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

other capital securities and borrowings from its credit 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 and use of derivatives, but it is also present in the Company’s ceded reinsurance activities and various insurance products.

Impact A decline in creditworthiness is typically reflected as an increase in an investment’s credit spread and associated decline in value, potentially resulting in an increase in other-than-temporary impairment, and an increased probability of a realized loss upon sale. In certain instances, counterparties may default on their obligations and the Company may realize a loss on default. Premiums receivable, reinsurance recoverable and deductible losses recoverable 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 in aggregate and to limit potential losses in accordance with the Company's credit risk management policy. The Company manages its credit risk by managing aggregations of risk, holding a diversified mix of issuers and counterparties across its investment, reinsurance, and insurance portfolios and limiting exposure to any specific reinsurer or counterparty. Potential credit losses can be mitigated through diversification (e.g., geographic regions, asset types, industry sectors), hedging and the use of collateral to reduce net credit exposure.

The Company manages credit risk through the use of various analyses and governance processes. The investment, derivatives and reinsurance areas have formal policies and procedures for counterparty approvals and authorizations, which establish criteria defining minimum levels of creditworthiness and financial stability for eligible counterparties. Credits considered for investment are subject to underwriting reviews and private securities are subject to management approval. Mitigation strategies vary across the three sources of credit risk, but may include:

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

•	Selling investments subject to credit risk;

•	Hedging through use of credit default swaps;

•	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, 2019, 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 $3 and $1, in 2019 and 2018, 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 $5,527 and $4,357, as of December 31, 2019 and 2018, 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 $4,384 and $3,995, as of December 31, 2019 and 2018, 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 additional 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 also has derivative counterparty exposure policies which limit the Company’s exposure to credit risk. Credit exposures are generally quantified based on the prior business day’s net fair value, including income accruals, of all derivative positions transacted with a single counterparty for each separate legal entity. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. The Company enters into collateral arrangements in connection with its derivatives positions and collateral is pledged to or held by, or on behalf of, the Company to the extent the exposure is greater than zero, subject to minimum transfer thresholds or negotiated thresholds. In accordance with industry standards and the contractual requirements, collateral is typically settled on the same business day. For the year ended December 31, 2019, the Company incurred no losses on derivative instruments due to counterparty default. For further discussion, see the Derivative Commitments section of Note 14 - Commitments and Contingencies of Notes to Consolidated Financial Statements.

Use of Credit Derivatives

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

Credit Risk Reduced Through Credit Derivatives

The Company uses credit derivatives to purchase credit protection with respect to a single entity or referenced index. The Company purchases credit protection through credit default swaps to economically hedge and manage credit risk of certain fixed maturity investments across multiple sectors of the investment portfolio. As of December 31, 2019 and 2018, the notional amount related to credit derivatives that purchase credit

protection was $124 and $6, respectively, while the fair value was $(3) and $0, 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, 2019 and 2018, the notional amount related to credit derivatives that assume credit risk was $500 and $1.1 billion, respectively, while the fair value was $13 and $3, respectively. 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 rate risk arising from its fixed maturity investments, commercial mortgage loans, capital securities issued by the Company and discount rate assumptions associated with the Company’s claim reserves and pension and other post retirement benefit obligations as well as from assets that support the Company's pension and other post-retirement benefit plans.

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
Ý	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
Þ	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 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 utilizes 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, 2019 and 2018, notional amounts pertaining to derivatives utilized to manage interest rate risk, including offsetting positions, totaled $11.4 billion and $10.5 billion, respectively primarily related to investments. The fair value of these derivatives was $(59) and $(61) as of December 31, 2019 and 2018, 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 $49.3 billion and $43.7 billion at December 31, 2019 and 2018, respectively. The weighted average duration of the portfolio, including derivative instruments, was approximately 5.0 years and 4.7 years as of December 31, 2019 and 2018, 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 rely upon actuarial pricing assumptions (including mortality and morbidity) and have an element of cash flow uncertainty. As of December 31, 2019 and 2018, the Company had $8,256 and $8,445, 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, 2019 and 2018, the Company had $732 and $791, 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 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,
	2019						2018
Basis point shift	-100			+100			-100			+100
Increase (decrease) in economic value, before tax	$	83		$	(101	)	$	47		$	(68	)

The carrying value of assets supporting the liabilities related to the businesses included in the table above was $10.6 billion and $10.0 billion, as of December 31, 2019 and 2018, 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, 2019 and 2018. 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,
	2019						2018
Basis point shift	-100			+100			-100			+100
Increase (decrease) in fair value, before tax	$	2,165		$	(1,853	)	$	1,761		$	(1,511	)

The carrying value of fixed maturities, commercial mortgage loans and short-term investments related to the businesses included in the table above was $38.7 billion and $33.7 billion as of December 31, 2019 and 2018, respectively.

Long-term Debt

A 100 basis point parallel decrease in the yield curve would result in an increase in the fair value of long-term debt by $607 and $331 as of December 31, 2019 and 2018, respectively. A 100 basis point parallel increase in the yield curve would result in a decrease in the fair value of long-term debt by $499 and $279 as of December 31, 2019 and 2018, 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 unfunded liabilities for pension and other post-retirement plan obligations of $185 and $178 as of December 31, 2019 and 2018, respectively. A 100 basis point parallel increase in the yield curve would have the inverse effect and result in a decrease in the unfunded liabilities for pension and other post-retirement plan obligations of $138 and $134 as of December 31, 2019 and 2018, 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.

