Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

facilities as needed. The Company maintains multiple sources of contingent liquidity including a revolving credit facility, a commercial paper program, an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates, and access to collateralized advances from the Federal Home Loan Bank of Boston ("FHLBB") for certain affiliates. The Company's CFO has primary responsibility for liquidity risk.

For further discussion on liquidity see the section on Capital Resources and Liquidity.

Credit Risk and Counterparty Risk

Credit risk is the risk to earnings or capital due to uncertainty of an obligor’s or counterparty’s ability or willingness to meet its obligations in accordance with contractually agreed upon terms. Credit risk is comprised of three major factors: the risk of change in credit quality, or credit migration risk; the risk of default; and the risk of a change in value due to changes in credit spreads.

Sources of Credit Risk The majority of the Company’s credit risk is concentrated in its investment holdings, but it is also present in the Company’s reinsurance and insurance portfolios.

Impact A decline in creditworthiness is typically associated with an increase in an investment’s credit spread, potentially resulting in an increase in other-than-temporary impairment, and an increased probability of a realized loss upon sale. Premiums receivable and reinsurance recoverables are also subject to credit risk based on the counterparty’s unwillingness or inability to pay.

Management The objective of the Company’s enterprise credit risk management strategy is to identify, quantify, and manage credit risk on an aggregate portfolio basis and to limit potential losses in accordance with an established credit risk management policy. The Company primarily manages its credit risk by holding a diversified mix of investment grade issuers and counterparties across its investment, reinsurance, and insurance portfolios. Potential losses are also limited within portfolios by diversifying across geographic regions, asset types, and sectors.

The Company manages credit risk on an on-going basis through the use of various processes and analyses. Both the investment and reinsurance areas have formulated procedures for counterparty approvals and authorizations, which establish minimum levels of creditworthiness and financial stability. Credits considered for investment are subjected to underwriting reviews. Within the investment portfolio, private securities are subject to management approval. Mitigation strategies vary across the three sources of credit risk, but may include:

•	Investing in a portfolio of high-quality and diverse securities;

•	Selling investments subject to credit risk;

•	Hedging through use of credit default swaps;

•	Clearing transactions through central clearing houses that require daily variation margin;

•	Entering into contracts only with strong creditworthy institutions

•	Requiring collateral; and

•	Non-renewing policies/contracts or reinsurance treaties.

The Company has developed credit exposure thresholds which are based upon counterparty ratings. Aggregate counterparty credit quality and exposure are monitored on a daily basis utilizing an enterprise-wide credit exposure information system that contains data on issuers, ratings, exposures, and credit limits. Exposures are tracked on a current and potential basis and aggregated by ultimate parent of the counterparty across investments, reinsurance receivables, insurance products with credit risk, and derivatives.

As of December 31, 2018, the Company had no investment exposure to any credit concentration risk of a single issuer or counterparty greater than 10% of the Company's stockholders' equity, other than the U.S. government and certain U.S. government agencies. For further discussion of concentration of credit risk in the investment portfolio, see the Concentration of Credit Risk section in Note 6 - Investments of Notes to Consolidated Financial Statements.

Assets and Liabilities Subject to Credit Risk

Investments Essentially all of the Company's invested assets are subject to credit risk. Credit related impairments on investments were $1 and $2, in 2018 and 2017, respectively. (See the Enterprise Risk Management section of the MD&A under “Other-Than-Temporary Impairments.”)

Reinsurance recoverables Reinsurance recoverables, net of an allowance for uncollectible reinsurance, were $4,357 and $4,061, as of December 31, 2018 and 2017, respectively. (See the Enterprise Risk Management section of the MD&A under “Reinsurance as a Risk Management Strategy.”)

Premiums receivable and agents' balances Premiums receivable and agents’ balances, net of an allowance for doubtful accounts, were $3,995 and $3,910, as of December 31, 2018 and 2017, respectively. (For a discussion regarding collectibility of these balances, see Note 1, Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements under the section labeled “Revenue Recognition.”)

Credit Risk of Derivatives

The Company uses various derivative counterparties in executing its derivative transactions. The use of counterparties creates credit risk that the counterparty may not perform in accordance with the terms of the derivative transaction.

Downgrades to the credit ratings of the Company’s insurance operating companies may have adverse implications for its use of derivatives. In some cases, downgrades may give derivative counterparties for OTC derivatives and clearing brokers for OTC-cleared derivatives the right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition, downgrades may result in counterparties and clearing brokers becoming unwilling to engage in or clear additional derivatives or may require collateralization before entering into any new trades.

Managing the Credit Risk of Counterparties to Derivative Instruments

The Company also has derivative counterparty exposure policies which limit the Company’s exposure to credit risk. The Company monitors counterparty exposure on a monthly basis to ensure compliance with Company policies and statutory limitations. The Company’s policies with respect to derivative counterparty exposure establishes market-based credit limits, favors long-term financial stability and creditworthiness of the counterparty and typically requires credit enhancement/credit risk reducing agreements, which are monitored and evaluated by the Company’s risk management team and reviewed by senior management.

The Company minimizes the credit risk of derivative instruments by entering into transactions with high quality counterparties primarily rated A or better. The Company also generally requires that OTC derivative contracts be governed by an International Swaps and Derivatives Association ("ISDA") Master Agreement, which is structured by legal entity and by counterparty and permits right of offset. The Company enters into credit support annexes in conjunction with the ISDA agreements, which require daily collateral settlement based upon agreed upon thresholds.

The Company has developed credit exposure thresholds which are based upon counterparty ratings. Credit exposures are generally quantified based on the prior business day's net fair value, including income accruals, resulting in amounts owed to the Company by its counterparties or potential payment obligations from the Company to its counterparties. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. 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. In accordance with industry standards and the contractual agreements, collateral is typically settled on the same business day.

For the year ended December 31, 2018, the Company incurred no losses on derivative instruments due to counterparty default.

Use of Credit Derivatives

The Company may also use credit default swaps to manage credit exposure or to assume credit risk to enhance yield.

Credit Risk Reduced Through Credit Derivatives

The Company uses credit derivatives to purchase credit protection with respect to a single entity or referenced index. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. As of December 31, 2018 and 2017, the notional amount related to credit derivatives that purchase credit protection was $6 and $61, respectively, while the fair value was $0 and $1, respectively. These amounts do not include positions that are in offsetting relationships.

Credit Risk Assumed Through Credit Derivatives

The Company also enters into credit default swaps that assume credit risk as part of replication transactions. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are

permissible investments under the Company’s investment policies. These swaps reference investment grade single corporate issuers and indexes. As of December 31, 2018 and 2017, the notional amount related to credit derivatives that assume credit risk was $1.1 billion and $823, respectively, while the fair value was $3 for both periods. These amounts do not include positions that are in offsetting relationships.

For further information on credit derivatives, see Note 7 Derivatives of Notes to Consolidated Financial Statements.

Credit Risk of Business Operations

A portion of the company's commercial business is written with large deductible policies or retrospectively-rated plans. Under some commercial insurance contracts with deductible features, the Company is obligated to pay the claimant the full amount of the claim. The Company is subsequently reimbursed by the contract holder for the deductible amount, and is subject to credit risk until such reimbursement is made. Additionally, retrospectively rated policies are utilized primarily for workers compensation coverage, whereby the ultimate premium is determined based on actual loss activity. Although the retrospectively rated feature of the policy substantially reduces insurance risk for the Company, it does introduce credit risk to the Company. The Company’s results of operations could be adversely affected if a significant portion of such contract holders failed to reimburse the Company for the deductible amount or the retrospectively rated policyholders failed to pay additional premiums owed. While the Company attempts to manage the risks discussed above through underwriting, credit analysis, collateral requirements, provision for bad debt, and other oversight mechanisms, the Company’s efforts may not be successful.

Interest Rate Risk

Interest rate risk is the risk of financial loss due to adverse changes in the value of assets and liabilities arising from movements in interest rates. Interest rate risk encompasses exposures with respect to changes in the level of interest rates, the shape of the term structure of rates and the volatility of interest rates. Interest rate risk does not include exposure to changes in credit spreads.

Sources of Interest Rate Risk The Company has exposure to interest rates arising from its fixed maturity securities, long-term debt obligations, short and long-term disability claim reserves, and discount rate assumptions associated with the Company’s pension and other post retirement benefit obligations.

