As of December 31, 2020, The Hartford owned building space totaling approximately 1.8 million square feet consisting principally of 1.77 million square feet for its home office complex in Hartford, Connecticut and other properties within the greater Hartford, Connecticut area, and approximately 22 thousand square feet in Belgium. In addition, we lease offices throughout North America, Europe and other overseas locations to house administrative, claims handling, sales and other business operations. As of December 31, 2020, The Hartford leased
On September 30, 2020, the Company entered into a definitive agreement to sell all of the issued and outstanding equity of Navigators Holdings (Europe) N.V., a Belgium holding company, and its subsidiaries, Bracht, Deckers & Mackelbert N.V. (“BDM”) and Assurances Contintales Contintale Verzekeringen N.V. (“ASCO”), (collectively referred to as "Continental Europe Operations").
For discussion of acquisitions, dispositions and reclassifications, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements.
Throughout the MD&A, we use certain terms and abbreviations, the more commonly used are summarized in the Acronyms section.
calculated by dividing (a) common stockholders' equity, excluding AOCI, after tax, by (b) common shares outstanding and dilutive potential common shares. The Company provides this measure to enable investors to analyze the amount of the Company's net worth that is primarily attributable to the Company's business operations. The Company believes that excluding AOCI from the numerator is useful to investors because it eliminates the effect of items that can fluctuate significantly from period to period, primarily based on changes in interest rates. Book value per diluted share is the most directly comparable U.S. GAAP measure.
Combined Ratio- The sum of the loss and loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. This ratio is a relative measurement that describes the related cost of losses and expenses for every $100 of earned premiums. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses.
•Restructuring and other costs - Costs incurred as part of a restructuring plan are not a recurring operating expense of the business.
•Loss on extinguishment of debt - Largely consisting of make-whole payments or tender premiums upon paying debt off before maturity, these losses are not a recurring operating expense of the business.
a business or to reinsure loss reserves, are not a recurring operating expense of the business.
•Integration and transaction costs in connection with an acquired business - As transaction costs are incurred upon acquisition of a business and integration costs are completed within a short period after an acquisition, they do not represent ongoing costs of the business.
In addition to the above components of net income available to common stockholders that are excluded from core earnings, preferred stock dividends declared, which are excluded from net income available to common stockholders, are included in the determination of core earnings. Preferred stock dividends are a cost of financing more akin to interest expense on debt and are expected to be a recurring expense as long as the preferred stock is outstanding.
Net income (loss) and net income (loss) available to common stockholders are the most directly comparable U.S. GAAP measures to core earnings. Core earnings should not be considered as a substitute for net income (loss) or net income (loss) available to common stockholders and does not reflect the overall profitability of the Company's business. Therefore, The Hartford believes that it is useful for investors to evaluate net income (loss), net income (loss) available to common stockholders, and core earnings when reviewing the Company's performance.
Core Earnings Margin- The Hartford uses the non-GAAP measure core earnings margin to evaluate, and believes it is an important measure of, the Group Benefits segment's operating performance. Core earnings margin is calculated by dividing core earnings by revenues, excluding buyouts and realized gains (losses). Net income margin, calculated by dividing net income by revenues, is the most directly comparable U.S. GAAP measure. The Company believes that core earnings margin provides investors with a valuable measure of the performance of Group Benefits because it reveals trends in the business that may be obscured by the effect of buyouts and realized gains (losses) as well as other items excluded in the calculation of core earnings. Core earnings margin should not be considered as a substitute for net income margin and does not reflect the overall profitability of Group Benefits. Therefore, the Company believes it is important for investors to evaluate both core earnings margin and net income margin when reviewing performance. A reconciliation of net income margin to core earnings margin is set forth in the Results of Operations section within MD&A - Group Benefits.
Current Accident Year Catastrophe Ratio- A component of the loss and loss adjustment expense ratio, represents the ratio of catastrophe losses incurred in the current accident year (net of reinsurance) to earned premiums. For U.S. events, a catastrophe is an event that causes $25 or more in industry insured property losses and affects a significant number of property and casualty policyholders and insurers, as defined by the Property Claim Services office of Verisk. For international events, the Company's approach is similar, informed, in part, by how Lloyd's defines catastrophes. Lloyd's is an insurance market-place operating worldwide. Lloyd's does not underwrite risks. The Company accepts risks as the sole member of its Lloyd's Syndicate. The current accident year catastrophe ratio includes the effect of catastrophe losses, but does not include the effect of reinstatement premiums.
Fee Income- Is largely driven from amounts earned as a result of contractually defined percentages of assets under management in our Hartford Funds business. These fees are generally earned on a daily basis. Therefore, the growth in assets under management either through positive net flows or favorable market performance will have a favorable impact on fee income. Conversely, either negative net flows or unfavorable market performance will reduce fee income.
Gross New Business Premium- Represents the amount of premiums charged, before ceded reinsurance, for policies issued to customers who were not insured with the Company in the previous policy term. Gross new business premium plus gross renewal written premium less ceded reinsurance equals total written premium.
Loss and Loss Adjustment Expense Ratio- A measure of the cost of claims incurred in the calendar year divided by earned premium and includes losses and loss adjustment expenses incurred for both the current and prior
Loss Ratio, excluding Buyouts- Utilized for the Group Benefits segment and is expressed as a ratio of benefits, losses and loss adjustment expenses, excluding those related to buyout premiums, to premiums and other considerations, excluding buyout premiums. Since Group Benefits occasionally buys a block of claims for a stated premium amount, the Company excludes this buyout from the loss ratio used for evaluating the profitability of the business as buyouts may distort the loss ratio. Buyout premiums represent takeover of open claim liabilities and other non-recurring premium amounts.
Policies in Force- Represents the number of policies with coverage in effect as of the end of the period. The number of
policies in force is a growth measure used for Personal Lines and standard commercial lines (small commercial and middle market lines within middle & large commercial) within Commercial Lines and is affected by both new business growth and policy count retention.
Premium Retention- Represents renewal premium written in the current period divided by total premium written in the prior period.
Reinstatement Premiums- Represents additional ceded premium paid for the reinstatement of the amount of reinsurance coverage that was reduced as a result of the Company ceding losses to reinsurers.
Renewal Written Price Increase (Decrease)-For Commercial Lines, represents the combined effect of rate changes, amount of insurance and individual risk pricing decisions per unit of exposure on commercial lines policies that renewed. For Personal Lines, renewal written price increases represent the total change in premium per policy since the prior year on those policies that renewed and includes the combined effect of rate changes, amount of insurance and other changes in exposure. For Personal Lines, other changes in exposure include, but are not limited to, the effect of changes in number of drivers, vehicles and incidents, as well as changes in customer policy elections, such as deductibles and limits. The rate component represents the change in rate filed with and approved by state regulators during the period and the amount of insurance represents the change in the value of the rating base, such as model year/vehicle symbol for automobiles, building replacement costs for property and wage inflation for workers’ compensation. A number of factors affect renewal written price increases (decreases) including
Underlying Combined Ratio-This non-GAAP financial measure of underwriting results represents the combined ratio before catastrophes, prior accident year development and current accident year change in loss reserves upon acquisition of
a business. Combined ratio is the most directly comparable GAAP measure. The underlying combined ratio represents the combined ratio for the current accident year, excluding the impact of current accident year catastrophes and current accident year change in loss reserves upon acquisition of a business. The Company believes this ratio is an important measure of the trend in profitability since it removes the impact of volatile and unpredictable catastrophe losses and prior accident year loss and loss adjustment expense reserve development. The changes to loss reserves upon acquisition of a business are excluded from underlying combined ratio because such changes could obscure the ability to compare results in periods after the acquisition to results of periods prior to the acquisition as such trends are valuable to our investors' ability to assess the Company's financial performance. A reconciliation of combined ratio to underlying combined ratio is set forth in the Results of Operations section within MD&A - Commercial Lines and Personal Lines.
Company’s reputation and ratings. Persistency refers to the percentage of premium remaining in-force from year-to-year.
The Hartford 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. The Company includes in the Corporate category reserves for run-off structured settlement and terminal funding agreement liabilities, restructuring costs, capital raising activities (including equity financing, debt financing and related interest expense), transaction expenses incurred in connection with an acquisition, purchase accounting adjustments related to goodwill, and other expenses not allocated to the reporting segments. Corporate also includes investment management fees and expenses related to managing third party business, including management of the invested assets of Talcott Resolution Life, Inc. and its subsidiaries ("Talcott Resolution").
The profitability of the Company's property and casualty insurance businesses over time is greatly influenced by the Company’s underwriting discipline, which seeks to manage exposure to loss through favorable risk selection and diversification, its management of claims, its use of reinsurance, the size of its in force block, actual mortality and morbidity experience, and its ability to manage its expense ratio which it accomplishes through economies of scale and its management of acquisition costs and other underwriting expenses. Pricing adequacy depends on a number of factors, including the ability to obtain regulatory approval for rate changes, proper evaluation of underwriting risks, the ability to project future loss cost frequency and severity based on historical loss experience adjusted for known trends, the Company’s response to rate actions taken by competitors, its expense levels and expectations about regulatory and legal developments. The Company seeks to price its insurance policies such that insurance premiums and future net investment income earned on premiums received will cover underwriting expenses and the ultimate cost of paying claims reported on the policies and provide for a profit margin. For many of its insurance products, the Company is required to obtain approval for its premium rates from state insurance departments and the Lloyd's Syndicate's ability to write business is subject to Lloyd's approval for its premium capacity each year. Most of Personal Lines written premium is associated with our exclusive licensing agreement with AARP. This agreement provides an important competitive advantage given the size of the 50 plus population and the strength of the AARP brand. During the second quarter of 2020, the Company extended this agreement through December 31, 2032.
Impact of COVID-19 on our financial condition, results of operations and liquidity
The COVID-19 pandemic has caused significant disruption to the economy of the U.S. and other countries in which we operate. Due to government restrictions that have prevented some businesses from offering goods and services to their customers and due to shelter-in-place guidelines that have reduced business activity, many of our customers, especially small businesses, have had to curtail their operations or have found they are unable to meet cash flow needs due to declining business volume, causing some to lay off workers. As one of the largest providers of small business insurance in the U.S., in 2020, we experienced a 3% year over year decline in our small commercial written premium although trends improved in the second half of 2020. In addition
to the expected decline in small commercial written and earned premium, other business lines in Commercial Lines have also been negatively affected due to government-mandated restrictions and stay-at-home guidelines reducing business activity and due to consumers having less disposable income or less willingness to spend on the products and services that our commercial lines policyholders sell. Excluding the effect of the Navigators acquisition, Commercial Lines written premium declined $290, or 4%, year over year driven by lower new business and due to endorsements or other changes to in-force policies that decrease premiums to reflect reduced exposures.