Discontinuation of LIBOR The Company continues to monitor the potential impacts of the discontinuation of LIBOR which is used as a benchmark or reference rate for certain investments and derivatives the Company owns and floating rate debt the Company has issued. The Company has identified three principal types of outstanding contracts that may be affected by the discontinuation of or transition from LIBOR to an alternative reference rate, including floating rate fixed maturity investments the Company holds in its investment portfolio; derivative instruments that hedge interest rate risk; and two classes of junior subordinated debentures that the Company has issued and are currently outstanding.

•

Using our best estimate of expected future cash flows including prepayments and maturities, the book value of LIBOR referenced floating rate fixed maturities that the Company owns as of December 31, 2019 and that the Company expects to be outstanding at the end of 2021, is approximately $2.7 billion. The Company has performed a review of the LIBOR replacement language on these assets and believes that greater than 80% have language that supports a transition to a new standard benchmark rate. The Company will continue to assess the remaining holdings and work with counterparties, as appropriate, to determine LIBOR replacement language or manage the assets in other ways, such as through asset sales.

•

The notional amount of derivative instruments as of December, 31, 2019 with a floating rate component that references LIBOR that the Company expects to be outstanding at the end of 2021, considering maturities, is $10.3 billion, with $10.1 billion being cleared through an exchange or clearinghouse. The Company anticipates that substantially all existing derivatives referencing LIBOR, whether or not cleared through an exchange or clearing house, will transition from LIBOR to SOFR or other market alternative rates in line with new market standards currently being developed.

•	The Company has issued $1.1 billion of junior subordinated debentures that mature after 2021 with LIBOR referenced floating interest rates. The Company is assessing options to manage the risk associated with the transition away from LIBOR related to these outstanding securities.

The uncertainty regarding the continued use and reliability of LIBOR, including the timing of such transition, could reduce the value of some of our floating rate fixed maturity investments and

increase the interest the Company pays on the junior subordinated debentures.

There is also a risk that certain derivatives may no longer qualify for hedge accounting if reference rates change on derivative contracts but the reference interest rate of the instruments being hedged do not change in a substantially similar manner, particularly for cash flow hedges of floating rate investments the Company owns and junior subordinated debentures the Company has issued. The loss of hedge accounting could result in the recognition of gains or losses on derivatives in the income statement rather than in accumulated other comprehensive income. The FASB has proposed guidance that would allow companies to continue to apply hedge accounting in these instances for one year after year end 2021 when the U.K. Financial Conduct Authority is expected to stop requiring financial institutions to publish LIBOR rates. Beyond the one year period ending 2022, there is uncertainty whether certain outstanding derivative contracts will continue to qualify for hedge accounting either because the replacement rate of the financial instrument being hedged is not sufficiently matched to the reference rate of the derivative contract or because replacement rate language for the hedged instrument has not been determined.

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. In addition, the Company has equity exposure through its 9.7% ownership interest in the limited partnership, Hopmeadow Holdings LP, that owns the life and annuity business sold in 2018. For further information, see Note 21 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements.

Impact The investment portfolio is exposed to losses from market declines affecting equity securities and derivatives, 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. For assets supporting pension and other post-retirement benefit plans, the asset allocation mix is reviewed on a periodic basis. In order to minimize risk, the pension plans maintain a listing of permissible and prohibited investments and impose concentration limits and investment quality requirements on permissible investment options.

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

Assets and Liabilities Subject to Equity Risk

Investment portfolio The investment portfolio is exposed to losses from market declines affecting equity securities and derivatives, 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.

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 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 do not capture the impact of portfolio re-allocations.

Equity Sensitivity [1]

	As of December 31, 2019										As of December 31, 2018
				Shock to S&P 500										Shock to S&P 500
(Before tax)	Fair Value			+20%			-20%				Fair Value			+20%			-20%
Investment Portfolio	$	3,295		$	440		$	(407	)		$	3,045		$	419		$	(418	)
Assets supporting pension and other post-retirement benefit plans	$	1,372		$	230		$	(230	)		$	1,226		$	209		$	(209	)

[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 $(50) as of December 31, 2019. 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.

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

Foreign Currency Exchange Risk

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

Sources of Currency Risk The Company has foreign currency exchange risk in non-U.S. dollar denominated cash, fixed maturities, equities, and derivative instruments. In addition, the Company has non-U.S. subsidiaries, some with functional currencies other than U.S. dollar, and which transact business in multiple currencies resulting in assets and liabilities denominated in foreign currencies.

Impact Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains and losses on changes in the value of assets and liabilities. The impact on the fair value of fixed maturities, AFS due to changes in foreign currency exchange rates, in relation to functional currency, is reported in unrealized gains or losses as part of other comprehensive income. The realization of gains or losses resulting from investment sales or resulting from changes in investments that record fair value through the income statement due to changes in foreign currency exchange rates is reflected through net realized capital gains and losses.

