REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
Results of Review of Interim Financial Information
We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of March 31, 2019, the related condensed consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for the three-month periods ended March 31, 2019 and 2018, and the related notes (collectively referred to as the "interim financial information"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2018, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated February 22, 2019, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2018, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
This interim financial information is the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ DELOITTE & TOUCHE LLP
Hartford, Connecticut
May 1, 2019
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions, except for per share data)
|
2019
|
2018
|
|
(Unaudited)
|
Revenues
|
|
|
Earned premiums
|
$
|
3,940
|
|
$
|
3,927
|
|
Fee income
|
314
|
|
323
|
|
Net investment income
|
470
|
|
451
|
|
Net realized capital gains (losses):
|
|
|
Total other-than-temporary impairment ("OTTI") losses
|
(4
|
)
|
(2
|
)
|
OTTI losses recognized in other comprehensive income (“OCI”)
|
2
|
|
2
|
|
Net OTTI losses recognized in earnings
|
(2
|
)
|
—
|
|
Other net realized capital gains (losses)
|
165
|
|
(30
|
)
|
Total net realized capital gains (losses)
|
163
|
|
(30
|
)
|
Other revenues
|
53
|
|
20
|
|
Total revenues
|
4,940
|
|
4,691
|
|
Benefits, losses and expenses
|
|
|
Benefits, losses and loss adjustment expenses
|
2,685
|
|
2,695
|
|
Amortization of deferred policy acquisition costs ("DAC")
|
355
|
|
342
|
|
Insurance operating costs and other expenses
|
1,048
|
|
1,037
|
|
Interest expense
|
64
|
|
80
|
|
Amortization of other intangible assets
|
13
|
|
18
|
|
Total benefits, losses and expenses
|
4,165
|
|
4,172
|
|
Income from continuing operations, before tax
|
775
|
|
519
|
|
Income tax expense
|
145
|
|
91
|
|
Income from continuing operations, net of tax
|
630
|
|
428
|
|
Income from discontinued operations, net of tax
|
—
|
|
169
|
|
Net income
|
630
|
|
597
|
|
Preferred stock dividends
|
5
|
|
—
|
|
Net income available to common stockholders
|
$
|
625
|
|
$
|
597
|
|
|
|
|
Income from continuing operations, net of tax, available to common stockholders per common share
|
|
|
Basic
|
$
|
1.74
|
|
$
|
1.20
|
|
Diluted
|
$
|
1.71
|
|
$
|
1.18
|
|
Net income available to common stockholders per common share
|
|
|
|
Basic
|
$
|
1.74
|
|
$
|
1.67
|
|
Diluted
|
$
|
1.71
|
|
$
|
1.64
|
|
See Notes to Condensed Consolidated Financial Statements.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions)
|
2019
|
2018
|
|
(Unaudited)
|
Net income
|
$
|
630
|
|
$
|
597
|
|
Other comprehensive income (loss):
|
|
|
Changes in net unrealized gain on securities
|
679
|
|
(855
|
)
|
Changes in OTTI losses recognized in other comprehensive income
|
1
|
|
(2
|
)
|
Changes in net gain on cash flow hedging instruments
|
5
|
|
(44
|
)
|
Changes in foreign currency translation adjustments
|
1
|
|
(6
|
)
|
Changes in pension and other postretirement plan adjustments
|
8
|
|
10
|
|
OCI, net of tax
|
694
|
|
(897
|
)
|
Comprehensive income (loss)
|
$
|
1,324
|
|
$
|
(300
|
)
|
See Notes to Condensed Consolidated Financial Statements.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
|
|
|
|
|
|
|
|
(In millions, except for share and per share data)
|
March 31,
2019
|
December 31, 2018
|
|
(Unaudited)
|
|
Assets
|
|
Investments:
|
|
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $35,894 and $35,603)
|
$
|
36,819
|
|
$
|
35,652
|
|
Fixed maturities, at fair value using the fair value option
|
20
|
|
22
|
|
Equity securities, at fair value
|
1,275
|
|
1,214
|
|
Mortgage loans (net of allowances for loan losses of $1 and $1)
|
3,637
|
|
3,704
|
|
Limited partnerships and other alternative investments
|
1,719
|
|
1,723
|
|
Other investments
|
222
|
|
192
|
|
Short-term investments
|
4,203
|
|
4,283
|
|
Total investments
|
47,895
|
|
46,790
|
|
Cash
|
104
|
|
121
|
|
Premiums receivable and agents’ balances, net
|
4,160
|
|
3,995
|
|
Reinsurance recoverables, net
|
4,341
|
|
4,357
|
|
Deferred policy acquisition costs
|
688
|
|
670
|
|
Deferred income taxes, net
|
921
|
|
1,248
|
|
Goodwill
|
1,290
|
|
1,290
|
|
Property and equipment, net
|
1,145
|
|
1,006
|
|
Other intangible assets, net
|
644
|
|
657
|
|
Other assets
|
2,136
|
|
2,173
|
|
Total assets
|
$
|
63,324
|
|
$
|
62,307
|
|
Liabilities
|
|
|
Unpaid losses and loss adjustment expenses
|
$
|
32,973
|
|
$
|
33,029
|
|
Reserve for future policy benefits
|
648
|
|
642
|
|
Other policyholder funds and benefits payable
|
742
|
|
767
|
|
Unearned premiums
|
5,482
|
|
5,282
|
|
Short-term debt
|
499
|
|
413
|
|
Long-term debt
|
3,767
|
|
4,265
|
|
Other liabilities
|
4,873
|
|
4,808
|
|
Total liabilities
|
48,984
|
|
49,206
|
|
Commitments and Contingencies (Note
11
)
|
|
|
Stockholders’ Equity
|
|
|
Preferred stock, $0.01 par value — 50,000,000 shares authorized, 13,800 shares issued at March 31, 2019 and December 31, 2018, aggregate liquidation preference of $345
|
334
|
|
334
|
|
Common stock, $0.01 par value — 1,500,000,000 shares authorized, 384,923,222 shares issued at March 31, 2019 and December 31, 2018
|
4
|
|
4
|
|
Additional paid-in capital
|
4,329
|
|
4,378
|
|
Retained earnings
|
11,572
|
|
11,055
|
|
Treasury stock, at cost — 24,058,244 and 25,772,238 shares
|
(1,014
|
)
|
(1,091
|
)
|
Accumulated other comprehensive loss, net of tax
|
(885
|
)
|
(1,579
|
)
|
Total stockholders’ equity
|
14,340
|
|
13,101
|
|
Total liabilities and stockholders’ equity
|
$
|
63,324
|
|
$
|
62,307
|
|
See Notes to Condensed Consolidated Financial Statements.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Changes in Stockholders' Equity
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions, except for share data)
|
2019
|
2018
|
|
(Unaudited)
|
Preferred Stock
|
$
|
334
|
|
$
|
—
|
|
Common Stock
|
4
|
|
4
|
|
Additional Paid-in Capital
|
|
|
Additional Paid-in Capital, beginning of period
|
4,378
|
|
4,379
|
|
Issuance of shares under incentive and stock compensation plans
|
(68
|
)
|
(74
|
)
|
Stock-based compensation plans expense
|
55
|
|
61
|
|
Issuance of shares for warrant exercise
|
(36
|
)
|
(3
|
)
|
Additional Paid-in Capital, end of period
|
4,329
|
|
4,363
|
|
Retained Earnings
|
|
|
Retained Earnings, beginning of period
|
11,055
|
|
9,642
|
|
Cumulative effect of accounting changes, net of tax
|
—
|
|
5
|
|
Adjusted balance, beginning of period
|
11,055
|
|
9,647
|
|
Net income
|
630
|
|
597
|
|
Dividends declared on preferred stock
|
(5
|
)
|
—
|
|
Dividends declared on common stock
|
(108
|
)
|
(88
|
)
|
Retained Earnings, end of period
|
11,572
|
|
10,156
|
|
Treasury Stock, at cost
|
|
|
Treasury Stock, at cost, beginning of period
|
(1,091
|
)
|
(1,194
|
)
|
Treasury stock acquired
|
—
|
|
—
|
|
Issuance of shares under incentive and stock compensation plans
|
71
|
|
81
|
|
Net shares acquired related to employee incentive and stock compensation plans
|
(30
|
)
|
(31
|
)
|
Issuance of shares for warrant exercise
|
36
|
|
3
|
|
Treasury Stock, at cost, end of period
|
(1,014
|
)
|
(1,141
|
)
|
Accumulated Other Comprehensive Income (Loss), net of tax
|
|
|
Accumulated Other Comprehensive Income (Loss), net of tax, beginning of period
|
(1,579
|
)
|
663
|
|
Cumulative effect of accounting changes, net of tax
|
—
|
|
(5
|
)
|
Adjusted balance, beginning of period
|
(1,579
|
)
|
658
|
|
Total other comprehensive income (loss)
|
694
|
|
(897
|
)
|
Accumulated Other Comprehensive Loss, net of tax, end of period
|
(885
|
)
|
(239
|
)
|
Total Stockholders’ Equity
|
$
|
14,340
|
|
$
|
13,143
|
|
Preferred Shares Outstanding
|
|
|
Preferred Shares Outstanding, beginning of period
|
13,800
|
|
—
|
|
Issuance of preferred shares
|
—
|
|
—
|
|
Preferred Shares Outstanding, end of period
|
13,800
|
|
—
|
|
Common Shares Outstanding
|
|
|
Common Shares Outstanding, beginning of period (in thousands)
|
359,151
|
|
356,835
|
|
Treasury stock acquired
|
—
|
|
—
|
|
Issuance of shares under incentive and stock compensation plans
|
1,534
|
|
1,770
|
|
Return of shares under incentive and stock compensation plans to treasury stock
|
(601
|
)
|
(595
|
)
|
Issuance of shares for warrant exercise
|
781
|
|
67
|
|
Common Shares Outstanding, at end of period
|
360,865
|
|
358,077
|
|
Cash dividends declared per common share
|
$
|
0.30
|
|
$
|
0.25
|
|
Cash dividends declared per preferred share
|
$
|
375.00
|
|
$
|
—
|
|
See Notes to Condensed Consolidated Financial Statements.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In millions)
|
2019
|
2018
|
Operating Activities
|
(Unaudited)
|
Net income
|
$
|
630
|
|
$
|
597
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
Net realized capital losses (gains)
|
(163
|
)
|
9
|
|
Amortization of deferred policy acquisition costs
|
355
|
|
383
|
|
Additions to deferred policy acquisition costs
|
(373
|
)
|
(356
|
)
|
Depreciation and amortization
|
108
|
|
116
|
|
Gain on sale
|
—
|
|
(62
|
)
|
Other operating activities, net
|
37
|
|
324
|
|
Change in assets and liabilities:
|
|
|
Decrease in reinsurance recoverables
|
16
|
|
19
|
|
Decrease in accrued and deferred income taxes
|
116
|
|
122
|
|
Increase in insurance liabilities
|
138
|
|
58
|
|
Net change in other assets and other liabilities
|
(585
|
)
|
(498
|
)
|
Net cash provided by operating activities
|
279
|
|
712
|
|
Investing Activities
|
|
|
Proceeds from the sale/maturity/prepayment of:
|
|
|
Fixed maturities, available-for-sale
|
5,072
|
|
6,639
|
|
Fixed maturities, fair value option
|
2
|
|
6
|
|
Equity securities, at fair value
|
619
|
|
185
|
|
Mortgage loans
|
100
|
|
154
|
|
Partnerships
|
68
|
|
75
|
|
Payments for the purchase of:
|
|
|
Fixed maturities, available-for-sale
|
(5,105
|
)
|
(5,874
|
)
|
Equity securities, at fair value
|
(607
|
)
|
(256
|
)
|
Mortgage loans
|
(31
|
)
|
(178
|
)
|
Partnerships
|
(78
|
)
|
(126
|
)
|
Net proceeds from (payments for) derivatives
|
26
|
|
(189
|
)
|
Net additions of property and equipment
|
(20
|
)
|
(39
|
)
|
Net proceeds from (payments for) short-term investments
|
82
|
|
(608
|
)
|
Other investing activities, net
|
1
|
|
(31
|
)
|
Net cash provided by (used for) investing activities
|
129
|
|
(242
|
)
|
Financing Activities
|
|
|
Deposits and other additions to investment and universal life-type contracts
|
—
|
|
1,366
|
|
Withdrawals and other deductions from investment and universal life-type contracts
|
(24
|
)
|
(7,670
|
)
|
Net transfers from separate accounts related to investment and universal life-type contracts
|
—
|
|
5,918
|
|
Federal Home Loan Bank of Boston ("FHLBB") advances
|
50
|
|
—
|
|
Repayments at maturity or settlement of consumer notes
|
—
|
|
(4
|
)
|
Net increase (decrease) in securities loaned or sold under agreements to repurchase
|
102
|
|
(368
|
)
|
Repayment of debt
|
(413
|
)
|
(320
|
)
|
Proceeds from the issuance of debt
|
—
|
|
490
|
|
Net issuance (return) of shares under incentive and stock compensation plans
|
(28
|
)
|
1
|
|
Dividends paid on preferred stock
|
(6
|
)
|
—
|
|
Dividends paid on common stock
|
(109
|
)
|
(90
|
)
|
Net cash used for financing activities
|
(428
|
)
|
(677
|
)
|
Foreign exchange rate effect on cash
|
3
|
|
(5
|
)
|
Net decrease in cash, including cash classified as assets held for sale
|
(17
|
)
|
(212
|
)
|
Less: Net increase (decrease) in cash classified as assets held for sale
|
—
|
|
(260
|
)
|
Net increase (decrease) in cash
|
(17
|
)
|
48
|
|
Cash – beginning of period
|
121
|
|
180
|
|
Cash – end of period
|
$
|
104
|
|
$
|
228
|
|
Supplemental Disclosure of Cash Flow Information
|
|
|
Income tax received (paid)
|
$
|
—
|
|
$
|
(1
|
)
|
Interest paid
|
$
|
41
|
|
$
|
65
|
|
See Notes to Condensed Consolidated Financial Statements
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
1
.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Hartford Financial Services Group, Inc. is a holding company for insurance and financial services subsidiaries that provide property and casualty insurance, group life and disability products and mutual funds and exchange-traded products to individual and business customers (collectively, “The Hartford”, the “Company”, “we” or “our”).
On August 22, 2018, the Company announced it entered into a definitive agreement to acquire all outstanding common shares of The Navigators Group, Inc. ("Navigators Group"), a global specialty underwriter, for
$70
a share, or
$2.2 billion
in cash, including transaction expenses. The transaction is expected to close in the second quarter of 2019, subject to customary closing conditions, including receipt of regulatory approvals. The Company signed an agreement with National Indemnity Company ("NICO"), a subsidiary of Berkshire Hathaway Inc., which, subject to regulatory approval and upon closing of the acquisition, will have Navigators Group subsidiaries enter into an aggregate excess of loss reinsurance agreement with NICO to cover unfavorable reserve development to Navigators Group reserves subject to the agreement, with limited exclusions. The reinsurance agreement will cover accident year 2018 and prior year reserves. The reinsurance agreement provides up to
$300
of coverage for potential unfavorable net loss reserve development in excess of
$1.916 billion
which is
$100
above Navigators Group recorded reserves subject to the agreement of
$1.816 billion
as of December 31, 2018.
On May 31, 2018, Hartford Holdings, Inc., a wholly owned subsidiary of the Company, completed the sale of the issued and outstanding equity of Hartford Life, Inc. (“HLI”), a holding company, for its life and annuity operating subsidiaries. For further discussion of this transaction, see Note
16
-
Business Disposition and Discontinued Operations
of Notes to Condensed Consolidated Financial Statements.
The Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, which differ materially from the accounting practices prescribed by various insurance regulatory authorities. These Condensed Consolidated Financial Statements and Notes should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's
2018
Form 10-K Annual Report. The results of operations for interim periods are not necessarily indicative of the results that may be expected for the full year.
