|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2020
|
|
Opening Balance
|
Cumulative Effect of Accounting Change
|
Adjusted Opening Balance
|
Mortgage loans
|
$
|
4,215
|
|
|
$
|
4,215
|
|
ACL on mortgage loans
|
—
|
|
$
|
(19)
|
|
(19)
|
|
Mortgage loans, net of ACL
|
4,215
|
|
(19)
|
|
4,196
|
|
Premiums receivable and agents’ balances
|
4,529
|
|
|
4,529
|
|
ACL on premiums receivable and agents' balances
|
(145)
|
|
23
|
|
(122)
|
|
Premiums receivable and agents' balances, net of ACL
|
4,384
|
|
23
|
|
4,407
|
|
Reinsurance recoverables
|
5,641
|
|
|
5,641
|
|
ACL and allowance for disputed amounts on reinsurance recoverables
|
(114)
|
|
(2)
|
|
(116)
|
|
Reinsurance recoverables, net of allowance for uncollectible reinsurance
|
5,527
|
|
(2)
|
|
5,525
|
|
Deferred income tax asset, net
|
299
|
|
5
|
|
304
|
|
Other liabilities
|
(5,157)
|
|
(25)
|
|
(5,182)
|
|
Retained Earnings
|
$
|
12,685
|
|
$
|
(18)
|
|
$
|
12,667
|
|
|
|
|
|
Summary of Adoption Impacts
|
|
|
|
|
|
Net increase to ACL and LCL
|
$
|
(23)
|
|
Net tax effects
|
5
|
|
Net decrease to retained earnings
|
$
|
(18)
|
|
Reference Rate Reform
On March 12, 2020, the Company adopted the FASB’s temporary guidance which allows The Hartford to account for contract modifications made solely due to rate reform (such as replacing LIBOR with another reference rate) as continuations of existing contracts and to maintain hedge accounting when the hedging effectiveness between a financial instrument and its hedge is only affected by the change to a replacement rate. As a result, The Hartford will not recognize gains and losses during the transition period of LIBOR to an alternative reference rate that would otherwise have arisen from accounting assessments and remeasurements. The guidance expires for contract modifications made and hedge relationships entered into or evaluated after December 31, 2022. The Company is not required to measure the
effect of adoption on its financial position, cash flows or net income because the guidance provides relief from accounting for the effects of the change to a replacement rate.
Mortgage Loan Modification
On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). Section 4013 of the CARES Act allows financial institutions the option to suspend the requirement to disclose and account for loan modifications as troubled debt restructurings for loan modifications related to the novel strain of coronavirus, specifically identified as the Coronavirus Disease 2019 (“COVID-19”) pandemic occurring between March 1, 2020 and the earlier of 60 days after the end of the national emergency or December 31, 2020. The Company’s adoption of Section 4013 of the CARES Act had no impact on our results of operations, financial position or cash flows because The Hartford has not granted significant concessions to borrowers on its mortgage loans that would have been disclosed and accounted for as troubled debt restructurings.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. BUSINESS ACQUISITION AND DISPOSITION
Business Acquisition
Navigators Group
On May 23, 2019, The Hartford acquired Navigators Group, a specialty underwriter, for total consideration of $2.121 billion and recorded provisional estimates of the fair value of the assets acquired and liabilities assumed. In the second quarter of 2020, The Hartford finalized its provisional estimates and recorded additional assets of $9 and liabilities of $7 with a net reduction in
goodwill of $2. The measurement period adjustments, determined as if the accounting had been completed as of the acquisition date, had no effect on the Condensed Consolidated Statements of Operations. The following table presents the preliminary allocation of the purchase price to the assets acquired and liabilities assumed as of the acquisition date, the measurement period adjustments recorded, and the final purchase price allocation.
Fair Value of Assets Acquired and Liabilities Assumed at the Acquisition Date
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary Values as of May 23, 2019 (as previously reported)
|
Measurement Period Adjustments
|
Adjusted Values as of May 23, 2019
|
Assets
|
|
|
|
Cash and invested assets
|
$
|
3,848
|
|
$
|
3
|
|
$
|
3,851
|
|
Premiums receivable
|
492
|
|
6
|
|
498
|
|
Reinsurance recoverables
|
1,100
|
|
(3)
|
|
1,097
|
|
Prepaid reinsurance premiums
|
238
|
|
—
|
|
238
|
|
Other intangible assets
|
580
|
|
—
|
|
580
|
|
Property and equipment
|
83
|
|
—
|
|
83
|
|
Other assets
|
99
|
|
3
|
|
102
|
|
Total Assets Acquired
|
6,440
|
|
9
|
|
6,449
|
|
Liabilities
|
|
|
|
Unpaid losses and loss adjustment expenses
|
2,823
|
|
—
|
|
2,823
|
|
Unearned premiums
|
1,219
|
|
—
|
|
1,219
|
|
Long-term debt
|
284
|
|
—
|
|
284
|
|
Deferred income taxes, net
|
48
|
|
(1)
|
|
47
|
|
Other liabilities
|
568
|
|
8
|
|
576
|
|
Total Liabilities Assumed
|
4,942
|
|
7
|
|
4,949
|
|
Net identifiable assets acquired
|
1,498
|
|
2
|
|
1,500
|
|
Goodwill [1]
|
623
|
|
(2)
|
|
621
|
|
Net Assets Acquired
|
$
|
2,121
|
|
$
|
—
|
|
$
|
2,121
|
|
[1] Non-deductible for income tax purposes.
The following table presents supplemental pro forma amounts of revenue and net income for the Company for the nine months ended September 30, 2019, as though the business was acquired on January 1, 2018. Pro forma adjustments include the revenue and earnings of Navigators Group as well as amortization of identifiable intangible assets acquired.
Pro Forma Results
|
|
|
|
|
|
|
Nine Months Ended September 30, 2019
|
Total Revenue
|
$
|
16,055
|
|
Net Income
|
$
|
1,532
|
|
Business Disposition
Sale of Continental Europe Operations
On September 30, 2020, the Company entered into a definitive agreement to sell our Continental Europe Operations. The transaction is expected to close by the second quarter of 2021, subject to customary closing conditions, including regulatory approvals. The complete sale of the Continental Europe Operations consists of multiple arrangements designed as a single transaction. The assets and liabilities of the Continental Europe Operations have been classified as held for sale in the Company's
Condensed Consolidated Balance Sheets beginning with the period ended September 30, 2020.
Total consideration less costs to sell is estimated to be approximately $14, resulting in an estimated loss on the sale of approximately $51, before tax, which has been recorded within net realized capital gains (losses) in the third quarter of 2020 in
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
the Condensed Consolidated Statements of Operations. The Company also recorded related income tax benefits of $19, for an estimated after-tax loss of $32 on the sale, in the third quarter of 2020. The accrual for the estimated before tax loss is included as a reduction of the carrying value of assets held for sale in the Company's Condensed Consolidated Balance Sheets as of September 30, 2020. The Continental Europe Operations are reported under the Commercial Lines segment. The estimate of consideration less costs to sell of $14 includes an estimate of
consideration that is contingent on how the ultimate amounts required to settle claims on 2020 and prior accident years, as determined at the end of 2024 compare with recorded reserves as currently estimated. The contingent consideration has been estimated at its fair value of $12 and could increase or decrease depending on how ultimate losses develop. Any change in the estimated fair value of contingent consideration in a future period would increase or decrease the estimated loss on sale in that period.
Carrying Value of Assets and Liabilities to be Transferred in Connection With the Sale [1]
|
|
|
|
|
|
|
As of September 30, 2020
|
Assets
|
|
Investments and cash
|
$
|
138
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverables and other
|
29
|
|
Total assets held for sale
|
167
|
|
Liabilities
|
|
Unpaid losses and loss adjustment expenses
|
74
|
|
Unearned premiums
|
35
|
|
Other liabilities
|
44
|
|
Total liabilities held for sale
|
$
|
153
|
|
[1] As of September 30, 2020, the estimated fair value of the disposal group is $14 based on the estimated consideration to be received less cost to sell. Within the disposal group, as of September 30, 2020, investments in fixed maturities and short-term investments, which are measured at fair value on a recurring basis, had a fair value of $80, of which $2 was based on quoted prices in active markets for identical assets and $78 was based on significant observable inputs. The remaining fair value less costs to sell for the disposal group is ($66), which is measured on a nonrecurring basis using significant unobservable inputs. See Note 5—Fair Value Measurements for more information.
3. EARNINGS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of Basic and Diluted Earnings per Common Share
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(In millions, except for per share data)
|
2020
|
2019
|
|
2020
|
2019
|
Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
459
|
|
$
|
535
|
|
|
$
|
1,200
|
|
$
|
1,537
|
|
Less: Preferred stock dividends
|
6
|
|
11
|
|
|
16
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common stockholders
|
$
|
453
|
|
$
|
524
|
|
|
$
|
1,184
|
|
$
|
1,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
Weighted average common shares outstanding, basic
|
358.3
|
|
361.4
|
|
|
358.3
|
|
361.0
|
|
Dilutive effect of warrants [1]
|
—
|
|
—
|
|
|
—
|
|
0.7
|
|
Dilutive effect of stock-based awards under compensation plans
|
2.2
|
|
4.0
|
|
|
2.0
|
|
3.4
|
|
Weighted average common shares outstanding and dilutive potential common shares
|
360.5
|
|
365.4
|
|
|
360.3
|
|
365.1
|
|
Net income available to common stockholders per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.26
|
|
$
|
1.45
|
|
|
$
|
3.30
|
|
$
|
4.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
$
|
1.26
|
|
$
|
1.43
|
|
|
$
|
3.29
|
|
$
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1] On June 26, 2019, the Capital Purchase Program warrants issued in 2009 expired.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. SEGMENT INFORMATION
The Company currently conducts business principally in five reporting segments including Commercial Lines, Personal Lines,
Property & Casualty Other Operations, Group Benefits and Hartford Funds, as well as a Corporate category.
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
|
2020
|
2019
|
Commercial Lines
|
$
|
323
|
|
$
|
336
|
|
|
$
|
378
|
|
$
|
890
|
|
Personal Lines
|
79
|
|
94
|
|
|
548
|
|
252
|
|
Property & Casualty Other Operations
|
2
|
|
18
|
|
|
12
|
|
52
|
|
Group Benefits
|
119
|
|
146
|
|
|
324
|
|
377
|
|
Hartford Funds
|
44
|
|
40
|
|
|
119
|
|
108
|
|
Corporate
|
(108)
|
|
(99)
|
|
|
(181)
|
|
(142)
|
|
Net income
|
459
|
|
535
|
|
|
1,200
|
|
1,537
|
|
Preferred stock dividends
|
6
|
|
11
|
|
|
16
|
|
16
|
|
Net income available to common stockholders
|
$
|
453
|
|
$
|
524
|
|
|
$
|
1,184
|
|
$
|
1,521
|
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
|
2020
|
2019
|
Earned premiums and fee income:
|
|
|
|
|
|
Commercial Lines
|
|
|
|
|
|
Workers’ compensation
|
$
|
776
|
|
$
|
825
|
|
|
$
|
2,312
|
|
$
|
2,480
|
|
Liability
|
355
|
|
330
|
|
|
1,035
|
|
731
|
|
Marine
|
59
|
|
59
|
|
|
191
|
|
86
|
|
Package business
|
390
|
|
376
|
|
|
1,150
|
|
1,092
|
|
Property
|
200
|
|
198
|
|
|
590
|
|
529
|
|
Professional liability
|
150
|
|
137
|
|
|
442
|
|
304
|
|
Bond
|
68
|
|
67
|
|
|
206
|
|
192
|
|
Assumed reinsurance
|
68
|
|
75
|
|
|
206
|
|
104
|
|
Automobile
|
193
|
|
191
|
|
|
562
|
|
522
|
|
Total Commercial Lines
|
2,259
|
|
2,258
|
|
|
6,694
|
|
6,040
|
|
Personal Lines
|
|
|
|
|
|
Automobile
|
547
|
|
564
|
|
|
1,552
|
|
1,690
|
|
Homeowners
|
240
|
|
248
|
|
|
721
|
|
741
|
|
Total Personal Lines [1]
|
787
|
|
812
|
|
|
2,273
|
|
2,431
|
|
|
|
|
|
|
|
Group Benefits
|
|
|
|
|
|
Group disability
|
697
|
|
697
|
|
|
2,142
|
|
2,124
|
|
Group life
|
594
|
|
621
|
|
|
1,833
|
|
1,902
|
|
Other
|
70
|
|
64
|
|
|
200
|
|
187
|
|
Total Group Benefits
|
1,361
|
|
1,382
|
|
|
4,175
|
|
4,213
|
|
Hartford Funds
|
|
|
|
|
|
Mutual fund and Exchange-Traded Products ("ETP")
|
228
|
|
231
|
|
|
660
|
|
674
|
|
Talcott Resolution life and annuity separate accounts [2]
|
22
|
|
23
|
|
|
64
|
|
69
|
|
Total Hartford Funds
|
250
|
|
254
|
|
|
724
|
|
743
|
|
Corporate
|
13
|
|
18
|
|
|
47
|
|
43
|
|
Total earned premiums and fee income
|
4,670
|
|
4,724
|
|
|
13,913
|
|
13,470
|
|
Net investment income
|
492
|
|
490
|
|
|
1,290
|
|
1,448
|
|
Net realized capital gains (losses)
|
6
|
|
89
|
|
|
(116)
|
|
332
|
|
Other revenues
|
3
|
|
44
|
|
|
108
|
|
129
|
|
Total revenues
|
$
|
5,171
|
|
$
|
5,347
|
|
|
$
|
15,195
|
|
$
|
15,379
|
|
[1]For the three months ended September 30, 2020 and 2019, AARP members accounted for earned premiums of $713 and $729, respectively. For the nine months ended September 30, 2020 and 2019, AARP members accounted for earned premiums of $2.1 billion and $2.2 billion, 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 September 30,
|
|
Nine Months Ended September 30,
|
|
Revenue Line Item
|
2020
|
2019
|
|
2020
|
2019
|
Commercial Lines
|
|
|
|
|
|
|
Installment billing fees
|
Fee income
|
$
|
8
|
|
$
|
8
|
|
|
$
|
21
|
|
$
|
26
|
|
Personal Lines
|
|
|
|
|
|
|
Installment billing fees
|
Fee income
|
8
|
|
9
|
|
|
26
|
|
28
|
|
Insurance servicing revenues
|
Other revenues
|
23
|
|
23
|
|
|
63
|
|
65
|
|
Group Benefits
|
|
|
|
|
|
|
Administrative services
|
Fee income
|
44
|
|
45
|
|
|
132
|
|
135
|
|
Hartford Funds
|
|
|
|
|
|
|
Advisor, distribution and other management fees
|
Fee income
|
228
|
|
232
|
|
|
659
|
|
677
|
|
Other fees
|
Fee income
|
22
|
|
22
|
|
|
65
|
|
65
|
|
Corporate
|
|
|
|
|
|
|
Investment management and other fees
|
Fee income
|
13
|
|
14
|
|
|
38
|
|
38
|
|
Transition service revenues
|
Other revenues
|
—
|
|
6
|
|
|
2
|
|
18
|
|
Total non-insurance revenues with customers
|
|
$
|
346
|
|
$
|
359
|
|
|
$
|
1,006
|
|
$
|
1,052
|
|
5. FAIR VALUE MEASUREMENTS
The Company carries certain financial assets and liabilities at estimated fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants. Our fair value framework 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 September 30, 2020
|
|
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")
|
$
|
1,490
|
|
$
|
—
|
|
$
|
1,490
|
|
$
|
—
|
|
Collateralized loan obligations ("CLOs")
|
2,449
|
|
—
|
|
2,308
|
|
141
|
|
Commercial mortgage-backed securities ("CMBS")
|
4,444
|
|
—
|
|
4,352
|
|
92
|
|
Corporate
|
19,416
|
|
—
|
|
18,420
|
|
996
|
|
Foreign government/government agencies
|
984
|
|
—
|
|
984
|
|
—
|
|
Municipal
|
9,310
|
|
—
|
|
9,304
|
|
6
|
|
Residential mortgage-backed securities ("RMBS")
|
4,548
|
|
—
|
|
4,097
|
|
451
|
|
U.S. Treasuries
|
1,403
|
|
381
|
|
1,022
|
|
—
|
|
Total fixed maturities
|
44,044
|
|
381
|
|
41,977
|
|
1,686
|
|
|
|
|
|
|
Equity securities, at fair value
|
819
|
|
352
|
|
398
|
|
69
|
|
Derivative assets
|
|
|
|
|
Credit derivatives
|
11
|
|
—
|
|
11
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
1
|
|
—
|
|
1
|
|
—
|
|
Total derivative assets [1]
|
12
|
|
—
|
|
12
|
|
—
|
|
Short-term investments
|
3,399
|
|
3,176
|
|
209
|
|
14
|
|
Total assets accounted for at fair value on a recurring basis
|
$
|
48,274
|
|
$
|
3,909
|
|
$
|
42,596
|
|
$
|
1,769
|
|
Liabilities accounted for at fair value on a recurring basis
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
Credit derivatives
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
|
|
|
|
|
Foreign exchange derivatives
|
$
|
6
|
|
$
|
—
|
|
$
|
6
|
|
$
|
—
|
|
Interest rate derivatives
|
(79)
|
|
—
|
|
(79)
|
|
—
|
|
Total derivative liabilities [2]
|
(72)
|
|
—
|
|
(72)
|
|
—
|
|
|
|
|
|
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(72)
|
|
$
|
—
|
|
$
|
(72)
|
|
$
|
—
|
|
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, 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
|
|
|
|
|
ABS
|
$
|
1,476
|
|
$
|
—
|
|
$
|
1,461
|
|
$
|
15
|
|
CLOs
|
2,183
|
|
—
|
|
2,088
|
|
95
|
|
CMBS
|
4,338
|
|
—
|
|
4,329
|
|
9
|
|
Corporate
|
17,396
|
|
—
|
|
16,664
|
|
732
|
|
Foreign government/government agencies
|
1,123
|
|
—
|
|
1,120
|
|
3
|
|
Municipal
|
9,498
|
|
—
|
|
9,498
|
|
—
|
|
RMBS
|
4,869
|
|
—
|
|
4,309
|
|
560
|
|
U.S. Treasuries
|
1,265
|
|
330
|
|
935
|
|
—
|
|
Total fixed maturities
|
42,148
|
|
330
|
|
40,404
|
|
1,414
|
|
Fixed maturities, FVO
|
11
|
|
—
|
|
11
|
|
—
|
|
Equity securities, at fair value
|
1,657
|
|
1,401
|
|
183
|
|
73
|
|
Derivative assets
|
|
|
|
|
Credit derivatives
|
11
|
|
—
|
|
11
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives
|
1
|
|
—
|
|
1
|
|
—
|
|
Total derivative assets [1]
|
12
|
|
—
|
|
12
|
|
—
|
|
Short-term investments
|
2,921
|
|
1,028
|
|
1,878
|
|
15
|
|
Total assets accounted for at fair value on a recurring basis
|
$
|
46,749
|
|
$
|
2,759
|
|
$
|
42,488
|
|
$
|
1,502
|
|
Liabilities accounted for at fair value on a recurring basis
|
|
|
|
|
Derivative liabilities
|
|
|
|
|
Credit derivatives
|
$
|
(1)
|
|
$
|
—
|
|
$
|
(1)
|
|
$
|
—
|
|
Equity derivatives
|
(15)
|
|
—
|
|
—
|
|
(15)
|
|
Foreign exchange derivatives
|
(2)
|
|
—
|
|
(2)
|
|
—
|
|
Interest rate derivatives
|
(60)
|
|
—
|
|
(60)
|
|
—
|
|
Total derivative liabilities [2]
|
(78)
|
|
—
|
|
(63)
|
|
(15)
|
|
Contingent consideration [3]
|
(22)
|
|
—
|
|
—
|
|
(22)
|
|
Total liabilities accounted for at fair value on a recurring basis
|
$
|
(100)
|
|
$
|
—
|
|
$
|
(63)
|
|
$
|
(37)
|
|
[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.