In regards to insurance and reinsurance contracts that the Company enters into for which we are obligated to pay losses in a foreign currency, the impact of changes in foreign currency exchange rates on assets and liabilities related to these contracts is reflected through net realized capital gains and losses. These assets or liabilities include, but are not limited to, cash and cash equivalents, premiums receivable, reinsurance recoverables, and unpaid losses and loss adjustment expenses. Additionally, the Company translates the assets, liabilities, and income of non-U.S. dollar functional currency legal entities into U.S. dollar. This translation amount is reported as a component of other comprehensive income.

Management The Company manages its foreign currency exchange risk primarily through asset-liability matching and through the use of derivative instruments. However, legal entity capital is invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations. The foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using foreign currency swaps and forwards.

Assets and Liabilities Subject to Foreign Currency Exchange Risk

Investment portfolio The Company is exposed to foreign exchange risk affecting non-U.S. dollar denominated cash, fixed maturities, equities and derivative instruments. Changes in relative values between currencies can positively or negatively impact net realized capital gains and losses or unrealized gains (losses) as part of other comprehensive income.

Assets supporting pension plan Changes in relative values between currencies can positively or negatively impact unrealized gains and losses 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. As of December 31, 2019 and 2018, the Company had pension plan assets of $83 and $68, respectively, of non-U.S. dollar investments in multiple currencies. These amounts are excluded from the sensitivity analysis below.

Insurance contract related assets and liabilities The Company has non-U.S. dollar denominated insurance contracts and associated premiums receivable, reinsurance recoverables and unpaid losses and loss adjustment expenses, that are exposed to foreign exchange risk. For contracts that are within U.S, dollar functional currency legal entities, changes in foreign currency exchange rates can positively or negatively impact net realized capital gains and losses. For contracts within non-U.S. dollar functional currency legal entities, changes in foreign currency exchange rates can positively or negatively impact other comprehensive income.

Foreign Currency Sensitivity

For the Company’s primary currencies that create foreign exchange risk, the following table provides the estimated impact of a hypothetical 10% unfavorable change in exchange rates. Actual results could differ materially due to the nature of the estimates and assumptions used in the analysis. The amounts presented are in U.S. dollars and before-tax.

Foreign Currency Sensitivity [1]

	GBP			CAD			10% Unfavorable Change
December 31, 2019
Net assets (liabilities)	$	336		$	173		$	(46	)
December 31, 2018
Net assets (liabilities)	$	—		$	89		$	(8	)

[1]	Amount excludes currencies where the value of net assets in U.S. dollar equivalent is less than 1% of total net assets of the Company.

Financial Risk on Statutory Capital

Statutory surplus amounts and 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

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

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 or a decline in equity market levels, 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 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, 2019									December 31, 2018
	Amortized Cost			Fair Value			Percent of Total Fair Value			Amortized Cost			Fair Value			Percent of Total Fair Value
United States Government/Government agencies	$	5,478		$	5,644		13.4	%		$	4,446		$	4,430		12.4	%
AAA	6,412			6,617			15.7	%		6,366			6,440			18.1	%
AA	7,746			8,146			19.3	%		6,861			6,985			19.6	%
A	10,144			10,843			25.7	%		8,314			8,370			23.5	%
BBB	8,963			9,530			22.6	%		8,335			8,163			22.9	%
BB & below	1,335			1,368			3.3	%		1,281			1,264			3.5	%
Total fixed maturities, AFS	$	40,078		$	42,148		100.0	%		$	35,603		$	35,652		100.0	%

The fair value of fixed maturities, AFS increased as compared to December 31, 2018, primarily due to the transfer in of assets related to the acquisition of Navigators Group as well as an increase in valuations due to lower interest rates and tighter

credit spreads. 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, 2019															December 31, 2018
	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	$	1,350		$	16		$	(3	)	$	1,363		3.2	%		$	1,159		$	5		$	(1	)	$	1,163		3.3	%
Other	111			2			—			113			0.3	%		113			—			—			113			0.3	%
Collateralized loan obligations ("CLOs")	2,186			5			(8		)	2,183			5.2	%		1,455			2			(20		)	1,437			4.0	%
CMBS
Agency [1]	1,878			43			(7		)	1,914			4.5	%		1,447			13			(33		)	1,427			4.0	%
Bonds	2,108			86			(4		)	2,190			5.2	%		1,845			13			(29		)	1,829			5.1	%
Interest only	224			12			(2		)	234			0.6	%		289			9			(2		)	296			0.8	%
Corporate
Basic industry	539			31			(1		)	569			1.4	%		604			8			(21		)	591			1.7	%
Capital goods	1,495			72			(9		)	1,558			3.7	%		1,132			8			(31		)	1,109			3.1	%
Consumer cyclical	991			57			(1		)	1,047			2.5	%		943			9			(29		)	923			2.6	%
Consumer non-cyclical	2,372			137			(3		)	2,506			5.9	%		1,936			11			(71		)	1,876			5.3	%
Energy	1,550			96			(3		)	1,643			3.9	%		1,156			14			(43		)	1,127			3.1	%
Financial services	3,977			192			(4		)	4,165			9.9	%		3,368			17			(99		)	3,286			9.2	%
Tech./comm.	2,360			208			—			2,568			6.1	%		1,720			34			(54		)	1,700			4.8	%
Transportation	743			44			—			787			1.9	%		548			4			(18		)	534			1.5	%
Utilities	2,019			132			(4		)	2,147			5.1	%		2,017			43			(69		)	1,991			5.6	%
Other	389			17			—			406			1.0	%		272			—			(11		)	261			0.7	%
Foreign govt./govt. agencies	1,057			66			—			1,123			2.7	%		866			7			(26		)	847			2.4	%
Municipal bonds
Taxable	815			45			(1		)	859			2.0	%		629			14			(17		)	626			1.8	%
Tax-exempt	7,948			692			(1		)	8,639			20.5	%		9,343			407			(30		)	9,720			27.3	%
RMBS
Agency	2,409			57			(1		)	2,465			5.8	%		1,508			7			(29		)	1,486			4.2	%
Non-agency	1,786			17			(2		)	1,801			4.2	%		933			5			(6		)	932			2.6	%
Alt-A	40			3			—			43			0.1	%		43			4			—			47			0.1	%
Sub-prime	540			20			—			560			1.3	%		786			28			—			814			2.3	%
U.S. Treasuries	1,191			75			(1		)	1,265			3.0	%		1,491			41			(15		)	1,517			4.2	%
Total fixed maturities, AFS	$	40,078		$	2,125		$	(55	)	$	42,148		100.0	%		$	35,603		$	703		$	(654	)	$	35,652		100.0	%
Fixed maturities, FVO										$	11														$	22
Equity securities, at fair value										$	1,657														$	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.