Impact Changes in interest rates from current levels can have both favorable and unfavorable effects for the Company.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Change in Interest Rates	Favorable Effects	Unfavorable Effects
ñ	Additional net investment income due to reinvesting at higher yields	Decrease in the fair value of the fixed income investment portfolio
	Higher interest expense on variable rate debt obligations
ò	Increase in the fair value of the fixed income investment portfolio	Lower net investment income due to reinvesting at lower investment yields
	Acceleration in paydowns and prepayments or calls of certain mortgage-backed and municipal securities

Management The Company primarily manages its exposure to interest rate risk by constructing investment portfolios that seek to protect the firm from the economic impact associated with changes in interest rates by setting portfolio duration targets that are aligned with the duration of the liabilities that they support. The Company analyzes interest rate risk using various models including parametric models and cash flow simulation under various market scenarios of the liabilities and their supporting investment portfolios. Key metrics that the Company uses to quantify its exposure to interest rate risk inherent in its invested assets and the associated liabilities include duration, convexity and key rate duration.

The Company may also utilize a variety of derivative instruments to mitigate interest rate risk associated with its investment portfolio or to hedge liabilities. Interest rate caps, floors, swaps, swaptions, and futures may be used to manage portfolio duration. Interest rate swaps are primarily used to convert interest receipts or payments to a fixed or variable rate. The use of such swaps enables the Company to customize contract terms and conditions to desired objectives and manage the duration profile within established tolerances. Interest rate swaps are also used to hedge the variability in the cash flows of a forecasted purchase or sale of fixed rate securities due to changes in interest rates. As of December 31, 2018 and 2017, notional amounts pertaining to derivatives utilized to manage interest rate risk, including offsetting positions, totaled $10.5 billion and $10.2 billion, respectively primarily related to investments. The fair value of these derivatives was $(61) and $(83) as of December 31, 2018 and 2017, respectively.

Assets and Liabilities Subject to Interest Rate Risk

Fixed income investments The fair value of fixed income investments, which include fixed maturities, commercial mortgage loans, and short-term investments, was $43.7 billion and $42.5 billion at December 31, 2018 and 2017, respectively. The weighted average duration of the portfolio, including derivative instruments, was approximately 4.7 years and 5.2 years as of December 31, 2018 and 2017, respectively. Changes in the fair value of fixed maturities due to changes in interest rates are reflected as a component of AOCI.

Long-term debt obligations The Company's variable rate debt obligations will generally result in increased interest expense as a result of higher interest rates; the inverse is true during a declining interest rate environment. Changes in the value of long-term debt as a result of changes in interest rates will impact the fair value of these instruments but not the carrying value in the Company's Consolidated Balance Sheets.

Group life and disability product liabilities The cash outflows associated with contracts issued by the Company's Group Benefits segment, primarily group life and short and long-term disability policy liabilities, are not interest rate sensitive but vary based on timing. Though the aggregate cash flow payment streams are relatively predictable, these products may rely upon actuarial pricing assumptions (including mortality and morbidity) and have an element of cash flow uncertainty. As of December 31, 2018 and 2017, the Company had $8,445 and $8,512, respectively of reserves for group life and disability contracts. Changes in the value of the liabilities as a result of changes in interest rates will impact the fair value of these instruments but not the carrying value in the Company's Consolidated Balance Sheets.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Pension and other post-retirement benefit obligations The Company’s pension and other post-retirement benefit obligations are exposed to interest rate risk based upon the sensitivity of present value obligations to changes in liability discount rates as well as the sensitivity of the fair value of investments in the plan portfolios to changes in interest rates. The discount rate assumption is based upon an interest rate yield curve that reflects high-quality fixed income investments consistent with the maturity profile of the expected liability cash flows. The Company is exposed to the risk of having to make additional plan contributions if the plans’ investment returns, including from investments in fixed maturities, are lower than expected. (For further discussion of discounting pension and other postretirement benefit obligations, refer to Note 18 - Employee Benefit Plans of Notes to Consolidated Financial Statements.) As of December 31, 2018 and 2017, the Company had $791 and $926, respectively, of unfunded liabilities for pension and post-retirement benefit obligations recorded within Other Liabilities in the accompanying Balance Sheets.

Interest Rate Sensitivity

Group Life and Disability Reserves and Invested Assets Supporting Them

Included in the following table is the before tax change in the net economic value of contracts issued by the Company’s Group Benefits segment, primarily group life and disability, for which fixed valuation discount rate assumptions are established based upon investment returns assumed in pricing, along with the corresponding invested assets. Also included in this analysis are the interest rate sensitive derivatives used by the Company to hedge its exposure to interest rate risk in the investment portfolios supporting these contracts. This analysis does not include the assets and corresponding liabilities of other insurance products such as automobile, property, workers' compensation and general liability insurance. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis as the interest rate sensitivity of these investments is generally lower and less predictable than fixed income investments. The calculation of the estimated hypothetical change in net economic value below assumes a 100 basis point upward and downward parallel shift in the yield curve.

The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated below due to the nature of the estimates and assumptions used in the above analysis. The Company’s sensitivity analysis calculation assumes that the composition of invested assets and liabilities remain materially consistent throughout the year and that the current relationship between short-term and long-term interest rates will remain constant over time. As a result, these calculations may not fully capture the impact of portfolio re-allocations, significant product sales or non-parallel changes in interest rates.

Interest Rate Sensitivity of Group Benefits Short and Long-term Disability Reserves and Invested Assets Supporting Them

	Change in Net Economic Value as of December 31,
	2018						2017
Basis point shift	-100			+100			-100			+100
Increase (decrease) in economic value, before tax	$	47		$	(68	)	$	51		$	(75	)

The carrying value of assets supporting the liabilities related to the businesses included in the table above was $10.0 billion and $10.1 billion, as of December 31, 2018 and 2017, respectively, and included fixed maturities, commercial mortgage loans and short-term investments. The assets supporting the liabilities are monitored and managed within set duration guidelines and are evaluated on a daily basis, as well as annually, using scenario simulation techniques in compliance with regulatory requirements.

Invested Assets not Supporting Group Life and Disability Reserves

The following table provides an analysis showing the estimated before tax change in the fair value of the Company’s investments and related derivatives, excluding assets supporting group life and disability reserves which are included in the table above, assuming 100 basis point upward and downward parallel shifts in the yield curve as of December 31, 2018 and 2017. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis as the interest rate sensitivity of these investments is generally lower and less predictable than fixed income investments.

Interest Rate Sensitivity of Invested Assets Not Supporting Group Benefits Short and Long-term Disability Reserves

	Change in Fair Value as of December 31,
	2018						2017
Basis point shift	-100			+100			-100			+100
Increase (decrease) in fair value, before tax	$	1,761		$	(1,511	)	$	1,819		$	(1,710	)

The carrying value of fixed maturities, commercial mortgage loans and short-term investments related to the businesses included in the table above was $33.7 billion and $32.4 billion, as of December 31, 2018 and 2017, respectively.

Long-term Debt

A 100 basis point parallel decrease in the yield curve would result in an increase in the fair value of the liability of $331 and $340 as of December 31, 2018 and 2017, respectively. A 100 basis point parallel increase in the yield curve would result in a decrease in the fair value of the liability of $(279) and $(287) as of December 31, 2018 and 2017, respectively. Changes in the value of long-term debt as a result of changes in interest rates will not impact the carrying value in the Company's Consolidated Balance Sheets.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Pension and Other Post-Retirement Plan Obligations

A 100 basis point parallel decrease in the yield curve would impact both the value of the underlying pension assets and the value of the liability, resulting in an increase in the net pension and other post-retirement plan obligations liability of $178 and $226 as of December 31, 2018 and 2017, respectively. A 100 basis point parallel increase in the yield curve would have the inverse effect and result in a decrease in the net pension and other post-retirement plan obligations liability of $(134) and $(170) as of December 31, 2018 and 2017, respectively. Gains or losses due to changes in interest rates on the pension and post-retirement plan obligations are recorded within AOCI and are amortized into the actuarial loss component of net periodic benefit cost when they exceed a threshold.

Equity Risk

Equity risk is the risk of financial loss due to changes in the value of global equities or equity indices.

Sources of Equity Risk The Company has exposure to equity risk from invested assets, assets that support the Company’s pension and other post-retirement benefit plans, and fee income derived from Hartford Funds assets under management.

Impact The investment portfolio is exposed to losses from market declines affecting equity securities, alternative assets and limited partnerships which could negatively impact the Company's reported earnings. For assets supporting pension and other post-retirement benefit plans, the Company may be required to make additional plan contributions if equity investments in the plan portfolios decline in value. Hartford Funds earnings are also significantly influenced by the U.S. and other equity markets. Generally, declines in equity markets will reduce the value of assets under management and the amount of fee income generated from those assets. Increases in equity markets will generally have the inverse impact.

Management The Company uses various approaches in managing its equity exposure, including limits on the proportion of assets invested in equities, diversification of the equity portfolio, and hedging of changes in equity indices.

