994 | $ | 973 | $ | 1,244 | $ | 6,732 | ||||||
| Personal Lines | 4,023 | 135 | 3,175 | 348 | 669 | 3,837 | ||||||||||||
| Property & Casualty Other Operations | — | 127 | 278 | — | 663 | (1 | ) | |||||||||||
| Group Benefits | 3,223 | 366 | 2,514 | 31 | 776 | — | ||||||||||||
| Hartford Funds | 885 | 1 | — | 24 | 741 | — | ||||||||||||
| Corporate | 3 | 31 | — | 1 | 413 | — | ||||||||||||
| Consolidated | $ | 14,824 | $ | 1,577 | $ | 9,961 | $ | 1,377 | $ | 4,506 | $ | 10,568 |
[1]includes interest expense, loss on extinguishment of debt, restructuring and other costs, reinsurance loss on disposition and amortization of intangible assets
[2]Excludes life insurance pursuant to Regulation S-X.
S-6
Part IV - Schedule IV. Reinsurance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE IV
REINSURANCE
(In millions)
| Gross Amount | Ceded Amount | Assumed From Other Companies | Net Amount | Percentage of Amount Assumed to Net | ||||||||||
| For the year ended December 31, 2018 | ||||||||||||||
| Life insurance in-force | $ | 722,048 | $ | 16,674 | $ | 442,817 | $ | 1,148,191 | 39 | % | ||||
| Insurance revenues | ||||||||||||||
| Property and casualty insurance | $ | 10,824 | $ | 599 | $ | 221 | $ | 10,446 | 2 | % | ||||
| Life insurance and annuities | 1,551 | 22 | 1,082 | 2,611 | 41 | % | ||||||||
| Accident and health insurance | 2,064 | 39 | 962 | 2,987 | 32 | % | ||||||||
| Total insurance revenues | $ | 14,439 | $ | 660 | $ | 2,265 | $ | 16,044 | 14 | % | ||||
| For the year ended December 31, 2017 | ||||||||||||||
| Life insurance in-force | $ | 700,860 | $ | 9,493 | $ | 301,573 | $ | 992,940 | 30 | % | ||||
| Insurance revenues | ||||||||||||||
| Property and casualty insurance | $ | 10,923 | $ | 600 | $ | 232 | $ | 10,555 | 2 | % | ||||
| Life insurance and annuities | 1,526 | 14 | 232 | 1,744 | 13 | % | ||||||||
| Accident and health insurance | 1,755 | 36 | 214 | 1,933 | 11 | % | ||||||||
| Total insurance revenues | $ | 14,204 | $ | 650 | $ | 678 | $ | 14,232 | 5 | % | ||||
| For the year ended December 31, 2016 | ||||||||||||||
| Life insurance in-force | $ | 657,197 | $ | 7,919 | $ | 22,239 | $ | 671,517 | 3 | % | ||||
| Insurance revenues | ||||||||||||||
| Property and casualty insurance | $ | 10,871 | $ | 583 | $ | 261 | $ | 10,549 | 2 | % | ||||
| Life insurance and annuities | 1,471 | 11 | 52 | 1,512 | 3 | % | ||||||||
| Accident and health insurance | 1,689 | 33 | 55 | 1,711 | 3 | % | ||||||||
| Total insurance revenues | $ | 14,031 | $ | 627 | $ | 368 | $ | 13,772 | 3 | % |
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Part IV - Schedule V. Valuation and Qualifying Accounts
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
(In millions)
| Balance January 1, | Increase (decrease) in Costs and Expenses | Write-offs/ Payments/ Other | Balance December 31, | |||||||||
| 2018 | ||||||||||||
| Allowance for doubtful accounts and other | $ | 132 | $ | 40 | $ | (37 | ) | $ | 135 | |||
| Allowance for uncollectible reinsurance | 104 | 3 | 19 | 126 | ||||||||
| Valuation allowance on mortgage loans | 1 | — | — | 1 | ||||||||
| Valuation allowance for deferred taxes | — | — | — | — | ||||||||
| 2017 | ||||||||||||
| Allowance for doubtful accounts and other | 137 | 42 | (47 | ) | 132 | |||||||
| Allowance for uncollectible reinsurance | 165 | 4 | (65 | ) | 104 | |||||||
| Valuation allowance on mortgage loans | — | 1 | — | 1 | ||||||||
| Valuation allowance for deferred taxes | — | — | — | — | ||||||||
| 2016 | ||||||||||||
| Allowance for doubtful accounts and other | $ | 134 | $ | 39 | $ | (36 | ) | $ | 137 | |||
| Allowance for uncollectible reinsurance | 266 | 3 | (104 | ) | 165 | |||||||