The fair value of AFS securities increased as compared with December 31, 2018, primarily due to the transfer in of assets related to the acquisition of Navigators Group as well as an increase in valuations due to lower interest rates and tighter credit spreads.

European Exposure

While the European economy is showing signs of stabilization, structural challenges including elevated sovereign debt levels and demographic headwinds are expected to suppress economic

growth in the region. Political risk will likely remain elevated in Europe during 2020 due to uncertainty surrounding 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.

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

As of December 31, 2019, the Company’s European investment exposure had an amortized cost of $3.0 billion and a fair value of $3.1 billion, or 6% of total invested assets; as of December 31, 2018, both the amortized cost and fair value totaled $2.5 billion. 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, Switzerland, Netherlands, and Sweden. As of both December 31, 2019 and 2018, 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, 2019 and 2018, the U.K. exposure totals less than

3% of total invested assets and largely relates to the industrial, sovereign, and financial services sectors and has an average credit rating of A-. The majority of the European investments are U.S. dollar-denominated. 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, 2019

	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]	$	1,878		$	1,914		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	1,878		$	1,914
Bonds	1,013			1,055			561			576			416			438			118			121			—			—			2,108			2,190
Interest Only	150			158			67			70			—			—			5			5			2			1			224			234
Total CMBS	3,041			3,127			628			646			416			438			123			126			2			1			4,210			4,338
RMBS
Agency	2,386			2,441			23			24			—			—			—			—			—			—			2,409			2,465
Non-Agency	1,215			1,226			300			304			257			257			13			13			1			1			1,786			1,801
Alt-A	—			—			8			8			4			4			8			9			20			22			40			43
Sub-Prime	9			9			56			57			167			173			164			171			144			150			540			560
Total RMBS	3,610			3,676			387			393			428			434			185			193			165			173			4,775			4,869
Total CMBS & RMBS	$	6,651		$	6,803		$	1,015		$	1,039		$	844		$	872		$	308		$	319		$	167		$	174		$	8,985		$	9,207

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

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

The Company also has exposure to commercial mortgage loans. These loans are collateralized by real estate properties that are diversified both geographically throughout the United States and by property type. These commercial loans are originated by the Company as high quality whole loans, and the Company may sell

participation interests in one or more loans to third parties. A loan participation interest represents a pro-rata share in interest and principal payments generated by the participated loan, and the relationship between the Company as loan originator, lead participant and servicer and the third party as a participant are

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

governed by a participation agreement.

As of December 31, 2019, commercial mortgage loans had an amortized cost of $4.2 billion and carrying value of $4.2 billion, with no valuation allowance. As of December 31, 2018, commercial mortgage loans had an amortized cost of $3.7 billion and carrying value of $3.7 billion with a valuation allowance of $1.

The Company funded $840 of commercial mortgage loans with a weighted average loan-to-value (“LTV”) ratio of 59% and a weighted average yield of 3.6% during the twelve months ended December 31, 2019. 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, 2019 or December 31, 2018.

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.

Available For Sale Investments in Municipal Bonds

	December 31, 2019								December 31, 2018
	Amortized Cost			Fair Value			Weighted Average Credit Quality		Amortized Cost			Fair Value			Weighted Average Credit Quality
General Obligation	$	1,157		$	1,268		AA		$	1,222		$	1,275		AA
Pre-refunded [1]	936			985			AAA		1,845			1,904			AAA
Revenue
Transportation	1,509			1,675			A+		1,449			1,537			A+
Health Care	1,360			1,454			A+		1,270			1,304			AA-
Education	784			853			AA		941			953			AA
Leasing [2]	781			842			AA-		772			799			AA-
Water & Sewer	660			700			AA		816			847			AA
Sales Tax	456			517			AA		507			541			AA
Power	339			374			A		308			328			A+
Housing	114			117			AA+		33			35			A+
Other	667			713			AA-		809			823			AA-
Total Revenue	6,670			7,245			AA-		6,905			7,167			AA-
Total Municipal	$	8,763		$	9,498		AA-		$	9,972		$	10,346		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, 2019 and December 31, 2018, the largest issuer concentrations were the New York Dormitory Authority, the New York City Transitional Finance 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 18% of the fair value of the Company's investment portfolio. In light of changes in corporate income tax rates that began in 2018, the Company has reduced its exposure to municipal bonds through maturities, asset sales and principal repayments.