The accompanying Condensed Consolidated Financial Statements and Notes are unaudited. These financial statements reflect all adjustments (generally consisting only of normal accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations and cash flows for the interim periods. The Company's significant accounting policies are summarized in Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to
Consolidated Financial Statements included in the Company's
2018
Form 10-K Annual Report.
Consolidation
The Condensed Consolidated Financial Statements include the accounts of The Hartford Financial Services Group, Inc., and entities in which the Company directly or indirectly has a controlling financial interest. Entities in which the Company has significant influence over the operating and financing decisions but does not control are reported using the equity method. All intercompany transactions and balances between The Hartford and its subsidiaries and affiliates that are not held for sale have been eliminated.
Discontinued Operations
The results of operations of a component of the Company are reported in discontinued operations when certain criteria are met as of the date of disposal, or earlier if classified as held-for-sale. When a component is identified for discontinued operations reporting, amounts for prior periods are retrospectively reclassified as discontinued operations. Components are identified as discontinued operations if they are a major part of an entity's operations and financial results such as a separate major line of business or a separate major geographical area of operations.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining property and casualty and group long-term disability insurance product reserves, net of reinsurance; evaluation of goodwill for impairment; valuation of investments and derivative instruments; valuation allowance on deferred tax assets; and contingencies relating to corporate litigation and regulatory matters.
Adoption of New Accounting Standards
Hedging Activities
On January 1, 2019, the Company adopted the Financial Accounting Standards Board's ("FASB") updated guidance for hedge accounting through a cumulative effect adjustment of less than
$1
to reclassify cumulative ineffectiveness on cash flow hedges from retained earnings to AOCI. The updates allow hedge accounting for new types of interest rate hedges of financial instruments and simplify documentation requirements to qualify for hedge accounting. In addition, any gain or loss from hedge
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
ineffectiveness is reported in the same income statement line with the effective hedge results and the hedged transaction. For cash flow hedges, the ineffectiveness is recognized in earnings only when the hedged transaction affects earnings; otherwise, the ineffectiveness gains or losses remain in AOCI. Under previous accounting, total hedge ineffectiveness was reported separately in realized capital gains and losses apart from the hedged transaction. The adoption did not affect the Company’s financial position or cash flows or have a material effect on net income.
Leases
On
January 1, 2019
, the Company adopted the FASB’s updated lease guidance. Under the updated guidance, lessees with operating leases are required to recognize a liability for the present value of future minimum lease payments with a corresponding asset for the right of use of the property. Prior to the new guidance, future minimum lease payments on operating leases were commitments that were not recognized as liabilities on the balance sheet. Leases are classified as financing or operating leases. Where the lease is economically similar to a purchase because The Hartford obtains control of the underlying
asset, the lease is classified as a financing lease and the Company recognizes amortization of the right of use asset and interest expense on the liability. Where the lease provides The Hartford with only the right to control the use of the underlying asset over the lease term and the lease term is greater than one year, the lease is an operating lease and the lease cost is recognized as rental expense over the lease term on a straight-line basis. Leases with a term of one year or less are also expensed over the lease term but not recognized on the balance sheet. On adoption, The Hartford recorded a lease payment obligation of
$160
for outstanding leases and a right of use asset of
$150
, which is net of
$10
in lease incentives received, with no change to comparative periods. As permitted by the new guidance, as of the implementation date, the Company did not reassess whether expired or existing contracts are leases or contain leases, did not change the classification of expired or existing operating leases, and did not reassess initial direct costs for existing leases to determine if deferred costs should be written-off or recorded on adoption. The adoption did not impact net income or cash flows.
2
.
EARNINGS PER COMMON SHARE
|
|
|
|
|
|
|
|
Computation of Basic and Diluted Earnings per Common Share
|
|
Three Months Ended March 31,
|
(In millions, except for per share data)
|
2019
|
2018
|
Earnings
|
|
|
Income from continuing operations, net of tax
|
$
|
630
|
|
$
|
428
|
|
Less: Preferred stock dividends
|
5
|
|
—
|
|
Income from continuing operations, net of tax, available to common stockholders
|
625
|
|
428
|
|
Income from discontinued operations, net of tax, available to common stockholders
|
—
|
|
169
|
|
Net income available to common stockholders
|
$
|
625
|
|
$
|
597
|
|
Shares
|
|
|
Weighted average common shares outstanding, basic
|
360.0
|
|
357.5
|
|
Dilutive effect of stock-based awards under compensation plans
|
3.3
|
|
4.4
|
|
Dilutive effect of warrants
|
1.4
|
|
2.0
|
|
Weighted average common shares outstanding and dilutive potential common shares
|
364.7
|
|
363.9
|
|
Earnings per common share
|
|
|
Basic
|
|
|
Income from continuing operations, net of tax, available to common stockholders
|
$
|
1.74
|
|
$
|
1.20
|
|
Income from discontinued operations, net of tax, available to common stockholders
|
—
|
|
0.47
|
|
Net income available to common stockholders
|
$
|
1.74
|
|
$
|
1.67
|
|
Diluted
|
|
|
Income from continuing operations, net of tax, available to common stockholders
|
$
|
1.71
|
|
$
|
1.18
|
|
Income from discontinued operations, net of tax, available to common stockholders
|
—
|
|
0.46
|
|
Net income available to common stockholders
|
$
|
1.71
|
|
$
|
1.64
|
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
3
.
SEGMENT INFORMATION
The Company currently conducts business principally in
five
reporting segments including Commercial Lines, Personal Lines, Property & Casualty ("P&C") Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category. The Company includes in the Corporate category discontinued operations related to the life and annuity business sold in May 2018, reserves for run-off structured settlement and terminal funding agreement liabilities, capital raising activities (including debt financing and related interest expense), certain purchase accounting adjustments related to goodwill and other expenses not allocated to the reporting segments. Corporate also includes investment management fees and expenses related to managing third party business, including management of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries ("Talcott Resolution"). Talcott Resolution is the new holding company of the life and annuity business the Company sold in May 2018. In addition, Corporate includes a
9.7
% ownership interest in the legal entity that acquired the sold life and annuity business. For further discussion of continued involvement in the life and annuity business sold in May 2018, see Note
16
-
Business Disposition and Discontinued Operations
of Notes to Condensed Consolidated Financial Statements.
The Company's revenues are generated primarily in the United States ("U.S."). Any foreign sourced revenue is immaterial.
Net Income
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
Commercial Lines
|
$
|
363
|
|
$
|
298
|
|
Personal Lines
|
96
|
|
89
|
|
Property & Casualty Other Operations
|
23
|
|
17
|
|
Group Benefits
|
118
|
|
54
|
|
Hartford Funds
|
30
|
|
34
|
|
Corporate
|
—
|
|
105
|
|
Net income
|
630
|
|
597
|
|
Preferred stock dividends
|
5
|
|
—
|
|
Net income available to common stockholders
|
$
|
625
|
|
$
|
597
|
|
Revenues
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
Earned premiums and fee income:
|
|
|
Commercial Lines
|
|
|
Workers’ compensation
|
$
|
825
|
|
$
|
818
|
|
Liability
|
168
|
|
151
|
|
Package business
|
352
|
|
332
|
|
Automobile
|
157
|
|
149
|
|
Professional liability
|
68
|
|
62
|
|
Bond
|
60
|
|
58
|
|
Property
|
156
|
|
150
|
|
Total Commercial Lines
|
1,786
|
|
1,720
|
|
Personal Lines
|
|
|
|
|
Automobile
|
561
|
|
607
|
|
Homeowners
|
247
|
|
262
|
|
Total Personal Lines [1]
|
808
|
|
869
|
|
Group Benefits
|
|
|
Group disability
|
704
|
|
677
|
|
Group life
|
643
|
|
664
|
|
Other
|
62
|
|
60
|
|
Total Group Benefits
|
1,409
|
|
1,401
|
|
Hartford Funds
|
|
|
Mutual fund and Exchange-Traded Products ("ETP")
|
216
|
|
232
|
|
Talcott Resolution life and annuity separate accounts [2]
|
22
|
|
26
|
|
Total Hartford Funds
|
238
|
|
258
|
|
Corporate
|
13
|
|
2
|
|
Total earned premiums and fee income
|
4,254
|
|
4,250
|
|
Net investment income
|
470
|
|
451
|
|
Net realized capital gains (losses)
|
163
|
|
(30
|
)
|
Other revenues
|
53
|
|
20
|
|
Total revenues
|
$
|
4,940
|
|
$
|
4,691
|
|
|
|
[1]
|
For the
three months ended
March 31, 2019
and
2018
, AARP members accounted for earned premiums of
$722
and
$758
, respectively.
|
|
|
[2]
|
Represents revenues earned for investment advisory services on the life and annuity separate account AUM sold in May 2018 that is still managed by the Company's Hartford Funds segment.
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenue from Non-Insurance Contracts with Customers
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
Revenue Line Item
|
2019
|
2018
|
Commercial Lines
|
|
|
|
Installment billing fees
|
Fee income
|
$
|
9
|
|
$
|
9
|
|
Personal Lines
|
|
|
|
|
|
Installment billing fees
|
Fee income
|
9
|
|
10
|
|
Insurance servicing revenues
|
Other revenues
|
19
|
|
19
|
|
Group Benefits
|
|
|
|
|
|
Administrative services
|
Fee income
|
45
|
|
44
|
|
Hartford Funds
|
|
|
|
|
|
Advisor, distribution and other management fees
|
Fee income
|
217
|
|
238
|
|
Other fees
|
Fee income
|
21
|
|
20
|
|
Corporate
|
|
|
|
|
|
Investment management and other fees
|
Fee income
|
13
|
|
2
|
|
Transition service revenues
|
Other revenues
|
6
|
|
—
|
|
Total non-insurance revenues with customers
|
|
$
|
339
|
|
$
|
342
|
|
4
.
FAIR VALUE MEASUREMENTS
The Company carries certain financial assets and liabilities at estimated fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. Our fair value framework includes a hierarchy that gives the highest priority to the use of quoted prices in active markets, followed by the use of market observable inputs, followed by the use of unobservable inputs. The fair value hierarchy levels are as follows:
|
|
Level 1
|
Fair values based primarily on unadjusted quoted prices for identical assets or liabilities, in active markets that the Company has the ability to access at the measurement date.
|
|
|
Level 2
|
Fair values primarily based on observable inputs, other than quoted prices included in Level 1, or based on prices for similar assets and liabilities.
|
|
|
Level 3
|
Fair values derived when one or more of the significant inputs are unobservable (including assumptions about risk). With little or no observable market, the determination of fair values uses considerable judgment and represents the Company’s best estimate of an amount that could be realized in a market exchange for the asset or liability. Also included are securities that are traded within illiquid markets and/or priced by independent brokers.
|
The Company will classify the financial asset or liability by level based upon the lowest level input that is significant to the determination of the fair value. In most cases, both observable inputs (e.g., changes in interest rates) and unobservable inputs (e.g., changes in risk assumptions) are used to determine fair values that the Company has classified within Level 3.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of March 31, 2019
|
|
Total
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets accounted for at fair value on a recurring basis
|
|
|
|
|
Fixed maturities, AFS
|
|
|
|
|
Asset-backed-securities ("ABS")
|
$
|
968
|
|
$
|
—
|
|
$
|
959
|
|
$
|
9
|
|
Collateralized loan obligations ("CLOs")
|
1,438
|
|
—
|
|
1,324
|
|
114
|
|
Commercial mortgage-backed securities ("CMBS")
|
3,568
|
|
—
|
|
3,556
|
|
12
|
|
Corporate
|
14,403
|
|
—
|
|
13,878
|
|
525
|
|
Foreign government/government agencies
|
882
|
|
—
|
|
879
|
|
3
|
|
Municipal
|
10,346
|
|
—
|
|
10,346
|
|
—
|
|
Residential mortgage-backed securities ("RMBS")
|
3,548
|
|
—
|
|
2,777
|
|
771
|
|
U.S. Treasuries
|
1,666
|
|
122
|
|
1,544
|
|
—
|
|
Total fixed maturities
|
36,819
|
|
122
|
|
35,263
|
|
1,434
|
|
Fixed maturities, FVO
|
20
|
|
—
|
|
20
|
|
—
|
|
Equity securities, at fair value
|
1,275
|
|
1,161
|
|
41
|
|
73
|
|
Derivative assets
|
|
|
|
|
Credit derivatives
|
24
|
|
—
|
|
24
|
|
—
|
|
Equity derivatives
|
1
|
|
—
|
|
—
|
|
1
|
|
Foreign exchange derivatives
|
(2
|
)
|
—
|
|
(2
|
)
|
—
|
|
Interest rate derivatives
|
1
|
|
—
|
|
1
|
|
—
|
|
Total derivative assets [1]
|
24
|
|
—
|
|
23
|
|
1
|
|
Short-term investments
|
4,203
|
|
1,488
|
|
2,715
|
|
—
|
|
Total assets accounted for at fair value on a recurring basis
|
$
|
42,341
|
|
$
|
2,771
|
|
$
|
38,062
|
|
$
|
1,508
|
|
Liabilities accounted for at fair value on a recurring basis
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
Credit derivatives
|
(5
|
)
|
—
|
|
(5
|
)
|
—
|
|
Foreign exchange derivatives
|
(3
|
)
|
—
|
|
(3
|
)
|
—
|
|
Interest rate derivatives
|
(56
|
)
|
—
|
|
(56
|
)
|
—
|
|
Total derivative liabilities [2]
|
(64
|
)
|
—
|
|
(64
|
)
|
—
|
|
Contingent consideration [3]
|
(29
|
)
|
—
|
|
—
|
|
(29
|
)
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(93
|
)
|
$
|
—
|
|
$
|
(64
|
)
|
$
|
(29
|
)
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets and (Liabilities) Carried at Fair Value by Hierarchy Level as of December 31, 2018
|
|
Total
|
Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
|
Significant
Observable
Inputs
(Level 2)
|
Significant
Unobservable
Inputs
(Level 3)
|
Assets accounted for at fair value on a recurring basis
|
|
|
|
|
Fixed maturities, AFS
|
|
|
|
|
Asset-backed-securities ("ABS")
|
$
|
1,276
|
|
$
|
—
|
|
$
|
1,266
|
|
$
|
10
|
|
Collateralized loan obligations ("CLOs")
|
1,437
|
|
—
|
|
1,337
|
|
100
|
|
Commercial mortgage-backed securities ("CMBS")
|
3,552
|
|
—
|
|
3,540
|
|
12
|
|
Corporate
|
13,398
|
|
—
|
|
12,878
|
|
520
|
|
Foreign government/government agencies
|
847
|
|
—
|
|
844
|
|
3
|
|
Municipal
|
10,346
|
|
—
|
|
10,346
|
|
—
|
|
Residential mortgage-backed securities ("RMBS")
|
3,279
|
|
—
|
|
2,359
|
|
920
|
|
U.S. Treasuries
|
1,517
|
|
330
|
|
1,187
|
|
—
|
|
Total fixed maturities
|
35,652
|
|
330
|
|
33,757
|
|
1,565
|
|
Fixed maturities, FVO
|
22
|
|
—
|
|
22
|
|
—
|
|
Equity securities, at fair value
|
1,214
|
|
1,093
|
|
44
|
|
77
|
|
Derivative assets
|
|
|
|
|
Credit derivatives
|
5
|
|
—
|
|
5
|
|
—
|
|
Equity derivatives
|
3
|
|
—
|
|
—
|
|
3
|
|
Foreign exchange derivatives
|
(2
|
)
|
—
|
|
(2
|
)
|
—
|
|
Interest rate derivatives
|
1
|
|
—
|
|
1
|
|
—
|
|
Total derivative assets [1]
|
7
|
|
—
|
|
4
|
|
3
|
|
Short-term investments
|
4,283
|
|
1,039
|
|
3,244
|
|
—
|
|
Total assets accounted for at fair value on a recurring basis
|
$
|
41,178
|
|
$
|
2,462
|
|
$
|
37,071
|
|
$
|
1,645
|
|
Liabilities accounted for at fair value on a recurring basis
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
Credit derivatives
|
(2
|
)
|
—
|
|
(2
|
)
|
—
|
|
Equity derivatives
|
1
|
|
—
|
|
1
|
|
—
|
|
Foreign exchange derivatives
|
(5
|
)
|
—
|
|
(5
|
)
|
—
|
|
Interest rate derivatives
|
(62
|
)
|
—
|
|
(63
|
)
|
1
|
|
Total derivative liabilities [2]
|
(68
|
)
|
—
|
|
(69
|
)
|
1
|
|
Contingent consideration [3]
|
(35
|
)
|
—
|
|
—
|
|
(35
|
)
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(103
|
)
|
$
|
—
|
|
$
|
(69
|
)
|
$
|
(34
|
)
|
|
|
[1]
|
Includes derivative instruments in a net positive fair value position after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law. See footnote 2 to this table for derivative liabilities.