[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.
In connection with the acquisition of Navigators Group, the Company has overseas deposits in Other Invested Assets of $53 and $38 as of September 30, 2020 and December 31, 2019, respectively, which are measured at fair value using the net asset value as a practical expedient.
Fixed Maturities, Equity Securities, Short-term Investments, and Derivatives
Valuation Techniques
The Company generally determines fair values using valuation techniques that use prices, rates, and other relevant information evident from market transactions involving identical or similar instruments. Valuation techniques also include, where appropriate, estimates of future cash flows that are converted into a single discounted amount using current market
expectations. The Company uses a "waterfall" approach comprised of the following pricing sources and techniques, which are listed in priority order:
•Quoted prices, unadjusted, for identical assets or liabilities in active markets, which are classified as Level 1.
•Prices from third-party pricing services, which primarily utilize a combination of techniques. These services utilize recently reported trades of identical, similar, or benchmark securities making adjustments for market observable inputs available through the reporting date. If there are no recently reported trades, they may use a discounted cash flow technique to develop a price using expected cash flows based upon the anticipated future performance of the underlying collateral discounted at an estimated market rate. Both techniques develop prices that consider the time value of future cash flows and provide a margin for risk, including liquidity and credit risk. Most prices provided by third-party
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 incorporates counterparty credit risk. In some cases, quoted market prices for exchange-traded and over-the-counter ("OTC") cleared derivatives may be used and in other cases independent broker quotes may
be used. The pricing valuation models primarily use inputs that are observable in the market or can be corroborated by observable market data. The valuation of certain derivatives may include significant inputs that are unobservable, such as volatility levels, and reflect the Company’s view of what other market participants would use when pricing such instruments.
Valuation Controls
The process for determining the fair value of investments is monitored by the Valuation Committee, which is a cross-functional group of senior management within the Company. The purpose of the Valuation Committee is to provide oversight of the pricing policy, procedures and controls, including approval of valuation methodologies and pricing sources. The Valuation Committee reviews market data trends, pricing statistics and trading statistics to ensure that prices are reasonable and consistent with our fair value framework. Controls and procedures used to assess third-party pricing services are reviewed by the Valuation Committee, including the results of annual due-diligence reviews. Controls include, but are not limited to, reviewing daily and monthly price changes, stale prices, and missing prices and comparing new trade prices to third-party pricing services, weekly price changes to published bond prices of a corporate bond index, and daily OTC derivative market valuations to counterparty valuations. The Company has a dedicated pricing unit that works with trading and investment professionals to challenge the price received by a third party pricing source if the Company believes that the valuation received does not accurately reflect the fair value. New valuation models and changes to current models require approval by the Valuation Committee. In addition, the Company’s enterprise-wide Operational Risk Management function provides an independent review of the suitability and reliability of model inputs, as well as an analysis of significant changes to current models.
Valuation Inputs
Quoted prices for identical assets in active markets are considered Level 1 and consist of on-the-run U.S. Treasuries, money market funds, exchange-traded equity securities, open-ended mutual funds, certain short-term investments, and exchange traded 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, CLOs and RMBS:
• Estimate of future principal prepayments, derived from the characteristics of the underlying structure
• Prepayment speeds previously experienced at the interest rate levels projected for the collateral
|
|
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for less liquid securities or those that trade less actively, including subprime RMBS:
• Estimated cash flows
• Credit spreads, which include illiquidity premium
• Constant prepayment rates
• Constant default rates
• Loss severity
|
Corporates
|
|
• Benchmark yields and spreads
• Reported trades, bids, offers of the same or similar securities
• Issuer spreads and credit default swap curves
Other inputs for investment grade privately placed securities that utilize internal matrix pricing:
• Credit spreads for public securities of similar quality, maturity, and sector, adjusted for non-public nature
|
|
• Independent broker quotes
• Credit spreads beyond observable curve
• Interest rates beyond observable curve
Other inputs for below investment grade privately placed securities and private bank loans:
• 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
|
|
• Independent broker quotes
|
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 September 30, 2020
|
CLOs [3]
|
$
|
78
|
|
Discounted cash flows
|
Spread
|
414 bps
|
414 bps
|
414 bps
|
Decrease
|
CMBS [3]
|
$
|
13
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
275 bps
|
1,235 bps
|
1,188 bps
|
Decrease
|
Corporate [4]
|
$
|
866
|
|
Discounted cash flows
|
Spread
|
129 bps
|
972 bps
|
311 bps
|
Decrease
|
|
|
|
|
|
|
|
|
RMBS [3]
|
$
|
411
|
|
Discounted cash flows
|
Spread [6]
|
30 bps
|
590 bps
|
128 bps
|
Decrease
|
|
|
|
Constant prepayment rate [6]
|
—%
|
11%
|
6%
|
Decrease [5]
|
|
|
|
Constant default rate [6]
|
2%
|
6%
|
3%
|
Decrease
|
|
|
|
Loss severity [6]
|
—%
|
100%
|
82%
|
Decrease
|
As of December 31, 2019
|
CLOs [3]
|
$
|
95
|
|
Discounted cash flows
|
Spread
|
246 bps
|
246 bps
|
246 bps
|
Decrease
|
CMBS [3]
|
$
|
1
|
|
Discounted cash flows
|
Spread (encompasses prepayment, default risk and loss severity)
|
9 bps
|
1,832 bps
|
161 bps
|
Decrease
|
Corporate [4]
|
$
|
633
|
|
Discounted cash flows
|
Spread
|
93 bps
|
788 bps
|
236 bps
|
Decrease
|
RMBS [3]
|
$
|
560
|
|
Discounted cash flows
|
Spread [6]
|
5 bps
|
233 bps
|
79 bps
|
Decrease
|
|
|
|
Constant prepayment rate [6]
|
—%
|
11%
|
6%
|
Decrease [5]
|
|
|
|
Constant default rate [6]
|
1%
|
6%
|
3%
|
Decrease
|
|
|
|
Loss severity [6]
|
—%
|
100%
|
70%
|
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 [1]
|
|
Fair
Value
|
Predominant
Valuation
Technique
|
Significant Unobservable Input
|
Minimum
|
Maximum
|
Weighted Average [2]
|
Impact of
Increase in Input Value [3]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
|
|
|
|
|
|
|
|
Equity options
|
$
|
(15)
|
|
Option model
|
Equity volatility
|
13
|
%
|
28
|
%
|
17
|
%
|
Increase
|
[1] As of September 30, 2020, the fair values of the Company's level 3 derivatives were less than $1 and are excluded from the table.
[2]The weighted average is determined based on the fair value of the derivatives.
[3]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.
The tables above exclude certain securities for which fair values are predominately based on independent broker quotes. While the Company does not have access to the significant unobservable inputs that independent brokers may use in their pricing process, the Company believes brokers likely use inputs similar to those used by the Company and third-party pricing services to price similar instruments. As such, in their pricing
models, brokers likely use estimated loss severity rates, prepayment rates, constant default rates and credit spreads. Therefore, similar to non-broker priced securities, increases in these inputs would generally cause fair values to decrease. As of September 30, 2020, no significant adjustments were made by the Company to broker prices received.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Contingent Consideration
The acquisition of Lattice Strategies LLC ("Lattice") on July 29, 2016 required 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 was 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 had been discounted back to the valuation date using a risk-adjusted discount rate of 10.0%. The risk-adjusted discount rate is an internally generated and significant unobservable input to fair value.
In January 2020, we made a third payment of $10 after Lattice AUM reached $3.0 billion. Given the dramatic market declines and outflow in March, 2020, the Lattice AUM declined to $2.3 billion as of March 30, 2020 and the Company reduced the remaining contingent consideration liability to zero, recognizing an $11.9 before tax reduction in expense in first quarter 2020.
The earn out period ended on July 29, 2020 with no additional consideration payable.
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 September 30, 2020
|
|
Total realized/unrealized gains (losses)
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 2020
|
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 September 30, 2020
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
ABS
|
$
|
23
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(23)
|
|
$
|
—
|
|
|
CLOs
|
99
|
|
—
|
|
1
|
|
63
|
|
(3)
|
|
—
|
|
—
|
|
(19)
|
|
141
|
|
|
CMBS
|
20
|
|
—
|
|
2
|
|
66
|
|
(1)
|
|
—
|
|
5
|
|
—
|
|
92
|
|
|
Corporate
|
1,109
|
|
1
|
|
19
|
|
45
|
|
(62)
|
|
—
|
|
22
|
|
(138)
|
|
996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal
|
—
|
|
(3)
|
|
2
|
|
—
|
|
—
|
|
—
|
|
7
|
|
—
|
|
6
|
|
|
RMBS
|
479
|
|
—
|
|
2
|
|
40
|
|
(48)
|
|
—
|
|
—
|
|
(22)
|
|
451
|
|
Total Fixed Maturities, AFS
|
1,730
|
|
(2)
|
|
26
|
|
214
|
|
(114)
|
|
—
|
|
34
|
|
(202)
|
|
1,686
|
|
Equity Securities, at fair value
|
66
|
|
—
|
|
—
|
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
69
|
|
Short-term investments
|
14
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
14
|
|
Total Assets
|
$
|
1,810
|
|
$
|
(2)
|
|
$
|
26
|
|
$
|
217
|
|
$
|
(114)
|
|
$
|
—
|
|
$
|
34
|
|
$
|
(202)
|
|
$
|
1,769
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
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 Nine Months Ended September 30, 2020
|
|
Total realized/unrealized gains (losses)
|
|
|
|
|
|
|
|
|
Fair value as of January 1, 2020
|
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 September 30, 2020
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
ABS
|
$
|
15
|
|
$
|
—
|
|
$
|
(1)
|
|
$
|
43
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(57)
|
|
$
|
—
|
|
|
CLOs
|
95
|
|
—
|
|
(1)
|
|
82
|
|
(16)
|
|
—
|
|
—
|
|
(19)
|
|
141
|
|
|
CMBS
|
9
|
|
—
|
|
2
|
|
79
|
|
(3)
|
|
—
|
|
5
|
|
—
|
|
92
|
|
|
Corporate
|
732
|
|
(31)
|
|
—
|
|
161
|
|
(126)
|
|
(27)
|
|
481
|
|
(194)
|
|
996
|
|
|
Foreign Govt./Govt. Agencies
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(3)
|
|
—
|
|
|
Municipal
|
—
|
|
(3)
|
|
2
|
|
—
|
|
—
|
|
—
|
|
7
|
|
—
|
|
6
|
|
|
RMBS
|
560
|
|
—
|
|
(10)
|
|
66
|
|
(136)
|
|
(7)
|
|
—
|
|
(22)
|
|
451
|
|
Total Fixed Maturities, AFS
|
1,414
|
|
(34)
|
|
(8)
|
|
431
|
|
(281)
|
|
(34)
|
|
493
|
|
(295)
|
|
1,686
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities, at fair value
|
73
|
|
(10)
|
|
—
|
|
6
|
|
—
|
|
—
|
|
—
|
|
—
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
15
|
|
—
|
|
—
|
|
—
|
|
(1)
|
|
—
|
|
—
|
|
—
|
|
14
|
|
Total Assets
|
$
|
1,502
|
|
$
|
(44)
|
|
$
|
(8)
|
|
$
|
437
|
|
$
|
(282)
|
|
$
|
(34)
|
|
$
|
493
|
|
$
|
(295)
|
|
$
|
1,769
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
(22)
|
|
12
|
|
—
|
|
—
|
|
10
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Derivatives, net [4]
|
|
|
|
|
|
|
|
|
|
Equity
|
Equity
|
(15)
|
|
36
|
|
—
|
|
—
|
|
—
|
|
(21)
|
|
—
|
|
—
|
|
—
|
|
Total Derivatives, net [4]
|
(15)
|
|
36
|
|
—
|
|
—
|
|
—
|
|
(21)
|
|
—
|
|
—
|
|
—
|
|
Total Liabilities
|
$
|
(37)
|
|
$
|
48
|
|
$
|
—
|
|
$
|
—
|
|
$
|
10
|
|
$
|
(21)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Rollforwards for Financial Instruments Classified as Level 3 for the Three Months Ended September 30, 2019
|
|
Total realized/unrealized gains (losses)
|
|
|
|
|
|
|
|
|
Fair value as of June 30, 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 September 30, 2019
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
ABS
|
$
|
5
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(5)
|
|
$
|
—
|
|
|
CLOs
|
286
|
|
—
|
|
—
|
|
92
|
|
(8)
|
|
—
|
|
—
|
|
(74)
|
|
296
|
|
|
CMBS
|
35
|
|
—
|
|
—
|
|
10
|
|
(1)
|
|
—
|
|
—
|
|
(24)
|
|
20
|
|
|
Corporate
|
568
|
|
(3)
|
|
—
|
|
166
|
|
(7)
|
|
(4)
|
|
15
|
|
(12)
|
|
723
|
|
|
Foreign Govt./Govt. Agencies
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
758
|
|
—
|
|
(3)
|
|
—
|
|
(51)
|
|
—
|
|
—
|
|
(90)
|
|
614
|
|
Total Fixed Maturities, AFS
|
1,655
|
|
(3)
|
|
(3)
|
|
268
|
|
(67)
|
|
(4)
|
|
15
|
|
(205)
|
|
1,656
|
|
Equity Securities, at fair value
|
72
|
|
(2)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
$
|
1,727
|
|
$
|
(5)
|
|
$
|
(3)
|
|
$
|
268
|
|
$
|
(67)
|
|
$
|
(4)
|
|
$
|
15
|
|
$
|
(205)
|
|
$
|
1,726
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
(21)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(21)
|
|
Derivatives, net [4]
|
|
|
|
|
|
|
|
|
|
|
Equity
|
(3)
|
|
(2)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5)
|
|
Total Derivatives, net [4]
|
(3)
|
|
(2)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5)
|
|
Total Liabilities
|
$
|
(24)
|
|
$
|
(2)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(26)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Nine Months Ended September 30, 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 September 30, 2019
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
ABS
|
$
|
10
|
|
$
|
—
|
|
$
|
—
|
|
$
|
5
|
|
$
|
(1)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(14)
|
|
$
|
—
|
|
|
CLOs
|
100
|
|
—
|
|
—
|
|
329
|
|
(18)
|
|
(6)
|
|
—
|
|
(109)
|
|
296
|
|
|
CMBS
|
12
|
|
—
|
|
1
|
|
34
|
|
(3)
|
|
—
|
|
—
|
|
(24)
|
|
20
|
|
|
Corporate
|
520
|
|
(4)
|
|
9
|
|
261
|
|
(13)
|
|
(68)
|
|
61
|
|
(43)
|
|
723
|
|
|
Foreign Govt./Govt. Agencies
|
3
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RMBS
|
920
|
|
1
|
|
(5)
|
|
134
|
|
(163)
|
|
(35)
|
|
—
|
|
(238)
|
|
614
|
|
Total Fixed Maturities, AFS
|
1,565
|
|
(3)
|
|
5
|
|
763
|
|
(198)
|
|
(109)
|
|
61
|
|
(428)
|
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
Equity Securities, at fair value
|
77
|
|
(3)
|
|
—
|
|
9
|
|
—
|
|
(13)
|
|
—
|
|
—
|
|
70
|
|
Derivatives, net [4]
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate
|
1
|
|
(1)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Total Derivatives, net [4]
|
1
|
|
(1)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Total Assets
|
$
|
1,643
|
|
$
|
(7)
|
|
$
|
5
|
|
$
|
772
|
|
$
|
(198)
|
|
$
|
(122)
|
|
$
|
61
|
|
$
|
(428)
|
|
$
|
1,726
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
(35)
|
|
(6)
|
|
—
|
|
—
|
|
20
|
|
—
|
|
—
|
|
—
|
|
(21)
|
|
Derivatives, net [4]
|
|
|
|
|
|
|
|
|
|
|
Equity
|
3
|
|
(8)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5)
|
|
Total Derivatives, net [4]
|
3
|
|
(8)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5)
|
|
Total Liabilities
|
$
|
(32)
|
|
$
|
(14)
|
|
$
|
—
|
|
$
|
—
|
|
$
|
20
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(26)
|
|
|
|
|
|
|
|
|
|
|
|
|
[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. Transfers into Level 3 for the nine months ended September 30, 2020, were primarily related to private securities that were priced using internal matrix pricing in the prior period, but changed to broker pricing in the current period.