Contributing to a 6% decline in Personal Lines written premium in 2020 was the effect of increased shopping behaviors, and lower new business levels arising out of the competitive marketplace. In addition, The Hartford provided a 15 percent refund on policyholders’ April, May and June personal automobile insurance premiums which reduced Personal Lines written and earned premiums by $81 in the second quarter of 2020. In Group Benefits, fully insured ongoing premium decreased 2% in 2020 resulting primarily from lower insured exposure on in-force policies. Because of the economic stress caused by COVID-19, we also experienced a higher amount of uncollectible premiums receivable in 2020. As a result, to reflect our higher expectation of credit losses, The Hartford increased its allowance for credit losses ("ACL") on premiums receivable by $40 in the twelve months ended December 31, 2020.
Total net investment income decreased in 2020 primarily due to a lower yield on fixed maturity investments resulting from lower reinvestment rates and lower yields on floating rate securities, partially offset by a higher level of invested assets, due in part to the acquisition of Navigators Group. In an effort to stimulate the economy, central banks have reduced benchmark interest rates to near zero, impacting our yields on floating rate securities and reinvestment rates. From late March to mid-May, 2020, the Company temporarily reinvested receipts of interest and proceeds from maturing fixed maturity investments in liquid, short-term investments. While the Company resumed investing in fixed maturities in May, 2020, lower interest rates since the pandemic began have generally resulted in lower investment yields on newly invested funds. A prolonged period of lower interest rates could depress the Company's net investment income such that to earn the same level of return on equity we may have to charge higher premiums for the insurance products we sell unless loss costs similarly lessen.
Net realized capital gains (losses) on equity securities for the year ended December 31, 2020 totaled $(214) before tax, consisting of unrealized mark-to-market gains (losses) on equity securities held and net realized gains (losses) on equity securities sold, net of realized gains on equity derivative hedges. While equity markets in the last nine months of 2020 increased more than the value they lost during the first quarter, economic conditions remain uncertain and if equity markets were to experience similar declines as occurred in the first quarter of 2020, we may incur more net realized capital losses in future periods.
Net realized capital losses for the year ended December 31, 2020 also included $47 of increases in the allowance for credit losses, partially offset by reversals of the allowance due to improvements in market value or sales, and $5 of intent-to-sell impairments. The increase in the allowance for credit losses in the twelve month period included increases of $28 on available for sale fixed maturities and increases of $19 on commercial mortgage loans. If it takes a prolonged period for the economy to recover or if the impacts of the economic downturn are deeper than anticipated, we could experience further credit losses and intent-to-sell impairments, particularly with highly leveraged companies and issuers in the energy, commercial real estate, and travel and leisure sectors, resulting in further net realized capital losses.
Nearly all of our property insurance policies require direct physical loss or damage to property and contain standard exclusions that we believe preclude coverage for COVID-19 related claims, and the vast majority of such policies contain exclusions for virus-related losses. Included in the $141 of COVID-19 property incurred losses and loss adjustment expenses in the twelve month period were $101 of losses arising from a small number of property policies that do not require direct physical loss or damage and from policies intended to cover specific business needs, including crisis management and performance disruption, as well as a reserve of $40 for legal defense costs. Given the significant business disruptions that have occurred due to the COVID-19 pandemic, the Company has experienced increased property claims, resulting in increased litigation activity and legal expenses. Within Property & Casualty, we incur COVID-19 workers’ compensation losses when it is determined that workers were exposed to COVID-19 out of and in the course of their employment and in other cases where states have passed laws providing for the presumption of coverage for certain industry classes, including health care and other essential workers. While current accident year losses for workers’ compensation for the year ended December 31, 2020 increased by $180 due to COVID-19 claims, this has been partially offset by lower claim frequency of non-COVID-19 related workers’ compensation claims due to reduced business activity, resulting in a net increase in incurred losses of $66. Favorable non-COVID-19 workers’ compensation claim frequency could continue through 2021 though possibly to a lesser extent if more business activity resumes. The Company could incur additional COVID-19 direct incurred losses in P&C through much of 2021, particularly for workers’ compensation and financial lines.
Within Group Benefits, the Company experienced excess mortality in its group life business of $239 in 2020, primarily caused by direct and indirect impacts of COVID-19. Within the group disability business, in 2020 the Company recognized $29 of
COVID-19 direct losses from short-term disability claims, more than offset by $38 of favorable frequency on other short-term disability claims.
•For the year ended December 31, 2020, we recognized an estimated decrease in current accident incurred losses in Personal Lines automobile of $218 due to a significant reduction in miles driven since the pandemic began, though miles driven has begun to increase again. In the second quarter of 2020, Personal Lines written and earned premiums were reduced by $81 due to providing automobile policyholders with premium refunds or credits in recognition of the decrease in miles driven.
•Because of the economic stress caused by COVID-19 and partly due to the extension of billing terms, we expect a higher amount of uncollectible premiums receivable. As a result, to reflect our higher expectation of credit losses, The Hartford increased its ACL on premiums receivable by $40 in the year ended December 31, 2020.
•Apart from the increase in the premiums receivable allowance, we have experienced a decline in insurance operating costs and other expenses partly due to lower travel and employee benefits costs and lower operating costs associated with lower earned premium volumes.
For information about additional resources the Company has to manage capital and liquidity during the COVID-19 pandemic and economic downturn, refer to the Capital Resources & Liquidity section of MD&A.
For additional information about the potential impacts of the COVID-19 pandemic and resulting economic downturn, see the risk factor "The pandemic caused by the spread of COVID-19 has disrupted our operations and may have a material adverse impact
$47 over the last six months of 2020 and expects a net expense reduction of approximately $240 in 2021 and approximately $423 in 2022.
[2] Does not include approximately $19 of real estate amortization after 2022.
- Decrease in net income + Increase in common stockholders' equity largely due to net income in excess of stockholder dividends and an increase in AOCI, primarily driven by an increase in net unrealized capital gains on available for sale
+ Lower non-COVID-19 current accident year non-catastrophe property losses, lower personal automobile claim frequency, net of premium refunds, and lower P&C operating expenses
Þ Decreased 40 bps Þ Improved 0.8 points Þ Decreased 2.4 points
- Lower current accident year loss ratio in Personal Lines, due to lower automobile claim frequency
- More favorable prior accident year development with 2020 reserve reductions for catastrophes partially offset by reserve increases for A&E and sexual molestation and sexual abuse claims
- Lower expense ratio mostly driven by lower variable incentive compensation, staffing levels, and travel
+ Higher current accident year catastrophes, largely due to losses from civil unrest
Net income available to common stockholders decreased by $348 primarily driven by a $409 before tax change from net realized capital gains in the 2019 period to net realized capital losses in the 2020 period, $278 before tax of P&C COVID-19 claims in the 2020 period, higher mortality in group life, mostly driven by COVID-19, a $143 before tax increase in current accident year catastrophes, a $105 before tax decrease in net investment income, and $104 before tax of restructuring costs, partially offset by lower Personal Lines automobile claim frequency in the 2020 period net of premium credits given to policyholders in second quarter 2020, lower non-catastrophe property losses, a decrease in P&C insurance operating costs, higher net favorable P&C prior accident year development, and the effect of charges in 2019, including the Navigators ADC premium paid of $91 before tax and a $90 before tax loss on debt extinguishment.
For a discussion of the Company's operating results by segment, see MD&A - Segment Operating Summaries. In addition, for further discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.
•A 1% decrease in Group Benefits, principally driven by a decline in group life due to lower insured exposure on in-force policies.
Other revenues decreased primarily due to a decrease in income generated from the Talcott Resolution investment and less transition services revenue received related to the sale of the life and annuity business in 2018.
•Depreciation in the value of equity securities due to the significant decline in equity market levels in the first quarter of 2020 as well as realized losses upon sales of equity securities, partially offset by net realized gains upon termination of derivatives used to hedge against a decline in equity market levels.
For further discussion of investment results, see MD&A - Investment Results, Net Realized Capital Gains and MD&A - Investment Results, Net Investment Income.
Amortization of deferred policy acquisition costs increased from the prior year period primarily due to an increase in Commercial Lines mainly attributable to the impact of the Navigators Group acquisition, partially offset by decreases in Personal Lines and Group Benefits consistent with the decline in earned premium in those segments.
For further discussion of impacts resulting from the Hartford Next initiative, see MD&A - The Hartford's Operations, Operational Transformation and Cost Reduction Plan and Note 23 - Restructuring and Other Costs of Notes to Consolidated Financial Statements.
Income tax expense decreased primarily due to a decline in income before tax.
For further discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
Fixed maturities, AFS increased primarily due to net additions of corporate securities and an increase in valuations as a result of a decline in interest rates.
[1]Yields calculated using annualized net investment income divided by the monthly average invested assets at amortized cost as applicable, excluding repurchase agreement and securities lending collateral, if any, and derivatives book value.
[3]Primarily includes changes in fair value of certain equity fund investments and income from derivatives that qualify for hedge accounting and are used to hedge fixed maturities.
Annualized net investment income yield, excluding limited partnerships and other alternative investments and non-routine items on fixed maturities, which primarily include make-whole payments and prepayment fees, partially offset by paydowns, was down primarily due to lower reinvestment and short-term rates.
[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]See Intent-to-Sell Impairments within the Investment Portfolio Risks and Risk Management section of the MD&A.
Equity securities net losses were driven by mark-to-market losses due to the decline in equity market levels in the first quarter and losses incurred on sales across multiple issuers as the Company reduced its exposure to equity securities, partially offset by mark-to-market equity gains given recent equity market performance and tighter credit spreads, which resulted in price appreciation of preferred equities.