Assets and Liabilities Subject to Equity Risk

Investment portfolio is exposed to losses from market declines affecting equity securities and certain alternative assets and limited partnerships. Generally, declines in equity markets will reduce the value of these types of investments and could negatively impact the Company’s earnings while increases in equity will have the inverse impact. For equity securities, the changes in fair value are reported in net realized capital gains and losses. For alternative assets and limited partnerships, the Company's share of earnings for the period is recorded in net investment income, though typically on a delay based on the availability of the underlying financial statements. For a discussion of equity sensitivity, see below.

Assets supporting pension and other post-retirement benefit plans The Company may be required to make additional plan contributions if equity investments in the plan portfolios decline in value. For a discussion of equity sensitivity, see below.

The asset allocation mix is reviewed on a periodic basis. In order to minimize the risk, the pension plans maintain a listing of permissible and prohibited investments and impose concentration limits and investment quality requirements on permissible investment options. Declines in value are recognized as unrealized losses in AOCI. Increases in equity markets are recognized as unrealized gains in AOCI. Unrealized gains and losses in AOCI are amortized into the actuarial loss component of net periodic benefit cost when they exceed a threshold. For further discussion of equity risk associated with the pension plans, see Note 18 Employee Benefit Plans of Notes to Consolidated Financial Statements.

Assets under management in Hartford Funds may decrease in value during equity market declines, which would result in lower earnings because fee income is earned based upon the value of assets under management.

Equity Sensitivity

Investment portfolio and the assets supporting pension and other post-retirement benefit plans

Included in the following tables are the estimated before tax change in the economic value of the Company’s invested assets and assets supporting pension and other post-retirement benefit plans with sensitivity to equity risk. The calculation of the hypothetical change in economic value below assumes a 20% upward and downward shock to the Standard & Poor's 500 Composite Price Index ("S&P 500"). For limited partnerships and other alternative investments, the movement in economic value is calculated using a beta analysis largely derived from historical experience relative to the S&P 500.

The selection of the 20% shock to the S&P 500 was made only as an illustration to the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially from those illustrated below due to the nature of the estimates and assumptions used in the analysis. These calculations may not fully capture the impact of portfolio re-allocations or significant product sales.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Equity Sensitivity [1]

	As of December 31, 2018										As of December 31, 2017
				Shock to S&P 500										Shock to S&P 500
(Before tax)	Fair Value			+20%			-20%				Fair Value			+20%			-20%
Investment Portfolio	$	3,045		$	419		$	(418	)		$	2,676		$	360		$	(360	)
Assets supporting pension and other post-retirement benefit plans	$	1,226		$	209		$	(209	)		$	1,459		$	251		$	(251	)

[1]	Table excludes the Company's investment in Hopmeadow Holdings LP which is reported in other assets on the Company's Consolidated Balance Sheets.

Hartford Funds assets under management

Hartford Funds earnings are significantly influenced by the U.S. and other equity markets. If equity markets were to hypothetically decline 20% and remain depressed for one year, the estimated before tax impact on reported earnings for that one year period is $(37) as of December 31, 2018. The selection of the 20% shock to the S&P 500 was made only as an illustration to the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis.

Foreign Currency Exchange Risk

Foreign currency exchange risk is the risk of financial loss due to changes in the relative value between currencies.

Sources of Currency Risk The Company has foreign currency exchange risk in non-U.S. dollar denominated investments, which primarily consist of fixed maturity and equity investments and foreign denominated cash.

Impact Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains and losses on changes in the fair value of assets and liabilities.

Based on the fair values of the Company’s non-U.S. dollar denominated securities and derivative instruments as of December 31, 2018 and 2017, management estimates that a hypothetical 10% unfavorable change in exchange rates would decrease the fair values by a before tax total of $9 and $10, respectively. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis.

Management The open foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using currency futures/forwards/swaps. In order to manage the currency risk related to any non-U.S. dollar denominated liability contracts, the Company holds non-U.S. dollar denominated investments which match the underlying currency exposure of the liabilities.

Assets and Liabilities Subject to Foreign Currency Exchange Risk

Non-U.S. dollar denominated fixed maturities, equities, and cash The fair values of the non-U.S. dollar denominated fixed maturities, equities and cash, excluding assets held for sale, at December 31, 2018

and 2017 were approximately $178 and $298, respectively. Included in these amounts are $119 and $128 at December 31, 2018 and 2017, respectively, related to non-U.S. dollar denominated fixed maturities, equities and cash that directly support liabilities denominated in the same currencies. The currency risk of the remaining non-U.S. dollar denominated fixed maturities and equities are hedged with foreign currency swaps.

Investment in a P&C run-off entity in the United Kingdom During 2015, the Company entered into certain foreign currency forwards to hedge the currency impacts on changes in equity of a P&C run-off entity in the United Kingdom that was sold during 2017. At December 31, 2016, the derivatives used to hedge the currency impacts had a total notional amount of $200, and a total fair value of $(2), respectively. The Company terminated these hedges in 2017.

Financial Risk on Statutory Capital

Statutory surplus amounts and risk-based capital (“RBC”) ratios may increase or decrease in any period depending upon a variety of factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. In general, as equity market levels and interest rates decline, the amount and volatility of either our actual or potential obligation, as well as the related statutory surplus and capital margin can be materially negatively affected, sometimes at a greater than linear rate. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. Factors include:

•	A decrease in the value of certain fixed-income and equity securities in our investment portfolio, due in part to credit spreads widening, may result in a decrease in statutory surplus and RBC ratios.

•	Decreases in the value of certain derivative instruments that do not get hedge accounting, may reduce statutory surplus and RBC ratios.

•	Non-market factors can also impact the amount and volatility of either our actual or potential obligation, as well as the related statutory surplus and capital margin.

Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by the statutory surplus amounts and RBC ratios of

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

our insurance company subsidiaries. In addition, rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital we must hold in order to maintain our current ratings.

Investment Portfolio Risk

The following table presents the Company’s fixed maturities, AFS, by credit quality. The credit ratings referenced throughout this

section are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.

Fixed Maturities by Credit Quality

	December 31, 2018									December 31, 2017
	Amortized Cost			Fair Value			Percent of Total Fair Value			Amortized Cost			Fair Value			Percent of Total Fair Value
United States Government/Government agencies	$	4,446		$	4,430		12.4	%		$	4,492		$	4,536		12.3	%
AAA	6,366			6,440			18.1	%		5,864			6,072			16.4	%
AA	6,861			6,985			19.6	%		7,467			7,810			21.1	%
A	8,314			8,370			23.5	%		8,510			8,919			24.1	%
BBB	8,335			8,163			22.9	%		7,632			7,931			21.5	%
BB & below	1,281			1,264			3.5	%		1,647			1,696			4.6	%
Total fixed maturities, AFS	$	35,603		$	35,652		100.0	%		$	35,612		$	36,964		100.0	%

The fair value of fixed maturities, AFS decreased as compared to December 31, 2017, primarily due to a decrease in valuations due to widening of credit spreads and higher interest rates. Fixed

Maturities, FVO, are not included in the preceding table. For further discussion on FVO securities, see Note 5 - Fair Value Measurements of Notes to Consolidated Financial Statements.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Securities by Type