[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 at End of Period
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2020
|
2019
|
2020
|
2019
|
|
2020
|
2019
|
2020
|
2019
|
|
|
Changes in Unrealized Gain/(Loss) included in Net Income [1] [2]
|
Changes in Unrealized Gain/(Loss) included in OCI [3]
|
|
Changes in Unrealized Gain/(Loss) included in Net Income [1] [2]
|
Changes in Unrealized Gain/(Loss) included in OCI [3]
|
Assets
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CLOs
|
—
|
|
—
|
|
1
|
|
—
|
|
|
—
|
|
—
|
|
(1)
|
|
1
|
|
|
CMBS
|
—
|
|
—
|
|
2
|
|
—
|
|
|
—
|
|
—
|
|
2
|
|
—
|
|
|
Corporate
|
(1)
|
|
(2)
|
|
17
|
|
—
|
|
|
(21)
|
|
(3)
|
|
1
|
|
8
|
|
|
Foreign Govt./Govt. Agencies
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
1
|
|
|
Municipal
|
(3)
|
|
—
|
|
2
|
|
—
|
|
|
(3)
|
|
—
|
|
2
|
|
—
|
|
|
RMBS
|
—
|
|
—
|
|
2
|
|
(3)
|
|
|
—
|
|
—
|
|
(9)
|
|
(4)
|
|
Total Fixed Maturities, AFS
|
(4)
|
|
(2)
|
|
24
|
|
(3)
|
|
|
(24)
|
|
(3)
|
|
(5)
|
|
6
|
|
Equity Securities, at fair value
|
—
|
|
(2)
|
|
—
|
|
—
|
|
|
(9)
|
|
(2)
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives, net
|
|
|
|
|
|
|
|
|
|
|
Equity
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Interest rate
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
(1)
|
|
—
|
|
—
|
|
Total Derivatives, net
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
(1)
|
|
—
|
|
—
|
|
Short-term investments
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
Total Assets
|
$
|
(4)
|
|
$
|
(4)
|
|
$
|
24
|
|
$
|
(3)
|
|
|
$
|
(33)
|
|
$
|
(6)
|
|
$
|
(5)
|
|
$
|
6
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
—
|
|
—
|
|
—
|
|
—
|
|
|
12
|
|
(6)
|
|
—
|
|
—
|
|
Derivatives, net
|
|
|
|
|
|
|
|
|
|
|
Equity
|
—
|
|
(2)
|
|
—
|
|
—
|
|
|
—
|
|
(8)
|
|
—
|
|
—
|
|
Total Derivatives, net
|
—
|
|
(2)
|
|
—
|
|
—
|
|
|
—
|
|
(8)
|
|
—
|
|
—
|
|
Total Liabilities
|
$
|
—
|
|
$
|
(2)
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
12
|
|
$
|
(14)
|
|
$
|
—
|
|
$
|
—
|
|
[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 RMBS that contain embedded credit derivatives with underlying credit risk. These securities are included within Fixed Maturities, FVO on the Condensed Consolidated Balance Sheets and changes in the fair value of these securities are reported in net realized capital gains and losses.
As of September 30, 2020 and December 31, 2019, the fair value of assets using the fair value option was $0 and $11, respectively, with assets as of December 31, 2019 within the residential real estate sector.
For the three and nine months ended September 30, 2020 and 2019 there were no realized capital gains (losses) related to the fair value of assets using the fair value option.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Financial Instruments Not Carried at Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Assets and Liabilities Not Carried at Fair Value
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Fair Value Hierarchy Level
|
Carrying Amount [1]
|
Fair Value
|
|
Fair Value Hierarchy Level
|
Carrying Amount
|
Fair Value
|
Assets
|
|
|
|
|
|
|
|
Mortgage loans
|
Level 3
|
$
|
4,461
|
|
$
|
4,720
|
|
|
Level 3
|
$
|
4,215
|
|
$
|
4,350
|
|
Liabilities
|
|
|
|
|
|
|
|
Other policyholder funds and benefits payable
|
Level 3
|
711
|
|
$
|
712
|
|
|
Level 3
|
$
|
763
|
|
$
|
765
|
|
Senior notes [2]
|
Level 2
|
$
|
3,261
|
|
$
|
4,172
|
|
|
Level 2
|
$
|
3,759
|
|
$
|
4,456
|
|
Junior subordinated debentures [2]
|
Level 2
|
$
|
1,090
|
|
$
|
1,093
|
|
|
Level 2
|
$
|
1,089
|
|
$
|
1,153
|
|
[1]As of September 30, 2020, carrying amount of mortgage loans is net of ACL of $38.
[2]Included in long-term debt in the Condensed Consolidated Balance Sheets, except for current maturities, which are included in short-term debt.
6. INVESTMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Realized Capital Gains (Losses)
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(Before tax)
|
2020
|
2019
|
|
2020
|
2019
|
Gross gains on sales
|
$
|
27
|
|
$
|
77
|
|
|
$
|
201
|
|
$
|
190
|
|
Gross losses on sales
|
(12)
|
|
(4)
|
|
|
(42)
|
|
(44)
|
|
Equity securities [1]
|
42
|
|
19
|
|
|
(269)
|
|
181
|
|
Net credit losses on fixed maturities, AFS [2]
|
(1)
|
|
|
|
(33)
|
|
|
Change in ACL on mortgage loans [3]
|
5
|
|
|
|
(19)
|
|
|
|
|
|
|
|
|
Intent-to-sell impairments
|
—
|
|
—
|
|
|
(5)
|
|
—
|
|
Net OTTI losses recognized in earnings
|
|
(1)
|
|
|
|
(3)
|
|
Valuation allowances on mortgage loans
|
|
—
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other, net [4]
|
(55)
|
|
(2)
|
|
|
51
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net realized capital gains (losses)
|
$
|
6
|
|
$
|
89
|
|
|
$
|
(116)
|
|
$
|
332
|
|
[1] The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of September 30, 2020, were $36 and $6 for the three and nine months ended September 30, 2020, respectively. The net unrealized gains (losses) on equity securities included in net realized capital gains (losses) related to equity securities still held as of September 30, 2019, were $17 and $100 for the three and nine months ended September 30, 2019, respectively.
[2] Due to the adoption of accounting guidance for credit losses on January 1, 2020, realized capital losses previously reported as OTTI are now presented as credit losses which are net of any recoveries. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies. In addition, see Credit Losses on Fixed Maturities, AFS within the Investment Portfolio Risks and Risk Management section of the MD&A.
[3]Represents the change in ACL recorded during the period following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies. In addition, see ACL on Mortgage Loans within the Investment Portfolio Risks and Risk Management section of the MD&A.
[4] Primarily includes loss of $51 from the sale of the Continental Europe Operations for the three and nine months ended September 30, 2020. Also includes gains (losses) from transactional foreign currency revaluation of ($4) and $6 for the three and nine months ended September 30, 2020, respectively. Additionally, for the same periods, includes gains (losses) on non-qualifying derivatives of $(2) and $97, respectively. For the three and nine months ended September 30, 2019, includes gains (losses) on non-qualifying derivatives of $(5) and $3, respectively.
Proceeds from the sales of fixed maturities, AFS totaled $4.5 billion and $11.7 billion for the three and nine months ended September 30, 2020, respectively, and $2.6 billion and $11.5 billion for the three and nine months ended September 30, 2019, respectively.
Accrued Interest Receivable on Fixed Maturities, AFS and Mortgage Loans
As of September 30, 2020 and December 31, 2019, the Company reported accrued interest receivable related to fixed maturities, AFS of $331 and $334, respectively, and accrued interest receivable related to mortgage loans of $14 and $14, respectively. These amounts are recorded in other assets on the Condensed Consolidated Balance Sheets and are not included in
the amortized cost or fair value of the fixed maturities or mortgage loans. The Company does not include the current accrued interest receivable balance when estimating the ACL. The Company has a policy to write-off accrued interest receivable balances that are more than 90 days past due. Write-offs of accrued interest receivable are recorded as a credit loss component of realized capital gains and losses.
Interest income on fixed maturities and mortgage loans is accrued unless it is past due over 90 days or management deems the interest uncollectible.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Recognition and Presentation of Intent-to-Sell Impairments and ACL on Fixed Maturities, AFS
The Company will record an "intent-to-sell impairment" as a reduction to the amortized cost of fixed maturities, AFS in an unrealized loss position if the Company intends to sell or it is more likely than not that the Company will be required to sell the fixed maturity before a recovery in value. A corresponding charge is recorded in net realized capital losses equal to the difference between the fair value on the impairment date and the amortized cost basis of the fixed maturity before recognizing the impairment.
When fixed maturities are in an unrealized loss position and the Company does not record an intent-to-sell impairment, the Company will record an ACL for the portion of the unrealized loss due to a credit loss. Any remaining unrealized loss on a fixed maturity after recording an ACL is the non-credit amount and is recorded in OCI. The ACL is the excess of the amortized cost over the greater of the Company's best estimate of the present value of expected future cash flows or the security's fair value. Cash flows are discounted at the effective yield that is used to record interest income. The ACL cannot exceed the unrealized loss and, therefore, it may fluctuate with changes in the fair value of the fixed maturity if the fair value is greater than the Company's best estimate of the present value of expected future cash flows. The initial ACL and any subsequent changes are recorded in net realized capital gains and losses. The ACL is written off against the amortized cost in the period in which all or a portion of the related fixed maturity investment is determined to be uncollectible.
Developing the Company’s best estimate of expected future cash flows is a quantitative and qualitative process that incorporates information received from third-party sources along with certain internal assumptions regarding the future performance. The Company's considerations include, but are not limited to, (a) changes in the financial condition of the issuer and/or the underlying collateral, (b) whether the issuer is current on contractually obligated interest and principal payments, (c) credit ratings, (d) payment structure of the security and (e) the extent to which the fair value has been less than the amortized cost of the security.
For non-structured securities, assumptions include, but are not limited to, economic and industry-specific trends and fundamentals, instrument-specific developments including changes in credit ratings, industry earnings multiples and the issuer’s ability to restructure, access capital markets, and execute asset sales.
For structured securities, assumptions include, but are not limited to, various performance indicators such as historical and projected default and recovery rates, credit ratings, current and projected delinquency rates, loan-to-value ratios ("LTVs"), average cumulative collateral loss rates that vary by vintage year, prepayment speeds, and property value declines. These assumptions require the use of significant management judgment and include the probability of issuer default and estimates regarding timing and amount of expected recoveries which may include estimating the underlying collateral value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL on Fixed Maturities, AFS by Type
|
|
|
Three Months Ended September 30, 2020
|
|
|
Nine Months Ended September 30, 2020
|
(Before tax)
|
|
Corporate
|
Municipal
|
Total
|
|
|
Corporate
|
Municipal
|
Total
|
Balance as of beginning of period
|
|
$
|
32
|
|
$
|
—
|
|
$
|
32
|
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Credit losses on fixed maturities where credit losses were not previously recorded
|
|
—
|
|
3
|
|
3
|
|
|
|
35
|
|
3
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
Reduction due to sales
|
|
(1)
|
|
—
|
|
(1)
|
|
|
|
(3)
|
|
—
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in allowance on fixed maturities that had an allowance in a previous period
|
|
(2)
|
|
—
|
|
(2)
|
|
|
|
(3)
|
|
—
|
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
|
$
|
29
|
|
$
|
3
|
|
$
|
32
|
|
|
|
$
|
29
|
|
$
|
3
|
|
$
|
32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Credit Impairments on Fixed Maturities, AFS
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
(Before tax)
|
2019
|
|
2019
|
Balance as of beginning of period
|
$
|
(18)
|
|
|
$
|
(19)
|
|
Additions for credit impairments recognized on [1]:
|
|
|
|
Fixed maturities not previously impaired
|
(1)
|
|
|
(3)
|
|
|
|
|
|
Reductions for credit impairments previously recognized on:
|
|
|
|
Fixed maturities that matured or were sold during the period
|
—
|
|
|
3
|
|
|
|
|
|
|
|
|
|
Balance as of end of period
|
$
|
(19)
|
|
|
$
|
(19)
|
|
[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)
Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS, by Type
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Amortized
Cost
|
ACL [1]
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
|
|
Amortized
Cost
|
Gross
Unrealized
Gains
|
Gross
Unrealized
Losses
|
Fair
Value
|
Non-Credit OTTI [2]
|
ABS
|
$
|
1,449
|
|
$
|
—
|
|
$
|
41
|
|
$
|
—
|
|
$
|
1,490
|
|
|
|
$
|
1,461
|
|
$
|
18
|
|
$
|
(3)
|
|
$
|
1,476
|
|
$
|
—
|
|
CLOs
|
2,465
|
|
—
|
|
4
|
|
(20)
|
|
2,449
|
|
|
|
2,186
|
|
5
|
|
(8)
|
|
2,183
|
|
—
|
|
CMBS
|
4,200
|
|
—
|
|
275
|
|
(31)
|
|
4,444
|
|
|
|
4,210
|
|
141
|
|
(13)
|
|
4,338
|
|
(4)
|
|
Corporate
|
17,930
|
|
(29)
|
|
1,597
|
|
(82)
|
|
19,416
|
|
|
|
16,435
|
|
986
|
|
(25)
|
|
17,396
|
|
—
|
|
Foreign govt./govt. agencies
|
901
|
|
—
|
|
83
|
|
—
|
|
984
|
|
|
|
1,057
|
|
66
|
|
—
|
|
1,123
|
|
—
|
|
Municipal
|
8,491
|
|
(3)
|
|
829
|
|
(7)
|
|
9,310
|
|
|
|
8,763
|
|
737
|
|
(2)
|
|
9,498
|
|
—
|
|
RMBS
|
4,394
|
|
—
|
|
156
|
|
(2)
|
|
4,548
|
|
|
|
4,775
|
|
97
|
|
(3)
|
|
4,869
|
|
—
|
|
U.S. Treasuries
|
1,243
|
|
—
|
|
160
|
|
—
|
|
1,403
|
|
|
|
1,191
|
|
75
|
|
(1)
|
|
1,265
|
|
—
|
|
Total fixed maturities, AFS
|
$
|
41,073
|
|
$
|
(32)
|
|
$
|
3,145
|
|
$
|
(142)
|
|
$
|
44,044
|
|
|
|
$
|
40,078
|
|
$
|
2,125
|
|
$
|
(55)
|
|
$
|
42,148
|
|
$
|
(4)
|
|
[1] Represents the ACL recorded following the adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
[2]Represents the amount of cumulative non-credit impairment losses recognized in OCI on fixed maturities that also had credit impairments. These losses are included in gross unrealized losses as of December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Maturities, AFS, by Contractual Maturity Year
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Amortized Cost
|
Fair Value
|
|
Amortized Cost
|
Fair Value
|
One year or less
|
$
|
1,593
|
|
$
|
1,614
|
|
|
$
|
1,082
|
|
$
|
1,090
|
|
Over one year through five years
|
6,872
|
|
7,229
|
|
|
7,200
|
|
7,401
|
|
Over five years through ten years
|
8,166
|
|
8,769
|
|
|
7,395
|
|
7,803
|
|
Over ten years
|
11,934
|
|
13,501
|
|
|
11,769
|
|
12,988
|
|
Subtotal
|
28,565
|
|
31,113
|
|
|
27,446
|
|
29,282
|
|
Mortgage-backed and asset-backed securities
|
12,508
|
|
12,931
|
|
|
12,632
|
|
12,866
|
|
Total fixed maturities, AFS
|
$
|
41,073
|
|
$
|
44,044
|
|
|
$
|
40,078
|
|
$
|
42,148
|
|
Estimated maturities may differ from contractual maturities due to call or prepayment provisions. Due to the potential for variability in payment speeds (i.e. prepayments or extensions), mortgage-backed and asset-backed securities are not categorized by contractual maturity.