•valuation of investments and derivative instruments including evaluation of credit losses on fixed maturities, AFS and ACL on mortgage loans; and
P&C Loss and Loss Adjustment Expense Reserves, Net of Reinsurance, by Segment as of December 31, 2020
Loss and LAE Reserves, Net of Reinsurance as of December 31, 2020
Loss and loss adjustment expense reserves provide for the estimated ultimate costs of paying claims under insurance policies written by the Company, less amounts paid to date. These reserves include estimates for both claims that have been reported and those that have not yet been reported, and include estimates of all expenses associated with processing and settling these claims. Case reserves are established by a claims handler on each individual claim and are adjusted as new information becomes known during the course of handling the claim. Incurred but not reported (“IBNR”) reserves represent the difference between the estimated ultimate cost of all claims and the actual loss and loss adjustment expenses reported to the Company by claimants (“reported losses”). Reported losses represent cumulative loss and loss adjustment expenses paid plus case reserves for outstanding reported claims. For most lines, Company actuaries evaluate the total reserves (IBNR and case reserves) on an accident year basis. An accident year is the calendar year in which a loss is incurred, or, in the case of claims-made policies, the calendar year in which a loss is reported. For certain lines acquired from the Navigators Group book of business, total reserves are evaluated on a policy year basis and then converted to accident year. A policy year is the calendar year in which a policy incepts.
Factors that Change Reserve Estimates- Reserve estimates can change over time because of unexpected changes in the external environment. Inflation in claim costs, such as with medical care, hospital care, automobile parts, wages and home and building repair, would cause claims to settle for more than they are initially reserved. Changes in the economy can cause an increase or decrease in the number of reported claims (claim frequency). For example, an improving economy could result in more automobile miles driven and a higher number of automobile reported claims, or a change in economic conditions can lead to more or less workers’ compensation reported claims. An increase in the number or percentage of claims litigated can increase the average settlement amount per claim (claim severity). Changes in the judicial environment can affect interpretations of damages and how policy coverage applies which could increase or decrease claim severity. Over time, judges or juries in certain jurisdictions may be more inclined to determine liability and award damages. New legislation can also change how damages are defined or change the statutes of limitations for the filing of civil suits, resulting in greater claim frequency or severity. In addition, new types of injuries may arise from exposures not contemplated when the policies were written. Past examples include pharmaceutical products, silica, lead paint, sexual molestation and sexual abuse and construction defects.
In the case of assumed reinsurance, all of the above risks apply. The Company assumes property and casualty risks from other insurance companies as part of its Global Re business acquired from Navigators Group and from certain pools and associations. Global Re, which is a part of the global specialty business, mostly assumes property, casualty, surety, agriculture, and marine risks and, until recently, assumed accident and health insurance risks. Changes in the case reserving and reporting patterns of insurance companies ceding to The Hartford can create additional uncertainty in estimating the reserves. Due to the inherent complexity of the assumptions used, final claim settlements may vary significantly from the present estimates of direct and assumed reserves, particularly when those settlements may not occur until well into the future.
Review of Reserve Adequacy- The Hartford regularly reviews the appropriateness of reserve levels at the line of business or more detailed level, taking into consideration the variety of trends that impact the ultimate settlement of claims.
The following is a discussion of the reserving methods used for the Company's property and casualty lines of business other than asbestos and environmental.
An expected loss ratio is used in initially recording the reserves for both short-tail and long-tail lines of business. This expected loss ratio is determined by starting with the average loss ratio of
Reserve Discounting- Most of the Company’s property and casualty insurance product reserves are not discounted. However, the Company has discounted liabilities funded through structured settlements and has discounted a portion of workers’ compensation reserves that have a fixed and determinable payment stream. For further discussion of these discounted liabilities, see Note 1 - Basis of Presentation and Significant Accounting Policies of Notes to Consolidated Financial Statements.
In the final step of the reserve review process, senior reserving actuaries and senior management apply their judgment to determine the appropriate level of reserves considering the actuarial indications and other factors not contemplated in the actuarial indications. Those factors include, but are not limited to, the assessed reliability of key loss trends and assumptions used in the current actuarial indications, the maturity of the accident
year, pertinent trends observed over the recent past, the level of volatility within a particular line of business, and the improvement or deterioration of actuarial indications in the current period as compared to the prior periods. The Company also considers the magnitude of the difference between the actuarial indication and the recorded reserves.
For a discussion of changes to reserve estimates recorded in 2020, see Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses in the Notes to Consolidated Financial Statements.
Directors' and officers' insurance- Uncertainty regarding the number and severity of class action suits can result in reserve volatility for both directors' and officers' insurance claims. Additionally, the Company’s exposure to losses under directors’ and officers’ insurance policies, both domestically and internationally, is primarily in excess layers, making estimates of loss more complex.
Assumed reinsurance- While the pricing and reserving processes can be challenging and idiosyncratic for insurance companies, the inherent uncertainties of setting prices and estimating such reserves are even greater for the reinsurer. This is primarily due to the longer time between the date of an occurrence and the reporting of claims to the reinsurer, the diversity of development patterns among different types of reinsurance treaties or contracts, the necessary reliance on the ceding companies for information regarding reported claims and differing pricing and reserving practices among ceding companies. In addition, trends that have affected development of liabilities in the past may not necessarily occur or impact liability
development in the same manner or to the same degree in the future. As a result, actual losses and LAE may deviate, perhaps substantially, from the expected estimates.
International business- In addition to several of the line-specific trends listed above, the International business acquired through the Navigators Group book of business may have additional uncertainty due to geopolitical, foreign currency, and trade dispute risks.
In addition to the direct impacts of COVID-19 mentioned above, we are monitoring for indirect impacts as well. In our commercial surety lines there continues to be the potential for elevated frequency and severity due to an increase in the number of bankruptcies, especially in small businesses and impacted industries such as hospitality, entertainment and transportation. In construction surety, there is the potential for elevated losses from contractors who experience project shutdowns or payment delays, which negatively impact their cash flows, or result in disruptions in their supply chains, labor shortages or inflation in the cost of materials.
As stated above, the Company’s practice is to estimate reserves using a variety of methods, assumptions and data elements within its reserve estimation process. The Company does not consistently use statistical loss distributions or confidence levels around its reserve estimate and, as a result, does not disclose reserve ranges.
The following discussion discloses possible variation from current estimates of loss reserves due to a change in certain key indicators of potential losses. For automobile liability lines in both Personal Lines and Commercial Lines, the key indicator is the annual loss cost trend, particularly the severity trend component of loss costs. For workers’ compensation and general liability, loss development patterns are a key indicator, particularly for more mature accident years. For workers’ compensation, paid loss development patterns have been impacted by medical cost inflation and other changes in loss cost trends. For general liability, incurred loss development patterns have been impacted by, among other things, emergence of new types of claims (e.g., construction defect claims) and a shift in the mixture between smaller, more routine claims and larger, more complex claims.
How A&E Reserves are Set- The process for establishing reserves for asbestos and environmental claims first involves estimating the required reserves gross of ceded reinsurance and then estimating reinsurance recoverables.
may change in the future and that the required adjustment to currently recorded reserves could be material to the Company’s results of operations and liquidity.
Rollforward of Property and Casualty Insurance Product Liabilities for Unpaid Losses and LAE for the Year Ended December 31, 2020
[3]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income.
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. In 2020, the Company received distributions, net of attorney costs, of $227.
[1]Prior accident year development does not include the benefit of a portion of losses ceded under the Navigators ADC which, under retroactive reinsurance accounting, is deferred and recognized over the period the ceded losses are recovered in cash from NICO. For additional information regarding the Navigators ADC agreement, refer to Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
[2]The “loss and loss expense paid ratio” represents the ratio of paid losses and loss adjustment expenses to earned premiums and fee income.
[3]“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
[2]“Prior accident year development (pts)” represents the ratio of prior accident year development to earned premiums.
Effective December 31, 2016, the Company entered into an A&E ADC reinsurance agreement with NICO, a subsidiary of Berkshire, to reduce uncertainty about potential adverse development. Under the A&E ADC, the Company paid a reinsurance premium of $650 for NICO to assume adverse net loss and allocated loss adjustment expense reserve development up to $1.5 billion above the Company’s existing net A&E reserves
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 have been recognized as a dollar-for-dollar offset to direct losses incurred. Cumulative ceded losses exceeding the $650 reinsurance premium paid have resulted in a deferred gain. As of December 31, 2020, the Company has incurred a cumulative $860 in adverse development on A&E reserves that have been ceded under the A&E ADC treaty with NICO, including $898 for Run-off A&E reserves and ($38) for A&E reserves in Commercial Lines and Personal Lines. As such, $640 of coverage is available for future adverse net reserve development, if any. As a result, the Company has recorded a $210 deferred gain within other liabilities, representing the difference between the reinsurance recoverable of $860 and ceded premium paid of $650. The deferred gain is 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 will result in charges against earnings, which may be significant.
Since December 31, 2016, asbestos and environmental net reserves have been declining since all adverse development has been ceded to NICO, up to a limit of $1.5 billion and the deferred gain on retroactive reinsurance has been recorded within other liabilities rather than in net loss and loss adjustment expense reserves. Recoveries from NICO will not be collected until the Company has cumulative loss payments of more than the $1.7 billion carrying value of net reserves as of December 31, 2016. Accordingly, the payment of losses without any current collection of recoveries from NICO has reduced the Company’s net loss reserves which decreases the net survival ratios such that, unadjusted, the net survival ratios would not be representative of the true number of years of average loss payments covered by the reserves. Therefore, the net survival ratios presented in the table below are calculated before considering the effect of the A&E ADC reinsurance agreement but net of other reinsurance in place.
[1] As of December 31, 2020, the one year net survival ratios after considering the reduction in reserves for losses ceded to the ADC were 4.1 and 2.6 for asbestos and environmental, respectively. As of December 31, 2020, the three year net survival ratios after considering the ADC were 4.7 and 2.7, respectively.
The Company performs its regular comprehensive annual review of asbestos and environmental reserves in the fourth quarter, including both Run-off A&E (P&C Other Operations) and asbestos and environmental reserves included in Commercial Lines and Personal Lines. As part of the evaluation of asbestos and environmental reserves in the fourth quarter of 2020, the Company reviewed all of its open direct domestic insurance accounts exposed to asbestos and environmental liability, as well as assumed reinsurance accounts.
and non-mesothelioma claims. In addition, average settlement values and defense costs were higher than anticipated, driven by elevated plaintiff demands. Overall, the number of claim filings in the period covered by the 2020 study was roughly flat with the 2019 study, driven by an increase in non-mesothelioma claim filings, while the number of mesothelioma claim filings decreased as expected. The increase in asbestos reserves was offset by $132 reinsurance recoverable under the NICO treaty, recognizing ($2) in reserve releases not subject to the NICO treaty.