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.

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

Limited Partnerships and Other Alternative Investments - Net Investment Income

	Year Ended December 31,
	2019						2018						2017
	Amount			Yield			Amount			Yield			Amount			Yield
Hedge funds	$	5		7.2	%		$	4		9.3	%		$	3		23.6	%
Real estate funds	70			17.0	%		58			12.0	%		43			9.1	%
Private equity funds	126			16.6	%		144			22.5	%		122			20.7	%
Other alternative investments [1]	31			8.2	%		(1		)	(0.2	)%		6			1.6	%
Total	$	232		14.4	%		$	205		13.2	%		$	174		12.0	%

Investments in Limited Partnerships and Other Alternative Investments

	December 31, 2019						December 31, 2018
	Amount			Percent			Amount			Percent
Hedge funds	$	94		5.3	%		$	51		3.0	%
Real estate funds	407			23.2	%		499			29.0	%
Private equity and other funds	851			48.4	%		788			45.7	%
Other alternative investments [1]	406			23.1	%		385			22.3	%
Total	$	1,758		100.0	%		$	1,723		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 $55 as of December 31, 2019, and have decreased $599 from December 31, 2018, primarily due to lower interest rates and tighter credit spreads. As of December 31, 2019, $50 of the gross unrealized losses were associated with securities depressed less than 20% of cost or amortized cost. The remaining $5 of gross unrealized losses were associated with securities depressed greater than 20%. The securities depressed more than 20% are primarily related to 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, 2019												December 31, 2018
Consecutive Months	Items		Cost or Amortized Cost			Fair Value			Unrealized Loss				Items		Cost or Amortized Cost			Fair Value			Unrealized Loss
Three months or less	347		$	2,529		$	2,514		$	(15	)		468		$	3,191		$	3,153		$	(38	)
Greater than three to six months	114		712			704			(8		)		359		2,530			2,487			(43		)
Greater than six to nine months	50		190			188			(2		)		347		2,243			2,186			(57		)
Greater than nine to eleven months	15		24			23			(1		)		817		5,921			5,688			(233		)
Twelve months or more	345		1,440			1,411			(29		)		969		5,272			4,989			(283		)
Total	871		$	4,895		$	4,840		$	(55	)		2,960		$	19,157		$	18,503		$	(654	)

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

Unrealized Loss Aging for AFS Securities Continuously Depressed Over 20%

	December 31, 2019												December 31, 2018
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	)
Greater than three to six months	5		2			1			(1		)		—		—			—			—
Greater than six to nine months	—		—			—			—				3		3			2			(1		)
Greater than nine to eleven months	—		—			—			—				2		2			1			(1		)
Twelve months or more	32		10			6			(4		)		36		13			8			(5		)
Total	37		$	12		$	7		$	(5	)		54		$	77		$	54		$	(23	)

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

	For the years ended December 31,
	2019			2018			2017
Credit Impairments
CMBS	—			1			2
Corporate	3			—			—
Equity Impairments	—			—			6
Total	$	3		$	1		$	8

Year ended December 31, 2019

For the year ended December 31, 2019, impairments recognized in earnings were comprised of credit impairments of $3 related to two corporate securities experiencing issuer-specific financial difficulties.

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 $3 for the year-ended December 31, 2019.

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, 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.

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 to the holding company as of December 31, 2019**:**

•	$1.2 billion in fixed maturities, short-term investments, and cash at The Hartford Financial Services Group, Inc. ("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 and $5 in letters of credit were issued as of December 31, 2019.

•	Borrowings available under a commercial paper program to a maximum of $750. As of December 31, 2019, there was no commercial paper outstanding.

•	An intercompany liquidity agreement that allows for short-term advances of funds among HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes.

2020 expected dividends and other sources of capital:

•	P&C - The Company's property and casualty insurance subsidiaries have dividend capacity of $1.6 billion for 2020, with $850 to $900 of net dividends expected in 2020.

•	Group Benefits - HLA has dividend capacity of $534 in 2020 with $300 to $350 of dividends expected in 2020.

•	Hartford Funds - HFSG Holding Company expects to receive $100 to $125 in dividends from Hartford Funds in 2020.

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

•	Cash tax receipts of approximately $520 to $540, including realization of net operating losses and AMT credits.

Expected liquidity requirements for the next twelve months as of December 31, 2019**:**

•	$500 maturing debt payment in March of 2020.

•	$235 of interest on debt.

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

•	$465 of common stockholders' dividends, subject to the discretion of the Board of Directors and before share repurchases.

Equity repurchase program:

Authorization for equity repurchases of up to $1.0 billion effective through December 31, 2020. Under the program the company repurchased 3.4 million shares during the period from January 1, 2019 to December 31, 2019 for $200 with $800 of authorization remaining as of December 31, 2019.

Liquidity Requirements and Sources of Capital

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

The liquidity requirements of the holding company of The Hartford Financial Services Group, Inc. have been and will continue to be met by HFSG Holding Company’s fixed maturities; short-term investments and cash; dividends, principally from its subsidiaries; and tax receipts, including realization of net operating losses and refunds of prior period AMT credits available to the HFSG Holding Company. 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.