Concentration of Credit Risk
The Company aims to maintain a diversified investment portfolio including issuer, sector and geographic stratification, where
applicable, and has established certain exposure limits, diversification standards and review procedures to mitigate credit risk. The Company had no investment exposure to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity as of September 30, 2020 or December 31, 2019 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 Fixed Maturities, AFS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of September 30, 2020
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
Fair Value
|
Unrealized Losses
|
|
|
Fair Value
|
Unrealized Losses
|
|
|
Fair Value
|
Unrealized Losses
|
ABS
|
|
$
|
44
|
|
$
|
—
|
|
|
|
$
|
—
|
|
$
|
—
|
|
|
|
$
|
44
|
|
$
|
—
|
|
CLOs
|
|
1,193
|
|
(10)
|
|
|
|
741
|
|
(10)
|
|
|
|
1,934
|
|
(20)
|
|
CMBS
|
|
533
|
|
(27)
|
|
|
|
16
|
|
(4)
|
|
|
|
549
|
|
(31)
|
|
Corporate
|
|
1,609
|
|
(56)
|
|
|
|
202
|
|
(26)
|
|
|
|
1,811
|
|
(82)
|
|
Foreign govt./govt. agencies
|
|
79
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
79
|
|
—
|
|
Municipal
|
|
478
|
|
(7)
|
|
|
|
—
|
|
—
|
|
|
|
478
|
|
(7)
|
|
RMBS
|
|
514
|
|
(2)
|
|
|
|
29
|
|
—
|
|
|
|
543
|
|
(2)
|
|
U.S. Treasuries
|
|
28
|
|
—
|
|
|
|
—
|
|
—
|
|
|
|
28
|
|
—
|
|
Total fixed maturities, AFS in an unrealized loss position
|
|
$
|
4,478
|
|
$
|
(102)
|
|
|
|
$
|
988
|
|
$
|
(40)
|
|
|
|
$
|
5,466
|
|
$
|
(142)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss Aging for Fixed Maturities, AFS by Type and Length of Time as of December 31, 2019
|
|
|
Less Than 12 Months
|
|
|
12 Months or More
|
|
|
Total
|
|
|
Fair Value
|
Unrealized Losses
|
|
|
Fair Value
|
Unrealized Losses
|
|
|
Fair Value
|
Unrealized Losses
|
ABS
|
|
$
|
398
|
|
$
|
(3)
|
|
|
|
$
|
9
|
|
$
|
—
|
|
|
|
$
|
407
|
|
$
|
(3)
|
|
CLOs
|
|
679
|
|
(2)
|
|
|
|
923
|
|
(6)
|
|
|
|
1,602
|
|
(8)
|
|
CMBS
|
|
538
|
|
(7)
|
|
|
|
20
|
|
(6)
|
|
|
|
558
|
|
(13)
|
|
Corporate
|
|
789
|
|
(9)
|
|
|
|
328
|
|
(16)
|
|
|
|
1,117
|
|
(25)
|
|
Foreign govt./govt. agencies
|
|
101
|
|
—
|
|
|
|
29
|
|
—
|
|
|
|
130
|
|
—
|
|
Municipal
|
|
222
|
|
(2)
|
|
|
|
—
|
|
—
|
|
|
|
222
|
|
(2)
|
|
RMBS
|
|
614
|
|
(3)
|
|
|
|
68
|
|
—
|
|
|
|
682
|
|
(3)
|
|
U.S. Treasuries
|
|
88
|
|
—
|
|
|
|
34
|
|
(1)
|
|
|
|
122
|
|
(1)
|
|
Total fixed maturities, AFS in an unrealized loss position
|
|
$
|
3,429
|
|
$
|
(26)
|
|
|
|
$
|
1,411
|
|
$
|
(29)
|
|
|
|
$
|
4,840
|
|
$
|
(55)
|
|
As of September 30, 2020, fixed maturities, AFS in an unrealized loss position consisted of 898 instruments, primarily in the corporate sectors, most notably energy issuers, as well as issuers in the financial services sector and issuers within the travel, leisure, and gaming industry, and CMBS and CLO securities, which were depressed largely due to widening of credit spreads since the purchase date. As of September 30, 2020, 96% of these fixed maturities were depressed less than 20% of cost or amortized cost. The increase in unrealized losses during the nine months ended September 30, 2020 was primarily attributable to wider credit spreads, partially offset by lower interest rates.
Most of the fixed maturities depressed for twelve months or more relate to corporates and CLOs. Corporate fixed maturities and CLO securities were primarily depressed because current market spreads are wider than at the respective purchase dates. Certain other corporate fixed maturities were depressed because of their variable-rate coupons and long-dated maturities, and current credit spreads are wider than at their purchase dates. The Company neither has an intention to sell nor does it expect to be required to sell the fixed maturities outlined in the preceding discussion. The decision to record credit impairments on fixed maturities, AFS in the form of an ACL requires us to make qualitative and quantitative estimates of expected future cash
flows. Given the uncertainty about the ultimate impact of the COVID-19 pandemic on issuers of these securities, actual cash flows could ultimately deviate significantly from our expectations resulting in realized losses in future periods.
Mortgage Loans
ACL on Mortgage Loans
The Company reviews mortgage loans on a quarterly basis to estimate the ACL with changes in the ACL recorded in net realized capital gains and losses. Apart from an ACL recorded on individual mortgage loans where the borrower is experiencing financial difficulties, the Company records an ACL on the pool of mortgage loans based on lifetime expected credit losses. The Company utilizes a third-party forecasting model to estimate lifetime expected credit losses at a loan level under multiple economic scenarios. The scenarios use macroeconomic data provided by an internationally recognized economics firm that generates forecasts of varying economic factors such as GDP growth, unemployment and interest rates. The economic scenarios are projected over 10 years. The first two to four years of the 10-year period assume a specific modeled economic scenario (including moderate upside, moderate recession and
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
severe recession scenarios) and then revert to historical long-term assumptions over the remaining period. Using these economic scenarios, the forecasting model projects property-specific operating income and capitalization rates used to estimate the value of a future operating income stream. The operating income and the property valuations derived from capitalization rates are compared to loan payment and principal amounts to create debt service coverage ratios ("DSCRs") and LTVs over the forecast period. The model overlays historical data about mortgage loan performance based on DSCRs and LTVs and projects the probability of default, amount of loss given a default and resulting expected loss through maturity for each loan under each economic scenario. Economic scenarios are probability-weighted based on a statistical analysis of the forecasted economic factors and qualitative analysis. The Company records the change in the ACL on mortgage loans based on the weighted-average expected credit losses across the selected economic scenarios.
In response to significant economic stress experienced as a result of the COVID-19 pandemic, during the first nine months of 2020, the Company increased the weight of both a moderate and severe recession in our estimate of the ACL. As of September 30, 2020, the economic scenarios improved modestly as compared to June 30, 2020, reflecting improvements in GDP growth, unemployment and other economic factors compared with the prior economic scenarios.
The ultimate impact to the Company’s financial statements could vary significantly from our estimates depending on, among other things, the duration and severity of the pandemic, the duration and severity of the economic downturn and the degree to which federal, state and local government actions to mitigate the economic impact of COVID-19 are effective. The impact on our commercial mortgage loan portfolio will also be impacted by borrower behavior in response to the economic stress. Borrowers with lower LTVs have an incentive to continue to make payments of principal and/or interest in order to preserve the equity they have in the underlying commercial real estate properties. As property values decline, borrowers have less incentive to continue to make payments.
When a borrower is experiencing financial difficulty, including when foreclosure is probable, the Company measures an ACL on individual mortgage loans. The ACL is established for any shortfall between the amortized cost of the loan and the fair value of the collateral less costs to sell. Estimates of collectibility from an individual borrower require the use of significant management judgment and include the probability and timing of borrower default and loss severity estimates. In addition, cash flow projections may change based upon new information about the borrower's ability to pay and/or the value of underlying collateral such as changes in projected property value estimates. As of
September 30, 2020, the Company did not have any mortgage loans for which an ACL was established on an individual basis.
There were no mortgage loans held-for-sale as of September 30, 2020 or December 31, 2019. For the three and nine months ended September 30, 2020 and 2019, respectively, the Company did not have any modifications that were accounted for as troubled debt restructurings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL on Mortgage Loans
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
|
2020
|
2019
|
ACL as of beginning of period
|
$
|
43
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
1
|
|
Cumulative effect of accounting changes [1]
|
|
|
|
19
|
|
|
Adjusted beginning ACL
|
43
|
|
—
|
|
|
19
|
|
1
|
|
Current period provision (release)
|
(5)
|
|
—
|
|
|
19
|
|
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ACL as of September 30,
|
$
|
38
|
|
$
|
—
|
|
|
$
|
38
|
|
$
|
—
|
|
[1] Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
The decrease in the allowance for the three months ended September 30, 2020, is the result of improved property valuations in certain industry sectors that have been less impacted by the COVID-19 pandemic and modestly improved economic forecasts as compared to the prior quarter. The increase in the allowance for the nine months ended September 30, 2020, is the result of the COVID-19 pandemic and its impacts on the economic forecasts, as discussed above, as well as lower estimated property values and operating income as compared to the prior year.
The weighted-average LTV ratio of the Company’s mortgage loan portfolio was 55% as of September 30, 2020, while the weighted-average LTV ratio at origination of these loans was 60%. LTV ratios compare the loan amount to the value of the underlying property collateralizing the loan with property values based on appraisals updated no less than annually. Factors considered in estimating property values include, among other things, actual and expected property cash flows, geographic market data and the ratio of the property's net operating income to its value. DSCR compares a property’s net operating income to the borrower’s principal and interest payments and are updated no less than annually through reviews of underlying properties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans LTV & DSCR by Origination Year as of September 30, 2020
|
|
2020
|
2019
|
2018
|
2017
|
2016
|
2015 & Prior
|
Total
|
Loan-to-value
|
Amortized Cost
|
Avg. DSCR
|
Amortized Cost
|
Avg. DSCR
|
Amortized Cost
|
Avg. DSCR
|
Amortized Cost
|
Avg. DSCR
|
Amortized Cost
|
Avg. DSCR
|
Amortized Cost
|
Avg. DSCR
|
Amortized Cost [1]
|
Avg. DSCR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65% - 80%
|
$
|
8
|
|
2.59x
|
$
|
248
|
|
1.81x
|
$
|
248
|
|
1.96x
|
$
|
80
|
|
1.73x
|
$
|
61
|
|
1.99x
|
$
|
165
|
|
1.73x
|
$
|
810
|
|
1.85x
|
Less than 65%
|
539
|
|
2.49x
|
672
|
|
2.70x
|
449
|
|
1.99x
|
426
|
|
1.89x
|
226
|
|
3.01x
|
1,377
|
|
3.07x
|
3,689
|
|
2.65x
|
Total mortgage loans
|
$
|
547
|
|
2.49x
|
$
|
920
|
|
2.46x
|
$
|
697
|
|
1.98x
|
$
|
506
|
|
1.86x
|
$
|
287
|
|
2.79x
|
$
|
1,542
|
|
2.93x
|
$
|
4,499
|
|
2.50x
|
[1] Amortized cost of mortgage loans excludes ACL of $38.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans LTV & DSCR
|
|
|
|
December 31, 2019
|
Loan-to-value
|
|
|
|
Amortized Cost
|
Avg. DSCR
|
|
|
|
|
|
|
65% - 80%
|
|
|
|
$
|
376
|
|
1.53x
|
Less than 65%
|
|
|
|
3,839
|
|
2.56x
|
Total mortgage loans
|
|
|
|
$
|
4,215
|
|
2.46x
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Region
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Amortized Cost [1]
|
Percent of Total
|
|
Amortized Cost
|
Percent of Total
|
East North Central
|
$
|
284
|
|
6.3
|
%
|
|
$
|
270
|
|
6.4
|
%
|
|
|
|
|
|
|
Middle Atlantic
|
292
|
|
6.5
|
%
|
|
319
|
|
7.5
|
%
|
Mountain
|
201
|
|
4.5
|
%
|
|
109
|
|
2.6
|
%
|
New England
|
397
|
|
8.8
|
%
|
|
344
|
|
8.2
|
%
|
Pacific
|
989
|
|
22.0
|
%
|
|
906
|
|
21.5
|
%
|
South Atlantic
|
989
|
|
22.0
|
%
|
|
944
|
|
22.4
|
%
|
West North Central
|
44
|
|
1.0
|
%
|
|
46
|
|
1.1
|
%
|
West South Central
|
473
|
|
10.5
|
%
|
|
439
|
|
10.4
|
%
|
Other [2]
|
830
|
|
18.4
|
%
|
|
838
|
|
19.9
|
%
|
Total mortgage loans
|
$
|
4,499
|
|
100.0
|
%
|
|
$
|
4,215
|
|
100.0
|
%
|
[1] Amortized cost of mortgage loans excludes ACL of $38.
[2]Primarily represents loans collateralized by multiple properties in various regions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Loans by Property Type
|
|
September 30, 2020
|
|
December 31, 2019
|
|
Amortized Cost [1]
|
Percent of Total
|
|
Amortized Cost
|
Percent of Total
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
$
|
1,284
|
|
28.5
|
%
|
|
$
|
1,167
|
|
27.7
|
%
|
|
|
|
|
|
|
Multifamily
|
1,493
|
|
33.2
|
%
|
|
1,313
|
|
31.2
|
%
|
Office
|
755
|
|
16.8
|
%
|
|
723
|
|
17.2
|
%
|
Retail
|
793
|
|
17.6
|
%
|
|
735
|
|
17.4
|
%
|
Single Family
|
134
|
|
3.0
|
%
|
|
137
|
|
3.2
|
%
|
Other
|
40
|
|
0.9
|
%
|
|
140
|
|
3.3
|
%
|
Total mortgage loans
|
$
|
4,499
|
|
100.0
|
%
|
|
$
|
4,215
|
|
100.0
|
%
|
[1] Amortized cost of mortgage loans excludes ACL of $38.
Past-Due Mortgage Loans
Mortgage loans are considered past due if a payment of principal or interest is not received according to the contractual terms of the loan agreement, which typically includes a grace period. As of September 30, 2020 and December 31, 2019, the Company held no mortgage loans considered past due.
Mortgage Servicing
The Company originates, sells and services commercial mortgage loans on behalf of third parties and recognizes servicing fee income over the period that services are performed. As of September 30, 2020, under this program, the Company serviced mortgage loans with a total outstanding principal of $6.7 billion,
of which $3.6 billion was serviced on behalf of third parties and $3.1 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. As of December 31, 2019, the Company serviced mortgage loans with a total outstanding principal balance of $6.4 billion, of which $3.5 billion was serviced on behalf of third parties and $2.9 billion was retained and reported in total investments on the Company's Condensed Consolidated Balance Sheets. Servicing rights are carried at the lower of cost or fair value and were $0 as of September 30, 2020 and December 31, 2019, because servicing fees were market-level fees at origination and remain adequate to compensate the Company for servicing the loans.
Purchased Financial Assets with Credit Deterioration
Purchased financial assets with credit deterioration ("PCD") are purchased financial assets with a “more-than-insignificant” amount of credit deterioration since origination. PCD assets are assessed only at initial acquisition date and for any investments identified, the Company records an allowance at acquisition with a corresponding increase to the amortized cost basis. As of September 30, 2020, the Company held no PCD fixed maturities, AFS or mortgage 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 September 30, 2020 and December 31, 2019, 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 September 30, 2020 and December 31, 2019 was limited to the total carrying value of $1.2 billion and $1.1 billion, respectively, which are included in limited
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
partnerships and other alternative investments in the Company's Condensed Consolidated Balance Sheets. As of September 30, 2020 and December 31, 2019, the Company has outstanding commitments totaling $730 and $851, 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 2019 Form 10-K Annual Report.
In addition, the Company makes passive investments in structured securities issued by VIEs for which the Company is not the manager. These investments are included in ABS, CLOs, CMBS and RMBS and are reported in fixed maturities, AFS, 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, Other Collateral Transactions and Restricted Investments
The Company enters into securities financing transactions as a way to earn additional income or manage liquidity, primarily through securities lending and repurchase agreements.
|
|
|
|
|
|
|
|
|
Securities Lending and Repurchase Agreements
|
|
September 30, 2020
|
December 31, 2019
|
|
Fair Value
|
Fair Value
|
Securities Lending Transactions:
|
|
|
Gross amount of securities on loan
|
$
|
74
|
|
$
|
606
|
|
Gross amount of associated liability for collateral received [1]
|
$
|
76
|
|
$
|
621
|
|
|
|
|
Repurchase agreements:
|
|
|
|
|
|
|
|
|
Gross amount of recognized receivables for reverse repurchase agreements
|
$
|
14
|
|
$
|
15
|
|
[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 $0 and $34 which are excluded from the Company's Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019, respectively.
Securities Lending
Under a securities lending program, the Company lends certain fixed maturities within the corporate, foreign government/government agencies, and municipal sectors as well as equity securities to qualifying third-party borrowers in return for collateral in the form of cash or securities. For domestic and non-domestic loaned securities, respectively, borrowers provide collateral of 102% and 105% of the fair value of the securities lent at the time of the loan. Borrowers will return the securities to the Company for cash or securities collateral at maturity dates generally of 90 days or less. Security collateral on deposit from counterparties in connection with securities lending transactions may not be sold or re-pledged, except in the event of default by the counterparty, and is not reflected on the Company’s 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 parties 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 under specified conditions 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
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
be transferred to the Company under specified conditions and the Company has the right to sell or re-pledge the securities received. The Company accounts for reverse repurchase agreements as collateralized financing. The receivable for reverse repurchase agreements is included within short-term investments in the Company's Condensed Consolidated Balance Sheets.
Other Collateral Transactions
As of September 30, 2020 and December 31, 2019, the Company pledged collateral of $34 and $37, 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 7 - Derivatives of Notes to Condensed Consolidated Financial Statements.
Other Restricted Investments
The Company is required by law to deposit securities with
government agencies in certain states in which it conducts business. As of September 30, 2020 and December 31, 2019, the fair value of securities on deposit was $2.6 billion and $2.3 billion, respectively.