As a result of the 2019 fourth quarter review, the Company increased estimated environmental reserves before NICO reinsurance in P&C Other Operations by $56, primarily due to regulatory remediation requirements that changed in 2019 for certain sites polluted by coal ash and resulted in more costly and extensive remediation plans, a higher than anticipated number of claims associated with PFAS, and increased defense and cleanup costs associated with Superfund sites. The increase in environmental reserves was offset by a $56 reinsurance recoverable under the NICO treaty.
•Known Direct Accounts- includes both Major Asbestos Defendants and Non-Major Accounts, and represent approximately 71% of the Company's total Direct gross asbestos reserves as of December 31, 2020 compared to approximately 73% as of December 31, 2019. Major Asbestos Defendants have been defined as the “Top 70” accounts in Tillinghast's published Tiers 1 and 2 and Wellington accounts, while Non-Major accounts are comprised of all other direct asbestos accounts and largely represent smaller and more peripheral defendants. Major Asbestos Defendants have the fewest number of asbestos accounts.
•Unallocated Direct Accounts- includes an estimate of the reserves necessary for asbestos claims related to direct insureds that have not previously tendered asbestos claims to the Company and exposures related to liability claims that may not be subject to an aggregate limit under the applicable policies. These exposures represent approximately 29% of the Company's Direct gross asbestos reserves as of December 31, 2020 compared to approximately 27% as of December 31, 2019.
The Company provides an allowance for uncollectible reinsurance, reflecting management’s best estimate of
Range of Prior Accident Year Unfavorable (Favorable) Development for the Ten Years Ended December 31, 2020
[1]Excluding the reserve increases for asbestos and environmental reserves, over the past ten years, reserve re-estimates for total property and casualty insurance ranged from (1.5%) to 1.0%.
variability for each of the segments are discussed under Critical Accounting Estimates for Property & Casualty Insurance Product Reserves and Asbestos and Environmental Reserves. See the section entitled Property & Casualty Other Operations, Annual Reserve Reviews about the impact that the A&E ADC retroactive reinsurance agreement with NICO may have on net reserve changes of asbestos and environmental reserves going forward.
[1]For the 2020 and 2019 calendar years, net favorable prior accident year development recognized in the Consolidated Statement of Operations was $(448) rather than $(136) and $65 rather than $81, respectively, as shown in this table as the Company recognized a $312 and $16 deferred gain on retroactive reinsurance. For additional information regarding the two adverse development cover reinsurance agreements, refer to Note 12 - Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
The net increases in estimates of ultimate losses for accident years 2010 and prior are driven mostly by increased reserves for asbestos and environmental reserves, and also by increased estimates for customs bonds, sexual molestation and sexual abuse and other mass torts claims.
Estimates of ultimate losses were decreased for accident years 2012 and 2013 due to favorable frequency and/or medical severity trends for workers’ compensation and favorable professional liability claim emergence. Favorable emergence of property lines of business, including catastrophes, for the 2013 accident year, is partially offset by increased reserves in automobile liability due to increased severity of large claims.
Changes in estimates of ultimate losses for accident years 2014 and 2015 were largely driven by unfavorable frequency and severity trends for personal and commercial automobile liability, increased severity of liability claims on package business and increased estimated severity on the acquired Navigators Group book of business related to U.S. construction, premises liability, products liability and excess casualty offset by favorable frequency and medical severity trends for workers' compensation.
Ultimate loss estimates were decreased for the 2017 accident year mainly due to release of reserves related to catastrophes, lower reserve estimates in personal automobile liability due to emergence of lower estimated severity and lower reserve estimates for workers’ compensation related to lower than previously estimated claim severity , somewhat offset by
Ultimate loss estimates were decreased for the 2018 accident year mainly due to reduction in estimated catastrophe reserves for California wildfires and for various wind and hail events. Reserve estimates were also reduced, to a lesser extent, for personal automobile liability which decreased due to lower than previously expected claim severity. These reserve decreases were slightly offset by increases in commercial automobile liability, professional liability and general liability. Commercial automobile liability reserve increases were related to higher estimated severity on middle & large commercial. Increases in general liability reserves for middle market and complex liability claims were also largely due to higher than previously expected severity. On the Navigators Group book of business, reserve increases for professional liability were related to large loss activity and increased estimated severity on directors and officers reserves.
Ultimate loss estimates were decreased for the 2019 accident year mainly due to favorable emergence of property lines of business, mainly related to catastrophes, slightly offset by increases in commercial automobile liability reserves due to higher than expected large losses in middle & large commercial.
Estimates for incurred but not reported ("IBNR") claims are made by applying completion factors to expected emerged experience by line of business. Included within IBNR are bulk reserves for claims reported but still within the waiting period until benefits are paid, typically 3 or 6 months depending on the contract. Completion factors are derived from standard actuarial techniques using triangles that display historical claim count emergence by incurral month. These estimates are reviewed for reasonableness and are adjusted for current trends and other factors expected to cause a change in claim emergence. The reserves include an estimate of unpaid claim expenses, including a provision for the cost of initial set-up of the claim once reported.
Discount Rate - The discount rate is the interest rate at which expected future claim cash flows are discounted to determine the present value. A higher selected discount rate results in a lower reserve. If the discount rate is higher than our future investment returns, our invested assets will not earn enough investment income to cover the discount accretion on our claim reserves which would negatively affect our profits. For each incurral year, the discount rates are estimated based on investment yields expected to be earned net of investment expenses. The incurral year is the year in which the claim is incurred and the estimated settlement pattern is determined. Once established, discount rates for each incurral year are unchanged except that LTD reserves assumed from the acquisition of Aetna's U.S. group life and disability business are all discounted using rates as of the November 1, 2017 acquisition date. The weighted average discount rate on LTD reserves was 3.4% in 2020 and 2019. Had the discount rate for each incurral year been 10 basis points lower at the time they were established, our LTD unpaid loss and loss adjustment expense reserves would be higher by $29, pretax, as of December 31, 2020.
for each claim is estimated using a predictive model that uses past Company experience, contract provisions, job characteristics and other claimant-specific characteristics such as diagnosis, time since disability began, and age. Actual claim termination experience will vary from period to period. Over the past 9 years, claim termination rates for a single incurral year have generally increased and have ranged from 6% below to 7% above current assumptions over that time period. For a single recent incurral year (such as 2020), a one percent decrease in our assumption for LTD claim termination rates would increase our reserves by $9. For all incurral years combined, as of December 31, 2020, a one percent decrease in our assumption for our LTD claim termination rates would increase our Group Benefits unpaid losses and loss adjustment expense reserves by $22.
We hedge our interest rate exposure over a three year period at the time we price and sell long-term disability policies and our weighted average discount rate assumption for the 2020 incurral year is up slightly from that of the 2019 incurral year.
Goodwill balances are reviewed for impairment at least annually, or more frequently if events occur or circumstances change that would indicate that a triggering event for a potential impairment has occurred. Effective January 1, 2020, the Company adopted updated accounting guidance on recognition and measurement of goodwill impairment, as required. The updated guidance requires recognition and measurement of goodwill impairment based on the excess of the carrying value of the reporting unit over its estimated fair value, up to the amount of the reporting unit’s goodwill.
growth, decreases in earnings projections and increases in the weighted average cost of capital will all cause a reporting unit’s fair value to decrease, increasing the possibility of impairment.
A reporting unit is defined as an operating segment or one level below an operating segment. The Company’s reporting units, for which goodwill has been allocated consist of Commercial Lines, Personal Lines, Group Benefits and Hartford Funds.
Evaluation of Credit Losses on Fixed Maturities, AFS and ACL on Mortgage Loans
or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated reserve at the low end of the range of losses.
[2]For discussion of consolidated investment results, see MD&A - Investment Results.
[2]Excludes Global Re and Continental Europe Operations and is before ceded reinsurance.
Net income decreased primarily due to a change from an underwriting gain in 2019 to an underwriting loss in 2020 and a change from net realized capital gains in 2019 to net realized capital losses in 2020, partially offset by higher net investment income. Also partially offsetting the decline in net income was $91 before tax of ADC ceded premium in the prior year period. For further discussion of investment results, see MD&A - Investment Results.
[1]Other of $43, $42, and $45 for 2020, 2019, and 2018, respectively, is included in the total.
Written premiums increased in 2020 with the growth attributable to the acquisition of Navigators Group. Excluding Navigators, written premiums declined in 2020 due to the economic impacts of COVID-19, including lower new business across most lines as well as reductions in estimated audit premiums and endorsements reducing premium in workers’ compensation due to a declining exposure base, partially offset by continued written pricing increases in all lines except workers' compensation.
In small commercial, renewal written price increases were slightly higher in 2020 than 2019, with mid-single digit to high single-digit rate increases in most lines, largely offset by written pricing decreases in workers’ compensation. In middle market, higher written pricing increases in 2020 were mostly due to double digit rate increases in middle market automobile and specialty excess liability lines and mid-single digit to high single-digit rate increases in most other middle market lines. In global specialty, our US wholesale book achieved an approximate 25% renewal written price increase, led by excess casualty, property and
•Small commercial written premium declined in 2020 driven by a decrease in workers compensation, partially offset by growth in package business.
•Middle & large commercial written premium decreased in 2020 driven by lower new business and premium retention across all lines, partially offset by the acquisition of Navigators Group. Middle & large commercial premium decreases in 2020 were primarily driven by declines in general industries, driven by underwriting actions to improve the profitability of that book, as well as in industry verticals and national accounts, partially offset by growth in specialty and commercial excess lines.
•Global specialty written premium increased in 2020 with the increase driven by the acquisition of Navigators Group. Apart from Navigators Group, written premium decreased slightly in 2020 due to a decline in wholesale and bond business, partially offset by growth in professional liability.
Current Accident Year Loss and LAE ratio before catastrophes increased in 2020, primarily due to COVID-19 incurred losses, net of favorable non-COVID-19 workers' compensation frequency as well as a slightly higher loss ratio in small commercial workers' compensation, partially offset by lower non-catastrophe property losses and margin improvement in the Navigators book, primarily in wholesale and global re.
2020 included COVID-19 incurred losses of $278 before tax, including losses of $141 in property, $66 in workers’ compensation, net of favorable frequency on other workers' compensation claims, and $71 in financial and other lines.
[3]For discussion of consolidated investment results, see MD&A - Investment Results.