During the second half of 2019, approximately $115 of capital was contributed by HFSG Holding Company to its Lloyd's corporate member and an additional contribution of approximately $30 is expected to be made in March 2020. It is expected that the amount of letters of credit under the Lloyd’s Letter of Credit Facility permitted to support Lloyd's capital requirements will be reduced by the end of 2020, which will require the Company to seek alternative means of supporting its obligations at Lloyd's, including utilizing HFSG Holding Company resources.

Debt

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

In the Navigators Group acquisition, the Company assumed $265 par value 5.75% senior notes due on October 15, 2023 with a fair value of $284 as of the acquisition date.

On August 19, 2019, The Hartford issued $600 of 2.8% senior notes (“2.8% Notes”) due August 19, 2029 and $800 of 3.6% senior notes (“3.6% Notes”) due August 19, 2049 for net proceeds of approximately $1.38 billion, after deducting underwriting discounts and expenses. Under both senior note issuances, interest is payable semi-annually in arrears on August 19 and February 19, commencing February 19, 2020.

After receiving proceeds from the issuance of the 2.8% Notes and 3.6% Notes, in third quarter 2019, The Hartford repaid $265 of 5.75% senior notes due 2023 that had been assumed in the Navigators Group acquisition and $800 of 5.125% senior notes due 2022 of The Hartford Financial Services Group, Inc., and recognized a loss on extinguishment of debt of $90 before tax. The balance of the proceeds was used for general corporate purposes.

For additional information on Debt, see Note 13 - Debt of Notes to Consolidated Financial Statements.

Equity

Under a $1.0 billion share repurchase authorization by the Board of Directors in February, 2019, during the year ended December 31, 2019, the Company repurchased 3.4 million common shares for $200. During the period from January 1, 2020 to February 19, 2020, the Company repurchased approximately 1.4 million common shares for $82 under this authorization. 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.

In 2018, the Company issued preferred stock and used the net proceeds from the 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

The Hartford's Board of Directors declared the following quarterly dividends since October 1, 2019:

Common Stock Dividends

Declared	Record	Payable	Amount per share
October 23, 2019	December 2, 2019	January 2, 2020	$	0.30
February 3, 2020	March 2, 2020	April 2, 2020	$	0.325

Preferred Stock Dividends

Declared	Record	Payable	Amount per share
October 23, 2019	February 1, 2020	February 18, 2020	$	375.00
February 20, 2020	May 1, 2020	May 15, 2020	$	375.00

There are no current restrictions on HFSG Holding Company's ability to pay dividends to its stockholders.

For a discussion of restrictions on dividends to HFSG Holding Company from its insurance subsidiaries, see "Dividends from Insurance Subsidiaries" below. For a discussion of potential

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

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 $70, $101 and $280 in 2019, 2018 and 2017, respectively. No contributions were made to the other postretirement plans in 2019, 2018 and 2017. The Company’s 2019, 2018 and 2017 required minimum funding contributions were immaterial. The Company does not have a 2020 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 2020. The Company will monitor the funded status of the U.S. qualified defined benefit pension plan during 2020 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.

The Company accounted for this change as a change in estimate, and accordingly, recognized the effect prospectively beginning in 2017. For further discussion on full yield curve approach, see Part 2, Item 7, MD&A - Pension Plans and Other Postretirement in The Hartford’s 2018 Form 10-K Annual Report.

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 net of 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 Subsidiaries

Dividends to HFSG Holding Company from its insurance subsidiaries are restricted by insurance regulation. Upon the acquisition of Navigators Group, the Company’s principal insurance subsidiaries are domiciled in the United States, the United Kingdom and Belgium.

The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer’s statutory policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the 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.

Property casualty insurers domiciled in New York, including Navigators Insurance Company ("NIC") and Navigators Specialty Insurance Company ("NSIC"), generally may not, without notice to and approval by the state insurance commissioner, pay dividends out of earned surplus in any twelve‑month period that exceeds the lesser of (i) 10% of the insurer’s statutory policyholders’ surplus as of the most recent financial statement on file, or (ii) 100% of its adjusted net investment income, as defined, for the same twelve month period. As part of the New York state insurance commissioner's approval of the Navigators Group acquisition, and as is common practice, any dividend from NIC and NSIC before May 2021 will require prior approval from the state 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.

Corporate members of Lloyd's Syndicates may pay dividends to its parent to the extent of available profits that have been distributed from the syndicate in excess of the Funds at Lloyd's ("FAL") capital requirement. The FAL is determined based on the syndicate’s solvency capital requirement under the E.U.'s Solvency II capital adequacy model, plus a Lloyd’s specific economic capital assessment.

Insurers domiciled in the United Kingdom may pay dividends to its parent out of its statutory profits subject to restrictions imposed under U.K. Company law and European Insurance regulation (Solvency II). Belgium domiciled insurers may only pay dividends if, at the end of its previous fiscal year, the total amount of its assets, as reduced by its provisions and debts, are in excess of certain minimum capital thresholds calculated under Belgian law.