|
|
|
[2]
|
Includes derivative instruments in a net negative fair value position (derivative liability) after consideration of the accrued interest and impact of collateral posting requirements which may be imposed by agreements and applicable law.
|
|
|
[3]
|
For additional information see the Contingent Consideration section below.
|
Fixed Maturities, Equity Securities, Short-term Investments, and Derivatives
Valuation Techniques
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market expectations. The Company uses a "waterfall" approach
comprised of the following pricing sources and techniques, which are listed in priority order:
|
|
•
|
Quoted prices, unadjusted, for identical assets or liabilities in active markets, which are classified as Level 1.
|
|
|
•
|
Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs available through the reporting date. If there are no recently reported trades, they may use a discounted cash flow technique to develop a price using expected cash flows based upon the anticipated future performance of the underlying collateral discounted at an estimated market rate. Both techniques develop prices that consider the time value of
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
future cash flows and provide a margin for risk, including liquidity and credit risk. Most prices provided by third-party pricing services are classified as Level 2 because the inputs used in pricing the securities are observable. However, some securities that are less liquid or trade less actively are classified as Level 3. Additionally, certain long-dated securities, such as municipal securities and bank loans, include benchmark interest rate or credit spread assumptions that are not observable in the marketplace and are thus classified as Level 3.
|
|
•
|
Internal matrix pricing, which is a valuation process internally developed for private placement securities for which the Company is unable to obtain a price from a third-party pricing service. Internal pricing matrices determine credit spreads that, when combined with risk-free rates, are applied to contractual cash flows to develop a price. The Company develops credit spreads using market based data for public securities adjusted for credit spread differentials between public and private securities, which are obtained from a survey of multiple private placement brokers. The market-based reference credit spread considers the issuer’s financial strength and term to maturity, using an independent public security index and trade information, while the credit spread differential considers the non-public nature of the security. Securities priced using internal matrix pricing are classified as Level 2 because the inputs are observable or can be corroborated with observable data.
|
|
|
•
|
Independent broker quotes, which are typically non-binding, use inputs that can be difficult to corroborate with observable market based data. Brokers may use present value techniques using assumptions specific to the security types, or they may use recent transactions of similar securities. Due to the lack of transparency in the process that brokers use to develop prices, valuations that are based on independent broker quotes are classified as Level 3.
|
The fair value of derivative instruments is determined primarily using a discounted cash flow model or option model technique and incorporate counterparty credit risk. In some cases, quoted market prices for exchange-traded and OTC-cleared derivatives may be used and in other cases independent broker quotes may be used. The pricing valuation models primarily use inputs that are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may include significant inputs that are unobservable, such as volatility levels, and reflect the Company’s view of what other market participants would use when pricing such instruments.
Valuation Controls
The fair value process for investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company that meets at least quarterly. The purpose of the committee is to oversee the pricing policy and procedures, as well as to approve changes to valuation methodologies and pricing sources. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews.
There are also two working groups under the Valuation Committee: a Securities Fair Value Working Group (“Securities Working Group”) and a Derivatives Fair Value Working Group
("Derivatives Working Group"). The working groups, which include various investment, operations, accounting and risk management professionals, meet monthly to review market data trends, pricing and trading statistics and results, and any proposed pricing methodology changes.
The Securities Working Group reviews prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The group considers trading volume, new issuance activity, market trends, new regulatory rulings and other factors to determine whether the market activity is significantly different than normal activity in an active market. A dedicated pricing unit follows up with trading and investment sector professionals and challenges prices of third-party pricing services when the estimated assumptions used differ from what the unit believes a market participant would use. If the available evidence indicates that pricing from third-party pricing services or broker quotes is based upon transactions that are stale or not from trades made in an orderly market, the Company places little, if any, weight on the third party service’s transaction price and will estimate fair value using an internal process, such as a pricing matrix.
The Derivatives Working Group reviews the inputs, assumptions and methodologies used to ensure that the prices represent a reasonable estimate of the fair value. A dedicated pricing team works directly with investment sector professionals to investigate the impacts of changes in the market environment on prices or valuations of derivatives. New models and any changes to current models are required to have detailed documentation and are validated to a second source. The model validation documentation and results of validation are presented to the Valuation Committee for approval.
The Company conducts other monitoring controls around securities and derivatives pricing including, but not limited to, the following:
|
|
•
|
Review of daily price changes over specific thresholds and new trade comparison to third-party pricing services.
|
|
|
•
|
Daily comparison of OTC derivative market valuations to counterparty valuations.
|
|
|
•
|
Review of weekly price changes compared to published bond prices of a corporate bond index.
|
|
|
•
|
Monthly reviews of price changes over thresholds, stale prices, missing prices, and zero prices.
|
|
|
•
|
Monthly validation of prices to a second source for securities in most sectors and for certain derivatives.
|
In addition, the Company’s enterprise-wide Operational Risk Management function, led by the Chief Risk Officer, is responsible for model risk management and provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and consist of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, certain short-term investments, and exchange traded futures and option contracts.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
Valuation Inputs Used in Levels 2 and 3 Measurements for Securities and Derivatives
|
Level 2
Primary Observable Inputs
|
Level 3
Primary Unobservable Inputs
|
Fixed Maturity Investments
|
Structured securities (includes ABS, CLOs, CMBS and RMBS)
|
|
• Benchmark yields and spreads
• Monthly payment information
• Collateral performance, which varies by vintage year and includes delinquency rates, loss severity rates and refinancing assumptions
• Credit default swap indices
Other inputs for ABS and RMBS:
• Estimate of future principal prepayments, derived from the characteristics of the underlying structure
• Prepayment speeds previously experienced at the interest rate levels projected for the collateral
|
|
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for less liquid securities or those that trade less actively, including subprime RMBS:
• Estimated cash flows
• Credit spreads, which include illiquidity premium
• Constant prepayment rates
• Constant default rates
• Loss severity
|
Corporates
|
|
• Benchmark yields and spreads
• Reported trades, bids, offers of the same or similar securities
• Issuer spreads and credit default swap curves
Other inputs for investment grade privately placed securities that utilize internal matrix pricing:
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
|
|
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for below investment grade privately placed securities:
• Independent broker quotes
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
|
U.S Treasuries, Municipals, and Foreign government/government agencies
|
|
• Benchmark yields and spreads
• Issuer credit default swap curves
• Political events in emerging market economies
• Municipal Securities Rulemaking Board reported trades and material event notices
• Issuer financial statements
|
|
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
|
Equity Securities
|
|
• Quoted prices in markets that are not active
|
|
• For privately traded equity securities, internal discounted cash flow models utilizing earnings multiples or other cash flow assumptions that are not observable
|
Short-term Investments
|
|
• Benchmark yields and spreads
• Reported trades, bids, offers
• Issuer spreads and credit default swap curves
• Material event notices and new issue money market rates
|
|
Not applicable
|
Derivatives
|
Credit derivatives
|
|
• Swap yield curve
• Credit default swap curves
|
|
Not applicable
|
Equity derivatives
|
|
• Equity index levels
• Swap yield curve
|
|
• Independent broker quotes
• Equity volatility
|
Foreign exchange derivatives
|
|
• Swap yield curve
• Currency spot and forward rates
• Cross currency basis curves
|
|
Not applicable
|
Interest rate derivatives
|
|
• Swap yield curve
|
|
• Independent broker quotes
• Interest rate volatility
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
Significant Unobservable Inputs for Level 3 - Securities
|
Assets accounted for at fair value on a recurring basis
|
Fair
Value
|
Predominant
Valuation
Technique
|
Significant
Unobservable Input
|
Minimum
|
Maximum
|
Weighted Average [1]
|
Impact of
Increase in Input
on Fair Value [2]
|
As of March 31, 2019
|
CLOs [3]
|
$
|
93
|
|
Discounted cash flows
|
Spread
|
256 bps
|
256 bps
|
256 bps
|
Decrease
|
CMBS [3]
|
$
|
2
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
9 bps
|
1,040 bps
|
180 bps
|
Decrease
|
Corporate [4]
|
$
|
294
|
|
Discounted cash flows
|
Spread
|
121 bps
|
656 bps
|
213 bps
|
Decrease
|
RMBS [3]
|
$
|
725
|
|
Discounted cash flows
|
Spread [6]
|
21 bps
|
407 bps
|
78 bps
|
Decrease
|
|
|
|
Constant prepayment rate [6]
|
—%
|
16%
|
6%
|
Decrease [5]
|
|
|
|
Constant default rate [6]
|
1%
|
6%
|
3%
|
Decrease
|
|
|
|
Loss severity [6]
|
—%
|
100%
|
62%
|
Decrease
|
As of December 31, 2018
|
CMBS [3]
|
$
|
2
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
9 bps
|
1,040 bps
|
182 bps
|
Decrease
|
Corporate [4]
|
$
|
274
|
|
Discounted cash flows
|
Spread
|
145 bps
|
1,175 bps
|
263 bps
|
Decrease
|
RMBS [3]
|
$
|
815
|
|
Discounted cash flows
|
Spread [6]
|
12 bps
|
215 bps
|
86 bps
|
Decrease
|
|
|
|
Constant prepayment rate [6]
|
1%
|
15%
|
6%
|
Decrease [5]
|
|
|
|
Constant default rate [6]
|
1%
|
8%
|
3%
|
Decrease
|
|
|
|
Loss severity [6]
|
—%
|
100%
|
61%
|
Decrease
|
|
|
[1]
|
The weighted average is determined based on the fair value of the securities.
|
|
|
[2]
|
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table.
|
|
|
[3]
|
Excludes securities for which the Company bases fair value on broker quotations.
|
|
|
[4]
|
Excludes securities for which the Company bases fair value on broker quotations; however, included are broker priced lower-rated private placement securities for which the Company receives spread and yield information to corroborate the fair value.
|
|
|
[5]
|
Decrease for above market rate coupons and increase for below market rate coupons.
|
|
|
[6]
|
Generally, a change in the assumption used for the constant default rate would have been accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for constant prepayment rate and would have resulted in wider spreads.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Significant Unobservable Inputs for Level 3 - Derivatives
|
|
Fair
Value
|
Predominant
Valuation
Technique
|
Significant Unobservable Input
|
Minimum
|
Maximum
|
Weighted Average [1]
|
Impact of
Increase in Input on
Fair Value [2]
|
As of March 31, 2019
|
Equity Options
|
$
|
1
|
|
Option model
|
Equity volatility
|
12
|
%
|
20
|
%
|
18
|
%
|
Increase
|
As of December 31, 2018
|
Interest rate swaptions [3]
|
$
|
1
|
|
Option model
|
Interest rate volatility
|
3
|
%
|
3
|
%
|
3
|
%
|
Increase
|
Equity options
|
$
|
3
|
|
Option model
|
Equity volatility
|
19
|
%
|
21
|
%
|
20
|
%
|
Increase
|
|
|
[1]
|
The weighted average is determined based on the fair value of the derivatives.
|
|
|
[2]
|
Conversely, the impact of a decrease in input would have the opposite impact to the fair value as that presented in the table. Changes are based on long positions, unless otherwise noted. Changes in fair value will be inversely impacted for short positions.
|
|
|
[3]
|
The swaptions presented are purchased options that have the right to enter into a pay-fixed swap.
|
The tables above exclude ABS and certain corporate securities for which fair values are predominately based on independent broker quotes. While the Company does not have access to the significant unobservable inputs that independent brokers may use in their pricing process, the Company believes brokers likely
use inputs similar to those used by the Company and third-party pricing services to price similar instruments. As such, in their pricing models, brokers likely use estimated loss severity rates, prepayment rates, constant default rates and credit spreads. Therefore, similar to non-broker priced securities, increases in
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
these inputs would generally cause fair values to decrease. As of
March 31, 2019
,
no
significant adjustments were made by the Company to broker prices received.
Contingent Consideration
The acquisition of Lattice Strategies LLC ("Lattice") on July 29, 2016 requires the Company to make payments to former owners of Lattice of up to
$60
contingent upon growth in exchange-traded products ("ETP") assets under management ("AUM") over a period of
four years
beginning on the date of acquisition. The contingent consideration is measured at fair value on a quarterly basis by projecting future eligible ETP AUM over the contingency period to estimate the amount of expected payout. The future expected payout is discounted back to the valuation date using a risk-adjusted discount rate of
12.7%
. The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value.
The contingency period for ETP AUM growth ends July 29, 2020 and management adjusts the fair value of the contingent consideration when it revises its projection of ETP AUM for the acquired business. Before discounting to fair value, the Company estimates a total contingent consideration payout of $
41
, of which
$10
was paid in January 2019 and another
$10
will be paid
in May 2019 given that ETP AUM reached
$2 billion
during the first quarter of 2019. Accordingly, as of March 31, 2019, the fair value of
$29
reflects remaining consideration payable of
$31
, assuming ETP AUM for the acquired business grows to approximately
$4.1
billion over the contingency period.