[1] Premium retention for automobile decreased in the twelve months ended December 31, 2020 largely due to $81 of premium credits given to automobile policyholders. Excluding the impact of the premium credits, automobile premium retention would have been 86% in the twelve month period ended December 31, 2020.
In 2021, the Company expects written pricing increases in 2021 to be in the low single digits for automobile and high-single digits for homeowners. Rate increases in automobile will likely continue to moderate as lower claim frequency due to shelter-in-place guidelines during the pandemic is reflected in rate filings.
The Company expects the combined ratio for Personal Lines will be between approximately 94.0 and 96.0 for 2021 compared to 75.5 in 2020 as 2020 benefited from lower claim frequency due to fewer miles driven as a result of the pandemic as well as from favorable prior accident year development. The underlying combined ratio for Personal Lines is expected to be higher due to an increase in the current accident year loss and loss adjustment expense ratio before catastrophes in both automobile and homeowners. Current accident year catastrophes are assumed to be 7.2 points of the combined ratio in 2021 compared with 6.9 points in 2020. For automobile, we expect the underlying combined ratio to increase as automobile claim frequency rises again as we emerge from the pandemic. The underlying combined ratio for homeowners is also expected to increase in 2021, primarily driven by a return to a higher, more normal, level of non-catastrophe weather loss experience, partially offset by the effect of earned pricing increases.
Underwriting gain in 2020 increased primarily due to favorable prior accident year development in the 2020 period driven by a reduction in prior year catastrophe reserves, lower current accident year losses in automobile due to effects of the COVID-19 pandemic, a reduction in non-catastrophe weather losses in homeowners, and lower underwriting expenses, partially offset by a reduction in earned premium, including the effect of $81 in premium credits given to automobile policyholders in the second quarter of 2020.
Earned premiums decreased in 2020, reflecting a decline in written premium over the prior twelve months in both Agency and in AARP Direct and, the effect of $81 of premium credits given to automobile policyholders in the second quarter of 2020 in recognition of shelter-in-place guidelines that have resulted in a decline in miles driven.
Written premiums decreased in 2020 in AARP Direct and Agency. For automobile, written premium in 2020 included a reduction for the $81 of premium credits given to policyholders in the second quarter. Written premium for both automobile and homeowners declined as the amount of non-renewed premium exceeded the new business premium. New business increased slightly in automobile and declined in homeowners.
Renewal written pricing increases were lower in 2020 in automobile in response to moderating loss cost trends. For homeowners, while written pricing increases had moderated during the first half of 2020, written pricing increases were higher in the second half of 2020 due to the rate need arising from catastrophe and other property claims experience.
Premium retention for automobile decreased in 2020 mostly due to the $81 of automobile premium credits given to policyholders in the second quarter of 2020. Premium retention for homeowners improved in 2020 driven by renewal rate increases, partially offset by a decline in policy count retention in the second half of 2020.
Policies in-force decreased in 2020 in both automobile and homeowners, driven by not generating enough new business to offset the loss of non-renewed policies.
Prior accident year development was favorable in 2020, principally due to a reduction in catastrophe loss reserves and, to a lesser extent, lower than previously expected AARP Direct automobile liability claim severity for the 2017 to 2019 accident years. The reduction in catastrophe loss reserves was
Unfavorable prior accident year development in 2020 primarily included a $208 charge for increases in A&E reserves and a $35 increase in ULAE reserves which was largely driven by the higher estimate for A&E claims. Before NICO reinsurance, A&E reserves were increased by $236 in P&C Other Operations, including $130 for asbestos and $106 for environmental. Cumulative adverse A&E reserve development on both ongoing operations and P&C Other Operations totaled $860 through December 31, 2020 and since this amount exceeds ceded premium paid for the A&E ADC of $650, the Company recognized a $210 deferred gain on retroactive reinsurance in 2020, all recognized within P&C Other Operations.
Asbestos Reserves prior accident year development in 2020 before NICO reinsurance of $130 was primarily due to a higher rate of claim settlements, particularly with certain larger, national defendants, higher than expected average settlement values and defense costs, and an increase in the Company's
estimated share of liability under pending or potential cost sharing agreements and settlements.
The Company expects Group Benefits fully insured ongoing premiums to increase modestly in 2021 due to modestly higher book persistency and continued strong sales which is expected to offset continued lagging employment levels as a result of the pandemic. In 2021, the segment's net income margin is expected to be between 3.5% and 4.5%, compared to a net income margin of 6.4% in 2020. The expected decrease in net income margin largely reflects downward pressure on pricing due to recent historical favorable claim incidence, an expectation of less favorable claim incidence and recoveries on long-term disability claims in 2021 and lower expected investment yields, partially offset by an expectation of lower excess mortality caused by COVID-19 though that is subject to significant uncertainty. The expected net income margin of 3.5% to 4.5% assumes excess mortality of $160 before tax, largely in the first half of 2021 with the most significant portion in the first quarter of 2021. Margins on long-term disability business are expected to decline as the favorable long-term disability loss trends begin to reverse due to economic factors and as price competition intensifies, partly driven by customer behavior to seek multiple bids for renewal. Margins on group life business in 2021 will largely depend on how long COVID-19 infections continue in 2021 pending the timing of distribution and citizen acceptance of vaccines. Management expects that the 2021 core earnings margin, which does not include the effect of net realized capital gains (losses) or integration costs associated with the acquired business, will be in the range of 3.7% to 4.7%, down from a 2020 core earnings margin of 6.4%.
Fully insured ongoing premiums decreased in 2020 with a decrease in both group disability and group life with the declines resulting primarily from lower insured exposure on in-force policies. Premiums for voluntary business increased primarily due to strong sales and persistency.
Total loss ratio increased 2.2 points in 2020 reflecting a higher group life loss ratio, partially offset by a lower group disability loss ratio. The group life loss ratio increased 8.0 points primarily due to a higher current incurral year loss ratio driven by higher mortality, including $239 of excess mortality due to the direct and indirect effects of COVID-19. Prior incurral year development for group life was more favorable due to favorable mortality emergence on the prior incurral year recognized in the three month period ended March 31, 2020, partially offset by the reserve assumption update related to late reported death claims. The group disability loss ratio decreased 1.2 points with a 0.6 point improvement in the current incurral year loss ratio and 0.3 points of more favorable prior incurral year development. The current incurral year group disability loss ratio improved 0.6 points as lower claim incidence more than offset 1.0 points ($29) of COVID-19 short-term disability and New York Paid Family Leave claims. The more favorable prior incurral year development in group disability was driven by higher claim recoveries and continued improving claim incidence, partially offset by the favorable impacts in 2019 from the long term disability reserve assumption update.
Expense ratio increased 0.7 points in 2020. The expense ratio increased largely due to the decline in premiums and other considerations as higher IT and other costs related to improving the customer experience was largely offset by lower incentive compensation, employee benefits, and travel costs.
[1]For discussion of income taxes, see Note 17 - Income Taxes of Notes to Consolidated Financial Statements.
[2]Represents annualized earnings divided by a daily average of assets under management, as measured in basis points.
[1]Represents AUM of the life and annuity business sold in May 2018 that is still managed by the Company's Hartford Funds segment.
[2]For discussion of debt, see Note 14 - Debt of Notes to Consolidated Financial Statements.
Net loss increased in 2020 compared to 2019 primarily due to restructuring costs of $104 before tax, lower net investment
income, lower transition services revenue, and lower income from the Company's retained equity interest in the former life and annuity operations, partially offset by a $90 before tax loss on extinguishment of debt in 2019, transaction costs incurred in 2019 in connection with the acquisition of Navigators Group and lower interest expense.
Interest expense decreased primarily due to the repayment of our 5.5% senior notes in March of 2020. For additional information, see Note 14 - Debt of Notes to the Consolidated Financial Statements.
•Property- Risk of loss to personal or commercial property from automobile related accidents, weather, explosions, smoke, shaking, fire, theft, vandalism, inadequate installation, faulty equipment, collisions and falling objects, and/or machinery mechanical breakdown resulting in physical damage and other covered perils.
•Liability- Risk of loss from automobile related accidents, uninsured and underinsured drivers, lawsuits from accidents, defective products, breach of warranty, negligent acts by professional practitioners, environmental claims, latent exposures, fraud, coercion, forgery, failure to fulfill obligations per contract surety, liability from errors and omissions, losses from political and credit coverages, losses from derivative lawsuits, and other securities actions and covered perils.
•Morbidity- Risk of loss to an insured from illness incurred during the course of employment or illness from other covered perils.
•Cyber Insurance- Risk of loss to property, breach of data and business interruption from various types of cyber-attacks.
Impact Non-catastrophe insurance risk can arise from unexpected loss experience, underpriced business and/or underestimation of loss reserves and can have significant effects on the Company’s earnings. Catastrophe insurance risk can arise from various unpredictable events and can have significant effects on the Company's earnings and may result in losses that could constrain its liquidity.
[2]For U.S. insurance subsidiaries, reported capital and surplus is equal to actual U.S. statutory capital and surplus. For Navigators Insurers in non-U.S. jurisdictions, reported capital and surplus is equal to U.S. GAAP equity of those subsidiaries less certain assets such as goodwill and intangible assets.
The Company uses reinsurance to transfer certain risks to reinsurance companies based on specific geographic or risk concentrations. A variety of traditional reinsurance products are used as part of the Company's risk management strategy, including excess of loss occurrence-based products that reinsure property and workers' compensation exposures, and individual risk (including facultative reinsurance) or quota share arrangements, that reinsure losses from specific classes or lines of business. The Company has no significant finite risk contracts in place and the statutory surplus benefit from all such prior year contracts is immaterial. The Hartford also participates in governmentally administered reinsurance facilities such as the Florida Hurricane Catastrophe Fund (“FHCF”), the Terrorism Risk Insurance Program (“TRIPRA”) and other reinsurance programs relating to particular risks or specific lines of business.
Reinsurance for Catastrophes- The Company utilizes various reinsurance programs to mitigate catastrophe losses including excess of loss occurrence-based treaties covering property and workers’ compensation, and an aggregate property catastrophe treaty. The aggregate property catastrophe treaty covers the
[1] These treaties do not cover the assumed reinsurance business which purchases its own retrocessional coverage.