	December 31, 2018															December 31, 2017
	Cost or Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value			Percent of Total Fair Value			Cost or Amortized Cost			Gross Unrealized Gains			Gross Unrealized Losses			Fair Value			Percent of Total Fair Value
Asset-backed securities ("ABS")
Consumer loans	$	1,159		$	5		$	(1	)	$	1,163		3.3	%		$	925		$	7		$	(2	)	$	930		2.5	%
Other	113			—			—			113			0.3	%		194			2			—			196			0.5	%
Collateralized loan obligations ("CLOs")	1,455			2			(20		)	1,437			4.0	%		1,257			3			—			1,260			3.4	%
CMBS
Agency [1]	1,447			13			(33		)	1,427			4.0	%		1,199			16			(14		)	1,201			3.2	%
Bonds	1,845			13			(29		)	1,829			5.1	%		1,726			32			(9		)	1,749			4.7	%
Interest only	289			9			(2		)	296			0.8	%		379			10			(3		)	386			1.0	%
Corporate
Basic industry	604			8			(21		)	591			1.7	%		523			28			(1		)	550			1.5	%
Capital goods	1,132			8			(31		)	1,109			3.1	%		1,050			44			(4		)	1,090			2.9	%
Consumer cyclical	943			9			(29		)	923			2.6	%		857			33			(2		)	888			2.4	%
Consumer non-cyclical	1,936			11			(71		)	1,876			5.3	%		1,643			46			(7		)	1,682			4.6	%
Energy	1,156			14			(43		)	1,127			3.1	%		1,056			43			(3		)	1,096			3.0	%
Financial services	3,368			17			(99		)	3,286			9.2	%		2,722			77			(10		)	2,789			7.5	%
Tech./comm.	1,720			34			(54		)	1,700			4.8	%		1,618			87			(9		)	1,696			4.6	%
Transportation	548			4			(18		)	534			1.5	%		555			18			—			573			1.6	%
Utilities	2,017			43			(69		)	1,991			5.6	%		2,097			110			(19		)	2,188			5.9	%
Other	272			—			(11		)	261			0.7	%		249			4			(1		)	252			0.7	%
Foreign govt./govt. agencies	866			7			(26		)	847			2.4	%		1,071			43			(4		)	1,110			3.0	%
Municipal bonds
Taxable	629			14			(17		)	626			1.8	%		537			30			(5		)	562			1.5	%
Tax-exempt	9,343			407			(30		)	9,720			27.3	%		11,206			724			(7		)	11,923			32.3	%
RMBS
Agency	1,508			7			(29		)	1,486			4.2	%		1,530			10			(4		)	1,536			4.2	%
Non-agency	933			5			(6		)	932			2.6	%		227			3			—			230			0.6	%
Alt-A	43			4			—			47			0.1	%		58			4			—			62			0.2	%
Sub-prime	786			28			—			814			2.3	%		1,170			46			—			1,216			3.3	%
U.S. Treasuries	1,491			41			(15		)	1,517			4.2	%		1,763			46			(10		)	1,799			4.9	%
Fixed maturities, AFS	35,603			703			(654		)	35,652			100.0	%		35,612			1,466			(114		)	36,964			100.0	%
Equity securities
Financial services																115			19			—			134			13.3	%
Other																792			102			(16		)	878			86.7	%
Equity securities, AFS [2]																907			121			(16		)	1,012			100.0	%
Total AFS securities	$	35,603		$	703		$	(654	)	$	35,652					$	36,519		$	1,587		$	(130	)	$	37,976
Fixed maturities, FVO										$	22														$	41
Equity securities, at fair value [2]										$	1,214

[1]	Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.

[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.

The fair value of AFS securities decreased as compared with December 31, 2017, primarily due to a decrease in valuations due to widening of credit spreads and higher interest rates. Also,

tax-exempt municipal bonds were reallocated into corporate bonds and structured securities during the period.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

European Exposure

While the European economy is still growing, the International Monetary Fund cut its 2019 growth forecasts for the region, citing the prospect for a more turbulent external environment, including escalating trade tensions and slowing global demand. Political risk will likely remain elevated in Europe during 2019 due to uncertainty surrounding Great Britain's pending departure from the European Union ("Brexit"), increasing pressure on centrist governments in France and Germany and ongoing concern over Italian fiscal policy. The Company manages the credit risk associated with its European securities within the investment portfolio on an on-going basis using several processes which are supported by macroeconomic analysis and issuer credit analysis. For additional details regarding the Company’s management of credit risk, see the Credit Risk section of this MD&A.

As of December 31, 2018, the Company’s European investment exposure had both an amortized cost and fair value of $2.5 billion, or 5% of total invested assets; as of December 31, 2017, amortized cost and fair value totaled $1.9 billion and $2 billion,

respectively. The investment exposure largely relates to corporate entities which are domiciled in or generate a significant portion of their revenue within the United Kingdom, Germany, Sweden, Switzerland, and the Netherlands. As of both December 31, 2018 and 2017, the weighted average credit quality of European investments was A-. Entities domiciled in the United Kingdom comprise the Company's largest European exposure; as of December 31, 2018 and 2017, the U.K. exposure totals less than 2% of total invested assets and largely relates to the industrial and financial services sector and has an average credit rating of BBB+. The majority of the European investments are U.S. dollar-denominated, and those securities that are British pound or euro-denominated are hedged to U.S. dollars. For a discussion of foreign currency risks, see the Foreign Currency Exchange Risk section of this MD&A.

Commercial & Residential Real Estate

The following table presents the Company’s exposure to CMBS and RMBS by current credit quality included in the preceding Securities by Type table.

Exposure to CMBS and RMBS as of December 31, 2018

	AAA						AA						A						BBB						BB and Below						Total
	Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value
CMBS
Agency [1]	$	1,447		$	1,427		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	1,447		$	1,427
Bonds	983			973			444			436			368			370			50			50			—			—			1,845			1,829
Interest Only	204			210			77			79			1			1			5			4			2			2			289			296
Total CMBS	2,634			2,610			521			515			369			371			55			54			2			2			3,581			3,552
RMBS
Agency	1,508			1,486			—			—			—			—			—			—			—			—			1,508			1,486
Non-Agency	611			610			167			167			111			109			33			33			11			13			933			932
Alt-A	—			—			10			10			4			5			9			9			20			23			43			47
Sub-Prime	31			32			72			73			211			217			179			186			293			306			786			814
Total RMBS	2,150			2,128			249			250			326			331			221			228			324			342			3,270			3,279
Total CMBS & RMBS	$	4,784		$	4,738		$	770		$	765		$	695		$	702		$	276		$	282		$	326		$	344		$	6,851		$	6,831

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Exposure to CMBS and RMBS as of December 31, 2017

	AAA						AA						A						BBB						BB and Below						Total
	Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value			Amortized Cost			Fair Value
CMBS
Agency [1]	$	1,199		$	1,201		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	1,199		$	1,201
Bonds	929			940			423			424			314			323			43			44			17			18			1,726			1,749
Interest Only	264			269			104			106			1			1			6			6			4			4			379			386
Total CMBS	2,392			2,410			527			530			315			324			49			50			21			22			3,304			3,336
RMBS
Agency	1,530			1,536			—			—			—			—			—			—			—			—			1,530			1,536
Non-Agency	122			123			15			14			56			56			21			22			13			15			227			230
Alt-A	2			3			5			5			4			4			13			13			34			37			58			62
Sub-Prime	35			36			74			75			249			255			159			165			653			685			1,170			1,216
Total RMBS	1,689			1,698			94			94			309			315			193			200			700			737			2,985			3,044
Total CMBS & RMBS	$	4,081		$	4,108		$	621		$	624		$	624		$	639		$	242		$	250		$	721		$	759		$	6,289		$	6,380

[1]Includes securities with pools of loans issued by the Small Business Administration which are backed by the full faith and credit of the U.S. government.

The Company also has exposure to commercial mortgage loans. These loans are collateralized by real estate properties that are diversified both geographically throughout the United States and by property type. These loans are originated by the Company as high quality whole loans and are participated out to third parties. Loan participations are loans where the Company has purchased or retained a portion of an outstanding loan or package of loans and participates on a pro-rata basis in collecting interest and principal pursuant to the terms of the participation agreement.

As of December 31, 2018, commercial mortgage loans had an amortized cost and carrying value of $3.7 billion, with a valuation allowance of $1. As of December 31, 2017, commercial mortgage loans had an amortized cost and carrying value of $3.2 billion with a valuation allowance of $1.

The Company funded $664 of commercial whole loans with a weighted average loan-to-value (“LTV”) ratio of 59% and a weighted average yield of 4.4% during the twelve months ended December 31, 2018. The Company continues to originate commercial loans within primary markets, such as office, industrial and multi-family, focusing on loans with strong LTV ratios and high quality property collateral. There were no mortgage loans held for sale as of December 31, 2018 or December 31, 2017.

Municipal Bonds

The following table presents the Company’s exposure to municipal bonds by type and weighted average credit quality included in the preceding Securities by Type table.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Available For Sale Investments in Municipal Bonds

	December 31, 2018								December 31, 2017
	Amortized Cost			Fair Value			Weighted Average Credit Quality		Amortized Cost			Fair Value			Weighted Average Credit Quality
General Obligation	$	1,222		$	1,275		AA		$	1,976		$	2,087		AA
Pre-refunded [1]	1,845			1,904			AAA		1,960			2,067			AAA
Revenue
Transportation	1,449			1,537			A+		1,638			1,790			A+
Health Care	1,270			1,304			AA-		1,278			1,359			AA-
Education	941			953			AA		1,079			1,130			AA
Water & Sewer	816			847			AA		1,069			1,131			AA
Leasing [2]	772			799			AA-		809			858			AA-
Sales Tax	507			541			AA		537			590			AA
Power	308			328			A+		442			478			AA-
Housing	33			35			A+		79			82			AA-
Other	809			823			AA-		876			913			AA-
Total Revenue	6,905			7,167			AA-		7,807			8,331			AA-
Total Municipal	$	9,972		$	10,346		AA		$	11,743		$	12,485		AA

[1]	Pre-Refunded bonds are bonds for which an irrevocable trust containing sufficient U.S. treasury, agency, or other securities has been established to fund the remaining payments of principal and interest.