Level 3 Assets and Liabilities Measured at Fair Value on a Recurring Basis Using Significant Unobservable Inputs
The Company uses derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instrument may not be classified with the same fair value hierarchy level as the associated asset or liability. Therefore, the realized and unrealized gains and losses on derivatives reported in the Level 3 rollforward may be offset by realized and unrealized gains and losses of the associated assets and liabilities in other line items of the financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Three Months Ended March 31, 2019
|
|
Total realized/unrealized gains (losses)
|
|
|
|
|
|
|
|
|
Fair value as of January 1, 2019
|
Included in net income [1]
|
Included in OCI [2]
|
Purchases
|
Settlements
|
Sales
|
Transfers into Level 3 [3]
|
Transfers out of Level 3 [3]
|
Fair value as of March 31, 2019
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
ABS
|
$
|
10
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(1
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
9
|
|
|
CLOs
|
100
|
|
—
|
|
—
|
|
35
|
|
—
|
|
(6
|
)
|
—
|
|
(15
|
)
|
114
|
|
|
CMBS
|
12
|
|
—
|
|
1
|
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
12
|
|
|
Corporate
|
520
|
|
(1
|
)
|
7
|
|
37
|
|
(2
|
)
|
(25
|
)
|
12
|
|
(23
|
)
|
525
|
|
|
Foreign Govt./Govt. Agencies
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3
|
|
|
RMBS
|
920
|
|
1
|
|
(2
|
)
|
44
|
|
(54
|
)
|
(35
|
)
|
—
|
|
(103
|
)
|
771
|
|
Total Fixed Maturities, AFS
|
1,565
|
|
—
|
|
6
|
|
116
|
|
(58
|
)
|
(66
|
)
|
12
|
|
(141
|
)
|
1,434
|
|
Equity Securities, at fair value
|
77
|
|
(1
|
)
|
—
|
|
5
|
|
—
|
|
(8
|
)
|
—
|
|
—
|
|
73
|
|
Derivatives, net [4]
|
|
|
|
|
|
|
|
|
|
|
Equity
|
3
|
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
|
Interest rate
|
1
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Total Derivatives, net [4]
|
4
|
|
(3
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
Total Assets
|
$
|
1,646
|
|
$
|
(4
|
)
|
$
|
6
|
|
$
|
121
|
|
$
|
(58
|
)
|
$
|
(74
|
)
|
$
|
12
|
|
$
|
(141
|
)
|
$
|
1,508
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
(35
|
)
|
(4
|
)
|
—
|
|
—
|
|
10
|
|
—
|
|
—
|
|
—
|
|
(29
|
)
|
Total Liabilities
|
$
|
(35
|
)
|
$
|
(4
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
10
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(29
|
)
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Three Months Ended March 31, 2018
|
|
Total realized/unrealized gains (losses)
|
|
|
|
|
|
|
|
|
Fair value as of January 1, 2018
|
Included in net income [1]
|
Included in OCI [2]
|
Purchases
|
Settlements
|
Sales
|
Transfers into Level 3 [3]
|
Transfers out of Level 3 [3]
|
Fair value as of March 31, 2018
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
ABS
|
$
|
19
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
(3
|
)
|
$
|
14
|
|
|
CLOs
|
95
|
|
—
|
|
—
|
|
21
|
|
—
|
|
—
|
|
—
|
|
(10
|
)
|
106
|
|
|
CMBS
|
69
|
|
—
|
|
(1
|
)
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
(34
|
)
|
33
|
|
|
Corporate
|
520
|
|
1
|
|
(1
|
)
|
65
|
|
(14
|
)
|
(23
|
)
|
—
|
|
(33
|
)
|
515
|
|
|
Foreign Govt./Govt. Agencies
|
2
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2
|
|
|
Municipal
|
17
|
|
—
|
|
(1
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
16
|
|
|
RMBS
|
1,230
|
|
—
|
|
(3
|
)
|
102
|
|
(81
|
)
|
—
|
|
—
|
|
(15
|
)
|
1,233
|
|
Total Fixed Maturities, AFS
|
1,952
|
|
1
|
|
(6
|
)
|
188
|
|
(98
|
)
|
(23
|
)
|
—
|
|
(95
|
)
|
1,919
|
|
Equity Securities, at fair value
|
76
|
|
28
|
|
—
|
|
—
|
|
—
|
|
(39
|
)
|
—
|
|
—
|
|
65
|
|
Derivatives, net [4]
|
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
2
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
1
|
|
|
Interest rate
|
1
|
|
1
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2
|
|
Total Derivatives, net [4]
|
2
|
|
3
|
|
—
|
|
—
|
|
—
|
|
(2
|
)
|
—
|
|
—
|
|
3
|
|
Total Assets
|
$
|
2,030
|
|
$
|
32
|
|
$
|
(6
|
)
|
$
|
188
|
|
$
|
(98
|
)
|
$
|
(64
|
)
|
$
|
—
|
|
$
|
(95
|
)
|
$
|
1,987
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
(29
|
)
|
2
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(27
|
)
|
Total Liabilities
|
$
|
(29
|
)
|
$
|
2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(27
|
)
|
|
|
[1]
|
Amounts in these columns are generally reported in net realized capital gains (losses). All amounts are before income taxes.
|
|
|
[2]
|
All amounts are before income taxes.
|
|
|
[3]
|
Transfers in and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.
|
|
|
[4]
|
Derivative instruments are reported in this table on a net basis for asset (liability) positions and reported in the Condensed Consolidated Balance Sheets in other investments and other liabilities.
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Unrealized Gains (Losses) for Financial Instruments Classified as Level 3 Still Held as of
|
|
|
Three months ended March 31,
|
Three months ended March 31,
|
|
|
2019
|
2018
|
2019
|
2018
|
|
|
Changes in Unrealized Gain/(Loss) included in Net Income [1] [2]
|
Changes in Unrealized Gain/(Loss) included in OCI [3]
|
Assets
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
CMBS
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
|
Corporate
|
(1
|
)
|
—
|
|
7
|
|
(1
|
)
|
|
Municipal
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
|
RMBS
|
—
|
|
—
|
|
(1
|
)
|
(3
|
)
|
Total Fixed Maturities, AFS
|
(1
|
)
|
—
|
|
7
|
|
(5
|
)
|
Fixed Maturities, FVO
|
—
|
|
—
|
|
—
|
|
—
|
|
Derivatives, net
|
|
|
|
|
|
Equity
|
(2
|
)
|
—
|
|
—
|
|
—
|
|
|
Interest rate
|
(1
|
)
|
1
|
|
—
|
|
—
|
|
Total Derivatives, net
|
(3
|
)
|
1
|
|
—
|
|
—
|
|
Total Assets
|
$
|
(4
|
)
|
$
|
1
|
|
$
|
7
|
|
$
|
(5
|
)
|
Liabilities
|
|
|
|
|
Contingent Consideration
|
(4
|
)
|
2
|
|
—
|
|
—
|
|
Total Liabilities
|
$
|
(4
|
)
|
$
|
2
|
|
$
|
—
|
|
$
|
—
|
|
|
|
[1]
|
All amounts in these rows are reported in net realized capital gains (losses). All amounts are before income taxes.
|
|
|
[2]
|
Amounts presented are for Level 3 only and therefore may not agree to other disclosures included herein.
|
|
|
[3]
|
Changes in unrealized gain/(loss) on fixed maturities, AFS are reported in changes in net unrealized gain on securities in the Condensed Consolidated Statements of Comprehensive Income. Changes in interest rate derivatives are reported in changes in net gain on cash flow hedging instruments in the Condensed Consolidated Statements of Comprehensive Income.
|
Fair Value Option
The Company has elected the fair value option for certain securities that contain embedded credit derivatives with underlying credit risk primarily related to residential real estate, and these securities are included within Fixed Maturities, FVO on the Condensed Consolidated Balance Sheets. The Company reports changes in the fair value of these securities in net realized capital gains and losses.
As of March 31, 2019
and
December 31, 2018
, the fair value of assets and liabilities using the fair value option was
$20
and
$22
, respectively, within the residential real estate sector.
For the three months ended
March 31, 2019
and
2018
there were
no
realized capital gains (losses) related to the fair value of assets using the fair value option.
Financial Instruments Not Carried at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets and Liabilities Not Carried at Fair Value
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Fair Value Hierarchy Level
|
Carrying Amount
|
Fair Value
|
|
Fair Value Hierarchy Level
|
Carrying Amount
|
Fair Value
|
Assets
|
|
|
|
|
|
|
|
Mortgage loans
|
Level 3
|
$
|
3,637
|
|
$
|
3,702
|
|
|
Level 3
|
$
|
3,704
|
|
$
|
3,746
|
|
Liabilities
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable
|
Level 3
|
$
|
751
|
|
$
|
753
|
|
|
Level 3
|
$
|
774
|
|
$
|
775
|
|
Senior notes [1]
|
Level 2
|
$
|
3,177
|
|
$
|
3,619
|
|
|
Level 2
|
$
|
3,589
|
|
$
|
3,887
|
|
Junior subordinated debentures [1]
|
Level 2
|
$
|
1,089
|
|
$
|
1,109
|
|
|
Level 2
|
$
|
1,089
|
|
$
|
1,052
|
|
|
|
[1]
|
Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
5
.
INVESTMENTS
|
|
|
|
|
|
|
|
Net Realized Capital Gains (Losses)
|
|
Three Months Ended March 31,
|
(Before tax)
|
2019
|
2018
|
Gross gains on sales
|
$
|
44
|
|
$
|
19
|
|
Gross losses on sales
|
(21
|
)
|
(57
|
)
|
Equity securities [1]
|
132
|
|
16
|
|
Net OTTI losses recognized in earnings
|
(2
|
)
|
—
|
|
Transactional foreign currency revaluation
|
—
|
|
1
|
|
Non-qualifying foreign currency derivatives
|
1
|
|
(3
|
)
|
Other, net [2]
|
9
|
|
(6
|
)
|
Net realized capital gains (losses)
|
$
|
163
|
|
$
|
(30
|
)
|
|
|
[1]
|
Includes all changes in fair value and trading gains and losses for equity securities.
|
|
|
[2]
|
Includes gains (losses) on non-qualifying derivatives, excluding foreign currency derivatives, of
$14
and
$(10)
, respectively, for the three months ended
March 31, 2019
and
2018
.
|
Net realized capital gains (losses) from investment sales are reported as a component of revenues and are determined on a specific identification basis. Before tax, net gains (losses) on sales and impairments previously reported as unrealized gains (losses) in AOCI were
$21
and
$(38)
for the
three months ended
March 31, 2019
and
2018
, respectively. Proceeds from sales of AFS securities totaled
$4.3 billion
for both the
three months ended
March 31, 2019
and
2018
.
The net unrealized gain (loss) on equity securities included in net realized capital gains (losses) related to equity securities still held as of
March 31, 2019
, was
$68
for the
three months ended
March 31, 2019
. The net unrealized gain (loss) on equity securities included in net realized capital gains (losses) related to equity securities still held as of March 31, 2018, was
$(14)
for the three months ended March 31, 2018.
Recognition and Presentation of Other-Than-Temporary Impairments
The Company will record an other-than-temporary impairment (“OTTI”) for fixed maturities if the Company intends to sell or it is more likely than not that the Company will be required to sell the security before a recovery in value. A corresponding charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security.
The Company will also record an OTTI for those fixed maturities for which the Company does not expect to recover the entire amortized cost basis. For these securities, the excess of the amortized cost basis over its fair value is separated into the portion representing a credit OTTI, which is recorded in net realized capital losses, and the remaining non-credit amount, which is recorded in OCI. The credit OTTI amount is the excess of its amortized cost basis over the Company’s best estimate of discounted expected future cash flows. The non-credit amount is the excess of the best estimate of the discounted expected future cash flows over the fair value. The Company’s best estimate of discounted expected future cash flows becomes the new cost
basis and accretes prospectively into net investment income over the estimated remaining life of the security.
Developing the Company’s best estimate of expected future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions regarding the future performance. The Company's considerations include, but are not limited to, (a) changes in the financial condition of the issuer and the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, security-specific developments, industry earnings multiples and the issuer’s ability to restructure and execute asset sales.
For structured securities, assumptions include, but are not limited to, various performance indicators such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, loan-to-value ("LTV") ratios, average cumulative collateral loss rates that vary by vintage year, prepayment speeds, and property value declines. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value.
|
|
|
|
|
|
|
|
Impairments in Earnings by Type
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
Credit impairments
|
$
|
2
|
|
$
|
—
|
|
Intent-to-sell impairments
|
—
|
|
—
|
|
Total impairments
|
$
|
2
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Cumulative Credit Impairments
|
|
Three Months Ended March 31,
|
(Before tax)
|
2019
|
2018
|
Balance as of beginning of period
|
$
|
(19
|
)
|
$
|
(25
|
)
|
Additions for credit impairments recognized on [1]:
|
|
|
Securities not previously impaired
|
(2
|
)
|
—
|
|
Reductions for credit impairments previously recognized on:
|
|
|
Securities that matured or were sold during the period
|
3
|
|
4
|
|
Balance as of end of period
|
$
|
(18
|
)
|
$
|
(21
|
)
|
|
|
[1]
|
These additions are included in the net OTTI losses recognized in earnings in the Condensed Consolidated Statements of Operations.
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Available-for-Sale Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AFS Securities by Type
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Cost or
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Non-Credit
OTTI [1]
|
|
Cost or
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Non-Credit
OTTI [1]
|
ABS
|
$
|
959
|
|
$
|
10
|
|
$
|
(1
|
)
|
$
|
968
|
|
$
|
—
|
|
|
$
|
1,272
|
|
$
|
5
|
|
$
|
(1
|
)
|
$
|
1,276
|
|
$
|
—
|
|
CLOs
|
1,442
|
|
7
|
|
(11
|
)
|
1,438
|
|
—
|
|
|
1,455
|
|
2
|
|
(20
|
)
|
1,437
|
|
—
|
|
CMBS
|
3,534
|
|
67
|
|
(33
|
)
|
3,568
|
|
(4
|
)
|
|
3,581
|
|
35
|
|
(64
|
)
|
3,552
|
|
(5
|
)
|
Corporate
|
14,187
|
|
349
|
|
(133
|
)
|
14,403
|
|
—
|
|
|
13,696
|
|
148
|
|
(446
|
)
|
13,398
|
|
—
|
|
Foreign govt./govt. agencies
|
866
|
|
23
|
|
(7
|
)
|
882
|
|
—
|
|
|
866
|
|
7
|
|
(26
|
)
|
847
|
|
—
|
|
Municipal
|
9,780
|
|
573
|
|
(7
|
)
|
10,346
|
|
—
|
|
|
9,972
|
|
421
|
|
(47
|
)
|
10,346
|
|
—
|
|
RMBS
|
3,507
|
|
54
|
|
(13
|
)
|
3,548
|
|
—
|
|
|
3,270
|
|
44
|
|
(35
|
)
|
3,279
|
|
—
|
|
U.S. Treasuries
|
1,619
|
|
51
|
|
(4
|
)
|
1,666
|
|
—
|
|
|
1,491
|
|
41
|
|
(15
|
)
|
1,517
|
|
—
|
|
Total fixed maturities, AFS
|
$
|
35,894
|
|
$
|
1,134
|
|
$
|
(209
|
)
|
$
|
36,819
|
|
$
|
(4
|
)
|
|
$
|
35,603
|
|
$
|
703
|
|
$
|
(654
|
)
|
$
|
35,652
|
|
$
|
(5
|
)
|
|
|
[1]
|
Represents the amount of cumulative non-credit OTTI losses recognized in OCI on securities that also had credit impairments. These losses are included in gross unrealized losses as of
March 31, 2019
and
December 31, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, AFS, by Contractual Maturity Year
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Amortized Cost
|
Fair Value
|
|
Amortized Cost
|
Fair Value
|
One year or less
|
$
|
964
|
|
$
|
969
|
|
|
$
|
999
|
|
$
|
1,002
|
|
Over one year through five years
|
5,785
|
|
5,871
|
|
|
5,786
|
|
5,791
|
|
Over five years through ten years
|
7,259
|
|
7,391
|
|
|
6,611
|
|
6,495
|
|
Over ten years
|
12,444
|
|
13,066
|
|
|
12,629
|
|
12,820
|
|
Subtotal
|
26,452
|
|
27,297
|
|
|
26,025
|
|
26,108
|
|
Mortgage-backed and asset-backed securities
|
9,442
|
|
9,522
|
|
|
9,578
|
|
9,544
|
|
Total fixed maturities, AFS
|
$
|
35,894
|
|
$
|
36,819
|
|
|
$
|
35,603
|
|
$
|
35,652
|
|
Estimated maturities may differ from contractual maturities due to security call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio including issuer, sector and geographic stratification, where
applicable, and has established certain exposure limits, diversification standards and review procedures to mitigate credit risk. The Company had
no
investment exposure to any credit concentration risk of a single issuer
greater than 10% of the Company's stockholders' equity
as of
March 31, 2019
or
December 31, 2018
other than U.S. government securities and certain U.S. government agencies.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unrealized Losses on AFS Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of March 31, 2019
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
ABS
|
$
|
143
|
|
$
|
143
|
|
$
|
—
|
|
|
$
|
108
|
|
$
|
107
|
|
$
|
(1
|
)
|
|
$
|
251
|
|
$
|
250
|
|
$
|
(1
|
)
|
CLOs
|
1,218
|
|
1,208
|
|
(10
|
)
|
|
82
|
|
81
|
|
(1
|
)
|
|
1,300
|
|
1,289
|
|
(11
|
)
|
CMBS
|
83
|
|
82
|
|
(1
|
)
|
|
1,391
|
|
1,359
|
|
(32
|
)
|
|
1,474
|
|
1,441
|
|
(33
|
)
|
Corporate
|
737
|
|
722
|
|
(15
|
)
|
|
4,175
|
|
4,057
|
|
(118
|
)
|
|
4,912
|
|
4,779
|
|
(133
|
)
|
Foreign govt./govt. agencies
|
35
|
|
35
|
|
—
|
|
|
292
|
|
285
|
|
(7
|
)
|
|
327
|
|
320
|
|
(7
|
)
|
Municipal
|
8
|
|
8
|
|
—
|
|
|
285
|
|
278
|
|
(7
|
)
|
|
293
|
|
286
|
|
(7
|
)
|
RMBS
|
237
|
|
236
|
|
(1
|
)
|
|
985
|
|
973
|
|
(12
|
)
|
|
1,222
|
|
1,209
|
|
(13
|
)
|
U.S. Treasuries
|
153
|
|
153
|
|
—
|
|
|
294
|
|
290
|
|
(4
|
)
|
|
447
|
|
443
|
|
(4
|
)
|
Total fixed maturities, AFS in an unrealized loss position
|
$
|
2,614
|
|
$
|
2,587
|
|
$
|
(27
|
)
|
|
$
|
7,612
|
|
$
|
7,430
|
|
$
|
(182
|
)
|
|
$
|
10,226
|
|
$
|
10,017
|
|
$
|
(209
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Aging for AFS Securities by Type and Length of Time as of December 31, 2018
|
|
Less Than 12 Months
|
|
12 Months or More
|
|
Total
|
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
|
Amortized Cost
|
Fair Value
|
Unrealized Losses
|
ABS
|
$
|
566
|
|
$
|
566
|
|
$
|
—
|
|
|
$
|
113
|
|
$
|
112
|
|
$
|
(1
|
)
|
|
$
|
679
|
|
$
|
678
|
|
$
|
(1
|
)
|
CLOs
|
1,358
|
|
1,338
|
|
(20
|
)
|
|
7
|
|
7
|
|
—
|
|
|
1,365
|
|
1,345
|
|
(20
|
)
|
CMBS
|
896
|
|
882
|
|
(14
|
)
|
|
1,129
|
|
1,079
|
|
(50
|
)
|
|
2,025
|
|
1,961
|
|
(64
|
)
|
Corporate
|
7,174
|
|
6,903
|
|
(271
|
)
|
|
2,541
|
|
2,366
|
|
(175
|
)
|
|
9,715
|
|
9,269
|
|
(446
|
)
|
Foreign govt./govt. agencies
|
407
|
|
391
|
|
(16
|
)
|
|
203
|
|
193
|
|
(10
|
)
|
|
610
|
|
584
|
|
(26
|
)
|
Municipal
|
1,643
|
|
1,613
|
|
(30
|
)
|
|
292
|
|
275
|
|
(17
|
)
|
|
1,935
|
|
1,888
|
|
(47
|
)
|
RMBS
|
1,344
|
|
1,329
|
|
(15
|
)
|
|
648
|
|
628
|
|
(20
|
)
|
|
1,992
|
|
1,957
|
|
(35
|
)
|
U.S. Treasuries
|
497
|
|
492
|
|
(5
|
)
|
|
339
|
|
329
|
|
(10
|
)
|
|
836
|
|
821
|
|
(15
|
)
|
Total fixed maturities, AFS in an unrealized loss position
|
$
|
13,885
|
|
$
|
13,514
|
|
$
|
(371
|
)
|
|
$
|
5,272
|
|
$
|
4,989
|
|
$
|
(283
|
)
|
|
$
|
19,157
|
|
$
|
18,503
|
|
$
|
(654
|
)
|
As of
March 31, 2019
, AFS securities in an unrealized loss position consisted of
1,682
securities, primarily in the corporate and commercial real estate sectors, which were depressed primarily due to an increase in interest rates and/or widening of credit spreads since the securities were purchased. As of
March 31, 2019
,
98%
of these securities were depressed less than
20%
of cost or amortized cost. The decrease in unrealized losses during the
three months ended
March 31, 2019
was primarily attributable to tighter credit spreads and lower interest rates.