[2]In addition to the Per Occurrence Property Catastrophe Treaty, for Florida wind events, The Hartford has purchased the mandatory FHCF reinsurance for the annual period starting at June 1, 2020. Retention and coverage varies by writing company. The writing company with the largest coverage under FHCF is Hartford Insurance Company of the Midwest, with coverage estimated at approximately $55 of per event losses in excess of a $24 retention (estimates are based on best available information at this time and are periodically updated as information is made available by Florida).
[3]Portions of this layer of coverage extend beyond a traditional one year term.
[5]In addition to the limits shown, the workers' compensation reinsurance includes a non-catastrophe, industrial accident layer, providing coverage for 80% of $30 in per event losses in excess of a $20 retention.
[6]Named hurricanes and tropical storms are defined as any storm or storm system declared to be a hurricane or tropical storm by the US National Hurricane Center, US Weather Prediction Center, or their successor organizations (being divisions of the US National Weather Service).
Reinsurance for Terrorism- For the risk of terrorism, private sector catastrophe reinsurance capacity is generally limited and largely unavailable for terrorism losses caused by nuclear, biological, chemical or radiological attacks. As such, the Company's principal reinsurance protection against large-scale terrorist attacks is the coverage currently provided through TRIPRA to the end of 2027.
TRIPRA provides a backstop for insurance-related losses resulting from any “act of terrorism”, which is certified by the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General, for losses that exceed a threshold of industry losses of $200. Under the program, in any one calendar year, the federal government will pay a percentage of losses incurred from a certified act of terrorism after an insurer's losses exceed 20% of the Company's eligible direct commercial earned premiums of the prior calendar year up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. The percentage of losses paid by the federal government is 80% . The Company's estimated deductible under the program is $1.6 billion for 2021. If an act of terrorism or acts of terrorism result in covered losses exceeding the $100 billion annual industry aggregate limit, Congress would be responsible for determining how additional losses in excess of $100 billion will be paid.
Reinsurance for A&E and Navigators Group Reserve Development - The Company has two adverse development cover (“ADC”) reinsurance agreements in place, both of which are accounted for as retroactive reinsurance. One agreement covers substantially all A&E reserve development for 2016 and prior accident years (the “A&E ADC”) and the other covers substantially all reserve development of Navigators Insurance
Company and certain of its affiliates for 2018 and prior accident years (“Navigators ADC”). For more information on the A&E ADC and the Navigators ADC, see Note 1, Basis of Presentation and Significant Accounting Policies, and Note 12, Reserve for Unpaid Losses and Loss Adjustment Expenses of Notes to Consolidated Financial Statements.
Property and Casualty insurance product reinsurance recoverables represent loss and loss adjustment expense recoverables from a number of entities, including reinsurers and pools. A portion of the total gross reinsurance recoverables balance relates to the Company’s participation in various mandatory (assigned) and involuntary risk pools and the value of annuity contracts held under structured settlement agreements.
The table below shows the gross and net reinsurance recoverables reported in the Property and Casualty and Group Benefits reporting segments as well as Corporate.
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
As part of its risk management strategy, the Company regularly monitors the financial strength of other insurers and, in particular, activity by insurance regulators and various state guaranty associations in the U.S. relating to troubled insurers. In all states, insurers licensed to transact certain classes of insurance are required to become members of a guaranty fund.
Operational risk is the risk of loss resulting from inadequate or failed internal processes and systems, human error, or from external events.
•Provided support to employees through our Corporate, Health & Well-being team composed of healthcare professionals to identify and isolate employees with potential COVID-19 exposure.
The Hartford has implemented an information protection program with established governance routines that promote an adaptive approach for assessing and managing risks. The Hartford employs a ‘defense-in-depth’ strategy that uses multiple security measures to protect the integrity of the Company's information assets. This ‘defense-in-depth’ strategy aligns to the National Institute of Standards and Technology ("NIST") Cyber Security Framework and provides preventative, detective and responsive measures that collectively protects the Company. Various cyber assurance methods, including security metrics, third party security assessments, external penetration testing, red team exercises, and cyber war game exercises are used to test the effectiveness of the overall cybersecurity control environment.
trading the Company's securities during the investigation and assessment of such cybersecurity incidents.
From a governance perspective, senior members of our Enterprise Risk Management, Information Protection and Internal Audit functions provided detailed, regular reports on cybersecurity matters in 2020 to the Board, including the Finance, Investment, and Risk Management Committee ("FIRMCo"), a committee consisting of all directors and the Audit Committee, which oversees controls for the Company's major risk exposures, and has principal responsibility for oversight of cybersecurity risk. The topics covered by these updates include the Company's activities, policies and procedures to prevent, detect and respond to cybersecurity incidents, as well as lessons learned from cybersecurity incidents and internal and external testing of our cyber defenses.
Consistent with its risk appetite, the Company establishes financial risk limits to control potential loss on a U.S. GAAP, statutory, and economic basis. Exposures are actively monitored and managed, with risks mitigated where appropriate. The Company uses various risk management strategies, including limiting aggregation of risk, portfolio re-balancing and hedging with over-the-counter and exchange-traded derivatives with counterparties meeting the appropriate regulatory and due diligence requirements. Derivatives are utilized to achieve the following Company-approved objectives: hedging risk arising from interest rate, equity market, commodity market, credit spread and issuer default, price or currency exchange rate risk or volatility; managing liquidity; controlling transaction costs; and engaging in income generation covered call transactions and synthetic replication transactions. Derivative activities are monitored and evaluated by the Company’s compliance and risk management teams and reviewed by senior management. The Company identifies different categories of financial risk, including liquidity, credit, interest rate, equity and foreign currency exchange.
Impact Inadequate capital resources and liquidity could negatively affect the Company’s overall financial strength and its ability to generate cash flows from its businesses, borrow funds at competitive rates and raise new capital to meet operating and growth needs.
Refer to the Capital Resources & Liquidity section of MD&A for the discussion of what the Company is doing to manage liquidity during the COVID-19 pandemic.
•Clearing derivative transactions through central clearing houses that require daily variation margin;
•Entering into derivative and reinsurance contracts only with strong creditworthy institutions
Downgrades to the credit ratings of the Company’s insurance operating companies may have adverse implications for its use of derivatives. In some cases, downgrades may give derivative counterparties for OTC derivatives and clearing brokers for OTC-cleared derivatives the right to cancel and settle outstanding derivative trades or require additional collateral to be posted. In addition, downgrades may result in counterparties and clearing brokers becoming unwilling to engage in or clear additional derivatives or may require additional collateralization before entering into any new trades.
The Company also has derivative counterparty exposure policies which limit the Company’s exposure to credit risk. Credit exposures are generally quantified based on the prior business day’s net fair value, including income accruals, of all derivative positions transacted with a single counterparty for each separate legal entity. The notional amount of derivative contracts represents the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. The Company enters into collateral arrangements in connection with its derivatives positions and collateral is pledged to or held by, or on behalf of, the Company to the extent the exposure is greater than zero, subject to minimum transfer thresholds or negotiated thresholds, if applicable. In accordance with industry standards and the contractual requirements, collateral is typically settled on the same business day. For further discussion, see the Derivative Commitments section of Note 15 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
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 regular monitoring. For more information, see Note 8- Premiums Receivable and Agents' Balances of Notes to the Consolidated Financial Statements.
Management The Company manages its exposure to interest rate risk by constructing investment portfolios that seek
The Company utilizes a variety of derivative instruments to mitigate interest rate risk associated with its investment portfolio or to hedge liabilities. Interest rate caps, floors, swaps, swaptions, and futures may be used to manage portfolio duration. Interest rate swaps are primarily used to convert interest receipts or payments to a fixed or variable rate. The use of such swaps enables the Company to customize contract terms and conditions to desired objectives and manage the duration profile within established tolerances. Interest rate swaps are also used to hedge the variability in the cash flows of a forecasted purchase or sale of fixed rate securities due to changes in interest rates. As of December 31, 2020 and 2019, notional amounts pertaining to derivatives utilized to manage interest rate risk, including offsetting positions, totaled $10.7 billion and $11.4 billion, respectively, and primarily relate to hedging invested assets. The fair value of these derivatives was $(69) and $(59) as of December 31, 2020 and 2019, respectively.
Group life and disability product liabilities The cash outflows associated with contracts issued by the Company's Group Benefits segment, primarily group life and short and long-term disability policy liabilities, are not interest rate sensitive but vary based on timing. Though the aggregate cash flow payment streams are relatively predictable, these products rely upon actuarial pricing assumptions (including mortality and morbidity) and have an element of cash flow uncertainty. As of December 31, 2020 and 2019, the Company had $8,653 and $8,667, respectively of reserves for group life and disability contracts. Changes in the value of the liabilities as a result of changes in interest rates will impact the fair value of these instruments but not the carrying value in the Company's Consolidated Balance Sheets.
The selection of the 100 basis point parallel shift in the yield curve was made only as an illustration of the potential hypothetical impact of such an event and should not be construed as a prediction of future market events. Actual results could differ
The following table provides an analysis showing the estimated before tax change in the fair value of the Company’s investments and related derivatives, excluding assets supporting group life and disability reserves which are included in the table above, assuming 100 basis point upward and downward parallel shifts in the yield curve as of December 31, 2020 and 2019. Certain financial instruments, such as limited partnerships and other alternative investments, have been omitted from the analysis as the interest rate sensitivity of these investments is generally lower and less predictable than fixed income investments.
[1] Prior year numbers have been updated to exclude the invested assets supporting the surplus associated with group benefits short and long-term disability reserves.
The carrying value of fixed maturities, commercial mortgage loans and short-term investments related to the businesses included in the table above was $40.7 billion and $37.3 billion as of December 31, 2020 and 2019, respectively.
A 100 basis point parallel decrease in the yield curve would result in an increase in the fair value of long-term debt by $670 and $607 as of December 31, 2020 and 2019, respectively. A 100 basis point parallel increase in the yield curve would result in a decrease in the fair value of long-term debt by $551 and $499 as of December 31, 2020 and 2019, respectively. Changes in the value of long-term debt as a result of changes in interest rates will not impact the carrying value in the Company's Consolidated Balance Sheets.
The Company has identified three principal types of outstanding contracts that may be affected by the discontinuation of or transition from LIBOR to an alternative reference rate, including floating rate fixed maturity investments the Company holds in its investment portfolio; derivative instruments that hedge interest rate risk; and two classes of junior subordinated debentures that the Company has issued and are currently outstanding.