[2]

Leasing revenue bonds are generally the obligations of a financing authority established by the municipality that leases facilities back to a municipality. The notes are typically secured by lease payments made by the municipality that is leasing the facilities financed by the issue. Lease payments may be subject to annual appropriation by the municipality or the municipality may be obligated to appropriate general tax revenues to make lease payments.

As of both December 31, 2018 and December 31, 2017, the largest issuer concentrations were the New York City Transitional Finance Authority, the New York Dormitory Authority, and the Commonwealth of Massachusetts, which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation and revenue bonds. In total, municipal bonds make up 22% of the fair value of the Company's investment portfolio. The Company has evaluated its portfolio allocation to municipal bonds with respect to the changes in corporate income tax rates that began in 2018 and has reduced exposure through both asset sales and principal repayments. The Company will continue to actively assess the sector’s relative value over time.

Limited Partnerships and Other Alternative Investments

The following table presents the Company’s investments in limited partnerships and other alternative investments which include hedge funds, real estate funds and private equity funds. Real estate funds consist of investments primarily in real estate joint ventures and, to a lesser extent, equity funds. Private equity funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential as well as limited exposure to public markets.

Limited Partnerships and Other Alternative Investments - Net Investment Income

	Year Ended December 31,
	2018						2017						2016
	Amount			Yield			Amount			Yield			Amount			Yield
Hedge funds	$	4		9.3	%		$	3		23.6	%		$	(4	)	(5.5	%)
Real estate funds	58			12.0	%		43			9.1	%		32			7.2	%
Private equity funds	144			22.5	%		122			20.7	%		105			17.6	%
Other alternative investments [1]	(1		)	(0.2	%)		6			1.6	%		(5		)	(1.3	%)
Total	$	205		13.2	%		$	174		12.0	%		$	128		8.6	%

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Investments in Limited Partnerships and Other Alternative Investments

	December 31, 2018						December 31, 2017
	Amount			Percent			Amount			Percent
Hedge funds	$	51		3.0	%		$	22		1.4	%
Real estate funds	499			29.0	%		486			30.6	%
Private equity and other funds	788			45.7	%		693			43.6	%
Other alternative investments [1]	385			22.3	%		387			24.4	%
Total	$	1,723		100.0	%		$	1,588		100.0	%

[1]	Consists of an insurer-owned life insurance policy which is invested in hedge funds and other investments.

Available-for-sale Securities — Unrealized Loss Aging

The total gross unrealized losses were $654 as of December 31, 2018, and have increased $524 from December 31, 2017, due to widening of credit spreads and higher interest rates. As of December 31, 2018, $631 of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost. The remaining $23 of gross unrealized losses were associated with securities depressed greater than 20%. The securities depressed more than 20% are primarily related to one corporate issuer with declining credit fundamentals and commercial real estate securities that were purchased at tighter credit spreads.

As part of the Company’s ongoing security monitoring process, the Company has reviewed its AFS securities in an unrealized loss position and concluded that these securities are temporarily depressed and are expected to recover in value as the securities approach maturity or as market spreads tighten. For these securities in an unrealized loss position where a credit impairment has not been recorded, the Company’s best estimate of expected future cash flows are sufficient to recover the amortized cost basis of the security. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these securities. For further information regarding the Company’s impairment analysis, see Other-Than-Temporary Impairments in the Investment Portfolio Risks and Risk Management section of this MD&A.

Unrealized Loss Aging for AFS Securities

	December 31, 2018												December 31, 2017
Consecutive Months	Items		Cost or Amortized Cost			Fair Value			Unrealized Loss				Items		Cost or Amortized Cost			Fair Value			Unrealized Loss
Three months or less	468		$	3,191		$	3,153		$	(38	)		1,286		$	4,315		$	4,289		$	(26	)
Greater than three to six months	359		2,530			2,487			(43		)		342		1,694			1,673			(21		)
Greater than six to nine months	347		2,243			2,186			(57		)		157		601			594			(7		)
Greater than nine to eleven months	817		5,921			5,688			(233		)		89		188			183			(5		)
Twelve months or more	969		5,272			4,989			(283		)		652		2,040			1,969			(71		)
Total	2,960		$	19,157		$	18,503		$	(654	)		2,526		$	8,838		$	8,708		$	(130	)

Unrealized Loss Aging for AFS Securities Continuously Depressed Over 20%

	December 31, 2018												December 31, 2017
Consecutive Months	Items		Cost or Amortized Cost			Fair Value			Unrealized Loss				Items		Cost or Amortized Cost			Fair Value			Unrealized Loss
Three months or less	13		$	59		$	43		$	(16	)		30		$	14		$	10		$	(4	)
Greater than three to six months	—		—			—			—				12		10			7			(3		)
Greater than six to nine months	3		3			2			(1		)		—		—			—			—
Greater than nine to eleven months	2		2			1			(1		)		—		—			—			—
Twelve months or more	36		13			8			(5		)		47		13			7			(6		)
Total	54		$	77		$	54		$	(23	)		89		$	37		$	24		$	(13	)

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Other-than-temporary Impairments Recognized in Earnings by Security Type

	For the years ended December 31,
	2018			2017			2016
Credit Impairments
CMBS	1			2			1
Corporate	—			—			20
Equity Impairments	—			6			4
Intent-to-Sell Impairments
Corporate	—			—			1
US Treasuries	—			—			1
Total	$	1		$	8		$	27

Year ended December 31, 2018

For the year ended December 31, 2018, impairments recognized in earnings were comprised of credit impairments of $1 related to CMBS interest-only securities and were identified through security specific review of the expected future cash flows.

The Company incorporates its best estimate of future performance using internal assumptions and judgments that are informed by economic and industry specific trends, as well as our expectations with respect to security specific developments.

Non-credit impairments recognized in other comprehensive income were $6 for the year ended December 31, 2018.

Future impairments may develop as the result of changes in intent to sell specific securities that are in an unrealized loss position or if modeling assumptions, such as macroeconomic factors or security specific developments, change unfavorably from our current modeling assumptions resulting in lower cash flow expectations.

Year ended December 31, 2017

For the year ended December 31, 2017, impairments recognized in earnings were comprised of credit impairments of $2 related to CMBS interest-only securities that were not expected to generate enough cash flow for the Company to recover the investment. Impairments of equity securities of $6 were comprised of securities in an unrealized loss position that the Company did not expect to recover.

Year ended December 31, 2016

For the year ended December 31, 2016, impairments recognized in earnings were comprised of credit impairments of $21 primarily related to corporate securities due to changes in the financial condition of the issuer, impairments on equity securities of $4, and intent-to-sell impairments of $2.

CAPITAL RESOURCES AND LIQUIDITY

The following section discusses the overall financial strength of The Hartford and its insurance operations including their ability to generate cash flows from each of their business segments, borrow funds at competitive rates and raise new capital to meet

operating and growth needs over the next twelve months.

SUMMARY OF CAPITAL RESOURCES AND LIQUIDITY

Capital available at the holding company as of December 31, 2018**:**

•	$3.4 billion in fixed maturities, short-term investments, and cash at HFSG Holding Company.

•	A senior unsecured five-year revolving credit facility that provides for borrowing capacity up to $750 of unsecured credit through March 29, 2023. No borrowings were outstanding as of December 31, 2018.

•	Borrowings available under a commercial paper program to a maximum of $750. As of December 31, 2018, there was no commercial paper outstanding.

•	The Hartford has an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2 billion for liquidity and other general corporate purposes.

•	The Company’s subsidiaries, Hartford Fire Insurance Company (“Hartford Fire”) and Hartford Life and Accident Insurance Company (“HLA”), are members of the Federal Home Loan Bank of Boston (“FHLBB”) and have access to collateralized advances of up to $1.1 billion and $0.6 billion, respectively, without prior approval of the Connecticut Department of Insurance (“CTDOI”).

2019 expected dividends and other sources of capital:

•	P&C - The Company does not anticipate receiving net dividends from its property and casualty insurance subsidiaries in 2019.

•	Group Benefits - Hartford Life and Accident Insurance Company ("HLA") has $380 dividend capacity for 2019, and anticipates paying $250 to $300 in dividends in 2019.

•	Hartford Funds - Anticipates paying $100 to $125 of dividends in 2019.

In addition, The Hartford Financial Services Group, Inc, ("HFSG Holding Company") anticipates cash tax receipts of approximately $600 to $700, including realization of net operating losses and AMT credits.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Expected liquidity requirements for the next twelve months as of December 31, 2018**:**

•	$413 maturing debt payment made in January of 2019.

•	$265 interest on debt.

•	$21 dividends on preferred stock, subject to the discretion of the Board of Directors.

•	$440 common stockholders' dividends, subject to the discretion of the Board of Directors and before share repurchases and any change in common stockholder dividend rate.