| Valuation allowance on mortgage loans | 4 | — | (4 | ) | — | |||||||
| Valuation allowance for deferred taxes | 79 | (79 | ) | — | — |
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Part IV - Schedule VI. Supplementary Information Concerning Property and Casualty Insurance Operations
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING
PROPERTY AND CASUALTY INSURANCE OPERATIONS
(In millions)
| Discount Deducted From Liabilities [1] | Losses and Loss Adjustment Expenses Incurred Related to: | Paid Losses and Loss Adjustment Expenses | ||||||||||
| Current Year | Prior Year | |||||||||||
| Years ended December 31, | ||||||||||||
| 2018 | $ | 388 | $ | 7,107 | $ | (167 | ) | $ | 6,406 | |||
| 2017 | $ | 410 | $ | 7,381 | $ | (41 | ) | $ | 6,579 | |||
| 2016 | $ | 483 | $ | 6,990 | $ | 457 | $ | 6,968 |
| [1] | Reserves for permanently disabled claimants have been discounted using the weighted average interest rates of 2.98%**, 3.06%**, and 3.11% for the years ended December 31, 2018*,* 2017*, and* 2016*, respectively.* |
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018
FORM 10-K
EXHIBITS INDEX
The exhibits attached to this Form 10-K are those that are required by Item 601 of Regulation S-K.
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| * | Management contract, compensatory plan or arrangement. | |
| ** | Filed with the Securities and Exchange Commission as an exhibit to this report. | |
| † | Certain portions of this exhibit have been omitted pursuant to the Securities and Exchange Commission Order Granting Confidential Treatment Under the Securities Exchange Act of 1934, dated August 7, 2017 | |
| †† | Certain portions of this exhibit have been omitted pursuant to the Securities and Exchange Commission Order Granting Confidential Treatment Under the Securities Exchange Act of 1934, dated March 17, 2017 | |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| THE HARTFORD FINANCIAL SERVICES GROUP, INC. | ||||
| By: | /s/ Scott R. Lewis | |||
| Scott R. Lewis | ||||
| Senior Vice President and Controller | ||||
| (Chief accounting officer and duly authorized signatory) |
Date: February 22, 2019
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||||
| /s/ Christopher J. Swift | Chairman, Chief Executive Officer and Director | February 22, 2019 | ||||
| Christopher J. Swift | (Principal Executive Officer) | |||||
| /s/ Beth A. Costello | Executive Vice President and Chief Financial Officer | February 22, 2019 | ||||
| Beth A. Costello | (Principal Financial Officer) | |||||
| /s/ Scott R. Lewis | Senior Vice President and Controller | February 22, 2019 | ||||
| Scott R. Lewis | (Principal Accounting Officer) | |||||
| * | Director | February 22, 2019 | ||||
| Robert B. Allardice III | ||||||
| * | Director | February 22, 2019 | ||||
| Carols Dominguez | ||||||
| * | Director | February 22, 2019 | ||||
| Trevor Fetter | ||||||
| * | Director | February 22, 2019 | ||||
| Stephen P. McGill | ||||||
| * | Director | February 22, 2019 | ||||
| Kathryn A. Mikells | ||||||
| * | Director | February 22, 2019 | ||||
| Michael G. Morris | ||||||
| * | Director | February 22, 2019 | ||||
| Thomas A. Renyi | ||||||
| * | Director | February 22, 2019 | ||||
| Julie G. Richardson | ||||||
| * | Director | February 22, 2019 | ||||
| Teresa W. Roseborough | ||||||
| * | Director | February 22, 2019 | ||||
| Virginia P. Ruesterholz | ||||||
| * | Director | February 22, 2019 | ||||
| Greg Woodring | ||||||
| *By: | /s/ David C. Robinson | |||||
| David C. Robinson | ||||||
| As Attorney-in-Fact |
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