In addition, as of September 30, 2020, the Company held fixed maturities and short-term investments of $639 and $10, respectively, in trust for the benefit of syndicate policyholders, held fixed maturities of $63 in a Lloyd's of London ("Lloyd's") trust account to provide a portion of the required capital, and maintained other investments of $53 primarily consisting of overseas deposits in various countries with Lloyd's to support underwriting activities in those countries. As of December 31, 2019, the Company held fixed maturities and short-term investments of $447 and $189, respectively, in trust and other investments of $38 primarily consisting of overseas deposits in various countries with Lloyd's. Lloyd's is an insurance market-place operating worldwide. Lloyd's does not underwrite risks. The Company accepts risks as the sole member of Lloyd's Syndicate 1221 ("Lloyd's Syndicate").
7. DERIVATIVES
The Company utilizes a variety of OTC, OTC-cleared and exchange traded derivative instruments as a part of its overall risk management strategy as well as to enter into replication transactions. Derivative instruments are used to manage risk associated with interest rate, equity market, credit spread, issuer default, price, and currency exchange rate or volatility. Replication transactions are used as an economical means to synthetically replicate the characteristics and performance of assets that are permissible investments under the Company’s investment policies.
Strategies that Qualify for Hedge Accounting
Some of the Company's derivatives satisfy hedge accounting requirements as outlined in Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements, included in The Hartford’s 2019 Form 10-K Annual Report. Typically, these hedging instruments include interest rate swaps and, to a lesser extent, foreign currency swaps where the terms or expected cash flows of the hedged item closely match the terms of the swap. The interest rate swaps are typically used to manage interest rate duration of certain fixed maturity securities or debt instruments issued. 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 variable-rate fixed maturity securities to fixed rates. The Company has also entered into interest rate swaps to convert the variable interest payments on the 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 2019 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.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 September 30, 2020 and December 31, 2019, the notional amount of interest rate swaps in offsetting relationships was $7.6 billion.
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.
Equity Index Options
From time to time, 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 covered 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Balance Sheet Presentation
|
|
Net Derivatives
|
|
Asset
Derivatives
|
|
Liability Derivatives
|
|
Notional Amount
|
Fair Value
|
|
Fair Value
|
|
Fair Value
|
Hedge Designation/ Derivative Type
|
Sep. 30, 2020
|
Dec. 31, 2019
|
Sep. 30, 2020
|
Dec. 31, 2019
|
|
Sep. 30, 2020
|
Dec. 31, 2019
|
|
Sep. 30, 2020
|
Dec. 31, 2019
|
Cash flow hedges
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
2,340
|
|
$
|
2,040
|
|
$
|
1
|
|
$
|
—
|
|
|
$
|
1
|
|
$
|
1
|
|
|
$
|
—
|
|
$
|
(1)
|
|
Foreign currency swaps
|
269
|
|
270
|
|
6
|
|
(1)
|
|
|
9
|
|
3
|
|
|
(3)
|
|
(4)
|
|
Total cash flow hedges
|
2,609
|
|
2,310
|
|
7
|
|
(1)
|
|
|
10
|
|
4
|
|
|
(3)
|
|
(5)
|
|
Non-qualifying strategies
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps and futures
|
8,334
|
|
9,338
|
|
(79)
|
|
(59)
|
|
|
5
|
|
3
|
|
|
(84)
|
|
(62)
|
|
Foreign exchange contracts
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps and forwards
|
251
|
|
464
|
|
—
|
|
(1)
|
|
|
—
|
|
—
|
|
|
—
|
|
(1)
|
|
Credit contracts
|
|
|
|
|
|
|
|
|
|
|
Credit derivatives that purchase credit protection
|
5
|
|
124
|
|
—
|
|
(3)
|
|
|
—
|
|
—
|
|
|
—
|
|
(3)
|
|
Credit derivatives that assume credit risk [1]
|
600
|
|
500
|
|
12
|
|
13
|
|
|
12
|
|
13
|
|
|
—
|
|
—
|
|
Credit derivatives in offsetting positions
|
222
|
|
29
|
|
—
|
|
—
|
|
|
5
|
|
5
|
|
|
(5)
|
|
(5)
|
|
Equity contracts
|
|
|
|
|
|
|
|
|
|
|
Equity index swaps and options
|
4
|
|
941
|
|
—
|
|
(15)
|
|
|
—
|
|
15
|
|
|
—
|
|
(30)
|
|
Total non-qualifying strategies
|
9,416
|
|
11,396
|
|
(67)
|
|
(65)
|
|
|
22
|
|
36
|
|
|
(89)
|
|
(101)
|
|
Total cash flow hedges and non-qualifying strategies
|
$
|
12,025
|
|
$
|
13,706
|
|
$
|
(60)
|
|
$
|
(66)
|
|
|
$
|
32
|
|
$
|
40
|
|
|
$
|
(92)
|
|
$
|
(106)
|
|
Balance Sheet Location
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, available-for-sale
|
$
|
251
|
|
$
|
244
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
—
|
|
Other investments
|
1,381
|
|
1,277
|
|
12
|
|
12
|
|
|
12
|
|
13
|
|
|
—
|
|
(1)
|
|
Other liabilities
|
10,393
|
|
12,185
|
|
(72)
|
|
(78)
|
|
|
20
|
|
27
|
|
|
(92)
|
|
(105)
|
|
Total derivatives
|
$
|
12,025
|
|
$
|
13,706
|
|
$
|
(60)
|
|
$
|
(66)
|
|
|
$
|
32
|
|
$
|
40
|
|
|
$
|
(92)
|
|
$
|
(106)
|
|
[1]The derivative instruments related to this strategy are held for other investment purposes.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2020
|
|
|
|
|
|
|
Other investments
|
$
|
32
|
|
$
|
9
|
|
$
|
12
|
|
$
|
11
|
|
$
|
1
|
|
$
|
22
|
|
Other liabilities
|
$
|
(92)
|
|
$
|
(4)
|
|
$
|
(72)
|
|
$
|
(16)
|
|
$
|
(81)
|
|
$
|
(7)
|
|
As of December 31, 2019
|
|
|
|
|
|
|
Other investments
|
$
|
40
|
|
$
|
37
|
|
$
|
12
|
|
$
|
(9)
|
|
$
|
1
|
|
$
|
2
|
|
Other liabilities
|
$
|
(106)
|
|
$
|
(23)
|
|
$
|
(78)
|
|
$
|
(5)
|
|
$
|
(73)
|
|
$
|
(10)
|
|
[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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in OCI
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2020
|
2019
|
|
2020
|
2019
|
Interest rate swaps
|
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
36
|
|
$
|
20
|
|
Foreign currency swaps
|
|
|
(12)
|
|
10
|
|
|
12
|
|
14
|
|
Total
|
|
|
$
|
(12)
|
|
$
|
10
|
|
|
$
|
48
|
|
$
|
34
|
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCI into Income
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
|
2020
|
2019
|
|
Net Realized Capital Gain/(Loss)
|
Net Investment Income
|
Interest Expense
|
Net Realized Capital Gain/(Loss)
|
Net Investment Income
|
Interest Expense
|
|
Net Realized Capital Gain/(Loss)
|
Net Investment Income
|
Interest Expense
|
Net Realized Capital Gain/(Loss)
|
Net Investment Income
|
Interest Expense
|
Interest rate swaps
|
$
|
—
|
|
$
|
9
|
|
$
|
(2)
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
|
$
|
—
|
|
$
|
19
|
|
$
|
(4)
|
|
$
|
2
|
|
$
|
1
|
|
$
|
1
|
|
Foreign currency swaps
|
1
|
|
1
|
|
—
|
|
—
|
|
1
|
|
—
|
|
|
1
|
|
3
|
|
—
|
|
—
|
|
2
|
|
—
|
|
Total
|
$
|
1
|
|
$
|
10
|
|
$
|
(2)
|
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
|
$
|
1
|
|
$
|
22
|
|
$
|
(4)
|
|
$
|
2
|
|
$
|
3
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total amounts presented on the Condensed Consolidated Statement of Operations
|
$
|
6
|
|
$
|
492
|
|
$
|
58
|
|
$
|
89
|
|
$
|
490
|
|
$
|
67
|
|
|
$
|
(116)
|
|
$
|
1,290
|
|
$
|
179
|
|
$
|
332
|
|
$
|
1,448
|
|
$
|
194
|
|
As of September 30, 2020, the Company had $35 of before tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months. 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 and nine months ended September 30, 2020 and 2019, 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 September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
|
2020
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
|
|
|
|
Foreign currency swaps and forwards
|
$
|
—
|
|
$
|
2
|
|
|
$
|
3
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts
|
|
|
|
|
|
Interest rate swaps, swaptions, and futures
|
—
|
|
(5)
|
|
|
21
|
|
(20)
|
|
Credit contracts
|
|
|
|
|
|
Credit derivatives that purchase credit protection
|
(1)
|
|
(1)
|
|
|
3
|
|
(1)
|
|
Credit derivatives that assume credit risk
|
(1)
|
|
—
|
|
|
(5)
|
|
27
|
|
Equity contracts
|
|
|
|
|
|
Equity index swaps and options
|
—
|
|
(1)
|
|
|
75
|
|
(5)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total [1]
|
$
|
(2)
|
|
$
|
(5)
|
|
|
$
|
97
|
|
$
|
3
|
|
[1]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 5 - Fair Value Measurements of Notes to 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 and CMBS 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 September 30, 2020
|
Single name credit default swaps
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
$
|
100
|
|
$
|
2
|
|
5 years
|
Corporate Credit
|
A-
|
$
|
—
|
|
$
|
—
|
|
Basket credit default swaps [4]
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
500
|
|
10
|
|
5 years
|
Corporate Credit
|
BBB+
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
100
|
|
—
|
|
8 years
|
CMBS Credit
|
AAA
|
100
|
|
—
|
|
Below investment grade risk exposure
|
11
|
|
(4)
|
|
Less than 1 year
|
CMBS Credit
|
CCC
|
11
|
|
4
|
|
Total [5]
|
$
|
711
|
|
$
|
8
|
|
|
|
|
$
|
111
|
|
$
|
4
|
|
As of December 31, 2019
|
Single name credit default swaps
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
$
|
100
|
|
$
|
3
|
|
5 years
|
Corporate Credit
|
A-
|
$
|
—
|
|
$
|
—
|
|
Basket credit default swaps [4]
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
400
|
|
10
|
|
5 years
|
Corporate Credit
|
BBB+
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Investment grade risk exposure
|
1
|
|
—
|
|
Less than 1 year
|
CMBS Credit
|
A
|
1
|
|
—
|
|
Below investment grade risk exposure
|
14
|
|
(5)
|
|
Less than 1 year
|
CMBS Credit
|
CCC-
|
14
|
|
5
|
|
Total [5]
|
$
|
515
|
|
$
|
8
|
|
|
|
|
$
|
15
|
|
$
|
5
|
|
[1]The average credit ratings are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P and Fitch. If no rating is available from a rating agency, then an internally developed rating is used.
[2]Notional amount is equal to the maximum potential future loss amount. These derivatives are governed by agreements and applicable law, which include collateral posting requirements. There is no additional specific collateral related to these contracts or recourse provisions included in the contracts to offset losses.
[3]The Company has entered into offsetting credit default swaps to terminate certain existing credit default swaps, thereby offsetting the future changes in value of, or losses paid related to, the original swap.
[4]Comprised of swaps of standard market indices of diversified portfolios of corporate and CMBS issuers referenced through credit default swaps. These swaps are subsequently valued based upon the observable standard market index.
[5]Excludes investments that contain an embedded credit derivative for which the Company has elected the fair value option. For further discussion, see the Fair Value Option section in Note 5 - Fair Value Measurements..
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 September 30, 2020, the Company has not pledged cash collateral. As of December 31, 2019, the Company pledged cash collateral with a fair value of less than $1 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 September 30, 2020 and December 31, 2019, the Company also pledged securities collateral associated with derivative instruments with a fair value of $88 and $78, respectively, which have been included in fixed maturities on the Company's Condensed Consolidated Balance Sheets. The counterparties generally have the right to sell or re-pledge these securities.
In addition, as of September 30, 2020 and December 31, 2019, the Company has pledged initial margin of securities related to
OTC-cleared and exchange traded derivatives with a fair value of $80 and $88, respectively, which are included within fixed maturities on the Company's Condensed Consolidated Balance Sheets.
As of September 30, 2020 and December 31, 2019, the Company accepted cash collateral associated with derivative instruments of $23 and $16, 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 September 30, 2020 and December 31, 2019, with a fair value of $1 as of both dates, which the Company has the right to sell or repledge. As of September 30, 2020 and December 31, 2019, the Company had no repledged securities and no securities held as collateral have been sold. Non-cash collateral accepted was held in separate custodial accounts and was not included in the Company’s Condensed Consolidated Balance Sheets.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. PREMIUMS RECEIVABLE AND AGENTS' BALANCES
|
|
|
|
|
|
Premiums Receivable and Agents' Balances
|
|
As of September 30, 2020
|
|
|
|
|
|
|
|
|
Premiums receivable, excluding receivables for losses within a deductible and retrospectively-rated policy premiums
|
$
|
4,027
|
|
Receivables for loss within a deductible and retrospectively-rated policy premiums, by credit quality:
|
|
AAA
|
—
|
|
AA
|
139
|
|
A
|
52
|
|
BBB
|
226
|
|
BB
|
103
|
|
Below BB
|
77
|
|
Total receivables for losses within a deductible and retrospectively-rated policy premiums
|
597
|
|
|
|
Total Premiums Receivable and Agents' Balances, Gross
|
4,624
|
|
ACL
|
(174)
|
|
Total Premiums Receivable and Agents' Balances, Net of ACL
|
$
|
4,450
|
|
ACL on Premiums Receivable and Agents' Balances
Premium receivable and agents' balances, excluding receivables for losses within a deductible and retrospectively-rated policy premiums, are primarily comprised of premiums due from policyholders, which are typically collectible within one year or less. The Company had an immaterial amount of receivables with a due date of more than one year that are past-due. Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods.
For these balances, the ACL is estimated based on an aging of receivables and recent historical credit loss and collection experience, adjusted for current economic conditions and reasonable and supportable forecasts, when appropriate. In response to significant economic stress experienced as a result of the COVID-19 pandemic, during the nine months ended September 30, 2020, the Company increased the expected loss factors used to estimate the ACL based on collections experience during past moderate and severe recessions as well as experience during periods when we provided policyholders additional time to make premiums payments. During the three months ended September 30, 2020, the ACL on premiums receivable decreased as the provision required on premiums written in the quarter was more than offset by write-offs and a reduction in the provision reflecting improved collection experience relative to prior assumptions in certain lines of business.
A portion of the Company's Commercial Lines business is written with large deductibles or under retrospectively-rated plans.
Under some commercial insurance contracts with a large deductible, the Company is obligated to pay the claimant the full amount of the claim and the Company is subsequently reimbursed by the policyholder for the deductible amount. As such, the Company is subject to credit risk until reimbursement is made. Retrospectively-rated policies are utilized primarily for workers' compensation coverage, whereby the ultimate premium is adjusted based on actual losses incurred. Although the premium adjustment feature of a retrospectively-rated policy substantially reduces insurance risk for the Company, it presents credit risk to the Company. The Company’s results of operations could be adversely affected if a significant portion of such policyholders failed to reimburse the Company for the deductible amount or the amount of additional premium owed under retrospectively-rated policies. The Company manages these credit risks through credit analysis, collateral requirements, and oversight.
The ACL for receivables for loss within a deductible and retrospectively-rated policy premiums is estimated as the amount of the receivable exposed to loss multiplied by estimated factors for probability of default and the amount of loss given a default. The probability of default is assigned based on each policyholder's credit rating, or a rating is estimated if no external rating is available. Credit ratings are reviewed and updated at least annually. The exposure amount is estimated net of collateral and other credit enhancement, considering the nature of the collateral, potential future changes in collateral values, and historical loss information for the type of collateral obtained. The probability of default factors are historical corporate defaults for receivables with similar durations estimated through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors through multiple economic cycles. The Company's evaluation of the required ACL for receivables for loss within a deductible and retrospectively-rated policy premiums considers the current economic environment as well as the probability-weighted macroeconomic scenarios similar to the approach used for estimating the ACL for mortgage loans. See Note 6 - Investments. In response to significant economic stress experienced as a result of the COVID-19 pandemic during the first nine months of 2020, the Company increased the weight of both a moderate and severe recession scenario in our estimate of the ACL for loss within a deductible and retrospectively-rated policy premiums. During the three months ended September 30, 2020, the economic scenarios improved modestly as compared to June 30, 2020, reflecting improvements in GDP growth, unemployment and other economic factors compared with the prior economic scenarios.