•	$2.2 billion of cash consideration including transaction expenses to acquire all outstanding common shares of Navigators Group, a global specialty underwriter.

Liquidity Requirements and Sources of Capital

The Hartford Financial Services Group, Inc. (Holding Company)

The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc. have been and will continue to be met by HFSG Holding Company’s fixed maturities, short-term investments and cash, dividends from its subsidiaries, principally its insurance operations, and tax receipts, including realization of HFSG Holding Company net operating losses and refunds of prior period AMT credits. In addition HFSG Holding Company can meet its liquidity requirements through the issuance of common stock, debt or other capital securities and borrowings from its credit facilities, as needed.

As of December 31, 2018, HFSG Holding Company held fixed maturities, short-term investments, and cash of $3.4 billion. Expected liquidity requirements of the HFSG Holding Company for the next twelve months include payment of the 6.0% senior note of $413 at maturity in January 2019, interest payments on debt of approximately $265, preferred stock dividends of approximately $21 and common stockholder dividends of approximately $440, subject to the discretion of the Board of Directors, as well as $2.2 billion of cash consideration including transaction expenses to acquire all outstanding common shares of Navigators Group.

Expected sources of capital of the HFSG Holding Company for the next twelve months include dividends from Group Benefits (HLA) of $250 to $300 , dividends from Hartford Funds of $100 to $125 and cash tax receipts of approximately $600 to $700, including realization of net operating losses and AMT credits.

Debt

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. The Hartford used a portion of the net proceeds from this issuance to repay $320 principal amount

of its 6.3% senior notes due March 15, 2018, and the balance of the proceeds will be used for general corporate purposes.

On June 15, 2018, The Hartford redeemed $500 aggregate principal amount of its 8.125% Fixed-to-Floating Rate Junior Subordinated Debentures due 2068.

On January 15, 2019, The Hartford repaid its $413, 6.0% senior notes at maturity .

For further information regarding debt, see Note 13 - Debt of Notes to Consolidated Financial Statements.

Equity

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 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.

For further information about equity repurchases, see Part II - Item 5. Market for the Hartford's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

On November 6, 2018, the Company issued 13.8 million depositary shares 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 proceeds of $334. The Preferred Stock is perpetual and has no maturity date but 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.

The Hartford used the net proceeds from this offering to help fund repayment of the Company's 6.000% Senior Notes due January 15, 2019.

For further information regarding Preferred Stock, see Note 15 - Equity of Notes to Consolidated Financial Statements.

Dividends

On February 21, 2019, The Hartford’s Board of Directors declared a quarterly dividend of $0.30 per common share payable on April 1, 2019 to common stockholders of record as of March 4, 2019.

On February 21, 2019, The Hartford's Board of Directors declared a dividend of $375.00 on each share of the Series G preferred stock (equivalent to $0.3750 per depository share) payable on May 15, 2019 to stockholders of record at the close of business on May 1, 2019.

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) which was paid on February 15, 2019, to stockholders of record at the close of business on February 1, 2019.

There are no current restrictions on the HFSG Holding Company's ability to pay dividends to its stockholders. For a discussion of restrictions on dividends to the HFSG Holding

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Company from its insurance subsidiaries, see "Dividends from Insurance Subsidiaries" below. For a discussion of potential limitations on the HFSG Holding Company's ability to pay dividends, see Part I, Item 1A, — Risk Factors for the risk factor "Our ability to declare and pay dividends is subject to limitations".

Pension Plans and Other Postretirement Benefits

While the Company has significant discretion in making voluntary contributions to the U. S. qualified defined benefit pension plan, minimum contributions are mandated in certain circumstances pursuant to the Employee Retirement Income Security Act of 1974, as amended by the Pension Protection Act of 2006, the Worker, Retiree, and Employer Recovery Act of 2008, the Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, the Moving Ahead for Progress in the 21st Century Act of 2012 (MAP-21) and Internal Revenue Code regulations. The Company made contributions to the U. S. qualified defined benefit pension plan of approximately $101, $280 and $300 in 2018, 2017 and 2016, respectively. No contributions were made to the other postretirement plans in 2018, 2017 and 2016. The Company’s 2018, 2017 and 2016 required minimum funding contributions were immaterial. The Company does not have a 2019 required minimum funding contribution for the U.S. qualified defined benefit pension plan and the funding requirements for all pension plans are expected to be immaterial. The Company has not determined whether, and to what extent, contributions may be made to the U. S. qualified defined benefit pension plan in 2019. The Company will monitor the funded status of the U.S. qualified defined benefit pension plan during 2019 to make this determination.

Beginning in 2017, the Company began to use a 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 was 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 did 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 resulted in a reduction of the interest cost component of net periodic benefit cost for 2017 of $32 before tax. The discount rate used to measure interest cost during 2017 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, recognized the effect prospectively beginning in 2017.

On June 30, 2017, the Company purchased a group annuity contract to transfer approximately $1.6 billion of the Company’s outstanding pension benefit obligations related to certain U.S. retirees, terminated vested participants, and beneficiaries. As a result of this transaction, in the second quarter of 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.

Dividends from Insurance Subsidiaries

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 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.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

2019 Dividend Capacity

•

P&C - Under the formula described above, 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 for 2019 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.

•	Group Benefits - Hartford Life and Accident Insurance Company ("HLA") has $380 dividend capacity for 2019, and anticipates paying $250 to $300 dividends in 2019.

Other Sources of Capital for the HFSG Holding Company

The Hartford endeavors to maintain a capital structure that provides financial and operational flexibility to its insurance subsidiaries, ratings that support its competitive position in the financial services marketplace (see the "Ratings" section below for further discussion), and stockholder returns. As a result, the Company may from time to time raise capital from the issuance of debt, common equity, preferred stock, equity-related debt or other capital securities and is continuously evaluating strategic opportunities. The issuance of debt, common equity, equity-related debt or other capital securities could result in the dilution of stockholder interests or reduced net income due to additional interest expense.

Shelf Registrations

The Hartford filed an automatic shelf registration statement with the Securities and Exchange Commission ("the SEC") on July 29, 2016 that permits it to offer and sell debt and equity securities during the three-year life of the registration statement.

Revolving Credit Facility and Commercial Paper

Revolving Credit Facilities

On March 29, 2018, the Company entered into an 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.

As of December 31, 2018, no borrowings were outstanding and $3 in letters of credit were issued under the Credit Facility and

the Company was in compliance with all financial covenants.

For further information regarding revolving credit facilities, see Note 13 - Debt of Notes to Consolidated Financial Statements.

Commercial Paper

The Hartford’s maximum borrowings available under its commercial paper program are $750. As of December 31, 2018 there was no commercial paper outstanding.

For further information regarding commercial paper, see Note 13 - Debt of Notes to Consolidated Financial Statements.

Intercompany Liquidity Agreements

The Company has $2.0 billion available under an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2 billion for liquidity and other general corporate purposes. The Connecticut Department of Insurance ("CTDOI") granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes.

As of December 31, 2018, there were no amounts outstanding at the HFSG Holding Company.

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.

As of December 31, 2018, there were no advances outstanding under either FHLBB facility.

For further information regarding collateralized advances with Federal Home Loan Bank of Boston, see Note 13 - Debt of Notes to Consolidated Financial Statements.

Derivative Commitments

Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical 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. For this $76, 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

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.

As of December 31, 2018, no derivative positions would be subject to immediate termination in the event of a downgrade of one level below the current financial strength ratings. This could change as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated.

Insurance Operations

While subject to variability period to period, underwriting and investment cash flows continue to be within historical norms and, therefore, the Company’s insurance operations’ current liquidity position is considered to be sufficient to meet anticipated demands over the next twelve months. For a discussion and tabular presentation of the Company’s current contractual obligations by period, refer to Off-Balance Sheet Arrangements and Aggregate Contractual Obligations within the Capital Resources and Liquidity section of the MD&A.

The principal sources of operating funds are premiums, fees earned from assets under management and investment income, while investing cash flows originate from maturities and sales of invested assets. The primary uses of funds are to pay claims, claim adjustment expenses, commissions and other underwriting and insurance operating costs, to pay taxes, to purchase new investments and to make dividend payments to the HFSG Holding Company.

The Company’s insurance operations consist of property and casualty insurance products (collectively referred to as “Property & Casualty Operations”) and Group Benefits.

The Company's insurance operations hold fixed maturity securities including a significant short-term investment position (securities with maturities of one year or less at the time of purchase) to meet liquidity needs. Liquidity requirements that are unable to be funded by the Company's insurance operations' short-term investments would be satisfied with current operating

funds, including premiums or investing cash flows, which includes proceeds received through the sale of invested assets. A sale of invested assets could result in significant realized capital losses.