Most of the securities depressed for twelve months or more relate to corporate securities and structured securities with exposure to commercial real estate. Corporate securities and commercial real estate securities were primarily depressed because current market spreads are wider and interest rates are higher than at the securities' respective purchase dates. The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined in the preceding discussion.
Mortgage Loans
Mortgage Loan Valuation Allowances
Mortgage loans are considered to be impaired when management estimates that, based upon current information and events, it is probable that the Company will be unable to collect amounts due according to the contractual terms of the loan agreement. The Company reviews mortgage loans on a quarterly basis to identify potential credit losses. Among other factors, management reviews current and projected macroeconomic trends, such as unemployment rates and property-specific factors such as rental rates, occupancy levels, LTV ratios and debt service coverage ratios (“DSCR”). In addition, the Company considers historical, current and projected delinquency rates and property values. Estimates of collectibility require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, cash flow projections may change based upon new information about the borrower's ability to pay and/or the value of underlying collateral such as changes in projected property value estimates.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
For mortgage loans that are deemed impaired, a valuation allowance is established for the difference between the carrying amount and estimated fair value. The mortgage loan's estimated fair value is most frequently the Company's share of the fair value of the collateral but may also be the Company’s share of either (a) the present value of the expected future cash flows discounted at the loan’s effective interest rate or (b) the loan’s observable market price. A valuation allowance may be recorded for an individual loan or for a group of loans that have an LTV ratio of 90% or greater, a low DSCR or have other lower credit quality characteristics. Changes in valuation allowances are recorded in net realized capital gains and losses. Interest income on impaired loans is accrued to the extent it is deemed collectible and the borrowers continue to make payments under the original or restructured loan terms. The Company stops accruing interest income on loans when it is probable that the Company will not receive interest and principal payments according to the contractual terms of the loan agreement. The Company resumes accruing interest income when it determines that sufficient collateral exists to satisfy the full amount of the loan principal and interest payments and when it is probable cash will be received in the foreseeable future. Interest income on defaulted loans is recognized when received.
As of
March 31, 2019
, mortgage loans had an amortized cost of
$3.6
billion and carrying value of
$3.6 billion
, with a valuation allowance of
$1
. As of
December 31, 2018
, mortgage loans had an amortized cost of
$3.7
billion and carrying value of
$3.7
billion, with a valuation allowance of
$1
.
As of
March 31, 2019
and
December 31, 2018
, the carrying value of mortgage loans that had a valuation allowance was
$23
. There were
no
mortgage loans held-for-sale as of
March 31, 2019
or
December 31, 2018
. As of
March 31, 2019
, the Company had
no
mortgage loans that have had extensions or restructurings other than what is allowable under the original terms of the contract.
The following table presents the activity within the Company’s valuation allowance for mortgage loans. These loans have been evaluated both individually and collectively for impairment. Loans evaluated collectively for impairment are immaterial.
|
|
|
|
|
|
|
|
Valuation Allowance Activity
|
|
2019
|
2018
|
Balance, as of January 1
|
$
|
(1
|
)
|
$
|
(1
|
)
|
Reversals
|
—
|
|
—
|
|
Deductions
|
—
|
|
—
|
|
Balance, as of March 31
|
$
|
(1
|
)
|
$
|
(1
|
)
|
The weighted-average LTV ratio of the Company’s mortgage loan portfolio was
52%
as of
March 31, 2019
, while the weighted-average LTV ratio at origination of these loans was
61%
. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan. The loan collateral values are updated no less than annually through reviews of the underlying properties. Factors considered in estimating property values include, among other things, actual and expected property cash flows, geographic market data and the ratio of the property's net operating income to its value. DSCR compares a property’s net operating income to the borrower’s principal and interest payments. As of
March 31, 2019
and
December 31, 2018
, the Company held
no
delinquent commercial mortgage loans past due by 90 days or more.
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans Credit Quality
|
|
March 31, 2019
|
|
December 31, 2018
|
Loan-to-value
|
Carrying Value
|
Avg. Debt-Service Coverage Ratio
|
|
Carrying Value
|
Avg. Debt-Service Coverage Ratio
|
65% - 80%
|
390
|
|
1.58x
|
|
386
|
|
1.60x
|
Less than 65%
|
3,247
|
|
2.58x
|
|
3,318
|
|
2.59x
|
Total mortgage loans
|
$
|
3,637
|
|
2.48x
|
|
$
|
3,704
|
|
2.49x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Region
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Carrying Value
|
Percent of Total
|
|
Carrying Value
|
Percent of Total
|
East North Central
|
$
|
250
|
|
6.9
|
%
|
|
$
|
250
|
|
6.8
|
%
|
Middle Atlantic
|
269
|
|
7.4
|
%
|
|
270
|
|
7.3
|
%
|
Mountain
|
30
|
|
0.8
|
%
|
|
30
|
|
0.8
|
%
|
New England
|
329
|
|
9.1
|
%
|
|
330
|
|
8.9
|
%
|
Pacific
|
902
|
|
24.8
|
%
|
|
917
|
|
24.8
|
%
|
South Atlantic
|
692
|
|
19.0
|
%
|
|
712
|
|
19.2
|
%
|
West North Central
|
121
|
|
3.3
|
%
|
|
148
|
|
4.0
|
%
|
West South Central
|
419
|
|
11.5
|
%
|
|
420
|
|
11.3
|
%
|
Other [1]
|
625
|
|
17.2
|
%
|
|
627
|
|
16.9
|
%
|
Total mortgage loans
|
$
|
3,637
|
|
100.0
|
%
|
|
$
|
3,704
|
|
100.0
|
%
|
|
|
[1]
|
Primarily represents loans collateralized by multiple properties in various regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Property Type
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Carrying Value
|
Percent of Total
|
|
Carrying
Value
|
Percent of Total
|
Commercial
|
|
|
|
|
|
Industrial
|
$
|
1,073
|
|
29.5
|
%
|
|
$
|
1,108
|
|
29.9
|
%
|
Multifamily
|
1,137
|
|
31.3
|
%
|
|
1,138
|
|
30.7
|
%
|
Office
|
680
|
|
18.7
|
%
|
|
708
|
|
19.1
|
%
|
Retail
|
390
|
|
10.7
|
%
|
|
392
|
|
10.6
|
%
|
Single Family
|
81
|
|
2.2
|
%
|
|
82
|
|
2.2
|
%
|
Other
|
276
|
|
7.6
|
%
|
|
276
|
|
7.5
|
%
|
Total mortgage loans
|
$
|
3,637
|
|
100.0
|
%
|
|
$
|
3,704
|
|
100.0
|
%
|
Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fees income over the period that services are performed. As of
March 31, 2019
, under this program, the Company serviced mortgage loans with a total outstanding principal of
$5.9 billion
, of which
$3.5 billion
was serviced on behalf of third parties and
$2.4 billion
was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets . As of
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
December 31, 2018
, the Company serviced mortgage loans with a total outstanding principal balance of
$6.0 billion
, of which
$3.6 billion
was serviced on behalf of third parties and
$2.4 billion
was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or fair value and were
zero
as of
March 31, 2019
and
December 31, 2018
, because servicing fees were market-level fees at origination and remain adequate to compensate the Company for servicing the loans.
Variable Interest Entities
The Company is engaged with various special purpose entities and other entities that are deemed to be VIEs primarily as an investor through normal investment activities but also as an investment manager.
A VIE is an entity that either has investors that lack certain essential characteristics of a controlling financial interest, such as simple majority kick-out rights, or lacks sufficient funds to finance its own activities without financial support provided by other entities. The Company performs ongoing qualitative assessments of its VIEs to determine whether the Company has a controlling financial interest in the VIE and therefore is the primary beneficiary. The Company is deemed to have a controlling financial interest when it has both the ability to direct the activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE. Based on the Company’s assessment, if it determines it is the primary beneficiary, the Company consolidates the VIE in the Company’s Condensed Consolidated Financial Statements.
Consolidated VIEs
As of
March 31, 2019
and
December 31, 2018
, the Company did not hold any securities for which it is the primary beneficiary.
Non-consolidated VIEs
The Company, through normal investment activities, makes passive investments in limited partnerships and other alternative investments. For these non-consolidated VIEs, the Company has determined it is not the primary beneficiary as it has no ability to direct activities that could significantly affect the economic performance of the investments. The Company’s maximum exposure to loss as of
March 31, 2019
and
December 31, 2018
was limited to the total carrying value of
$1 billion
, at each date, which are included in limited partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of
March 31, 2019
and
December 31, 2018
, the Company has outstanding commitments totaling
$767
and
$718
, respectively, whereby the Company is committed to fund these investments and may be called by the partnership during the commitment period to fund the purchase of new investments and partnership expenses. These investments are generally of a passive nature in that the Company does not take an active role in management. For further discussion of these investments, see Equity Method Investments within Note 6 - Investments of Notes to Consolidated Financial Statements included in the Company’s
2018
Form 10-K Annual Report.
In addition, the Company also makes passive investments in structured securities issued by VIEs for which the Company is not the manager. These investments are included in ABS, CLOs,
CMBS and RMBS in the Available-for-Sale Securities table and fixed maturities, FVO, in the Company’s Condensed Consolidated Balance Sheets. The Company has not provided financial or other support with respect to these investments other than its original investment. For these investments, the Company determined it is not the primary beneficiary due to the relative size of the Company’s investment in comparison to the principal amount of the structured securities issued by the VIEs, the level of credit subordination which reduces the Company’s obligation to absorb losses or right to receive benefits and the Company’s inability to direct the activities that most significantly impact the economic performance of the VIEs. The Company’s maximum exposure to loss on these investments is limited to the amount of the Company’s investment.
Securities Lending, Repurchase Agreements and Other Collateral Transactions
The Company enters into securities financing transactions as a way to earn additional income or manage liquidity, primarily through securities lending and repurchase agreements.
|
|
|
|
|
|
|
|
Payables for Collateral on Investments
|
|
March 31, 2019
|
December 31, 2018
|
|
Fair Value
|
Fair Value
|
|
Securities Lending Transactions:
|
|
|
Gross amount of securities on loan
|
$
|
675
|
|
$
|
820
|
|
Gross amount of associated liability for collateral received [1]
|
$
|
691
|
|
$
|
840
|
|
|
|
|
Repurchase agreements:
|
|
|
Gross amount of recognized liabilities for repurchase agreements
|
$
|
300
|
|
$
|
72
|
|
Gross amount of collateral pledged related to repurchase agreements [2]
|
$
|
303
|
|
$
|
73
|
|
Gross amount of recognized receivables for reverse repurchase agreements
|
$
|
83
|
|
$
|
64
|
|
|
|
|
Federal Home Loan Bank of Boston ("FHLBB") advance agreements:
|
|
|
Gross amount of recognized liabilities for FHLBB agreements
|
$
|
50
|
|
$
|
—
|
|
Gross amount of collateral pledged related to FHLBB agreements [2]
|
$
|
60
|
|
$
|
—
|
|
|
|
[1]
|
Cash collateral received is reinvested in fixed maturities, AFS and short-term investments which are included in the Condensed Consolidated Balance Sheets. Amount includes additional securities collateral received of
$1
and
$3
which are excluded from the Company's Condensed Consolidated Balance Sheets as of
March 31, 2019
and
December 31, 2018
, respectively.
|
|
|
[2]
|
Collateral pledged is included within fixed maturities, AFS and short-term investments in the Company's Condensed Consolidated Balance Sheets.
|
Securities Lending
Under a securities lending program, the Company lends certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities to qualifying third-party borrowers in return for
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
collateral in the form of cash or securities. For domestic and non-domestic loaned securities, respectively, borrowers provide collateral of 102% and 105% of the fair value of the securities lent at the time of the loan. Borrowers will return the securities to the Company for cash or securities collateral at maturity dates generally of 90 days or less. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, except in the event of default by the counterparty, and is not reflected on the Company’s Condensed Consolidated Balance Sheets. Additional collateral is obtained if the fair value of the collateral falls below 100% of the fair value of the loaned securities. The agreements are continuous and do not have stated maturity dates and provide the counterparty the right to sell or re-pledge the securities loaned. If cash, rather than securities, is received as collateral, the cash is typically invested in short-term investments or fixed maturities and is reported as an asset on the Company's Condensed Consolidated Balance Sheets. Income associated with securities lending transactions is reported as a component of net investment income in the Company’s Condensed Consolidated Statements of Operations.