Company will continue to assess the remaining holdings and work with counterparties, as appropriate, to determine LIBOR replacement language or manage the assets in other ways, such as through asset sales.
•The Company has issued $1.1 billion of junior subordinated debentures that mature after 2021 with LIBOR referenced floating interest rates. The Company is assessing options to manage the risk associated with the transition away from LIBOR related to these outstanding securities.
There is also a risk that certain derivatives may no longer qualify for hedge accounting if reference rates change on derivative contracts but the reference interest rate of the instruments being hedged do not change in a substantially similar manner, particularly for cash flow hedges of floating rate investments the Company owns and junior subordinated debentures the Company has issued. The loss of hedge accounting could result in the recognition of gains or losses on derivatives in the income statement rather than in accumulated other comprehensive income. The Company has 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 the financial instrument and its hedge is only affected by the change to a replacement rate. The guidance expires for contract modifications made and hedge relationships entered into or evaluated after December 31, 2022, after which, there is uncertainty whether certain outstanding derivative contracts will continue to qualify for hedge accounting either because the replacement rate of the financial instrument being hedged is not sufficiently matched to the reference rate of the derivative contract or because replacement rate language for the hedged instrument has not been determined.
Sources of Equity Risk The Company has exposure to equity risk from invested assets, assets that support the Company’s pension and other post-retirement benefit plans, and fee income derived from Hartford Funds assets under management. In addition, the Company has equity exposure through its 9.7% ownership interest in the limited partnership, Hopmeadow Holdings LP, that owns the life and annuity business
alternative assets and limited partnerships, the Company's share of earnings for the period is recorded in net investment income, though typically on a delay based on the availability of the underlying financial statements. For a discussion of equity sensitivity, see below.
Impact Changes in relative values between currencies can create variability in cash flows and realized or unrealized gains and losses on changes in the fair value of assets and liabilities. The impact on the fair value of fixed maturities, AFS due to changes in foreign currency exchange rates, in relation to functional currency, is reported in unrealized gains or losses as part of other comprehensive income. The realization of gains or losses resulting from investment sales or from changes in investments that record changes in fair value through the income statement due to changes in foreign currency exchange rates is reflected through net realized capital gains and losses.
Management The Company manages its foreign currency exchange risk primarily through asset-liability matching and through the use of derivative instruments. However, legal entity
capital is invested in local currencies in order to satisfy regulatory requirements and to support local insurance operations. The foreign currency exposure of non-U.S. dollar denominated investments will most commonly be reduced through the sale of the assets or through hedges using foreign currency swaps and forwards.
[1]Amount excludes currencies where the value of net assets in U.S. dollar equivalent is less than 1% of total net assets of the Company.
•A decrease in the value of certain fixed-income and equity securities in our investment portfolio, due in part to credit spreads widening or a decline in equity market levels, may result in a decrease in statutory surplus and RBC ratios.
•Non-market factors can also impact the amount and volatility of either our actual or potential obligation, as well as the related statutory surplus and RBC ratios.
Most of these factors are outside of the Company’s control. Among other factors, rating agencies consider the level of statutory capital and surplus of our U.S. insurance subsidiaries as
The following table presents the Company’s fixed maturities, AFS, by credit quality. The credit ratings referenced throughout this section are based on availability and are generally the midpoint of the available ratings among Moody’s, S&P, and Fitch. If no rating is available from a rating agency, then an internally developed rating is used. Accrued interest receivable related to fixed maturities are recorded in other assets on the Consolidated Balance Sheets and are not included in the amortized cost or fair value of the fixed maturities. For further information refer to Note 6 - Investments.
The fair value of fixed maturities, AFS increased as compared to December 31, 2019, primarily due to net additions of corporate securities and an increase in valuations as a result of a decline in interest rates.
The fair value of fixed maturities, AFS increased as compared with December 31, 2019, primarily due to net additions of corporate securities and an increase in valuations as a result of a decline in interest rates. The Company increased holdings in consumer cyclical and non-cyclical, financial services and technology/communication corporate bonds as well as in CLOs and taxable municipal bonds, while reducing holdings in tax-exempt municipal bonds, RMBS, and foreign government/government agencies.
the energy sector totals approximately 3% of invested assets as of December 31, 2020 and is primarily comprised of investment grade corporate debt. These investments are diversified by issuer and different sub-sectors of the energy market, with the highest exposure to the midstream industry and the lowest to refining services. The following table summarizes the Company's exposure to the energy sector by security type and credit quality.
The Company manages the credit risk associated with the energy sector within the investment portfolio on an on-going basis using macroeconomic analysis and issuer credit analysis. The Company considers alternate scenarios including oil prices remaining at low levels for an extended period and/or declining significantly below current levels. For additional details regarding the Company’s management of credit risks, see the Credit Risk Section of this MD&A. The Company has evaluated available-for-sale securities with exposure to energy for a potential ACL as of December 31, 2020 and concluded that for all but one of the securities in an unrealized loss position, it is more likely than not that the Company will recover the entire amortized cost basis of the securities. In addition, no other securities in the table above have been identified as intent-to-sell, nor is the Company required to sell. For additional details regarding the Company’s credit loss assessment process, see the Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments section below.
The following table presents the Company’s exposure to CMBS and RMBS by current credit quality included in the preceding Fixed Maturities, AFS by Type table.
As of December 31, 2020, mortgage loans had an amortized cost of $4.5 billion and carrying value of $4.5 billion, with an ACL of $38. As of December 31, 2019, mortgage loans had an amortized cost of $4.2 billion and carrying value of $4.2 billion with no valuation allowance. The increase in the allowance is attributable
mortgage loans held for sale as of December 31, 2020 or December 31, 2019.
municipal bonds by type and weighted average credit quality included in the preceding Securities by Type table.
As of December 31, 2020, the largest issuer concentrations were the New York Dormitory Authority, the Commonwealth of Massachusetts, and the New York City Municipal Water Finance Authority, which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation and revenue bonds. As of December 31, 2019, the largest issuer concentrations were the New York Dormitory Authority, the New York City Transitional Finance Authority, and the Commonwealth of Massachusetts, which each comprised less than 3% of the municipal bond portfolio and were primarily comprised of general obligation and revenue bonds. In total, municipal bonds make up 17% of the fair value of the Company's investment portfolio. While COVID-19 has had an impact on many municipal issuers, the average credit quality of the Company’s holdings is AA-, and the Company believes the issuers in which it invests have multiple levers to maintain the strength of their credit profile.
The following table presents the Company’s investments in limited partnerships and other alternative investments which include hedge funds, real estate funds, and private equity funds. Real estate funds consist of investments primarily in real estate joint ventures and, to a lesser extent, equity funds. Private equity funds primarily consist of investments in funds whose assets typically consist of a diversified pool of investments in small to mid-sized non-public businesses with high growth potential, and
strong owner sponsorship, as well as limited exposure to public markets.
[1]Consists of an insurer-owned life insurance policy which is primarily invested in fixed income, private equity, and hedge funds.
As part of the Company’s ongoing investment monitoring process, the Company has reviewed its fixed maturities, AFS in an unrealized loss position and concluded that these fixed maturities are temporarily depressed and are expected to recover in value as the investments approach maturity or as market spreads tighten. For these fixed maturities in an unrealized loss position where an ACL has not been recorded, the Company’s best estimate of expected future cash flows are sufficient to recover the amortized cost basis of the investment. Furthermore, the Company neither has an intention to sell nor does it expect to be required to sell these investments. For further information regarding the Company’s ACL analysis, see the Credit Losses on Fixed Maturities, AFS and Intent-to-Sell Impairments section below.
Unrealized Loss Aging for Fixed Maturities, AFS Continuously Depressed Over 20%
The Company recorded net credit losses on fixed maturities, AFS of $28. The losses were primarily attributable to corporate fixed maturities, mainly one private regional and commercial aircraft lessor and to a lesser extent, one tax-exempt municipal bond impacted by COVID-19. Unrealized losses on securities with ACL recognized in other comprehensive income were $1. For further information, refer to Note 6 - Investments of Notes to Consolidated Financial Statements.
The Company incorporates its best estimate of future performance using internal assumptions and judgments that are informed by economic and industry specific trends, as well as our expectations with respect to security specific developments.
Future intent-to-sell impairments or credit losses may develop as the result of changes in our intent to sell specific securities that are in an unrealized loss position or if modeling assumptions, such as macroeconomic factors or security specific developments, change unfavorably from our current modeling assumptions, resulting in lower cash flow expectations. For a discussion of impacts resulting from the COVID-19 pandemic, refer to the Impact of COVID-19 on our financial condition, results of operations and liquidity section of this MD&A.
Capital available to the holding company as of December 31, 2020:
•A senior unsecured five-year revolving credit facility that provides for borrowing capacity up to $750 of unsecured credit through March 29, 2023. As of December 31, 2020, there were no borrowings outstanding.
•An intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. As of December 31, 2020, there were no borrowings outstanding.
•P&C - The Company's U.S. property and casualty insurance subsidiaries have dividend capacity of $1.7 billion for 2021, with $850 to $900 of net dividends expected in 2021.
•Group Benefits - HLA has dividend capacity of $295 in 2021 with $250 to $295 of dividends expected in 2021.
•Hartford Funds - HFSG Holding Company expects to receive $125 to $150 in dividends from Hartford Funds in 2021.
Expected liquidity requirements for the next twelve months as of December 31, 2020:
•$21 dividends on preferred stock, subject to the discretion of the Board of Directors.
In parts of the second and third quarters of 2020, the Company waived late payment fees for a period of time for business and personal insurance customers and temporarily suspended the
policy cancellation process for policyholders of our Commercial Lines, Personal Lines and Group Benefits segments. Due to those actions and the economic effects of the pandemic, we experienced an increase in uncollectible premiums receivable and, accordingly, increased our current expected credit loss allowance on premiums receivable by $40 before tax for the year ended December 31, 2020.
In July 2020, the Company contributed €18 million to Navigators Holdings (Europe) N.V., a Belgium holding company.
In September 2020, the Company received a $30 dividend from its retained equity interest in the legal entity that acquired the life and annuity business sold in May 2018.
Through December 30, 2020, HFSG Holding Company received cash tax receipts of $533, including realization of net operating losses and refunds of prior period AMT credits.
Under the previous $1.0 billion share repurchase authorization that was effective through December 31, 2020, the Company repurchased 2.7 million and 3.4 million shares for $150 and $200 during the years ended 2020 and 2019, respectively. The Company’s 2019 share repurchase program expired on December 31, 2020.