The ultimate impact to the Company’s financial statements from the COVID-19 pandemic could vary significantly from our estimates depending on the duration and severity of the pandemic, the duration and severity of the economic downturn and the degree to which federal, state and local government actions to mitigate the economic impact of COVID-19 are effective.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rollforward of ACL on Premiums Receivable and Agents' Balances
|
|
Three Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2020
|
|
Premiums Receivable and Agents' Balances, Excluding Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
|
Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
|
Total
|
|
Premiums Receivable and Agents' Balances, Excluding Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
|
Receivables for Loss within a Deductible and Retrospectively-Rated Policy Premiums
|
Total
|
Beginning ACL
|
$
|
139
|
|
$
|
44
|
|
$
|
183
|
|
|
$
|
85
|
|
$
|
60
|
|
$
|
145
|
|
Cumulative effect of accounting change [1]
|
—
|
|
—
|
|
—
|
|
|
(2)
|
|
(21)
|
|
(23)
|
|
Adjusted beginning ACL
|
139
|
|
44
|
|
183
|
|
|
83
|
|
39
|
|
122
|
|
Current period provision (release)
|
2
|
|
—
|
|
2
|
|
|
78
|
|
5
|
|
83
|
|
|
|
|
|
|
|
|
|
Current period gross write-offs
|
(12)
|
|
—
|
|
(12)
|
|
|
(35)
|
|
—
|
|
(35)
|
|
Current period gross recoveries
|
1
|
|
—
|
|
1
|
|
|
4
|
|
—
|
|
4
|
|
Ending ACL
|
$
|
130
|
|
$
|
44
|
|
$
|
174
|
|
|
$
|
130
|
|
$
|
44
|
|
$
|
174
|
|
[1]Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. The adjusted beginning ACL was based on the Company's historical loss information adjusted for current conditions and the forecasted economic environment at the time the guidance was adopted. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
The Company records total credit loss expenses related to premiums receivable in insurance operating costs and other expenses. Write-offs of premiums receivable and agents'
balances and any related ACL are recorded in the period in which the balance is deemed uncollectible.
9. REINSURANCE
The Company cedes insurance risk to reinsurers to enable the Company to manage capital and risk exposure. Such arrangements do not relieve the Company of its primary liability to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company's procedures include carefully selecting its reinsurers, structuring agreements to provide collateral funds where necessary, and regularly monitoring the financial condition and ratings of its reinsurers.
Reinsurance Recoverables
Reinsurance recoverables include balances due from reinsurance companies and are presented net of an allowance for uncollectible reinsurance. Reinsurance recoverables include an estimate of the amount of gross losses and loss adjustment
expense reserves that may be ceded under the terms of the reinsurance agreements, including incurred but not reported unpaid losses. The Company’s estimate of losses and loss adjustment expense reserves ceded to reinsurers is based on assumptions that are consistent with those used in establishing the gross reserves for amounts the Company owes to its claimants. The Company estimates its ceded reinsurance recoverables based on the terms of any applicable facultative and treaty reinsurance, including an estimate of how incurred but not reported losses will ultimately be ceded under reinsurance agreements. Accordingly, the Company’s estimate of reinsurance recoverables is subject to similar risks and uncertainties as the estimate of the gross reserve for unpaid losses and loss adjustment expenses.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance Recoverables by Credit Quality Indicator as of September 30, 2020
|
|
Property and Casualty
|
Group Benefits
|
Corporate
|
Total
|
A.M. Best Financial Strength Rating
|
|
|
|
|
A++
|
$
|
1,301
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,301
|
|
A+
|
1,754
|
|
234
|
|
309
|
|
2,297
|
|
A
|
571
|
|
—
|
|
—
|
|
571
|
|
A-
|
31
|
|
9
|
|
—
|
|
40
|
|
B++
|
673
|
|
—
|
|
3
|
|
676
|
|
Below B++
|
23
|
|
1
|
|
—
|
|
24
|
|
Total Rated by A.M. Best
|
4,353
|
|
244
|
|
312
|
|
4,909
|
|
Mandatory (Assigned) and Voluntary Risk Pools
|
263
|
|
—
|
|
—
|
|
263
|
|
Captives
|
319
|
|
—
|
|
—
|
|
319
|
|
Other not rated companies
|
279
|
|
7
|
|
—
|
|
286
|
|
Gross Reinsurance Recoverables
|
5,214
|
|
251
|
|
312
|
|
5,777
|
|
Allowance for uncollectible reinsurance
|
(106)
|
|
(1)
|
|
(2)
|
|
(109)
|
|
Net Reinsurance Recoverables
|
$
|
5,108
|
|
$
|
250
|
|
$
|
310
|
|
$
|
5,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had no reinsurance recoverables with a due date of one year or more that are past-due. Balances are considered past due when amounts that have been billed are not collected within contractually stipulated time periods, generally 30, 60 or 90 days.
To manage reinsurer credit risk, a reinsurance security review committee evaluates the credit standing, financial performance, management and operational quality of each potential reinsurer. In placing reinsurance, the Company considers the nature of the risk reinsured, including the expected liability payout duration, and establishes limits tiered by reinsurer credit rating.
Where its contracts permit, the Company secures future claim obligations with various forms of collateral or other credit enhancement, including irrevocable letters of credit, secured trusts, funds held accounts and group wide offsets. As part of its reinsurance recoverable review, the Company analyzes recent developments in commutation activity between reinsurers and cedants, recent trends in arbitration and litigation outcomes in disputes between cedants and reinsurers and the overall credit quality of the Company’s reinsurers.
The Company periodically evaluates the recoverability of its reinsurance recoverable assets and establishes an allowance for uncollectible reinsurance. The allowance for uncollectible reinsurance reflects management’s best estimate of reinsurance cessions that may be uncollectible in the future due to reinsurers’ unwillingness or inability to pay. The allowance for uncollectible reinsurance comprises an ACL and an allowance for disputed balances. Based on this analysis, the Company may adjust the allowance for uncollectible reinsurance or charge off reinsurer balances that are determined to be uncollectible.
Due to the inherent uncertainties as to collection and the length of time before reinsurance recoverables become due, it is possible that future adjustments to the Company’s reinsurance recoverables, net of the allowance, could be required, which could have a material adverse effect on the Company’s consolidated results of operations or cash flows in a particular quarter or annual period.
The ACL is estimated as the amount of reinsurance recoverables exposed to loss multiplied by estimated factors for the probability
of default and the amount of loss given a default. The probability of default is assigned based on each reinsurer's credit rating, or a rating is estimated if no external rating is available. Credit ratings are reviewed and updated at least annually. The probability of default factors are historical insurer and reinsurer defaults for liabilities with similar durations to the reinsured liabilities as estimated through multiple economic cycles. Credit ratings are forward-looking and consider a variety of economic outcomes. The loss given default factors are based on a study of historical recovery rates for general creditors of corporations through multiple economic cycles or, in the case of purchased annuities funding structured settlements accounted for as reinsurance, historical recovery rates for annuity contract holders.
As shown in the table above, a portion of the total gross reinsurance recoverable balance relates to the Company’s participation in various mandatory (assigned) and voluntary risk pools. Reinsurance recoverables due from pools are backed by the financial position of all insurance companies participating in the pools and the credit backing the reinsurance recoverable is not limited to the financial strength of each pool. The mandatory pools generally are funded through policy assessments or surcharges and if any participant in the pool defaults, remaining liabilities are apportioned among the other members.
The Company's evaluation of the required ACL for reinsurance recoverables considers the current economic environment as well as macroeconomic scenarios similar to the approach used to estimate the ACL for mortgage loans. See Note 6 - Investments. Insurance companies, including reinsurers, are regulated and hold risk-based capital to mitigate the risk of loss due to economic factors and other risks. Non-U.S. reinsurers are either subject to a capital regime substantively equivalent to domestic insurers or we hold collateral to support collection of reinsurance recoverables. As a result, there is limited history of losses from insurer defaults. In response to significant economic stress experienced as a result of the COVID-19 pandemic, during the first nine months of 2020, the Company increased the weight of both a moderate and severe recession in our estimate of the ACL. While GDP growth, unemployment and other economic factors improved modestly in the third quarter of 2020 compared with prior economic scenarios, this improvement did not have a
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
significant impact on our expected credit losses on reinsurance recoverables. The Company expects the impact of the COVID-19 pandemic to reinsurers to be somewhat mitigated by their regulated capital and liquidity positions. The ultimate impact to the Company's financial statements could vary significantly from our estimates depending on the duration and severity of the
pandemic, the duration and severity of the economic downturn and the degree to which federal, state and local government actions to mitigate the economic impact of COVID-19 are effective. The following table presents the activity within the Company's ACL for reinsurance recoverables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Uncollectible Reinsurance
|
|
Three Months Ended September 30, 2020
|
|
Nine Months Ended September 30, 2020
|
|
Property and Casualty
|
Group Benefits
|
Corporate
|
Total
|
|
Property and Casualty
|
Group Benefits
|
Corporate
|
Total
|
Beginning allowance for uncollectible reinsurance
|
$
|
108
|
|
$
|
1
|
|
$
|
2
|
|
$
|
111
|
|
|
$
|
114
|
|
$
|
—
|
|
$
|
—
|
|
$
|
114
|
|
Beginning allowance for disputed amounts
|
57
|
|
—
|
|
—
|
|
57
|
|
|
66
|
|
—
|
|
—
|
|
66
|
|
Beginning ACL
|
51
|
|
1
|
|
2
|
|
54
|
|
|
48
|
|
—
|
|
—
|
|
48
|
|
Cumulative effect of accounting change [1]
|
—
|
|
—
|
|
—
|
|
—
|
|
|
—
|
|
1
|
|
1
|
|
2
|
|
Adjusted beginning ACL
|
51
|
|
1
|
|
2
|
|
54
|
|
|
48
|
|
1
|
|
1
|
|
50
|
|
Current period provision (release)
|
1
|
|
—
|
|
—
|
|
1
|
|
|
3
|
|
—
|
|
1
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current period gross recoveries
|
—
|
|
—
|
|
—
|
|
—
|
|
|
1
|
|
—
|
|
—
|
|
1
|
|
Ending ACL
|
52
|
|
1
|
|
2
|
|
55
|
|
|
52
|
|
1
|
|
2
|
|
55
|
|
Ending allowance for disputed amounts
|
54
|
|
—
|
|
—
|
|
54
|
|
|
54
|
|
—
|
|
—
|
|
54
|
|
Ending allowance for uncollectible reinsurance
|
$
|
106
|
|
$
|
1
|
|
$
|
2
|
|
$
|
109
|
|
|
$
|
106
|
|
$
|
1
|
|
$
|
2
|
|
$
|
109
|
|
[1] Represents the adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies.
The Company records credit loss expenses related to reinsurance recoverables in benefits losses and loss adjustment expenses. Write-offs of reinsurance recoverables and any related ACL are recorded in the period in which the balance is deemed uncollectible. Expected recoveries are included in the estimate of the ACL. There were no write-offs for the three and nine months ended September 30, 2020, respectively.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. 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 nine months ended September 30,
|
|
2020
|
2019
|
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
28,261
|
|
$
|
24,584
|
|
|
Reinsurance and other recoverables
|
5,275
|
|
4,232
|
|
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
22,986
|
|
20,352
|
|
|
Navigators Group acquisition
|
—
|
|
2,001
|
|
|
Provision for unpaid losses and loss adjustment expenses
|
|
|
|
Current accident year
|
5,992
|
|
5,448
|
|
|
Prior accident year development [1]
|
(320)
|
|
(23)
|
|
|
Total provision for unpaid losses and loss adjustment expenses
|
5,672
|
|
5,425
|
|
|
Change in deferred gain on retroactive reinsurance included in other liabilities [1]
|
(97)
|
|
—
|
|
|
Payments
|
|
|
|
Current accident year
|
(1,447)
|
|
(1,549)
|
|
|
Prior accident years
|
(3,338)
|
|
(3,403)
|
|
|
Total payments
|
(4,785)
|
|
(4,952)
|
|
|
Net reserves transferred to liabilities held for sale
|
(43)
|
|
—
|
|
|
Foreign currency adjustment
|
(3)
|
|
(12)
|
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
23,730
|
|
22,814
|
|
|
Reinsurance and other recoverables
|
5,421
|
|
5,083
|
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
29,151
|
|
$
|
27,897
|
|
|
[1] Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators adverse development cover ('Navigators ADC') which, under retroactive reinsurance accounting, is deferred and is recognized over the period the ceded losses are recovered in cash from National Indemnity Company ("NICO"). For additional information regarding the Navigators ADC agreement, please refer to Adverse Development Covers discussion below.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
Unfavorable (Favorable) Prior Accident Year Development
|
|
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
|
|
2020
|
2019
|
Workers’ compensation
|
|
|
$
|
(72)
|
|
$
|
(90)
|
|
|
|
|
|
|
Workers’ compensation discount accretion
|
|
|
27
|
|
25
|
|
General liability
|
|
|
112
|
|
62
|
|
Marine
|
|
|
1
|
|
8
|
|
Package business
|
|
|
(24)
|
|
(32)
|
|
Commercial property
|
|
|
(6)
|
|
(16)
|
|
Professional liability
|
|
|
(16)
|
|
32
|
|
Bond
|
|
|
(10)
|
|
(2)
|
|
Assumed reinsurance
|
|
|
(7)
|
|
3
|
|
Automobile liability - Commercial Lines
|
|
|
27
|
|
27
|
|
Automobile liability - Personal Lines
|
|
|
(53)
|
|
(28)
|
|
Homeowners
|
|
|
3
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Catastrophes
|
|
|
(413)
|
|
(27)
|
|
Uncollectible reinsurance
|
|
|
(8)
|
|
—
|
|
Other reserve re-estimates, net
|
|
|
22
|
|
15
|
|
Prior accident year development before change in deferred gain
|
|
|
(417)
|
|
(23)
|
|
Change in deferred gain on retroactive reinsurance included in other liabilities [1]
|
|
|
97
|
|
—
|
|
Total prior accident year development
|
|
|
$
|
(320)
|
|
$
|
(23)
|
|
[1] The change in deferred gain for the nine months ended September 30, 2020 primarily included increased reserves for marine, professional liability, general liability, assumed reinsurance and prior accident year catastrophes.
Re-estimates of prior accident year reserves for the nine months ended September 30, 2020
Workers’ compensation reserves were reduced on national account business within middle & large commercial, driven by lower than previously estimated claim severity for the 2014 and prior accident years and were reduced in small commercial due to lower than expected claim severity for the 2013 to 2018 accident years.
General liability reserves were increased in part due to guaranteed cost construction business for accident years 2014 to 2019 as incurred losses are developing higher than previously expected for premises and operations claims and product liability claims, partly due to a change in industry mix and a heavier concentration of losses in California than initially assumed, as well as increased reserves for middle market and complex liability claims for accident year 2018 largely due to higher than expected severity. Also contributing were increases in reserves on primary layer construction account business within global specialty, mainly related to accident years 2015-2017, which is included as a component of the change in deferred gain under retroactive reinsurance in the above table.
In addition, the Company recorded an increase in reserves for sexual molestation and abuse claims related to cases brought against religious and other institutions that were insureds of the
Company which was partly offset by reserve decreases for other mass torts and extra contractual liability claims.
The Company increased reserves for sexual molestation claims by $129 considering the impact of recent bankruptcy filings and an expected increase in claim incidence largely driven by legislation passed in a number of states that provides an opportunity for claimants to file claims for a period of time despite the fact that the original statute of limitations had expired.
Marine reserves were increased principally due to an increase in domestic marine liability, mostly in accident years 2017 and 2018 due to a higher number of large losses. The increase in marine reserves is included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Package business reserves decreased for accident years 2014 to 2017 largely due to lower estimates of allocated loss adjustment expenses.
Commercial property reserves were decreased for accident year 2019 due to favorable developments on marine and middle market property claims.
Professional liability reserves were decreased primarily due to lower estimated severity on non-security class action D&O claims and fewer than expected E&O claims with financial institutions for the 2011 to 2018 accident years, partially offset by an increase in D&O reserves for the 2019 accident year driven by higher frequency of class action lawsuits and an increase in large Syndicate D&O losses for the 2016 and 2017 accident years. These Syndicate reserve increases within Global Specialty are included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Assumed reinsurance reserves were increased for accident year 2018 mostly due to higher accident and health reserve estimates for medical professionals on assumed casualty business. These reserve increases are included as a component of the change in deferred gain under retroactive reinsurance in the above table.
Automobile liability reserves were decreased in Personal Lines principally due to lower than previously expected AARP Direct automobile liability claim severity for the 2017 and 2018 accident years. Automobile liability reserves were increased in Commercial Lines primarily due to higher than expected large losses on national accounts in the first quarter of 2020 related to accident years 2015 to 2017 and due to large losses within middle & large commercial, primarily within the 2018 and 2019 accident years.
Catastrophes reserves were reduced, primarily due to a reduction in estimated reserves for 2017 and 2018 California wildfires and a reduction in estimated catastrophes for wind and hail events in the 2018 and 2019 accident years, partially offset by an increase in reserves for 2019 typhoons Hagibis and Faxai in Asia. The reduction in reserves for the 2017 and 2018 wildfires was largely due to recognizing a $289 subrogation benefit in the second quarter of 2020 from PG&E Corporation and Pacific Gas and Electric Company (together, “PG&E”).
In December, 2019, the judge overseeing the bankruptcy of PG&E approved an $11 billion settlement of insurance subrogation claims to resolve all such claims arising from the 2017 Northern California wildfires and 2018 Camp wildfire. That settlement was contingent upon, among other things, the judge
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
entering an order confirming PG&E’s chapter 11 bankruptcy plan (“PG&E Plan”) incorporating the settlement agreement. On June 20, 2020, the bankruptcy court judge approved the PG&E Plan and PG&E subsequently transferred the $11 billion settlement amount to a trust designed to allocate and distribute the settlement among subrogation holders, including certain of the Company’s insurance subsidiaries. In the second quarter of 2020, the Company recorded an estimated $289 subrogation benefit though the ultimate amount it collects will depend on how the Company’s ultimate paid claims subject to subrogation compare to other insurers’ ultimate paid claims subject to subrogation.
Re-estimates of prior accident year reserves for the nine months ended September 30, 2019
Workers’ compensation reserves were reduced, principally in small commercial driven by lower than previously estimated claim severity for the 2014 through 2017 accident years and, to a lesser extent, in national accounts due to lower estimated claim severity, primarily for accident years 2013 and prior.