Repurchase Agreements
From time to time, the Company enters into repurchase agreements to manage liquidity or to earn incremental income. A repurchase agreement is a transaction in which one party (transferor) agrees to sell securities to another party (transferee) in return for cash (or securities), with a simultaneous agreement to repurchase the same securities at a specified price at a later date. The maturity of these transactions is generally ninety days or less. Repurchase agreements include master netting provisions that provide both counterparties the right to offset claims and apply securities held by them with respect to their obligations in the event of a default. Although the Company has the contractual right to offset claims, the Company's current positions do not meet the specific conditions for net presentation.
Under repurchase agreements, the Company transfers collateral of U.S. government and government agency securities and receives cash. For repurchase agreements, the Company obtains cash in an amount equal to at least
95%
of the fair value of the securities transferred. The agreements require additional collateral to be transferred when necessary and provide the counterparty the right to sell or re-pledge the securities transferred. The cash received from the repurchase program is typically invested in short-term investments or fixed maturities and is reported as an asset on the Company's Condensed Consolidated Balance Sheets. The Company accounts for the repurchase agreements as collateralized borrowings. The securities transferred under repurchase agreements are included in fixed maturities, AFS with the obligation to repurchase those securities recorded in other liabilities on the Company's Condensed Consolidated Balance Sheets.
From time to time, the Company enters into reverse repurchase agreements where the Company purchases securities and simultaneously agrees to resell the same or substantially the same securities. The maturity of these transactions is generally within one year. The agreements require additional collateral to be transferred to the Company when necessary and the Company has the right to sell or re-pledge the securities received. The Company accounts for reverse repurchase agreements as collateralized financing. The receivable for reverse repurchase agreements is included within short-term investments in the Company's Condensed Consolidated Balance Sheets.
Federal Home Loan Bank Advance Agreements
The Company’s subsidiaries are members of the FHLBB which provides access to collateralized advance agreements. These agreements may be short or long-term with fixed or variable rates and can be used to earn incremental investment income. Contractual maturities of the FHLBB agreements are generally of 90 days or less. The amount of advances that can be taken is limited to a percentage of the fair value of the assets pledged as collateral which ranges from a high of
97%
for U.S. government-backed fixed maturities maturing within 3 years to a low of
40%
for A-rated commercial mortgage-backed fixed maturities maturing in 5 years or more. Membership to the FHLBB requires a minimum purchase of FHLBB common stock and is included within equity securities, at fair value in the
Company’s Condensed Consolidated Balance Sheets. As of March 31, 2019 and December 31, 2018, the
Company held
$9
and
$10
, respectively, of required investment in FHLBB common stock.
Other Collateral Transactions
The Company is required by law to deposit securities with government agencies in certain states in which it conducts business. As of
March 31, 2019
and
December 31, 2018
, the fair value of securities on deposit was $
2.3 billion
and
$2.2 billion
, respectively.
As of
March 31, 2019
and
December 31, 2018
, the Company pledged collateral of
$35
and
$47
, respectively, of U.S. government securities and municipal securities or cash primarily related to certain bank loan participations committed to through a limited partnership agreement. These amounts also include collateral related to letters of credit.
For disclosure of collateral in support of derivative transactions, refer to the Derivative Collateral Arrangements section in Note
6
-
Derivatives
of Notes to Condensed Consolidated Financial Statements.
6
.
DERIVATIVES
The Company utilizes a variety of OTC, OTC-cleared and exchange traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate risk or volatility.
Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Strategies that Qualify for Hedge Accounting
Some of the Company's derivatives satisfy hedge accounting requirements as outlined in Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to Consolidated Financial Statements, included in The Hartford’s
2018
Form 10-K Annual Report. Typically, these hedging instruments include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities. The hedge strategies by hedge accounting designation include:
Cash Flow Hedges
Interest rate swaps are predominantly used to manage portfolio duration and better match cash receipts from assets with cash disbursements required to fund liabilities. These derivatives primarily convert interest receipts on floating-rate fixed maturity securities to fixed rates. The Company has also entered into interest rate swaps to convert the variable interest payments on the 3 month Libor + 2.125% junior subordinated debt to fixed interest payments. For further information, see the Junior Subordinated Debentures section within Note 13 - Debt of Notes to the Consolidated Financial Statements, included in The Hartford's 2018 Form 10-K Annual Report.
Foreign currency swaps are used to convert foreign currency-denominated cash flows related to certain investment receipts to U.S. dollars in order to reduce cash flow fluctuations due to changes in currency rates.
The Company also previously entered into forward starting swap agreements to hedge the interest rate exposure related to the future purchase of fixed-rate securities, primarily to hedge interest rate risk inherent in the assumptions used to price certain group benefits liabilities.
Non-qualifying Strategies
Derivative relationships that do not qualify for hedge accounting (“non-qualifying strategies”) primarily include hedging and replication strategies that utilize credit default swaps. In addition, hedges of interest rate, foreign currency and equity risk of certain fixed maturities and equities do not qualify for hedge accounting. The non-qualifying strategies include:
Credit Contracts
Credit default swaps are used to purchase credit protection on an individual entity or referenced index to economically hedge against default risk and credit-related changes in the value of fixed maturity securities. Credit default swaps are also used to assume credit risk related to an individual entity or referenced index as a part of replication transactions. These contracts
require the Company to pay or receive a periodic fee in exchange for compensation from the counterparty should the referenced security issuers experience a credit event, as defined in the contract. The Company also enters into credit default swaps to terminate existing credit default swaps, thereby offsetting the changes in value of the original swap going forward.
Interest Rate Swaps, Swaptions and Futures
The Company uses interest rate swaps, swaptions and futures to manage interest rate duration between assets and liabilities in certain investment portfolios. In addition, the Company enters into interest rate swaps to terminate existing swaps, thereby offsetting the changes in value of the original swap going forward. As of
March 31, 2019
and
December 31, 2018
, the notional amount of interest rate swaps in offsetting relationships was
$7.6 billion
and
$7.1 billion
, respectively.
Foreign Currency Swaps and Forwards
The Company enters into foreign currency swaps to convert the foreign currency exposures of certain foreign currency-denominated fixed maturity investments to U.S. dollars. The Company may at times enter into foreign currency forwards to hedge non-U.S. dollar denominated cash and, previously, equity securities.
Equity Index Options
The Company enters into equity index options to hedge the impact of a decline in the equity markets on the investment portfolio. The Company also enters into call options on equity securities to generate additional return.
Derivative Balance Sheet Classification
For reporting purposes, the Company has elected to offset within assets or liabilities based upon the net of the fair value amounts, income accruals, and related cash collateral receivables and payables of OTC derivative instruments executed in a legal entity and with the same counterparty under a master netting agreement, which provides the Company with the legal right of offset. The following fair value amounts do not include income accruals or related cash collateral receivables and payables, which are netted with derivative fair value amounts to determine balance sheet presentation. The Company’s derivative instruments are held for risk management purposes, unless otherwise noted in the following table. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and is presented in the table to quantify the volume of the Company’s derivative activity. Notional amounts are not necessarily reflective of credit risk.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Balance Sheet Presentation
|
|
Net Derivatives
|
Asset Derivatives
|
Liability Derivatives
|
|
Notional Amount
|
Fair Value
|
Fair Value
|
Fair Value
|
Hedge Designation/ Derivative Type
|
Mar. 31, 2019
|
Dec. 31, 2018
|
Mar. 31, 2019
|
Dec. 31, 2018
|
Mar. 31, 2019
|
Dec. 31, 2018
|
Mar. 31, 2019
|
Dec. 31, 2018
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
2,040
|
|
$
|
2,040
|
|
$
|
(2
|
)
|
$
|
1
|
|
$
|
1
|
|
$
|
2
|
|
$
|
(3
|
)
|
$
|
(1
|
)
|
Foreign currency swaps
|
175
|
|
153
|
|
(5
|
)
|
(6
|
)
|
1
|
|
2
|
|
(6
|
)
|
(8
|
)
|
Total cash flow hedges
|
2,215
|
|
2,193
|
|
(7
|
)
|
(5
|
)
|
2
|
|
4
|
|
(9
|
)
|
(9
|
)
|
Non-qualifying strategies
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
Interest rate swaps and futures
|
8,336
|
|
8,451
|
|
(53
|
)
|
(62
|
)
|
9
|
|
8
|
|
(62
|
)
|
(70
|
)
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
Foreign currency swaps and forwards
|
384
|
|
287
|
|
—
|
|
(1
|
)
|
1
|
|
—
|
|
(1
|
)
|
(1
|
)
|
Credit contracts
|
|
|
|
|
|
|
|
|
Credit derivatives that purchase credit protection
|
5
|
|
6
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Credit derivatives that assume credit risk [1]
|
810
|
|
1,102
|
|
19
|
|
3
|
|
19
|
|
8
|
|
—
|
|
(5
|
)
|
Credit derivatives in offsetting positions
|
38
|
|
41
|
|
—
|
|
—
|
|
6
|
|
6
|
|
(6
|
)
|
(6
|
)
|
Equity contracts
|
|
|
|
|
|
|
|
|
Equity index swaps and options
|
723
|
|
211
|
|
1
|
|
4
|
|
1
|
|
5
|
|
—
|
|
(1
|
)
|
Total non-qualifying strategies
|
10,296
|
|
10,098
|
|
(33
|
)
|
(56
|
)
|
36
|
|
27
|
|
(69
|
)
|
(83
|
)
|
Total cash flow hedges and non-qualifying strategies
|
$
|
12,511
|
|
$
|
12,291
|
|
$
|
(40
|
)
|
$
|
(61
|
)
|
$
|
38
|
|
$
|
31
|
|
$
|
(78
|
)
|
$
|
(92
|
)
|
Balance Sheet Location
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale
|
$
|
153
|
|
$
|
153
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Other investments
|
1,951
|
|
9,864
|
|
24
|
|
7
|
|
27
|
|
23
|
|
(3
|
)
|
(16
|
)
|
Other liabilities
|
10,407
|
|
2,274
|
|
(64
|
)
|
(68
|
)
|
11
|
|
8
|
|
(75
|
)
|
(76
|
)
|
Total derivatives
|
$
|
12,511
|
|
$
|
12,291
|
|
$
|
(40
|
)
|
$
|
(61
|
)
|
$
|
38
|
|
$
|
31
|
|
$
|
(78
|
)
|
$
|
(92
|
)
|
|
|
[1]
|
The derivative instruments related to this strategy are held for other investment purposes.
|
Offsetting of Derivative Assets/Liabilities
The following tables present the gross fair value amounts, the amounts offset, and net position of derivative instruments eligible for offset in the Company's Condensed Consolidated Balance Sheets. Amounts offset include fair value amounts, income
accruals and related cash collateral receivables and payables associated with derivative instruments that are traded under a common master netting agreement, as described in the preceding discussion. Also included in the tables are financial collateral receivables and payables, which are contractually permitted to be offset upon an event of default, although are disallowed for offsetting under U.S. GAAP.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting Derivative Assets and Liabilities
|
|
(i)
|
(ii)
|
(iii) = (i) - (ii)
|
(iv)
|
(v) = (iii) - (iv)
|
|
|
|
Net Amounts Presented in the Statement of Financial Position
|
Collateral Disallowed for Offset in the Statement of Financial Position
|
|
|
Gross Amounts of Recognized Assets (Liabilities)
|
Gross Amounts Offset in the Statement of Financial Position
|
Derivative Assets [1] (Liabilities) [2]
|
Accrued Interest and Cash Collateral (Received) [3] Pledged [2]
|
Financial Collateral (Received) Pledged [4]
|
Net Amount
|
As of March 31, 2019
|
|
|
|
|
|
|
Other investments
|
$
|
38
|
|
$
|
31
|
|
$
|
24
|
|
$
|
(17
|
)
|
$
|
2
|
|
$
|
5
|
|
Other liabilities
|
$
|
(78
|
)
|
$
|
(9
|
)
|
$
|
(64
|
)
|
$
|
(5
|
)
|
$
|
(60
|
)
|
$
|
(9
|
)
|
As of December 31, 2018
|
|
|
|
|
|
|
Other investments
|
$
|
31
|
|
$
|
26
|
|
$
|
7
|
|
$
|
(2
|
)
|
$
|
2
|
|
$
|
3
|
|
Other liabilities
|
$
|
(92
|
)
|
$
|
(20
|
)
|
$
|
(68
|
)
|
$
|
(4
|
)
|
$
|
(65
|
)
|
$
|
(7
|
)
|
|
|
[1]
|
Included in other investments in the Company's Condensed Consolidated Balance Sheets.
|
|
|
[2]
|
Included in other liabilities in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative payable associated with each counterparty.
|
|
|
[3]
|
Included in other investments in the Company's Condensed Consolidated Balance Sheets and is limited to the net derivative receivable associated with each counterparty.
|
|
|
[4]
|
Excludes collateral associated with exchange-traded derivative instruments.
|
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives in Cash Flow Hedging Relationships
|
|
Gain (Loss) Recognized in OCI on Derivative
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
Interest rate swaps
|
$
|
7
|
|
$
|
(14
|
)
|
Foreign currency swaps
|
—
|
|
(7
|
)
|
Total
|
$
|
7
|
|
$
|
(21
|
)
|
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCI into Income
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
|
Net Realized Capital Gain/(Loss)
|
Net Investment Income
|
Net Realized Capital Gain/(Loss)
|
Net Investment Income
|
Interest rate swaps
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
$
|
8
|
|
Foreign currency swaps
|
—
|
|
1
|
|
—
|
|
—
|
|
Total
|
$
|
—
|
|
$
|
1
|
|
$
|
1
|
|
$
|
8
|
|
|
|
|
|
|
Total amounts presented on the Condensed Consolidated Statement of Operations
|
$
|
163
|
|
$
|
470
|
|
$
|
(30
|
)
|
$
|
451
|
|
As of
March 31, 2019
, the before tax deferred net gains on derivative instruments recorded in AOCI that are expected to be
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
reclassified to earnings during the next twelve months are
$7
. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to net investment income over the term of the investment cash flows.
During the
three months ended
March 31, 2019
and
2018
, the Company had
no
net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges due to forecasted transactions that were no longer probable of occurring.