The following tables represent the fixed maturity holdings, including the aforementioned cash and short-term investments necessary to meet liquidity needs, for each of the Company’s insurance operations.

Property & Casualty

	As of
	December 31, 2018
Fixed maturities	$	24,779
Short-term investments	1,081
Cash	91
Less: Derivative collateral	58
Total	$	25,893

Group Benefits Operations

	As of
	December 31, 2018
Fixed maturities	$	9,882
Short-term investments	398
Cash	18
Less: Derivative collateral	18
Total	$	10,280

Off-balance Sheet Arrangements and Aggregate Contractual Obligations

The Company does not have any off-balance sheet arrangements that are reasonably likely to have a material effect on the financial condition, results of operations, liquidity, or capital resources of the Company, except for unfunded commitments to purchase investments in limited partnerships and other alternative investments, private placements, and mortgage loans as disclosed in Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Aggregate Contractual Obligations as of December 31, 2018

	Payments due by period
	Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Property and casualty obligations [1]	$	24,972		$	5,740		$	5,882		$	2,868		$	10,482
Group life and disability obligations [2]	11,041			1,315			3,749			1,630			4,347
Operating lease obligations [3]	173			44			61			34			34
Long-term debt obligations [4]	9,803			674			956			1,180			6,993
Purchase obligations [5]	2,107			1,515			375			181			36
Other liabilities reflected on the balance sheet [6]	933			933			—			—			—
Total	$	49,029		$	10,221		$	11,023		$	5,893		$	21,892

[1]	The following points are significant to understanding the cash flows estimated for obligations (gross of reinsurance) under property and casualty contracts:

•

Reserves for Property & Casualty unpaid losses and loss adjustment expenses include IBNR and case reserves. While payments due on claim reserves are considered contractual obligations because they relate to insurance policies issued by the Company, the ultimate amount to be paid to settle both case reserves and IBNR is an estimate, subject to significant uncertainty. The actual amount to be paid is not finally determined until the Company reaches a settlement with the claimant. Final claim settlements may vary significantly from the present estimates, particularly since many claims will not be settled until well into the future.

•

In estimating the timing of future payments by year, the Company has assumed that its historical payment patterns will continue. However, the actual timing of future payments could vary materially from these estimates due to, among other things, changes in claim reporting and payment patterns and large unanticipated settlements. In particular, there is significant uncertainty over the claim payment patterns of asbestos and environmental claims. In addition, the table does not include future cash flows related to the receipt of premiums that may be used, in part, to fund loss payments.

•

Under U.S. GAAP, the Company is only permitted to discount reserves for losses and loss adjustment expenses in cases where the payment pattern and ultimate loss costs are fixed and determinable on an individual claim basis. For the Company, these include claim settlements with permanently disabled claimants. As of December 31, 2018*, the total property and casualty reserves in the above table are gross of a reserve discount of* $388*.*

•	Amounts shown do not consider $4.2 billion of reinsurance and other recoverables the Company expects to collect related to property and casualty obligations.

[2]

Estimated group life and disability obligations are based on assumptions comparable with the Company’s historical experience, modified for recent observed trends. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. As of December 31, 2018*, the total group life and disability obligations in the above table are gross of a reserve discount of $1.5 billion.*

[3]	Includes future minimum lease payments on operating lease agreements. See Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements for additional discussion on lease commitments.

[4]	Includes contractual principal and interest payments. See Note 13 - Debt of Notes to Consolidated Financial Statements for additional discussion of long-term debt obligations.

[5]

Includes $954 in commitments to purchase investments including approximately $707 of limited partnership and other alternative investments, $163 of private debt and equity securities, and $84 of mortgage loans. Of the $954 in commitments to purchase investments, $48 are related to mortgage loan commitments which the Company can cancel unconditionally. Outstanding commitments under these limited partnerships and mortgage loans are included in payments due in less than 1 year since the timing of funding these commitments cannot be reliably estimated. The remaining commitments to purchase investments primarily represent payables for securities purchased which are reflected on the Company’s Consolidated Balance Sheets. Also included in purchase obligations is $688 relating to contractual commitments to purchase various goods and services such as maintenance, human resources, and information technology in the normal course of business. Purchase obligations exclude contracts that are cancelable without penalty or contracts that do not specify minimum levels of goods or services to be purchased.

[6]	Includes cash collateral of $9 which the Company has accepted in connection with the Company’s derivative instruments. Since the timing of the return of the collateral is uncertain, the return of the collateral has been included in the payments due in less than 1 year. Also included in other long-term liabilities are net unrecognized tax benefits of $14*.*

Capitalization

Capital Structure
	December 31, 2018			December 31, 2017			Change
Short-term debt (includes current maturities of long-term debt)	$	413		$	320		29	%
Long-term debt	4,265			4,678			(9	%)
Total debt	4,678			4,998			(6	%)
Common stockholders' equity, excluding AOCI	14,346			12,831			12	%
Preferred stock	334			—			—	%
AOCI, net of tax	(1,579		)	663			(338	%)
Total stockholders’ equity	$	13,101		$	13,494		(3	%)
Total capitalization	$	17,779		$	18,492		(4	%)
Debt to stockholders’ equity	36		%	37		%
Debt to capitalization	26		%	27		%

Total stockholders' equity decreased in 2018 primarily due to a decrease in AOCI, partially offset by net income in excess of stockholder dividends and the issuance of preferred stock in 2018. AOCI decreased mainly due to the removal of AOCI

related to the life and annuity business sold in May 2018, as well as due to lower net unrealized capital gains on fixed maturities. Total capitalization decreased $713, or 4%, as of December 31,

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

2018 compared with December 31, 2017 primarily due to the decrease in stockholders' equity and decrease in total debt.

For additional information regarding AOCI, net of tax, see Note

17 - Changes in and Reclassifications From Accumulated Other Comprehensive Income (Loss) of Notes to Consolidated Financial Statements.

Cash Flow [1]

	2018			2017			2016
Net cash provided by operating activities	$	2,843		$	2,186		$	2,066
Net cash provided by (used for) investing activities	$	(1,962	)	$	(1,442	)	$	949
Net cash used for financing activities	$	(1,467	)	$	(979	)	$	(2,541	)
Cash — end of year	$	121		$	180		$	328

[1] Cash activities include cash flows from Discontinued Operations; see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements for information on cash flows from Discontinued Operations.

Year ended December 31, 2018 compared to the year ended December 31, 2017

Cash provided by operating activities increased in 2018 as compared to the prior year period primarily due to the effect of a $650 payment in 2017 for the ADC reinsurance agreement with NICO and the effect of an increase in premium and fee income received, partially offset by an increase in payments for benefits, losses, and loss adjustment expenses as well as operating expenses that were mostly driven by the acquisition of the Aetna U.S. group life and disability business.

Cash used for investing activities increased in 2018 compared to the prior year period primarily due to payments for short term investments and an increase in net payments for equity securities and mortgage loans, partially offset by proceeds from the life and annuity business sold in May 2018 and an increase in net proceeds from available for sale securities.

Cash used for financing activities increased from the 2017 period primarily due to a change to a decrease in securities loaned or sold under agreements to repurchase, as well as an increase in debt repayments in 2018, partially offset by a reduction in treasury stock acquired, proceeds raised from preferred stock issued net of issuance costs and a decline in separate account activity.

Year ended December 31, 2017 compared to the year ended December 31, 2016

Cash provided by operating activities increased in 2017 as compared to the prior year due, in part, to an increase in fee income received, a decrease in taxes paid and a decrease in Property & Casualty claim payments, largely offset by the $650 ceded premium paid to NICO for the asbestos and environmental adverse development cover entered into in 2016.

Cash used for investing activities in 2017 primarily relates to the acquisition of Aetna's U.S. group life and disability business for $1.4 billion (net of cash acquired), net of $222 of net proceeds from the sale of the Company's P&C U.K. run-off business. Cash provided by investing activities in 2016 primarily related to net proceeds from available-for-sale securities of $2.7 billion, partially offset by net payments for short-term investments of $1.4 billion.

Cash used for financing activities in 2017 consists primarily of net payments for deposits, transfers and withdrawals for investments and universal life products of $991, the

repurchase of common shares outstanding and the payment of common stock dividends, offset by an increase in cash from securities loaned or sold under agreements to repurchase securities and issuance of debt. Cash used for financing activities in 2016 consisted primarily of repurchases of common shares outstanding of $1.3 billion, net payments for deposits, transfers and withdrawals for investments and universal life products of $782 and repayment of debt of $275.

Equity Markets

For a discussion of the potential impact of the equity markets on capital and liquidity, see the Financial Risk on Statutory Capital and Liquidity Risk section in this MD&A.