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, reserve increases in middle and large commercial for accident years 2015 to 2018 due to higher estimated severity, as well as increased estimated severity on the acquired Navigators book of business related to U.S. construction, premises liability, products liability and excess casualty, mostly related to accident years 2014 to 2018. In addition, an increase in reserves for mass torts was offset by a decrease in reserves for extra contractual liability claims.
Package business reserves were decreased, primarily due to favorable emergence on property claims related to accident years 2016 through 2018 and due to favorable development of allocated loss adjustment expenses on general liability claims for 2017 and prior accident years.
Commercial property reserves were decreased, principally due to favorable emergence of reported losses, including on the acquired Navigators Group book of business related to offshore energy in accident years 2017 to 2018 and construction engineering across accident years 2015 to 2018.
Professional liability reserves were increased, primarily due to large loss activity, including wrongful termination and discrimination claims, in accident years 2017 and 2018 and increased estimated frequency and severity of directors’ and officers’ reserves on the Navigators Group book of business, principally for the 2014 to 2018 accident years.
Marine reserves were increased, principally related to pollution exposure from the 1980s and 1990s related to the Navigators Group book of business.
Automobile liability reserves were decreased in Personal Lines due to the emergence of lower estimated severity in automobile liability for accident year 2017 and were increased in Commercial Lines due to higher estimated severity on national accounts, principally in accident years 2017 and 2018.
Catastrophes reserves were reduced, primarily as a result of lower estimated net losses from 2017 hurricanes Harvey and Irma.
Adverse Development Covers
The Company has an adverse development cover reinsurance agreement with NICO, a subsidiary of Berkshire Hathaway Inc., to reinsure loss development after 2016 on substantially all of the Company’s asbestos and environmental reserves (the “A&E ADC”). Under the A&E ADC, the Company paid a reinsurance premium of $650 for NICO to assume adverse net loss reserve development up to $1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $1.7 billion including reserves for A&E exposure for accident years prior to 1986 that are reported in Property & Casualty Other Operations ("Run-off A&E") and reserves for A&E exposure for accident years 1986 and subsequent from policies underwritten prior to 2016 that are reported in ongoing Commercial Lines and Personal Lines. The $650 reinsurance premium was placed into a collateral trust account as security for NICO’s claim payment obligations to the Company. The Company has retained the risk of collection on amounts due from other third-party reinsurers and continues to be responsible for claims handling and other administrative services, subject to certain conditions. The A&E ADC covers substantially all the Company’s A&E reserve development up to the reinsurance limit.
Under retroactive reinsurance accounting, net adverse A&E reserve development after December 31, 2016 will result in an offsetting reinsurance recoverable up to the $1.5 billion limit. Cumulative ceded losses up to the $650 reinsurance premium paid are recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the $650 reinsurance premium paid would result in a deferred gain. The deferred gain would be recognized over the claim settlement period in the proportion of the amount of cumulative ceded losses collected from the reinsurer to the estimated ultimate reinsurance recoveries. Consequently, until periods when the deferred gain is recognized as a benefit to earnings, cumulative adverse development of asbestos and environmental claims after December 31, 2016 in excess of $650 may result in significant charges against earnings. As of September 30, 2020, the Company has incurred $640 in cumulative adverse development on asbestos and environmental reserves that have been ceded under the A&E ADC treaty with NICO with $860 of available limit remaining under the A&E ADC.
Immediately after closing on the acquisition of Navigators Group, effective May 23, 2019, the Company purchased the Navigators ADC, an aggregate excess of loss reinsurance agreement covering adverse reserve development, from NICO, on behalf of Navigators Insurers. Under the Navigators ADC, the Navigators Insurers paid NICO a reinsurance premium of $91 in exchange for reinsurance coverage of $300 of adverse net loss reserve development that attaches $100 above the Navigators Insurers' existing net loss and allocated loss adjustment reserves as of December 31, 2018 subject to the treaty of $1.816 billion for accidents and losses prior to December 31, 2018.
As of September 30, 2020, the Company has recorded a reinsurance recoverable under the Navigators ADC of $204, as estimated cumulative loss development on the 2018 and prior accident year reserves of $304 exceed the $100 deductible. While the reinsurance recoverable is $204, the Company has also
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
recorded a $113 cumulative deferred gain within other liabilities since, under retroactive reinsurance accounting, ceded losses in excess of the $91 of ceded premium paid must be recognized as a
deferred gain. As the Company has ceded $204 of the $300 available limit, there is $96 of remaining limit available as of September 30, 2020.
Group Life, Disability and Accident Products
Rollforward of Liabilities for Unpaid Losses and Loss Adjustment Expenses
|
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
2020
|
2019
|
Beginning liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
8,256
|
|
$
|
8,445
|
|
Reinsurance recoverables [1]
|
246
|
|
239
|
|
Beginning liabilities for unpaid losses and loss adjustment expenses, net
|
8,010
|
|
8,206
|
|
|
|
|
Provision for unpaid losses and loss adjustment expenses
|
|
|
Current incurral year
|
3,339
|
|
3,351
|
|
Prior year's discount accretion
|
160
|
|
169
|
|
Prior incurral year development [2]
|
(362)
|
|
(321)
|
|
Total provision for unpaid losses and loss adjustment expenses [3]
|
3,137
|
|
3,199
|
|
Payments
|
|
|
Current incurral year
|
(1,553)
|
|
(1,603)
|
|
Prior incurral years
|
(1,681)
|
|
(1,743)
|
|
Total payments
|
(3,234)
|
|
(3,346)
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, net
|
7,913
|
|
8,059
|
|
Reinsurance recoverables
|
242
|
|
231
|
|
Ending liabilities for unpaid losses and loss adjustment expenses, gross
|
$
|
8,155
|
|
$
|
8,290
|
|
[1]Reflects a cumulative effect adjustment of $(1) representing an adjustment to the ACL recorded on adoption of accounting guidance for credit losses on January 1, 2020. See Note 1 - Basis of Presentation and Significant Accounting Policies for further information.
[2]Prior incurral year development represents the change in estimated ultimate incurred losses and loss adjustment expenses for prior incurral years on a discounted basis.
[3]Includes unallocated loss adjustment expenses of $133 and $130 for the nine months ended September 30, 2020 and 2019, 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 nine months ended September 30, 2020
Group disability- Prior period reserve estimates decreased by approximately $293 largely driven by group long-term disability lower claim incidence and higher recoveries on prior incurral year claims, and a refund on the New York Paid Family Leave program.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $50 largely driven by lower-than-previously expected claim incidence in group life premium waiver.
Supplemental Accident & Health- Prior period reserve estimates decreased by approximately $19 driven by lower-than-expected emergence of prior year claims, especially for voluntary critical Illness and voluntary accident products.
Re-estimates of prior incurral years reserves for the nine months ended September 30, 2019
Group disability- Prior period reserve estimates decreased by approximately $265 largely driven by group long-term disability claim recoveries higher than prior reserve assumptions and claim incidence lower than prior assumptions. Long-term disability ("LTD") reserve assumptions were also updated based partially on these more recent favorable trends. New York Paid Family Leave also experienced favorable claim emergence and refund compared to year-end estimates.
Group life and accident (including group life premium waiver)- Prior period reserve estimates decreased by approximately $45 largely driven by lower-than-previously expected claim incidence in group life premium waiver.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. RESERVE FOR FUTURE POLICY BENEFITS
|
|
|
|
|
|
Changes in Reserves for Future Policy Benefits[1]
|
Liability balance, as of January 1, 2020
|
$
|
635
|
|
Incurred
|
74
|
|
Paid
|
(67)
|
|
Change in unrealized investment gains and losses
|
8
|
|
Liability balance, as of September 30, 2020
|
$
|
650
|
|
Reinsurance recoverable asset, as of January 1, 2020
|
$
|
31
|
|
Incurred
|
(2)
|
|
Paid
|
—
|
|
Reinsurance recoverable asset, as of September 30, 2020
|
$
|
29
|
|
|
|
|
|
|
|
Liability balance, as of January 1, 2019
|
$
|
642
|
|
Incurred
|
63
|
|
Paid
|
(77)
|
|
Change in unrealized investment gains and losses
|
17
|
|
Liability balance, as of September 30, 2019
|
$
|
645
|
|
Reinsurance recoverable asset, as of January 1, 2019
|
$
|
27
|
|
Incurred
|
2
|
|
Paid
|
—
|
|
Reinsurance recoverable asset, as of September 30, 2019
|
$
|
29
|
|
[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.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. DEBT
Senior Notes
On March 30, 2020, The Hartford repaid at maturity the $500 principal amount of its 5.5% senior notes.
Lloyd's Letter of Credit Facilities
As a result of the acquisition of Navigators Group, The Hartford has two letter of credit facility agreements: the Club Facility and the Bilateral Facility, which are used to provide a portion of the
capital requirements at Lloyd's. As of September 30, 2020, uncollateralized letters of credit with an aggregate face amount of $165 and £60 million were outstanding under the Club Facility and £18 million was outstanding under the Bilateral Facility. As of September 30, 2020, the Bilateral Facility has unused capacity of $2 for issuance of additional letters of credit. Among other covenants, the Club Facility and Bilateral Facility contain financial covenants regarding tangible net worth and Funds at Lloyd's ("FAL"). As of September 30, 2020, Navigators Group was in compliance with all financial covenants.
13. INCOME TAXES
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Rate Reconciliation
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
|
2020
|
2019
|
Tax provision at U.S. federal statutory rate
|
$
|
111
|
|
$
|
138
|
|
|
$
|
308
|
|
$
|
396
|
|
Tax-exempt interest
|
(12)
|
|
(14)
|
|
|
(36)
|
|
(43)
|
|
Dividends received deduction ("DRD")
|
(4)
|
|
(3)
|
|
|
(5)
|
|
(5)
|
|
Executive compensation
|
1
|
|
—
|
|
|
6
|
|
5
|
|
Increase in deferred tax valuation allowance
|
6
|
|
—
|
|
|
19
|
|
—
|
|
Stock-based compensation
|
—
|
|
(3)
|
|
|
(1)
|
|
(7)
|
|
Sale of business
|
(8)
|
|
—
|
|
|
(8)
|
|
—
|
|
Tax credits
|
(4)
|
|
—
|
|
|
(4)
|
|
—
|
|
Carryback benefit
|
(11)
|
|
—
|
|
|
(11)
|
|
—
|
|
Other
|
(6)
|
|
—
|
|
|
—
|
|
1
|
|
Provision for income taxes
|
$
|
73
|
|
$
|
118
|
|
|
$
|
268
|
|
$
|
347
|
|
Uncertain Tax Positions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rollforward of Unrecognized Tax Benefits
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
|
2020
|
2019
|
Balance, beginning of period
|
$
|
14
|
|
$
|
14
|
|
|
$
|
14
|
|
$
|
14
|
|
Gross increases - tax positions in prior period
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Gross decreases - tax positions in prior period
|
—
|
|
—
|
|
|
—
|
|
—
|
|
Gross increases - tax positions in current period
|
1
|
|
—
|
|
|
1
|
|
—
|
|
Balance, end of period
|
$
|
15
|
|
$
|
14
|
|
|
$
|
15
|
|
$
|
14
|
|
The entire amount of unrecognized tax benefits, if recognized, would affect the effective tax rate in the period of the release.
Other Tax Matters
On March 27, 2020, as part of the business stimulus package in response to the COVID-19 pandemic, the U.S. government
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act established new tax provisions including, but not limited to: (1) five-year carryback of net operating losses ("NOLs") generated in 2018, 2019 and 2020; (2) accelerated refund of alternative minimum tax ("AMT") credit carryforwards; and (3) retroactive changes to allow accelerated depreciation for certain depreciable property.
The legislation resulted in a benefit of $6 related to the ability to carryback non-insurance losses to recover taxes paid in prior years as described below. The changes to AMT recovery periods do not impact the Company due to the fact that the Company was already expecting to receive a refund or reduction of regular tax payable for all the remaining AMT credits in 2020.
For the period ending September 30, 2020 the Company recorded a tax benefit of $11 related to the expected carryback of losses from the Navigators Group 2019 pre-acquisition tax return to recover taxes paid in prior years at the previous statutory tax rate of 35%, of which $6 was due to the non-insurance carryback provision of the CARES Act.
For the three and nine months ended September 30, 2020, the Company recorded a tax benefit of $8 related to the excess tax over GAAP basis on the sale of the Continental Europe Operations. For discussion of this transaction, refer to Note 2 - Business Acquisition and Disposition.
In July of 2020, the Company received a $206 refund of AMT credits including $1 of interest, with the remaining balance of AMT credits to be utilized against 2020 federal estimated tax payments.
For the period ending September 30, 2020, the Company has utilized all US net operating loss carryforwards as a reduction of
2020 current tax liability. The Company has foreign net operating losses of $11 for which a valuation allowance of $11 has been established. While the foreign NOLs do not expire, this assessment reflects uncertainty in the Company's ability to generate sufficient taxable income in the near term in those specific jurisdictions.
Management has assessed the need for a valuation allowance against its deferred tax assets based on tax character and jurisdiction. In making the assessment, management considered future taxable temporary difference reversals, future taxable income exclusive of reversing temporary differences and carryovers, taxable income in open carry back years and other tax planning strategies. From time to time, tax planning strategies could include holding a portion of debt securities with market value losses until recovery, altering the level of tax exempt securities held, making investments which have specific tax characteristics, and business considerations such as asset-liability matching. Management views such tax planning strategies as prudent and feasible and would implement them, if necessary, to realize the deferred tax assets.
The federal audits for the Company have been completed through 2013, and the Company is not currently under federal examination for any open years. The statute of limitations is closed through the 2015 tax year with the exception of NOL carryforwards utilized in open tax years. Navigators Group is currently under federal audit for the 2016 year and has completed examinations through 2015. Management believes that adequate provision has been made in the Company's Condensed Consolidated Financial Statements for any potential adjustments that may result from tax examinations and other tax-related matters for all open tax years.
14. COMMITMENTS AND CONTINGENCIES
Management evaluates each contingent matter separately. A loss is recorded if probable and reasonably estimable. Management establishes liabilities for these contingencies at its “best estimate,” or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated liability at the low end of the range of losses.
Litigation
The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending or providing indemnity for third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid loss and loss adjustment expense reserves. Subject to the uncertainties discussed under “Regulatory and Legal Risks” of the Risk Factors disclosed in Item 1A of Part I of the Company's Annual Report on Form 10-K for the year ended December 31, 2019, as amended in Part II Item 1A herein, and in the following discussion under the caption “Run-off Asbestos and Environmental Claims,” management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford.
The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include putative class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper sales or underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, property, disability, life and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims or other allegedly unfair or improper business practices. Like many other insurers, The Hartford also has been joined in actions by asbestos plaintiffs asserting, among other things, that insurers had a duty to protect the public from the dangers of asbestos and that insurers committed unfair trade practices by asserting defenses on behalf of their policyholders in the underlying asbestos cases. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for estimated losses, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, the outcome in certain matters could, from time to time, have a material adverse effect on the Company’s results of operations or cash flows in particular quarterly or annual periods.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
COVID-19 Pandemic Business Income Insurance Coverage Litigation
Like many others in the property and casualty insurance industry, beginning in April 2020, various direct and indirect subsidiaries of the Company (collectively the "Hartford Writing Companies”), and in some instances the Company itself, have been served as defendants in lawsuits seeking insurance coverage under commercial insurance policies issued by the Hartford Writing Companies for alleged losses resulting from the shutdown or suspension of their businesses due to the spread of COVID-19. More than 200 such lawsuits have been filed, of which more than 50 purport to be filed on behalf of broad nationwide or statewide classes of policyholders. These lawsuits have been filed in state and federal courts in roughly 27 states. Although the allegations vary, the plaintiffs generally seek a declaration of insurance coverage, damages for breach of contract in unspecified amounts, interest, and attorney’s fees. Many of the lawsuits also allege that the insurance claims were denied in bad faith or otherwise in violation of state laws and seek extra-contractual or punitive damages. The Joint Panel on Multi-District Litigation (“JPMDL”) considered consolidating, for pre-trial purposes, all COVID-19 pandemic business income coverage lawsuits pending in federal court against any commercial insurer, including Hartford Writing Companies, or alternatively, against specific insurers, including Hartford Writing Companies. The Hartford Writing Companies opposed consolidation on an industry and individual basis. In October 2020, the JPMDL declined to consolidate the cases involving the Company or Hartford Writing Companies.
The Company and its subsidiaries deny the allegations and intend to defend vigorously. The Hartford Writing Companies maintain that they have no coverage obligations with respect to these suits for business income allegedly lost by the plaintiffs due to the COVID-19 pandemic based on the clear terms of the applicable insurance policies. Although the policy terms vary depending, among other things, upon the size, nature, and location of the policyholder’s business, in general, the claims at issue in these lawsuits were denied because the claimant identified no direct physical damage or loss to property at the insured premises, and the governmental orders that led to the complete or partial shutdown of the business were not due to the existence of any direct physical loss or damage in the immediate vicinity of the insured premises and did not prohibit access to the insured premises, as required by the terms of the insurance policies. In addition, the vast majority of the policies at issue expressly exclude from coverage any loss caused directly or indirectly by the presence, growth, proliferation, spread or activity of a virus, subject to a narrow set of exceptions not applicable in connection with this pandemic, and contain a pollution and contamination exclusion that, among other things, expressly excludes from coverage any loss caused by material that threatens human health or welfare.