Non-qualifying Strategies
For non-qualifying strategies, including embedded derivatives that are required to be bifurcated from their host contracts and accounted for as derivatives, the gain or loss on the derivative is recognized currently in earnings within net realized capital gains (losses).
|
|
|
|
|
|
|
|
Non-qualifying Strategies Recognized within Net Realized Capital Gains (Losses)
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
Foreign exchange contracts
|
|
|
Foreign currency swaps and forwards
|
$
|
1
|
|
$
|
(3
|
)
|
Other non-qualifying derivatives
|
|
|
Interest rate contracts
|
|
|
Interest rate swaps, swaptions, and futures
|
(8
|
)
|
(2
|
)
|
Credit contracts
|
|
|
Credit derivatives that purchase credit protection
|
1
|
|
(1
|
)
|
Credit derivatives that assume credit risk
|
21
|
|
(8
|
)
|
Equity contracts
|
|
|
Equity index swaps and options
|
—
|
|
1
|
|
Total other non-qualifying derivatives
|
14
|
|
(10
|
)
|
Total [1]
|
$
|
15
|
|
$
|
(13
|
)
|
|
|
[1]
|
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note
4
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
|
Credit Risk Assumed through Credit Derivatives
The Company enters into credit default swaps that assume credit risk of a single entity or referenced index in order to synthetically replicate investment transactions that are permissible under the Company's investment policies. The Company will receive periodic payments based on an agreed upon rate and notional amount and will only make a payment if there is a credit event. A credit event payment will typically be equal to the notional value of the swap contract less the value of the referenced security
issuer’s debt obligation after the occurrence of the credit event. A credit event is generally defined as a default on contractually obligated interest or principal payments or bankruptcy of the referenced entity. The credit default swaps in which the Company assumes credit risk primarily reference investment grade single corporate issuers and baskets, which include standard diversified portfolios of corporate and CMBS issuers. The diversified portfolios of corporate issuers are established within sector concentration limits and may be divided into tranches that possess different credit ratings.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit Risk Assumed Derivatives by Type
|
|
|
|
|
Underlying Referenced Credit
Obligation(s) [1]
|
|
|
|
Notional
Amount
[2]
|
Fair
Value
|
Weighted
Average
Years to
Maturity
|
Type
|
Average
Credit
Rating
|
Offsetting
Notional
Amount [3]
|
Offsetting
Fair
Value [3]
|
As of March 31, 2019
|
Single name credit default swaps
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
$
|
165
|
|
$
|
3
|
|
5 years
|
Corporate Credit
|
A-
|
$
|
—
|
|
$
|
—
|
|
Basket credit default swaps [4]
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
550
|
|
10
|
|
5 years
|
Corporate Credit
|
BBB+
|
—
|
|
—
|
|
Below investment grade risk exposure
|
95
|
|
6
|
|
5 years
|
Corporate Credit
|
B+
|
—
|
|
—
|
|
Investment grade risk exposure
|
1
|
|
—
|
|
Less than 1 year
|
CMBS Credit
|
A
|
1
|
|
—
|
|
Below investment grade risk exposure
|
18
|
|
(6
|
)
|
Less than 1 year
|
CMBS Credit
|
CCC
|
18
|
|
6
|
|
Total [5]
|
$
|
829
|
|
$
|
13
|
|
|
|
|
$
|
19
|
|
$
|
6
|
|
As of December 31, 2018
|
Single name credit default swaps
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
$
|
169
|
|
$
|
2
|
|
4 years
|
Corporate Credit/
Foreign Gov.
|
A
|
$
|
—
|
|
$
|
—
|
|
Basket credit default swaps [4]
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
799
|
|
(1
|
)
|
6 years
|
Corporate Credit
|
BBB+
|
—
|
|
—
|
|
Below investment grade risk exposure
|
125
|
|
2
|
|
5 years
|
Corporate Credit
|
B+
|
—
|
|
—
|
|
Investment grade risk exposure
|
11
|
|
—
|
|
5 years
|
CMBS Credit
|
A-
|
2
|
|
—
|
|
Below investment grade risk exposure
|
19
|
|
(6
|
)
|
Less than 1 year
|
CMBS Credit
|
CCC
|
19
|
|
6
|
|
Total [5]
|
$
|
1,123
|
|
$
|
(3
|
)
|
|
|
|
$
|
21
|
|
$
|
6
|
|
|
|
[1]
|
The average credit ratings are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.
|
|
|
[2]
|
Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and applicable law, which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
|
|
|
[3]
|
The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.
|
|
|
[4]
|
Comprised of swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
|
|
|
[5]
|
Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note
4
-
Fair Value Measurements
of Notes to Condensed Consolidated Financial Statements.
|
Derivative Collateral Arrangements
The Company enters into various collateral arrangements in connection with its derivative instruments, which require both the pledging and accepting of collateral. As of
March 31, 2019
and
December 31, 2018
, the Company pledged cash collateral with a fair value of less than
$1
and
$4
, respectively, associated with derivative instruments. The collateral receivable has been recorded in other assets or other liabilities on the Company's Condensed Consolidated Balance Sheets as determined by the Company's election to offset on the balance sheet. As of
March 31, 2019
and
December 31, 2018
, the Company also pledged securities collateral associated with derivative instruments with a fair value of
$63
and
$67
, respectively, which have been included in fixed maturities on the Condensed Consolidated Balance Sheets. The counterparties generally have the right to sell or re-pledge these securities.
In addition, as of
March 31, 2019
and
December 31, 2018
, the Company has pledged initial margin of securities related to OTC-cleared and exchange traded derivatives with a fair value of
$85
and
$89
, respectively, which are included within fixed maturities on the Company's Condensed Consolidated Balance Sheets.
As of
March 31, 2019
and
December 31, 2018
, the Company accepted cash collateral associated with derivative instruments of
$18
and
$9
, respectively, which was invested and recorded in the Company's Condensed Consolidated Balance Sheets in fixed maturities and short-term investments with corresponding amounts recorded in other investments or other liabilities as determined by the Company's election to offset on the balance sheet. The Company also accepted securities collateral as of
March 31, 2019
and
December 31, 2018
, with a fair value of
$3
and
$5
, respectively, which the Company has the right to sell or repledge.
As
of
March 31, 2019
and
December 31, 2018
, the Company had
no
repledged securities. During the same periods, the Company
did not sell any securities held as collateral
. In
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
addition, as of
March 31, 2019
and
December 31, 2018
, non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Consolidated Balance Sheets
.
7
.
RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Property and Casualty Insurance Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
2018
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
24,584
|
|
$
|
23,775
|
|
Reinsurance and other recoverables
|
4,232
|
|
3,957
|
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
20,352
|
|
19,818
|
|
Provision for unpaid losses and loss adjustment expenses
|
|
|
|
|
Current accident year
|
1,641
|
|
1,640
|
|
Prior accident year development
|
(11
|
)
|
(32
|
)
|
Total provision for unpaid losses and loss adjustment expenses
|
1,630
|
|
1,608
|
|
Less payments
|
|
|
|
|
Current accident year
|
271
|
|
327
|
|
Prior accident years
|
1,309
|
|
1,322
|
|
Total payments
|
1,580
|
|
1,649
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
20,402
|
|
19,777
|
|
Reinsurance and other recoverables
|
4,209
|
|
3,938
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
24,611
|
|
$
|
23,715
|
|
Unfavorable (Favorable) Prior Accident Year Development
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
2018
|
Workers’ compensation
|
$
|
(20
|
)
|
$
|
(25
|
)
|
Workers’ compensation discount accretion
|
8
|
|
10
|
|
General liability
|
6
|
|
8
|
|
Package business
|
5
|
|
8
|
|
Commercial property
|
(2
|
)
|
(13
|
)
|
Professional liability
|
—
|
|
2
|
|
Bond
|
—
|
|
—
|
|
Automobile liability - Commercial Lines
|
—
|
|
(5
|
)
|
Automobile liability - Personal Lines
|
(5
|
)
|
—
|
|
Homeowners
|
1
|
|
(12
|
)
|
Net asbestos reserves
|
—
|
|
—
|
|
Net environmental reserves
|
—
|
|
—
|
|
Catastrophes
|
(8
|
)
|
(3
|
)
|
Uncollectible reinsurance
|
—
|
|
—
|
|
Other reserve re-estimates, net
|
4
|
|
(2
|
)
|
Total prior accident year development
|
$
|
(11
|
)
|
$
|
(32
|
)
|
Re-estimates of prior accident year reserves for the
three months ended
March 31, 2019
Workers’ compensation reserves
were reduced, principally in small commercial
driven by lower than previously estimated claim severity for the 2014 and 2015 accident years.
General liability reserves
were increased, primarily due to reserve increases in small commercial for accident years 2017 and 2018 due to higher frequency of high-severity bodily injury claims.
Package business reserves
were increased, primarily due to increased severity on 2018 accident year property claims.
Automobile liability reserves
were reduced, primarily driven by the emergence of lower estimated severity in personal automobile liability for accident year 2017.
Catastrophes reserves
were reduced, primarily as a result of lower estimated net losses from 2017 hurricanes Harvey and Irma.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Re-estimates of prior accident year reserves for the
three months ended
March 31, 2018
Workers’ compensation reserves
were reduced in small commercial, primarily for accident years 2011 to 2015, as both claim frequency and medical claim severity have emerged favorably compared to previous reserve estimates.
General liability reserves
were increased modestly, primarily due to an increase in reserves for specialty business within middle market for accident years 2009 to 2017, largely offset by a decrease in reserves for other lines within middle market, including premises and operations and products liability, principally for accident years 2015 and prior. Contributing to the
increase in reserves for specialty general liability reserves was an increase in large losses. Contributing to the reduction in reserves for other middle market lines was more favorable outcomes on litigated claims.
Package business reserves
were increased primarily due to increased severity of 2017 accident year property claims.
Commercial property reserves
were r
educed, driven by an increase in estimated reinsurance recoverable on marine losses from the 2017 accident year.
Homeowners reserves
were reduced, primarily in accident years 2013 to 2017, driven by lower than expected severity across multiple perils.
Group Life, Disability and Accident Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
|
|
|
|
|
|
|
|
|
For the three months ended March 31,
|
|
2019
|
2018
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
8,445
|
|
$
|
8,512
|
|
Reinsurance recoverables
|
239
|
|
209
|
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
8,206
|
|
8,303
|
|
Provision for unpaid losses and loss adjustment expenses
|
|
|
|
|
Current incurral year
|
1,150
|
|
1,185
|
|
Prior year's discount accretion
|
58
|
|
62
|
|
Prior incurral year development [1]
|
(120
|
)
|
(127
|
)
|
Total provision for unpaid losses and loss adjustment expenses [2]
|
1,088
|
|
1,120
|
|
Less: payments
|
|
|
|
|
Current incurral year
|
314
|
|
318
|
|
Prior incurral years
|
855
|
|
840
|
|
Total payments
|
1,169
|
|
1,158
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
8,125
|
|
8,265
|
|
Reinsurance recoverables
|
237
|
|
233
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
8,362
|
|
$
|
8,498
|
|
|
|
[1]
|
Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
|
|
|
[2]
|
Includes unallocated loss adjustment expenses of
$46
, and
$41
for the
three months ended
March 31, 2019
and
2018
, respectively, that are recorded in insurance operating costs and other expenses in the Condensed Consolidated Statements of Operations.
|
Re-estimates of prior incurral years reserves for the
three months ended
March 31, 2019
Group disability-
Prior period reserve estimates decreased by approximately
$105
largely driven by group long-term disability claim recoveries higher than prior reserve assumptions and claim incidence lower than prior assumptions. New York Paid Family Leave also experienced favorable claim emergence compared to prior estimates
Group life and accident (including group life premium waiver)-
Prior period reserve estimates decreased by approximately
$10
largely driven by lower than previously expected claim incidence in group life premium waiver.
Re-estimates of prior incurral years reserves for the
three months ended
March 31, 2018
Group disability-
Prior period reserve estimates decreased by approximately
$85
largely driven by group long-term disability claim terminations (recoveries and claimant deaths) higher than prior reserve assumptions and claim incidence lower than prior assumptions.
Group life and accident (including group life premium waiver)-
Prior period reserve estimates decreased by approximately
$40
largely driven by lower-than- previously expected claim incidence on group life, group life premium waiver, and group accidental death & dismemberment claims.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8
.
RESERVE FOR FUTURE POLICY BENEFITS
|
|
|
|
|
Changes in Reserves for Future Policy Benefits
[1]
|
Liability balance, as of January 1, 2019
|
$
|
642
|
|
Incurred
|
27
|
|
Paid
|
(28
|
)
|
Change in unrealized investment gains and losses
|
7
|
|
Liability balance, as of March 31, 2019
|
$
|
648
|
|
Reinsurance recoverable asset, as of January 1, 2019
|
$
|
27
|
|
Incurred
|
5
|
|
Paid
|
(2
|
)
|
Reinsurance recoverable asset, as of March 31, 2018
|
$
|
30
|
|
|
|
|
|
|
Liability balance, as of January 1, 2018
|
$
|
713
|
|
Incurred
|
10
|
|
Paid
|
(8
|
)
|
Change in unrealized investment gains and losses
|
(37
|
)
|
Liability balance, as of March 31, 2018
|
$
|
678
|
|
Reinsurance recoverable asset, as of January 1, 2018
|
$
|
26
|
|
Incurred
|
8
|
|
Paid
|
—
|
|
Reinsurance recoverable asset, as of March 31, 2018
|
$
|
34
|
|
[1]Reserves for future policy benefits includes paid-up life insurance and whole-life policies resulting from conversion from group life policies included within the Group Benefits segment and reserves for run-off structured settlement and terminal funding agreement liabilities which are in the Corporate category.
9
.
DEBT
Senior Notes
On January 15, 2019, The Hartford repaid at maturity the
$413
principal amount of its
6.0%
senior notes.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10
.
INCOME TAXES
Income Tax Expense
|
|
|
|
|
|
|
|
Income Tax Rate Reconciliation
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
Tax provision at U.S. federal statutory rate
|
$
|
163
|
|
$
|
109
|
|
Tax-exempt interest
|
(15
|
)
|
(17
|
)
|
Executive compensation
|
4
|
|
4
|
|
Stock-based compensation
|
(3
|
)
|
(2
|
)
|
Tax Reform
|
—
|
|
(3
|
)
|
Other
|
(4
|
)
|
—
|
|
Provision for income taxes
|
$
|
145
|
|
$
|
91
|
|
In addition to the effect of tax-exempt interest, the Company's effective tax rate for the three months ended March 31, 2019 reflects a federal income tax expense of $
4
related to non-deductible executive compensation and a benefit of $
3
related to a deduction for stock-based compensation that vested at a fair value per share greater than the fair value on the date of grant.
Uncertain Tax Positions
|
|
|
|
|
|
|
|
Rollforward of Unrecognized Tax Benefits
|
|
Three Months Ended March 31,
|
|
2019
|
2018
|
Balance, beginning of period
|
$
|
14
|
|
$
|
9
|
|
Gross increases - tax positions in prior period
|
—
|
|
—
|
|
Gross decreases - tax positions in prior period
|
—
|
|
—
|
|
Balance, end of period
|
$
|
14
|
|
$
|
9
|
|
The entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate in the period of the release.
Other Tax Matters
As of March 31, 2019 the Company had alternative minimum tax (AMT) credit carryovers of $
839
which are reflected as a current income tax receivable within other assets in the accompanying Condensed Consolidated Balance Sheets. AMT credits may be used to offset a regular tax liability for any taxable year beginning after December 31, 2017, and are refundable at an amount equal to 50 percent of the excess of the minimum tax credit for the taxable year over the amount of credit allowable for the year against regular tax liability. Any remaining credits not used against regular tax liability are refundable in the 2021 tax year to be realized in 2022. For the three months ended March 31, 2019, the Company offset
$2
regular tax liability with AMT credits. Included within net deferred income taxes in the accompanying Condensed Consolidated Balance Sheet are
$459
of future tax benefits associated with the Company's U.S. net operating loss ("NOL") carryovers. Although the Company projects there will be sufficient future taxable income to fully recover the remainder of the NOL carryover, the Company's estimate of the likely realization may change over time. NOL carryovers, if unused, would expire between 2026 and 2036.
The federal audits have been completed through 2013, and the Company is not currently under examination for any open years. Management believes that adequate provision has been made in the condensed consolidated financial statements for any potential adjustments that may result from tax examinations and other tax-related matters for all open tax years.
The Company classifies interest and penalties (if applicable) as income tax expense in the condensed consolidated financial statements. The Company recognized
no
interest expense for the three months ended
March 31, 2019
and
2018
. The Company had
no
interest payable as of
March 31, 2019
and
2018
. The Company does
not
believe it would be subject to any penalties in any open tax years and, therefore, has
not
recorded any accrual for penalties.
11
.
COMMITMENTS AND CONTINGENCIES
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes liabilities for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated liability at the low end of the range of losses.
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties in the following discussion
under the caption “Asbestos and Environmental Claims,” management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, and in addition to the matters in the following discussion, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. The
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company's results of operations or cash flows in particular quarterly or annual periods.
Asbestos and Environmental Claims
–The Company continues to receive asbestos and environmental ("A&E") claims. Asbestos claims relate primarily to bodily injuries asserted by people who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs.
The Company wrote several different categories of insurance contracts that may cover A&E claims. First, the Company wrote primary policies providing the first layer of coverage in an insured’s liability program. Second, the Company wrote excess and umbrella policies providing higher layers of coverage for losses that exhaust the limits of underlying coverage. Third, the Company acted as a reinsurer assuming a portion of those risks assumed by other insurers writing primary, excess, umbrella and reinsurance coverages. Fourth, subsidiaries of the Company participated in the London Market, writing both direct insurance and assumed reinsurance business.
Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid gross losses and expenses related to environmental and particularly asbestos claims. The degree of variability of gross reserve estimates for these exposures is significantly greater than for other more traditional exposures.