Ratings

Ratings are an important factor in establishing a competitive position in the insurance marketplace and impact the Company's ability to access financing and its cost of borrowing. There can be no assurance that the Company’s ratings will continue for any given period of time, or that they will not be changed. In the event the Company’s ratings are downgraded, the Company’s competitive position, ability to access financing, and its cost of borrowing, may be adversely impacted.

Insurance Financial Strength Ratings as of February 20, 2019

	As of	February 20, 2019
	A.M. Best	Standard & Poor's	Moody's
Hartford Fire Insurance Company	A+	A+	A1
Hartford Life and Accident Insurance Company	A	A	A2
Other Ratings:
The Hartford Financial Services Group, Inc.:
Senior debt	a-	BBB+	Baa1
Commercial paper	AMB-1	A-2	P-2

These ratings are not a recommendation to buy or hold any of The Hartford’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization.

The agencies consider many factors in determining the final rating of an insurance company. One consideration is the relative

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

level of statutory capital and surplus (referred to collectively as "statutory capital") necessary to support the business written and is reported in accordance with accounting practices prescribed by the applicable state insurance department. See Part I, Item 1A.

Risk Factors — “Downgrades in our financial strength or credit ratings may make our products less attractive, increase our cost of capital and inhibit our ability to refinance our debt.”

Statutory Capital

Statutory Capital Rollforward for the Company's Insurance Subsidiaries
	Property and Casualty Insurance Subsidiaries [1]			Group Benefits Insurance Subsidiary			Total
U.S. statutory capital at January 1, 2018	$	7,396		$	2,029		$	9,425
Statutory income	1,114			390			1,504
Dividends to parent	(840		)	—			(840		)
Other items	(235		)	(12		)	(247		)
Net change to U.S. statutory capital	39			378			417
U.S. statutory capital at December 31, 2018	$	7,435		$	2,407		$	9,842

[1]	The statutory capital for property and casualty insurance subsidiaries in this table does not include the value of an intercompany note owed by HHI to Hartford Fire Insurance Company. Accordingly, neither the $1.9 billion principal paydown of the note nor an associated $1.9 billion of dividends to the holding company during the year ended December 31, 2018 are reflected in this table.

Stat to GAAP Differences

Significant differences between U.S. GAAP stockholders’ equity and aggregate statutory capital prepared in accordance with U.S. STAT include the following:

•	U.S. STAT excludes equity of non-insurance and foreign insurance subsidiaries not held by U.S. insurance subsidiaries.

•	Costs incurred by the Company to acquire insurance policies are deferred under U.S. GAAP while those costs are expensed immediately under U.S. STAT.

•	Temporary differences between the book and tax basis of an asset or liability which are recorded as deferred tax assets are evaluated for recoverability under U.S. GAAP while those amounts deferred are subject to limitations under U.S. STAT.

•	The assumptions used in the determination of Group Benefits reserves (i.e. for Group Benefits contracts) are prescribed under U.S. STAT, while the assumptions used under U.S. GAAP are generally the Company’s best estimates.

•

The difference between the amortized cost and fair value of fixed maturity and other investments, net of tax, is recorded as an increase or decrease to the carrying value of the related asset and to equity under U.S. GAAP, while U.S. STAT only records certain securities at fair value, such as equity securities and certain lower rated bonds required by the NAIC to be recorded at the lower of amortized cost or fair value.

•

U.S. STAT for life insurance companies like HLA establishes a formula reserve for realized and unrealized losses due to default and equity risks associated with certain invested assets (the Asset Valuation Reserve), while U.S. GAAP does not. Also, for those realized gains and losses caused by changes in interest rates, U.S. STAT for life insurance companies defers and amortizes the gains and losses, caused by changes in interest rates, into income over the original life to maturity of the asset sold (the Interest Maintenance Reserve) while U.S. GAAP does not.

•	Goodwill arising from the acquisition of a business is tested for recoverability on an annual basis (or more frequently, as necessary) for U.S. GAAP, while under U.S. STAT goodwill is amortized over a period not to exceed 10 years and the amount of goodwill admitted as an asset is limited.

In addition, certain assets, including a portion of premiums receivable and fixed assets, are non-admitted (recorded at zero value and charged against surplus) under U.S. STAT. U.S. GAAP generally evaluates assets based on their recoverability.

Risk-Based Capital

The Company's U.S. insurance companies' states of domicile impose 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.

Sensitivity

In any particular year, statutory capital amounts and RBC ratios may increase or decrease depending upon a variety of factors. The amount of change in the statutory capital or RBC ratios can vary based on individual factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. For further discussion on these factors and the potential impacts to the life insurance subsidiaries, see MD&A - Enterprise Risk Management, Financial Risk on Statutory Capital.

Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Statutory capital at the property and casualty subsidiaries has historically been maintained at or above the capital level required to meet “AA level” ratings from rating agencies. Statutory capital generated by the property and casualty subsidiaries in excess of the capital level required to meet “AA level” ratings is available for use by the enterprise or for corporate purposes. The amount of statutory capital can increase or decrease depending on a number of factors affecting property and casualty results including, among other factors, the level of catastrophe claims incurred, the amount of reserve development, the effect of changes in interest rates on investment income and the discounting of loss reserves, and the effect of realized gains and losses on investments.

Contingencies

Legal Proceedings

For a discussion regarding contingencies related to The Hartford’s legal proceedings, please see the information contained under “Litigation” and “Asbestos and Environmental Claims,” in Note 14 - Commitments and Contingencies of the Notes to Consolidated Financial Statements and Part I, Item 3 Legal Proceedings, which are incorporated herein by reference.

Legislative and Regulatory Developments

Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act") It is unclear whether the Administration, Congress or the courts will seek to reverse, amend or alter the ongoing operation of the Affordable Care Act ("ACA"). If such actions were to occur, they may have an impact on various aspects of our business, including our insurance businesses. It is unclear what an amended ACA would entail, and to what extent there may be a transition period for the phase out of the ACA. The impact to The Hartford as an employer would be consistent with other large employers. The Hartford’s core business does not involve the issuance of health insurance, and we have not observed any material impacts on the Company’s workers’ compensation business or group benefits business from the enactment of the ACA. We will continue to monitor the impact of the ACA and any reforms on consumer, broker and medical provider behavior for leading indicators of changes in medical costs or loss payments primarily on the Company's workers' compensation and disability liabilities.

Tax Reform At the end of 2017, Congress passed and the president signed, the Tax Cuts and Jobs Act of 2017 ("Tax Reform"), which enacted significant reforms to the U.S. tax code. The major areas of interest to the company include the reduction of the corporate tax rate from 35% to 21% and the repeal of the corporate alternative minimum tax (AMT) and the refunding of AMT credits. We continue to analyze Tax Reform for other potential impacts. The U.S. Treasury and IRS are developing guidance implementing Tax Reform, and Congress may consider additional technical corrections to the legislation. Tax proposals and regulatory initiatives which have been or are being considered by Congress and/or the U.S. Treasury Department could have a material effect on the company and its insurance businesses. The nature and timing of any Congressional or regulatory action with respect to any such efforts is unclear. For additional information on risks to the Company related to Tax Reform, please see the risk factor entitled "Changes in federal or state tax laws could adversely affect our business, financial

condition, results of operations and liquidity" under "Risk Factors" in Part I.

Guaranty Fund and Other Insurance-related Assessments

For a discussion regarding Guaranty Fund and Other Insurance-related Assessments, see Note 14 Commitments and Contingencies of Notes to Consolidated Financial Statements.

IMPACT OF NEW ACCOUNTING STANDARDS

For a discussion of accounting standards, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements.

Part II - Item 9A. Controls and Procedures

Item 9A. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures

The Company's principal executive officer and its principal financial officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) have concluded that the Company's disclosure controls and procedures are effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-15(e) as of December 31, 2018.

Management’s annual report on internal control over financial reporting

The management of The Hartford Financial Services Group, Inc. and its subsidiaries (“The Hartford”) is responsible for establishing and maintaining adequate internal control over financial reporting for The Hartford as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. A company's internal control over financial reporting includes policies and procedures that (1) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The Hartford's management assessed its internal controls over financial reporting as of December 31, 2018 in relation to criteria for effective internal control over financial reporting described in “Internal Control-Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment under those criteria, The Hartford's management concluded that its internal control over financial reporting was effective as of December 31, 2018.

Changes in internal control over financial reporting

There were no changes in the Company's internal control over financial reporting that occurred during the Company's fourth fiscal quarter of 2018 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Attestation report of the Company’s registered public accounting firm

The Hartford's independent registered public accounting firm, Deloitte & Touche LLP, has issued their attestation report on the Company's internal control over financial reporting which is set forth below.