In addition to the inherent difficulty in predicting litigation outcomes, the COVID-19 pandemic business income coverage lawsuits present numerous uncertainties and contingencies that are not yet known, including how many policyholders will ultimately file claims, the number of lawsuits that will be filed, the extent to which any state or nationwide classes will be certified, and the size and scope of any such classes. The legal theories advocated by plaintiffs vary significantly by case as do the state laws that govern the policy interpretation. These lawsuits are in the earliest stages of litigation, many were stayed pending a decision on the contemplated multi-district litigation, many
complaints are in the process of being amended, and some have been dismissed voluntarily and may be refiled. Accordingly, little discovery has occurred and few substantive legal rulings have been made. In addition, business income calculations depend upon a wide range of factors that are particular to the circumstances of each individual policyholder and, here, virtually none of the plaintiffs have submitted proofs of loss or otherwise quantified or factually supported any allegedly covered loss, and, in any event, the Company’s experience shows that demands for damages often bear little relation to a reasonable estimate of potential loss. Accordingly, management cannot now reasonably estimate the possible loss or range of loss, if any. Nonetheless, given the large number of claims and potential claims, the indeterminate amounts sought, and the inherent unpredictability of litigation, it is possible that adverse outcomes, if any, in the aggregate, could have a material adverse effect on the Company’s consolidated operating results.
Run-off Asbestos and Environmental Claims
The Company continues to receive A&E claims. Asbestos claims relate primarily to bodily injuries asserted by people who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs.
The vast majority of the Company's exposure to A&E relates to Run-off A&E, reported within the P&C Other Operations segment. In addition, since 1986, the Company has written asbestos and environmental exposures under commercial liability policies and pollution liability under homeowners policies, which are reported in the Commercial Lines and Personal Lines segments.
Prior to 1986, the Company wrote several different categories of insurance contracts that may cover A&E claims. First, the Company wrote primary policies providing the first layer of coverage in an insured’s liability program. Second, the Company wrote excess and umbrella policies providing higher layers of coverage for losses that exhaust the limits of underlying coverage. Third, the Company acted as a reinsurer assuming a portion of those risks assumed by other insurers writing primary, excess, umbrella and reinsurance coverages.
Significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid gross losses and expenses related to environmental and 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.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
For its Run-off A&E, as of September 30, 2020, the Company reported $749 of net asbestos reserves and $101 of net environmental reserves. While the Company believes that its current Run-off A&E reserves are appropriate, significant uncertainties limit our ability to estimate the ultimate reserves necessary for unpaid losses and related expenses. The ultimate liabilities, thus, could exceed the currently recorded reserves, and any such additional liability, while not reasonably estimable now, could be material to The Hartford's consolidated operating results and liquidity.
The Company’s A&E ADC reinsurance agreement with NICO reinsures substantially all A&E reserve development for 2016 and prior accident years, including Run-off A&E and A&E reserves included in Commercial Lines and Personal Lines. The A&E ADC has a coverage limit of $1.5 billion above the Company’s existing net A&E reserves as of December 31, 2016 of approximately $1.7
billion. As of September 30, 2020, the Company has incurred $640 in cumulative adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, leaving $860 of coverage available for future adverse net reserve development, if any. Cumulative adverse development of A&E claims for accident years 2016 and prior could ultimately exceed the $1.5 billion treaty limit in which case any adverse development in excess of the treaty limit would be absorbed as a charge to earnings by the Company. In these scenarios, the effect of these charges could be material to the Company’s consolidated operating results and liquidity. For more information on the A&E ADC, refer to Note 11, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements included in the Company's 2019 Form 10-K Annual Report.
Derivative Commitments
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical rating 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 September 30, 2020 was $86 for which the legal entities have posted collateral of $88 in the normal course of business. Based on derivative market values as of September 30, 2020, 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. A downgrade of two levels would require an additional $5 of assets to be posted as collateral. These collateral amounts could change as derivative market values change, as a result of changes in our hedging activities or to the extent changes in contractual terms are negotiated. The nature of the additional collateral that we would post, if required, would be primarily in the form of U.S. Treasury bills, U.S. Treasury notes and government agency securities.
Guarantees
The Hartford has guaranteed the timely payment of contractual claims under certain life, accident and health and annuity contracts issued by its former life and annuity business with most of the guaranteed contracts issued between 1990 and 1997 (the "Talcott Guarantees"). Upon the sale of the life and annuity business in May 2018, the purchaser indemnified the Company for any liability arising under the guarantees. The Talcott Guarantees cover contractual obligations only but otherwise have no limitation as to maximum potential future payments. Prior to January 1, 2020, the Company had not recorded a liability because the likelihood of any payment under the Talcott Guarantees is remote. Upon adoption of new credit loss guidance
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
on January 1, 2020, the Company estimated a LCL of $25. For further information refer to Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Condensed Consolidated Financial Statements.
The LCL is calculated for the estimated amount payable under guaranteed contracts multiplied by the probability of default and the amount of loss given a default. The probability of default is assigned by credit rating of the applicable insurance company that issued the contract and is based on historical insurance industry defaults for liabilities with similar durations estimated through multiple economic cycles. Credit ratings are current and forward-looking and consider a variety of economic outcomes. Because annuities represent the majority of the contracts issued, the loss given default factors are based on a historical study of annuity policyholder recoveries from insolvent estate assets. The Company's exposure is expected to run off over a period that will include more than one economic cycle.
The Company's evaluation of the required LCL for the Talcott Guarantees considers the current economic environment as well as macroeconomic scenarios similar to the approach used to estimate the ACL for mortgage loans. See Note 6 - Investments for additional information. In response to significant economic stress experienced as a result of the COVID-19 pandemic, during
the first nine months of 2020 the Company increased the weight of both a moderate and severe recession scenario in our estimate of the LCL. As of September 30, 2020, the economic scenarios improved modestly as compared to June 30, 2020, reflecting improvements in GDP growth, unemployment and other economic factors compared with the prior economic scenarios. The ultimate impact to the Company’s financial statements could vary significantly from our estimates depending on the duration and severity of the pandemic, the duration and severity of the economic downturn and the degree to which federal, state and local government actions to mitigate the economic impact of COVID-19 are effective. The Company has never experienced a loss on financial guarantees of this nature and we believe the risk of loss is remote. For the three and nine months ended September 30, 2020, the Company recorded net credit loss expense (reversal) within insurance operating costs and other expenses of $(1) and $2, respectively, related to the Talcott Guarantees. The decrease for the three months ended September 30, 2020, was primarily due to a reduction in the estimated amount payable under the guaranteed contracts due to equity market recovery as well as due to the run-off of the business. The increase for the nine months ended September 30, 2020 was primarily as a result of the COVID-19 pandemic and the impacts on the economic forecasts, as discussed above.
15. EQUITY
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. During the nine months ended September 30, 2020, the Company repurchased
2.7 million common shares for $150. Any repurchase of shares under the remaining equity repurchase authorization of $650 is dependent on market conditions and other factors including the extent to which COVID-19 impacts our business, results of operations, financial condition and liquidity.
16. CHANGES IN AND RECLASSIFICATIONS FROM ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in AOCI, Net of Tax for the Three Months Ended September 30, 2020
|
|
Changes in
|
|
Net Unrealized Gain on Fixed Maturities
|
Unrealized Loss on Fixed Maturities with ACL
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI,
net of tax
|
Beginning balance
|
$
|
2,055
|
|
$
|
(2)
|
|
$
|
48
|
|
$
|
27
|
|
$
|
(1,649)
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
388
|
|
—
|
|
(10)
|
|
6
|
|
—
|
|
384
|
|
Amounts reclassified from AOCI
|
(12)
|
|
—
|
|
(7)
|
|
—
|
|
12
|
|
(7)
|
|
OCI, net of tax
|
376
|
|
—
|
|
(17)
|
|
6
|
|
12
|
|
377
|
|
Ending balance
|
$
|
2,431
|
|
$
|
(2)
|
|
$
|
31
|
|
$
|
33
|
|
$
|
(1,637)
|
|
$
|
856
|
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in AOCI, Net of Tax for the Nine Months Ended September 30, 2020
|
|
Changes in
|
|
Net Unrealized Gain on Fixed Maturities
|
Unrealized Loss on Fixed Maturities with ACL
|
Net Gain on Cash Flow Hedging Instruments
|
Foreign Currency Translation Adjustments
|
Pension and Other Postretirement Plan Adjustments
|
AOCI,
net of tax
|
Beginning balance
|
$
|
1,684
|
|
$
|
(3)
|
|
$
|
9
|
|
$
|
34
|
|
$
|
(1,672)
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
842
|
|
1
|
|
37
|
|
(1)
|
|
(1)
|
|
878
|
|
Amounts reclassified from AOCI
|
(95)
|
|
—
|
|
(15)
|
|
—
|
|
36
|
|
(74)
|
|
OCI, net of tax
|
747
|
|
1
|
|
22
|
|
(1)
|
|
35
|
|
804
|
|
Ending balance
|
$
|
2,431
|
|
$
|
(2)
|
|
$
|
31
|
|
$
|
33
|
|
$
|
(1,637)
|
|
$
|
856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications from AOCI
|
|
Three Months Ended September 30, 2020
|
Nine Months Ended September 30, 2020
|
Affected Line Item in the Condensed Consolidated Statement of Operations
|
Net Unrealized Gain on Fixed Maturities
|
|
|
|
Available-for-sale fixed maturities
|
$
|
15
|
|
$
|
120
|
|
Net realized capital gains (losses)
|
|
15
|
|
120
|
|
Total before tax
|
|
3
|
|
25
|
|
Income tax expense
|
|
|
|
|
|
$
|
12
|
|
$
|
95
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains on Cash Flow Hedging Instruments
|
|
|
|
|
|
|
|
Interest rate swaps
|
$
|
9
|
|
19
|
|
Net investment income
|
Interest rate swaps
|
(2)
|
|
(4)
|
|
Interest expense
|
Foreign currency swaps
|
1
|
|
3
|
|
Net investment income
|
Foreign currency swaps
|
$
|
1
|
|
$
|
1
|
|
Net realized capital gains (losses)
|
|
9
|
|
19
|
|
Total before tax
|
|
2
|
|
4
|
|
Income tax expense
|
|
|
|
|
|
$
|
7
|
|
$
|
15
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Plan Adjustments
|
|
|
|
Amortization of prior service credit
|
$
|
2
|
|
$
|
5
|
|
Insurance operating costs and other expenses
|
Amortization of actuarial loss
|
(17)
|
|
(50)
|
|
Insurance operating costs and other expenses
|
|
|
|
|
|
(15)
|
|
(45)
|
|
Total before tax
|
|
(3)
|
|
(9)
|
|
Income tax expense
|
|
$
|
(12)
|
|
$
|
(36)
|
|
Net income
|
Total amounts reclassified from AOCI
|
$
|
7
|
|
$
|
74
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in AOCI, Net of Tax for the Three Months Ended September 30, 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
|
$
|
1,367
|
|
$
|
(3)
|
|
$
|
11
|
|
$
|
34
|
|
$
|
(1,607)
|
|
$
|
(198)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OCI before reclassifications
|
458
|
|
—
|
|
8
|
|
(4)
|
|
1
|
|
463
|
|
Amounts reclassified from AOCI
|
(57)
|
|
—
|
|
(2)
|
|
—
|
|
8
|
|
(51)
|
|
OCI, net of tax
|
401
|
|
—
|
|
6
|
|
(4)
|
|
9
|
|
412
|
|
Ending balance
|
$
|
1,768
|
|
$
|
(3)
|
|
$
|
17
|
|
$
|
30
|
|
$
|
(1,598)
|
|
$
|
214
|
|
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in AOCI, Net of Tax for the Nine Months Ended September 30, 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
|
1,857
|
|
1
|
|
27
|
|
—
|
|
1
|
|
1,886
|
|
Amounts reclassified from AOCI
|
(113)
|
|
—
|
|
(5)
|
|
—
|
|
25
|
|
(93)
|
|
OCI, net of tax
|
1,744
|
|
1
|
|
22
|
|
—
|
|
26
|
|
1,793
|
|
Ending balance
|
$
|
1,768
|
|
$
|
(3)
|
|
$
|
17
|
|
$
|
30
|
|
$
|
(1,598)
|
|
$
|
214
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassifications from AOCI
|
|
Three Months Ended September 30, 2019
|
Nine Months Ended September 30, 2019
|
Affected Line Item in the Condensed Consolidated Statement of Operations
|
Net Unrealized Gain on Securities
|
|
|
|
Available-for-sale securities
|
$
|
72
|
|
$
|
143
|
|
Net realized capital gains (losses)
|
|
72
|
|
143
|
|
Total before tax
|
|
15
|
|
30
|
|
Income tax expense
|
|
|
|
|
|
$
|
57
|
|
$
|
113
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gains on Cash Flow Hedging Instruments
|
|
|
|
Interest rate swaps
|
$
|
—
|
|
$
|
2
|
|
Net realized capital gains (losses)
|
Interest rate swaps
|
1
|
|
1
|
|
Net investment income
|
Interest rate swaps
|
—
|
|
1
|
|
Interest expense
|
Foreign currency swaps
|
1
|
|
2
|
|
Net investment income
|
|
2
|
|
6
|
|
Total before tax
|
|
—
|
|
1
|
|
Income tax expense
|
|
|
|
|
|
$
|
2
|
|
$
|
5
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and Other Postretirement Plan Adjustments
|
|
|
|
Amortization of prior service credit
|
$
|
2
|
|
$
|
5
|
|
Insurance operating costs and other expenses
|
Amortization of actuarial loss
|
(12)
|
|
(37)
|
|
Insurance operating costs and other expenses
|
|
|
|
|
|
(10)
|
|
(32)
|
|
Total before tax
|
|
(2)
|
|
(7)
|
|
Income tax expense
|
|
$
|
(8)
|
|
$
|
(25)
|
|
Net income
|
Total amounts reclassified from AOCI
|
$
|
51
|
|
$
|
93
|
|
Net income
|
17. EMPLOYEE BENEFIT PLANS
The Company’s employee benefit plans are described in Note 18 - Employee Benefit Plans of Notes to Consolidated Financial Statements included in The Hartford’s 2019 Annual Report on
Form 10-K. The Company, at its discretion, made a contribution of $70 in September 2020 to the U.S. qualified defined benefit pension plan.
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 September 30,
|
Nine Months Ended September 30,
|
|
Three Months Ended September 30,
|
Nine Months Ended September 30,
|
|
2020
|
2019
|
2020
|
2019
|
|
2020
|
2019
|
2020
|
2019
|
Service cost
|
$
|
1
|
|
$
|
1
|
|
$
|
3
|
|
$
|
3
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Interest cost
|
31
|
|
40
|
|
95
|
|
119
|
|
|
1
|
|
2
|
|
4
|
|
6
|
|
Expected return on plan assets
|
(53)
|
|
(57)
|
|
(161)
|
|
(170)
|
|
|
—
|
|
(1)
|
|
(2)
|
|
(3)
|
|
Amortization of prior service credit
|
—
|
|
—
|
|
—
|
|
—
|
|
|
(2)
|
|
(2)
|
|
(5)
|
|
(5)
|
|
Amortization of actuarial loss
|
15
|
|
11
|
|
45
|
|
33
|
|
|
2
|
|
1
|
|
5
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost (benefit)
|
$
|
(6)
|
|
$
|
(5)
|
|
$
|
(18)
|
|
$
|
(15)
|
|
|
$
|
1
|
|
$
|
—
|
|
$
|
2
|
|
$
|
2
|
|
18. RESTRUCTURING AND OTHER COSTS
In recognition of the need to become more cost efficient and competitive along with enhancing the experience we provide to agents and customers, on July 30, 2020 the Company announced an operational transformation and cost reduction plan it refers to as Hartford Next. Hartford Next is intended to reduce annual insurance operating costs and other expenses through reduction of the Company's headcount, investment in information technology ("IT") to further enhance our capabilities, and other activities. The activities are expected to be substantially complete by the end of 2022. These estimated restructuring and other costs do not include all costs associated with a real estate consolidation plan as those plans are not yet sufficiently developed to provide a full estimate of those costs and related savings.
Termination benefits related to workforce reductions and professional fees are included within restructuring and other costs in the Condensed Consolidated Statement of Operations and unpaid restructuring costs are included in other liabilities in the September 30, 2020 Condensed Consolidated Balance Sheet. Subsequent to September 30, 2020, the Company expects to incur additional costs including accelerated amortization of IT and right of use assets, other IT costs to retire applications, professional fees and other expenses. Total restructuring and other costs are expected to be approximately $150, before tax, and will be recognized in Corporate for segment reporting.
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and Other Costs, Before Tax
|
|
|
|
|
Incurred in the Three and Nine Months Ended September 30, 2020 [1]
|
|
Total Amount Expected to be Incurred
|
|
|
Severance benefits
|
$
|
78
|
|
|
$
|
78
|
|
|
|
IT costs
|
—
|
|
|
28
|
|
|
|
Professional fees and other expenses
|
9
|
|
|
44
|
|
|
|
Total restructuring and other costs, before tax
|
$
|
87
|
|
|
$
|
150
|
|
|
|
[1] Amounts incurred for the nine months ended September 30, 2020 are the cumulative incurred under the restructuring program.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued Restructuring and Other Costs
|
|
|
Nine Months Ended September 30, 2020
|
|
|
Severance Benefits and Related Costs
|
IT Costs
|
Professional Fees and Other
|
|
Total Restructuring and Other Costs Liability
|
|
Balance, beginning of period
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Incurred
|
78
|
|
—
|
|
9
|
|
|
87
|
|
|
Payments
|
(3)
|
|
—
|
|
(9)
|
|
|
(12)
|
|
|
Balance, end of period
|
$
|
75
|
|
$
|
—
|
|
$
|
—
|
|
|
$
|
75
|
|
|