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

In 2019, HFSG Holding Company received $300 of dividends from HLA, $116 from Hartford Funds and $3 from a run-off HFSG subsidiary. In addition, HFSG Holding Company received $50 of ordinary P&C dividends that were subsequently contributed to a run-off P&C subsidiary. Excluding the dividends that were subsequently contributed to a P&C subsidiary, there were no net dividends paid by P&C subsidiaries to HFSG Holding Company 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 May 17, 2019 that permits it to offer and sell debt and equity securities during the three-year life of the registration statement.

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

Revolving Credit Facilities

The Company has a senior unsecured five-year revolving credit facility (the "Credit Facility") that provides up to $750 million of unsecured credit through March 29, 2023. As of December 31, 2019, no borrowings were outstanding and $5 in letters of credit were issued under the Credit Facility and the Company was in compliance with all financial covenants.

Commercial Paper

As of December 31, 2019, The Hartford's maximum borrowings available under its commercial paper program is $750 and there was no commercial paper outstanding.

Intercompany Liquidity Agreements

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

As of December 31, 2019, there were no amounts outstanding at HFSG Holding Company.

Collateralized Advances with Federal Home Loan Bank of Boston

The Company’s subsidiaries, Hartford Fire Insurance Company (“Hartford Fire”) and HLA, are 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. Advances may be used to support general corporate purposes, which would be presented as short- or long-term debt, or to earn incremental investment income, which would be presented in other liabilities consistent with other collateralized financing transactions. As of December 31, 2019, there were no advances outstanding.

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

Lloyd's Letter of Credit Facilities

As a result of the acquisition of Navigators Group, The Hartford has two letter of credit facility agreements: the Club Facility and the Bilateral Facility, which are used to provide a portion of the capital requirements at Lloyd's. As of December 31, 2019, uncollateralized letters of credit with an aggregate face amount of $165 and £60 million were outstanding under the Club Facility and £18 million was outstanding under the Bilateral Facility. As of December 31, 2019, the Bilateral Facility has unused capacity of $1 for issuance of additional letters of credit. Among other covenants, the Club Facility and Bilateral Facility contain financial covenants regarding tangible net worth and FAL. As of December 31, 2019, Navigators Group was in compliance with all financial covenants. In November of 2019, the Company issued £11 million of letters of credit under the Bilateral Facility.

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, 2019 was $81. For this $81, the legal entities have posted collateral of $77, in the normal course of business. Based on derivative market values as of December 31, 2019, a downgrade of one level below the current financial strength ratings 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, 2019, a downgrade of two levels below the current financial strength ratings by either Moody’s or S&P would require an additional $5 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 additional collateral that we would post, if required,

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

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

As of December 31, 2019, 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 primarily 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

available to meet liquidity needs, for each of the Company’s insurance operations.

Property & Casualty

	As of
	December 31, 2019
Fixed maturities	$	31,302
Short-term investments	1,476
Cash	163
Less: Derivative collateral	68
Total	$	32,873

Group Benefits Operations

	As of
	December 31, 2019
Fixed maturities	$	10,313
Short-term investments	361
Cash	13
Less: Derivative collateral	25
Total	$	10,662

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, 2019

	Payments due by period
	Total			Less than 1 year			1-3 years			3-5 years			More than 5 years
Property and casualty obligations [1]	$	28,649		$	6,953		$	7,309		$	3,441		$	10,946
Group life and disability obligations [2]	10,695			1,141			3,479			1,661			4,414
Operating lease obligations [3]	285			53			85			64			83
Long-term debt obligations [4]	10,497			736			444			444			8,873
Purchase obligations [5]	2,392			1,837			326			198			31
Other liabilities reflected on the balance sheet [6]	617			617			—			—			—
Total	$	53,135		$	11,337		$	11,643		$	5,808		$	24,347

[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, 2019*, the total property and casualty reserves in the above table are gross of a reserve discount of* $388*.*

•	Amounts shown do not consider $5.3 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, 2019*, the total group life and disability obligations in the above table are gross of a reserve discount of* $1.4 billion*.*

[3]	Includes undiscounted lease payments on operating lease agreements, including leases that have not yet commenced. See Note 20 - Leases 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 $1.3 billion in commitments to purchase investments including approximately $852 of limited partnership and other alternative investments, $191 of private debt and equity securities, and $215 of mortgage loans. Of the $1.3 billion in commitments to purchase investments, $130 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 $581 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 $16 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.

Capitalization

Capital Structure
	December 31, 2019			December 31, 2018			Change
Short-term debt (includes current maturities of long-term debt)	$	500		$	413		21	%
Long-term debt	4,348			4,265			2	%
Total debt	4,848			4,678			4	%
Common stockholders' equity, excluding AOCI, net of tax	15,884			14,346			11	%
Preferred stock	334			334			—	%
AOCI, net of tax	52			(1,579		)	(103	%)
Total stockholders’ equity	$	16,270		$	13,101		24	%
Total capitalization	$	21,118		$	17,779		19	%
Debt to stockholders’ equity	30		%	36		%
Debt to capitalization	23		%	26		%

Total capitalization increased $3,339, or 19%, as of December 31, 2019 compared with December 31, 2018 primarily due an increase in AOCI and net income in excess of stockholders dividends.

For additional information on AOCI, net of tax, including unrealized capital gains from securities, see Note 17 - Changes in and Reclassifications From Accumulated Other Comprehensive Income (Loss), and Note 6 - Investments. For additional

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

information on debt, see Note 13 - Debt of Notes to Consolidated Financial Statements.