The Hartford's Board of Directors declared the following quarterly dividends since October 1, 2020:
statutory insurance accounting principles. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer’s earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner.
Corporate members of Lloyd's Syndicates may pay dividends to its parent to the extent of available profits that have been distributed from the syndicate in excess of the Funds at Lloyd's ("FAL") capital requirement. The FAL is determined based on the syndicate’s solvency capital requirement under the Solvency II capital adequacy model, the current regulatory framework governing UK domiciled insurers, plus a Lloyd’s specific economic capital assessment.
The Hartford filed an automatic shelf registration statement with the Securities and Exchange Commission ("the SEC") on May 17, 2019 that permits it to offer and sell debt and equity securities during the three-year life of the registration statement.
The Company has $2.0 billion available under an intercompany liquidity agreement that allows for short-term advances of funds among the HFSG Holding Company and certain affiliates of up to $2.0 billion for liquidity and other general corporate purposes. The Connecticut Department of Insurance ("CTDOI") granted approval for certain affiliated insurance companies that are parties to the agreement to treat receivables from a parent, including the HFSG Holding Company, as admitted assets for statutory accounting purposes.
As of December 31, 2020, there were no amounts outstanding at the HFSG Holding Company.
As a result of the acquisition of Navigators Group, The Hartford had two letter of credit facility agreements: the Club Facility and the Bilateral Facility, which were 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, or $78, were outstanding under the Club Facility and £18 million, or $23, was outstanding under the $25 Bilateral Facility. These agreements terminated on November 5, 2020.
On November 5, 2020, The Hartford entered into a new committed credit facility agreement with a syndicate of lenders (the “Club Facility”). The Club Facility has two tranches with one tranche extending a $104 commitment and the other tranche extending a £85 million ($116 as of December 31, 2020) commitment. In addition, on November 5, 2020, The Hartford entered into a new non-committed $25 credit facility with a lender (the “Bilateral Facility”). The term of both of these facilities is two years. The purpose of these facilities is to issue letters of credit to provide Funds at Lloyd’s to support underwriting capacity provided by the Navigators Corporate Underwriters Limited to the Lloyd’s Syndicate for the 2021 and 2022 underwriting years of account (and prior open years). As of December 31, 2020, letters of credit with an aggregate face amount of $104 and £85 million, or $116, were outstanding under the Club Facility and no letters of credit were outstanding under the Bilateral Facility.
Among other covenants, the Club Facility and Bilateral Facility contain financial covenants regarding The Hartford’s consolidated net worth and financial leverage and that limit the amount of letters of credit that can support Funds at Lloyd’s, consistent with Lloyd’s requirements. As of December 31, 2020, The Hartford was in compliance with all financial covenants of both facilities.
Certain of the Company’s derivative agreements contain provisions that are tied to the financial strength ratings, as set by nationally recognized statistical agencies, of the individual legal entity that entered into the derivative agreement. If the legal entity’s financial strength were to fall below certain ratings, the counterparties to the derivative agreements could demand immediate and ongoing full collateralization and in certain instances enable the counterparties to terminate the agreements and demand immediate settlement of all outstanding derivative positions traded under each impacted bilateral agreement. For further information, refer to Note 15 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
The Company’s insurance operations consist of property and casualty insurance products (collectively referred to as “Property & Casualty Operations”) and Group Benefits.
The Company's insurance operations hold fixed maturity securities including a significant short-term investment position (securities with maturities of one year or less at the time of purchase) to meet liquidity needs. Liquidity requirements that are
[1]The following points are significant to understanding the cash flows estimated for obligations (gross of reinsurance) under property and casualty contracts:
•Reserves for Property & Casualty unpaid losses and loss adjustment expenses include IBNR and case reserves. While payments due on claim reserves are considered contractual obligations because they relate to insurance policies issued by the Company, the ultimate amount to be paid to settle both case reserves and IBNR is an estimate, subject to significant uncertainty. The actual amount to be paid is not finally determined until the Company reaches a settlement with the claimant. Final claim settlements may vary significantly from the present estimates, particularly since many claims will not be settled until well into the future.
[2] Estimated group life and disability obligations are based on assumptions comparable with the Company’s historical experience, modified for recent observed trends. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. As of December 31, 2020, the total group life and disability obligations in the above table are gross of a reserve discount of $1.4 billion.
[4] Long-term debt obligations include payments of contractual principal and interest through final maturity. Contractual interest payments are based on stated rates for fixed rate notes and based on prevailing rates at December 31, 2020 for the period of time the Company’s junior subordinated debentures have floating rates. Interest payments do not consider the impact of future rate movements. Payments exclude amounts associated with an interest rate swap of the Company’s $500 junior subordinated debenture. See Note 14 - Debt of Notes to Consolidated Financial Statements for additional discussion of long-term debt obligations.
[5]Includes $1.1 billion in commitments to purchase investments including approximately $804 of limited partnership and other alternative investments, $79 of private debt and equity securities, and $236 of mortgage loans. Of the $1.1 billion in commitments to purchase investments, $149 are related to mortgage loan commitments which the Company can cancel unconditionally. Outstanding commitments under these limited partnerships and mortgage loans are included in payments due in less than 1 year since the timing of funding these commitments cannot be reliably estimated. In addition, $904 relates to commitments to purchase investments which are reflected on the Company’s Consolidated Balance Sheets. The remaining balance relates to contractual commitments to purchase various goods and services such as maintenance, human resources, and information technology in the normal course of business, as well as unfunded tax credit investments. Purchase obligations exclude contracts that are cancellable without penalty or contracts that do not specify minimum levels of goods or services to be purchased.
[1]Cash activities in 2018 include cash flows from Discontinued Operations; see Note 22 - Business Dispositions and Discontinued Operations of Notes to Consolidated Financial Statements for information on cash flows from Discontinued Operations.
Net cash provided by operating activities increased as compared to the prior year period primarily driven by the inclusion of Navigators Group for the full year in 2020, subrogation benefit distributions collected of $227 arising from the PG&E settlement agreement, a decrease in claims paid for Group Benefits and P&C excluding Navigators, lower operating expenses paid and the deferral of paying payroll taxes as a result of the Coronavirus Aid, Relief and Economic Security (“CARES”) Act, partially offset by lower P&C premiums received excluding Navigators and a lower refund of AMT credits.
Cash used for investing activities decreased primarily due to the acquisition of Navigators Group for $1.9 billion in 2019, an increase in net proceeds from equity securities, and a decrease in net payments from mortgage loans, partially offset by a change from net proceeds to net payments from short-term investments, and an increase in net purchases of partnerships and fixed maturities.
Cash used for financing activities increased primarily due to a decrease in proceeds from issuing debt and a larger net decrease in securities loaned or sold under agreements to repurchase, partially offset by a decrease in repayments of debt.
These ratings are not a recommendation to buy, sell or hold any of The Hartford’s securities and they may be revised or revoked at any time at the sole discretion of the rating organization. Each agency’s rating should be evaluated independently of any other agency’s rating. The system and the number of rating categories can vary across rating agencies.
[1]The statutory capital for property and casualty insurance subsidiaries in this table does not include the value of an intercompany note owed by HHI to Hartford Fire Insurance Company.
•U.S. STAT excludes equity of non-insurance and foreign insurance subsidiaries not held by U.S. insurance subsidiaries.
•Costs incurred by the Company to acquire insurance policies are deferred under U.S. GAAP while those costs are expensed immediately under U.S. STAT.
•The assumptions used in the determination of Group Benefits reserves (i.e. for Group Benefits contracts) are prescribed under U.S. STAT, while the assumptions used under U.S. GAAP are generally the Company’s best estimates.
•The difference between the amortized cost and fair value of fixed maturity and other investments, net of tax, is recorded as an increase or decrease to the carrying value of the related asset and to equity under U.S. GAAP, while, under U.S. STAT, most investments are carried at amortized cost with only certain securities carried at fair value, such as equity securities and certain lower rated bonds required by the NAIC to be recorded at the lower of amortized cost or fair value.
•Goodwill arising from the acquisition of a business is tested for recoverability on an annual basis (or more frequently, as necessary) for U.S. GAAP, while under U.S. STAT goodwill is amortized over a period not to exceed 10 years and the amount of goodwill admitted as an asset is limited.
In addition, certain assets, including a portion of premiums receivable and fixed assets, are non-admitted (recorded at zero value and charged against surplus) under U.S. STAT. U.S. GAAP generally evaluates assets based on their recoverability.
In any particular period, statutory capital amounts and RBC ratios may increase or decrease depending upon a variety of factors. The amount of change in the statutory capital or RBC ratios can vary based on individual factors and may be compounded in extreme scenarios or if multiple factors occur at the same time. At times the impact of changes in certain market factors or a combination of multiple factors on RBC ratios can be counterintuitive. For further discussion on these factors, see
Statutory capital at the insurance subsidiaries has been maintained at capital levels commensurate with the Company's desired RBC ratios and ratings from rating agencies. The amount of statutory capital can increase or decrease depending on a number of factors affecting insurance results including, among other factors, the level of catastrophe claims incurred, the amount of reserve development, the effect of changes in interest rates on investment income and the discounting of loss reserves, and the effect of realized gains and losses on investments.
For a discussion regarding contingencies related to The Hartford’s legal proceedings, see the information
Federal pandemic risk insurance - Congress is considering possible action for future pandemic risk insurance coverage through a risk sharing mechanism between insurers and the federal government. Timing for any Congressional action with respect to these efforts is uncertain at this time. If such a program were to be enacted, it could represent a significant obligation for the company in terms of deductible and co-share obligations.
Tax Reform At the end of 2017, the Tax Cuts and Jobs Act of 2017 ("TCJA") was enacted. The TCJA made significant reforms to the U.S. tax code. The major areas of interest to the Company included the reduction of the corporate tax rate from 35% to 21% and the repeal of the corporate alternative minimum tax (AMT) and the refunding of AMT credits. The U.S. Treasury and IRS continue to develop guidance implementing TCJA, and Congress may consider additional technical corrections to the law. In addition, President Biden has indicated he will propose to
For a discussion regarding Guaranty Fund and Other Insurance-related Assessments, see Note 15 - Commitments and Contingencies of Notes to Consolidated Financial Statements.
NICO National Indemnity Company, a subsidiary of Berkshire Hathaway Inc. (“Berkshire”)