In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate loss development patterns, plaintiffs’ expanding theories of liability, the risks inherent in major litigation, and inconsistent emerging legal doctrines. Furthermore, over time, insurers, including the Company, have experienced significant changes in the rate at which asbestos claims are brought, the claims experience of particular insureds, and the value of claims, making predictions of future exposure from past experience uncertain. Plaintiffs and insureds also have sought to use bankruptcy proceedings, including “pre-packaged” bankruptcies, to accelerate and increase loss payments by insurers. In addition, some policyholders have asserted new classes of claims for coverages to which an aggregate limit of liability may not apply. Further uncertainties include insolvencies of other carriers and unanticipated developments pertaining to the Company’s ability to recover reinsurance for A&E claims. Management believes these issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include expanding
theories of liability and damages, the risks inherent in major litigation, inconsistent decisions concerning the existence and scope of coverage for environmental claims, and uncertainty as to the monetary amount being sought by the claimant from the insured.
The reporting pattern for assumed reinsurance claims, including those related to A&E claims, is much longer than for direct claims. In many instances, it takes months or years to determine that the policyholder’s own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves.
It is also not possible to predict changes in the legal and legislative environment and their effect on the future development of A&E claims.
Given the factors described above, the Company believes the actuarial tools and other techniques it employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure are less precise in estimating reserves for A&E exposures. For this reason, the Company principally relies on exposure-based analysis to estimate the ultimate costs of these claims, both gross and net of reinsurance, and regularly evaluates new account information in assessing its potential A&E exposures. The Company supplements this exposure-based analysis with evaluations of the Company’s historical direct net loss and expense paid and reported experience, and net loss and expense paid and reported experience by calendar and/or report year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and reported activity.
While the Company believes that its current A&E reserves are appropriate, significant uncertainties limit the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not estimable now, could be material to The Hartford’s consolidated operating results and liquidity.
As of
March 31, 2019
, the Company reported
$1.0 billion
of net asbestos reserves and
$196
of net environmental reserves. While the Company believes that its current A&E reserves are appropriate, significant uncertainties limit our ability to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not reasonably estimable now, could be material to The Hartford's consolidated operating results and liquidity.
Effective December 31, 2016, the Company entered into an A&E adverse development cover ("ADC") reinsurance agreement with NICO to reduce uncertainty about potential adverse development of A&E reserves. Under the ADC, the Company paid a reinsurance premium of
$650
for NICO to assume adverse net loss and allocated loss adjustment expense reserve development up to
$1.5 billion
above the Company’s existing net A&E reserves as of December 31, 2016 of approximately
$1.7 billion
. The
$650
reinsurance premium was placed in a collateral trust account as security for NICO’s claim payment obligations to the Company. Under retroactive reinsurance accounting, net adverse A&E reserve development after December 31, 2016 will result in an offsetting reinsurance recoverable up to the
$1.5 billion
limit. Cumulative ceded losses up to the
$650
reinsurance premium
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
paid are recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the
$650
reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of A&E claims after December 31, 2016 in excess of
$650
may result in significant charges against earnings. Furthermore, cumulative adverse development of A&E claims could ultimately exceed the
$1.5 billion
treaty limit in which case any adverse development in excess of the treaty limit would be absorbed as a charge to earnings by the Company. In these scenarios, the effect of these charges could be material to the Company’s consolidated operating results and liquidity. As of
March 31, 2019
, the Company has incurred
$523
in cumulative adverse development on A&E reserves that have been ceded under the ADC treaty with NICO, leaving approximately $
977
of coverage available for future adverse net reserve development, if any.
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
March 31, 2019
was
$68
. For this
$68
, the legal entities have posted collateral of
$61
in the normal course of business. Based on derivative market values as of
March 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
March 31, 2019
, a downgrade of two levels below the current financial strength ratings by either Moody's or S&P would require an additional
$8
of assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the collateral that we post, if required, is primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
12
.
EQUITY
Capital Purchase Program ("CPP") Warrants
As of
March 31, 2019
and
December 31, 2018
, respectively, the Company has
1.0 million
and
1.9 million
of CPP warrants outstanding and exercisable. The CPP warrants were issued in 2009 as part of a program established by the U.S. Department of the Treasury under the Emergency Economic Stabilization Act of 2008. The CPP warrants expire in June 2019.
CPP warrant exercises were
0.9 million
and
0.1 million
for the
three months ended
March 31, 2019
and
2018
, respectively.
The declaration of common stock dividends by the Company in excess of a threshold triggers a provision in the Company's warrant agreement with The Bank of New York Mellon resulting in adjustments to the CPP warrant exercise price and the number of shares deliverable for each warrant exercised (the “Warrant Share Number”). Accordingly, the declaration of a common stock dividend during the
three months ended
March 31, 2019
resulted in an adjustment to the CPP warrant exercise price. The CPP warrant exercise price was
$8.791
as of
March 31, 2019
and
$8.836
as of
December 31, 2018
and the Warrant Share Number was
1.1
as of
March 31, 2019
and
December 31, 2018
. The exercise price will be settled by the Company withholding the number of common shares issuable upon exercise of the warrants equal to the value of the aggregate exercise price of the warrants so exercised determined by reference to the closing price of the Company's common stock on the trading day on which the warrants are exercised and notice is delivered to the warrant agent.
Equity Repurchase Program
In February, 2019, the Company announced a
$1.0 billion
share repurchase authorization by the Board of Directors which is effective through December 31, 2020. Based on projected holding company resources, the Company expects to use a portion of the authorization in 2019 but anticipates using the majority of the program in 2020. Any repurchase of shares under the equity repurchase program is dependent on market conditions and other factors. During the three months ended March 31, 2019, no common shares were repurchased.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
13
.
CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in AOCI, Net of Tax for the Three Months Ended March 31, 2019
|
|
Changes in
|
|
Net Unrealized Gain on Securities
|
OTTI Losses in OCI
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI, net of tax
|
Beginning balance
|
$
|
24
|
|
$
|
(4
|
)
|
$
|
(5
|
)
|
$
|
30
|
|
$
|
(1,624
|
)
|
$
|
(1,579
|
)
|
OCI before reclassifications
|
696
|
|
1
|
|
6
|
|
1
|
|
(1
|
)
|
703
|
|
Amounts reclassified from AOCI
|
(17
|
)
|
—
|
|
(1
|
)
|
—
|
|
9
|
|
(9
|
)
|
OCI, net of tax
|
679
|
|
1
|
|
5
|
|
1
|
|
8
|
|
694
|
|
Ending balance
|
$
|
703
|
|
$
|
(3
|
)
|
$
|
—
|
|
$
|
31
|
|
$
|
(1,616
|
)
|
$
|
(885
|
)
|
|
|
|
|
|
|
Reclassifications from AOCI
|
|
Three Months Ended March 31, 2019
|
Affected Line Item in the Condensed Consolidated Statement of Operations
|
Net Unrealized Gain on Securities
|
|
|
Available-for-sale securities
|
$
|
21
|
|
Net realized capital gains (losses)
|
|
21
|
|
Total before tax
|
|
4
|
|
Income tax expense
|
|
$
|
17
|
|
Net income
|
Net Gains on Cash Flow Hedging Instruments
|
|
|
Foreign currency swaps
|
1
|
|
Net investment income
|
|
1
|
|
Total before tax
|
|
—
|
|
Income tax expense
|
|
$
|
1
|
|
Net income
|
Pension and Other Postretirement Plan Adjustments
|
|
|
Amortization of prior service credit
|
$
|
1
|
|
Insurance operating costs and other expenses
|
Amortization of actuarial loss
|
(12
|
)
|
Insurance operating costs and other expenses
|
|
(11
|
)
|
Total before tax
|
|
(2
|
)
|
Income tax expense
|
|
$
|
(9
|
)
|
Net income
|
Total amounts reclassified from AOCI
|
$
|
9
|
|
Net income
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in AOCI, Net of Tax for the Three Months Ended March 31, 2018
|
|
Changes in
|
|
Net Unrealized Loss on Securities
|
OTTI Losses in OCI
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI, net of tax
|
Beginning balance
|
$
|
1,931
|
|
$
|
(3
|
)
|
$
|
18
|
|
$
|
34
|
|
$
|
(1,317
|
)
|
$
|
663
|
|
Cumulative effect of accounting changes, net of tax [1]
|
273
|
|
—
|
|
2
|
|
4
|
|
(284
|
)
|
(5
|
)
|
Adjusted balance, beginning of period
|
2,204
|
|
(3
|
)
|
20
|
|
38
|
|
(1,601
|
)
|
658
|
|
OCI before reclassifications
|
(882
|
)
|
(2
|
)
|
(31
|
)
|
(6
|
)
|
1
|
|
(920
|
)
|
Amounts reclassified from AOCI
|
27
|
|
—
|
|
(13
|
)
|
—
|
|
9
|
|
23
|
|
OCI, net of tax
|
(855
|
)
|
(2
|
)
|
(44
|
)
|
(6
|
)
|
10
|
|
(897
|
)
|
Ending balance
|
$
|
1,349
|
|
$
|
(5
|
)
|
$
|
(24
|
)
|
$
|
32
|
|
$
|
(1,591
|
)
|
$
|
(239
|
)
|
[1] Includes reclassification to retained earnings of
$88
of stranded tax effects and
$93
of net unrealized gains, after tax, related to equity securities. For further discussion of these reclassifications, see Note
1
-
Basis of Presentation and Significant Accounting Policies
of Notes to the Consolidated Financial Statements included in The Hartford's 2018 Form 10-K Annual Report.
|
|
|
|
|
|
Reclassifications from AOCI
|
|
Three Months Ended March 31, 2018
|
Affected Line Item in the Condensed Consolidated Statement of Operations
|
Net Unrealized Loss on Securities
|
|
|
Available-for-sale securities
|
$
|
(38
|
)
|
Net realized capital gains (losses)
|
|
(38
|
)
|
Total before tax
|
|
(8
|
)
|
Income tax expense
|
|
3
|
|
Income from discontinued operations, net of tax
|
|
$
|
(27
|
)
|
Net income
|
Net Gains on Cash Flow Hedging Instruments
|
|
|
Interest rate swaps
|
$
|
1
|
|
Net realized capital gains (losses)
|
Interest rate swaps
|
8
|
|
Net investment income
|
|
9
|
|
Total before tax
|
|
2
|
|
Income tax expense
|
|
6
|
|
Income from discontinued operations, net of tax
|
|
$
|
13
|
|
Net income
|
Pension and Other Postretirement Plan Adjustments
|
|
|
Amortization of prior service credit
|
$
|
1
|
|
Insurance operating costs and other expenses
|
Amortization of actuarial loss
|
(13
|
)
|
Insurance operating costs and other expenses
|
|
(12
|
)
|
Total before tax
|
|
(3
|
)
|
Income tax expense
|
|
$
|
(9
|
)
|
Net income
|
Total amounts reclassified from AOCI
|
$
|
(23
|
)
|
Net income
|
14
.
EMPLOYEE BENEFIT PLANS
The Company’s employee benefit plans are described in Note
18
-
Employee Benefit Plans
of Notes to Consolidated Financial
Statements included in The Hartford’s
2018
Annual Report on Form 10-K.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Periodic Cost (Benefit)
|
|
Pension Benefits
|
Other
Postretirement
Benefits
|
|
Three Months Ended March 31,
|
Three Months Ended March 31,
|
|
2019
|
2018
|
2019
|
2018
|
Service cost
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
Interest cost
|
39
|
|
35
|
|
2
|
|
2
|
|
Expected return on plan assets
|
(57
|
)
|
(56
|
)
|
(1
|
)
|
(2
|
)
|
Amortization of prior service credit
|
—
|
|
—
|
|
(1
|
)
|
(1
|
)
|
Amortization of actuarial loss
|
11
|
|
12
|
|
1
|
|
1
|
|
Net periodic cost (benefit)
|
$
|
(6
|
)
|
$
|
(8
|
)
|
$
|
1
|
|
$
|
—
|
|
15
.
LEASES
The Hartford has operating leases for real estate and equipment. The right-of-use asset as of
March 31, 2019
was $
157
and is included in property and equipment, net, in the Condensed Consolidated Balance Sheet. The lease liability as of
March 31, 2019
was $
167
and is included in other liabilities in the Condensed Consolidated Balance Sheet. Variable lease costs include changes in interest rates on variable rate leases primarily for automobiles.
Components of Lease Expense
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
Operating lease cost
|
$
|
11
|
|
Short-term lease cost
|
1
|
|
Variable lease cost
|
—
|
|
Sublease income
|
(1
|
)
|
Total lease costs included in insurance operating costs and other expenses
|
$
|
11
|
|
Supplemental Operating Lease Information
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
Operating cash flows for operating leases
|
$
|
10
|
|
Weighted-average remaining lease term for operating leases
|
6
|
|
Weighted-average discount rate for operating leases
|
3.7
|
%
|
Future Minimum Lease Payments
|
|
|
|
|
|
As of March 31, 2019
|
2019
|
$
|
32
|
|
2020
|
40
|
|
2021
|
30
|
|
2022
|
25
|
|
2023
|
22
|
|
Thereafter
|
52
|
|
Total future minimum lease payments
|
201
|
|
Less: Discount on lease payments to present value
|
34
|
|
Total lease liability
|
$
|
167
|
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
16
.
BUSINESS DISPOSITION AND DISCONTINUED OPERATIONS
Sale of life and annuity business
On May 31, 2018, the Company’s wholly-owned subsidiary, Hartford Holdings, Inc., completed the sale of its life and annuity business to a group of investors led by Cornell Capital LLC, Atlas Merchant Capital LLC, TRB Advisors LP, Global Atlantic Financial Group, Pine Brook and J. Safra Group. Under the terms of the sale agreement signed December 3, 2017, the investor group formed a limited partnership, Hopmeadow Holdings LP, that acquired HLI, and its life and annuity operating subsidiaries. The Hartford received a
9.7%
ownership interest in the limited partnership. The life and annuity operations met the criteria for reporting as discontinued operations and are reported in the Corporate category through the date of sale.
The Hartford reported its 9.7% ownership interest in Hopmeadow Holdings LP, which is accounted for under the equity method, in other assets in the Condensed Consolidated Balance Sheet. The Hartford recognizes its share of income in other revenues in the Condensed Consolidated Statement of Operations on a three month delay, when financial information from the investee becomes available. The Company recognized $
28
, before tax, of income for the three months ended March 31, 2019.
For further information on the sale, including ongoing transactions with the life and annuity business sold, see Note 20 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements, included in The Hartford's 2018 Form 10-K Annual Report.
Reconciliation of the Major Line Items Constituting Pretax Profit (Loss) of Discontinued Operations
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
Revenues
|
|
Earned premiums
|
$
|
27
|
|
Fee income and other
|
232
|
|
Net investment income
|
312
|
|
Net realized capital gains
|
21
|
|
Total revenues
|
592
|
|
Benefits, losses and expenses
|
|
|
Benefits, losses and loss adjustment expenses
|
328
|
|
Amortization of DAC
|
41
|
|
Insurance operating costs and other expenses [1]
|
101
|
|
Total benefits, losses and expenses
|
470
|
|
Income before income taxes
|
122
|
|
Income tax expense
|
15
|
|
Income from operations of discontinued operations, net of tax
|
107
|
|
Net realized capital gain on disposal, net of tax
|
62
|
|
Income from discontinued operations, net of tax
|
$
|
169
|
|
[1]Corporate allocated overhead has been included in continuing operations.
Cash Flows from Discontinued Operations
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2018
|
Net cash provided by operating activities from discontinued operations
|
$
|
267
|
|
Net cash used in investing activities from discontinued operations
|
$
|
(187
|
)
|
Net cash used in financing activities from discontinued operations
|
$
|
(340
|
)
|
Cash paid for interest
|
$
|
2
|
|
Cash flows from discontinued operations are included in the Condensed Consolidated Statement of Cash Flows.