Cash Flow [1]

	2019			2018			2017
Net cash provided by operating activities	$	3,489		$	2,843		$	2,186
Net cash used for investing activities	$	(2,148	)	$	(1,962	)	$	(1,442	)
Net cash used for financing activities	$	(1,191	)	$	(1,467	)	$	(979	)
Cash and restricted cash— end of year	$	262		$	121		$	180

[1] Cash activities in 2018 and 2017 include cash flows from Discontinued Operations; see Note 21 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements for information on cash flows from Discontinued Operations.

Year ended December 31, 2019 compared to the year ended December 31, 2018

Net cash provided by operating activities increased in 2019 as compared to the prior year period, primarily due to an increase in premiums received in excess of losses and expenses paid, including the effect of the Navigators Group acquisition, and an AMT refund of $421, partially offset by the fact that the 2018 period included operating cash flows of the life and annuity business sold in 2018.

Net cash used for investing activities increased primarily due to a change from net proceeds to net payments for fixed maturities in the 2019 period, as well as cash paid for the acquisition of Navigators Group of $1.9 billion (net of cash acquired), partially offset by net proceeds from short term investments, equity securities at fair value and derivatives in 2019 as opposed to net payments in the 2018 period. Further contributing to the increase in net cash used from investing activities were proceeds in 2018 from the sale of the life and annuity business.

Net cash used for financing activities decreased from the 2018 period primarily due to a decrease in cash used for net securities loaned or sold under agreements to repurchase and an increase in proceeds from issuance of debt, partially offset by an increase in repayments of debt in 2019, an increase in treasury stock acquired in 2019, and a decrease in net payments for deposits, transfers and withdrawals for investments and universal life products due to the sale of the life and annuity business in 2018.

Operating cash flows for the year ended December 31, 2019 have been adequate to meet liquidity requirements.

Equity Markets

For a discussion of the potential impact of the equity markets on capital and liquidity, see the Financial Risk 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.

On April 15, 2019, Standards & Poor's ("S&P") raised its issuer credit and financial strength ratings on HLA to A+ from A. The upgrade of HLA's ratings reflects S&P's improved view of the Company's group benefits business, which they consider core to the Company, under their group rating methodology criteria.

On August 30, 2019, AM Best raised its financial strength rating on Navigators Insurance Company ("NIC") to A+ from A. The upgrade reflects the support provided by The Hartford, as well as the importance it will play within the overall Hartford organization, following its acquisition in May 2019.

Insurance Financial Strength Ratings as of February 19, 2020

	A.M. Best	Standard & Poor's	Moody's
Hartford Fire Insurance Company	A+	A+	A1
Hartford Life and Accident Insurance Company	A	A+	A2
Navigators Insurance Company	A+	A	Not Rated
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 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.”

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

Statutory Capital

U.S. Statutory Capital Rollforward for the Company's Insurance Subsidiaries
	Property and Casualty Insurance Subsidiaries [1] [2]			Group Benefits Insurance Subsidiary			Total
U.S. statutory capital at January 1, 2019	$	8,440		$	2,407		$	10,847
Statutory income	1,391			513			1,904
Contributions from (dividends to) parent	46			(300		)	(254		)
Other items	331			24			355
Net change to U.S. statutory capital	1,768			237			2,005
U.S. statutory capital at December 31, 2019	$	10,208		$	2,644		$	12,852

[1]	The statutory capital for property and casualty insurance subsidiaries in this table does not include the value of an intercompany note owed by Hartford Holdings, Inc. ("HHI") to Hartford Fire Insurance Company. Excluding the dividends that were subsequently contributed to a P&C subsidiary, there were no net dividends paid by P&C subsidiaries to HFSG Holding Company in 2019.

[2]	Excludes insurance operations in the U.K. and continental Europe. Though the business was not acquired until May 23, 2019, this table includes statutory capital and surplus of Navigators U.S. insurance subsidiaries as of both January 1, 2019 and December 31, 2019.

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 these amounts are then subject to further admissibility tests 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 U.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, see MD&A - Enterprise Risk Management, Financial Risk on Statutory Capital.

Statutory capital at the insurance subsidiaries has been

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

maintained at capital levels commensurate with the Company's desired ratings from rating agencies. Statutory capital generated by the insurance subsidiaries in excess of the capital level required to meet desired 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 insurance 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 included 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. The U.S. Treasury and IRS continue to develop guidance implementing Tax Reform, and Congress may consider additional technical corrections to the law. 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, 2019.

On May 23, 2019 we acquired Navigators Group. SEC guidance permits management to omit an assessment of an acquired business from management's assessment of internal control over financial reporting for a period not to exceed one year from the date of the acquisition. Accordingly, we have not yet included Navigators Group in our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019. For the year ended December 31, 2019, Navigators Group accounted for 5% of our total net revenue, and as of December 31, 2019 represented 10% of total assets.

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, 2019 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, 2019.

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 2019 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

As described above, our management excluded an assessment of the internal controls over financial reporting of Navigators Group from its assessment of the effectiveness of our internal control over financial reporting as of December 31, 2019. The Company has begun integrating Navigators Group into its existing control procedures, which may lead us to modify certain internal controls in future periods.

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.